Case Law Details
Thomas Philip Vs Interim Board For Settlement-II (Kerala High Court)
Kerala High Court held that court cannot interfere with order of settlement commission if challenge is merely that Settlement Commission has chosen to take one of two possible views that can be legally taken in respect of an issue. Accordingly, writ disposed of.
Facts- The appellant has a 70% shareholding in two companies, namely M/s Delta Aggregators and Sand Pvt. Ltd. and M/s Delta Msand Pvt. Ltd. During the pendency of the proceedings initiated u/s. 153A, the appellant, along with the two companies, preferred settlement applications before the Interim Board for Settlement [IBS].
In this Writ Appeal, we are concerned only with the settlement application put in by the appellant in his personal capacity. That application was filed on 26.02.2021, and the appellant admitted an undisclosed income of Rs.44,00,000/- towards remuneration earned outside the banking channels for the assessment years 2013-14 to 2018-19. By the said order of the IBS, the total income of the appellant was settled at Rs.35,36,42,238/- together with applicable interest thereon. The appellant was also granted immunity from prosecution and from imposition of penalty under various provisions of the I.T. Act. The plea of the appellant for capitalisation of the amount offered as additional income was also allowed.
In the writ petition, the challenge of the appellant to the impugned order of the IBS was essentially confined to the finding of the IBS on the issue of deemed dividend, which the IBS found had to be treated as undisclosed income of the appellant.
Conclusion- Held that a defect that vitiates a settlement must be one that vitiates the whole and not merely any part of the settlement. It follows, therefore, that if the defect pointed out by a person who challenges an order of settlement is merely that the Settlement Commission has chosen to take one of two possible views that can be legally taken in respect of an issue, then this Court would not be justified in interfering with that order of settlement passed by the Settlement Commission. In the spirit of settlement, and more so when the assessee does not choose to contest the rest of the terms of the settlement, the assessee cannot be permitted to contend so. A settlement partakes the nature of a negotiated contract, and there is always a certain “give and take” in every settlement. The test is to see whether on an overall assessment the parties to the settlement are satisfied. The settlement, in other words, must fail or succeed as a whole. A partial acceptance of a settlement is not envisaged under the I.T. Act, and the courts must defer to that scheme of statutory finality envisaged for settlement under the I.T. Act while exercising the jurisdiction of judicial review under Article 226 of the Constitution.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The petitioner in W.P.(C).No.1175 of 2024 is the appellant before us aggrieved by the judgment dated 21.02.2024 of the learned Single Judge in the writ petition.
2. The brief facts necessary for disposal of this Writ Appeal are as follows:
The appellant has a 70% shareholding in two companies, namely M/s Delta Aggregators and Sand Pvt. Ltd. and M/s Delta Msand Pvt. Ltd. A search and seizure action under Section 132 of the Income Tax Act [hereinafter referred to as the “I.T. Act”] was carried out on 13.10.2017 at the business premises of the two companies as also at the residence of the appellant. Consequent to the search, notices under Section 153A of the I.T. Act were issued on 07.06.2018 to the companies as well as to the appellant for the assessment years 201213 to 2017-18. A notice under Section 143(2) of the I.T. Act was also issued on 23.09.2019 for the assessment year 2018-19.
3. During the pendency of the proceedings initiated under Section 153A, the appellant, along with the two companies, preferred settlement applications before the Interim Board for Settlement [IBS].
In this Writ Appeal, we are concerned only with the settlement application put in by the appellant in his personal capacity. That application was filed on 26.02.2021, and the appellant admitted an undisclosed income of Rs.44,00,000/- towards remuneration earned outside the banking channels for the assessment years 2013-14 to 2018-19.
4. On the settlement application being entertained by the IBS, a report was called for in terms of Rule 9 of the Income Tax Settlement Commission (Procedure) Rules from the Principal Commissioner of Income Tax, Kochi. In the report that was submitted before the IBS, the Principal Commissioner opined that the appellant had not disclosed an additional income to the extent of Rs.10,52,12,443/- for the assessment years 2012-13 to 2018-19. Although the appellant preferred a detailed objection to the said report, the proceedings before the IBS ultimately culminated in the final order which was impugned in the writ petition. By the said order of the IBS, the total income of the appellant was settled at Rs.35,36,42,238/- together with applicable interest thereon. The appellant was also granted immunity from prosecution and from imposition of penalty under various provisions of the I.T. Act. The plea of the appellant for capitalisation of the amount offered as additional income was also allowed.
5. In the writ petition, the challenge of the appellant to the impugned order of the IBS was essentially confined to the finding of the IBS on the issue of deemed dividend, which the IBS found had to be treated as undisclosed income of the appellant. The appellant, as the majority shareholder in the two companies referred above, had availed a loan of Rs.1,62,88,442/- from M/s Delta Aggregates and Sand Pvt. Ltd. during the financial year relevant to the assessment year 2014-15. The latter was a company in which the appellant held 70% shares and 10% voting right. In the same year, the appellant also availed a loan of Rs.1,20,00,000/- from M/s Metro Aggregates and Sand Pvt. Ltd. in which he held 23% shares and more than 10% of the voting right. Further, during the financial year relevant to the assessment year 2018-19, he had availed a loan of Rs.11,54,10,055/-from M/s Delta Msand Pvt. Ltd., in which he was a 70% shareholder and held more than 10% of the voting right. The Principal Commissioner, who had submitted the report under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, opined that the said borrowings were in the nature of ‘deemed dividend’ under Section 2(22)(e) of the I.T. Act and recommended an addition of the loan amount to the undisclosed income of the appellant. After overruling the objections of the appellant, the IBS had confirmed the addition of this amount as undisclosed income of the appellant for the purposes of settlement.
6. The learned Single Judge, who considered the writ petition, took note of the Scheme of Chapter XIXA of the I.T. Act, which dealt with the procedure for settlement of cases before the Settlement Commission constituted under the said Act. His analysis of the Scheme inherent in the said provisions is discernible from paragraphs 8 to 8.3 and 10 to 11.2 of the impugned judgment that read as follows:
“8. Under the scheme of Chapter XIX A of the Act the proceedings before the Settlement Commission commence by an application made by the assessee as contemplated by Section 245C. Section 245D prescribes the procedure to be followed by the Commission on receipt of an application under Section 245C. The particulars which need to be disclosed in the application under Section 245C are provided. Sub-section (4) of Section 245D provides: “after examination of the records and the report of the Principal Commissioner or Commissioner, if any, received under – (i) sub-section (2B) or subsection 3, or (ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007, and after giving an opportunity to the applicant and to the Principal Commissioner or Commissioner to be heard, either in person or through a representative duly authorized in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of Principal Commissioner or Commissioner.” (emphasis supplied)
8.1 Section 245E empowers the Commission to re-open the completed proceedings in appropriate cases, while 245F confers all the powers of an Income Tax authority upon the Commission. Section 245H empowers the Commission to grant immunity from penalty and prosecution, with or without conditions, in cases where it is satisfied that the assessee has fully disclosed his income and its sources.
8.2 Where a proceeding before the Settlement Commission abates, the Assessing Officer or any other Income Tax Authority before whom the proceedings at the time of making the application were pending are required to dispose of the case in accordance with the provisions of the Act as if no application under Section 245C has been made. Section 245-I declares that every order of settlement passed under Sub-section (4) of Section 245D shall be conclusive as to the matter stated therein and no matter covered by such order shall, save as otherwise provided in Chapter XIXA be reopened in any proceedings under the Act or under any other law for the time being in force. Section 245L declares that any proceedings under Chapter XIXA before the Settlement Commission shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purposes of Section 196 of the Indian Penal Code.
8.3 Under the scheme of Chapter XIXA the Settlement Commission is not a regular Tribunal. Its function is different from quasi-judicial authorities created by the Income Tax Act. Where an assessee makes an offer of settlement, the Commission either accepts it or rejects it subject to such conditions and terms as it deems appropriate to impose in that behalf. Settlement means a sort of composition. The Commission is not required to give detailed reasoning in its order. It is also well settled that even if the Commission decides any principles, they do not bind the Income Tax authorities in relating to the subsequent years. The Order of the Commission is relevant and confined only to the assessment years to which it relates.
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10. The Order of the Commission is in the nature of a package deal. An assessee cannot be permitted to accept what is favourable to him and reject what is not. The scope of enquiry by the High Court or Supreme Court is limited, i.e., whether the Order of the Commission is contrary to any of the provisions of the Act and, if so, has it prejudiced the applicant apart from the grounds of bias, fraud, or malice?
10.1 From the provisions of Chapter XIXA, it is clear that once the Settlement Commission admits a case for consideration, it shall have exclusive jurisdiction to exercise all powers of regular authorities under the Act to effect a settlement and recover tax penalty and interest. Once the Settlement Commission formally allows the application to be considered for “settlement”, the regular assessment proceedings and recoveries initiated for tax penalty or interest pursuant thereto shall become subject to the powers of the Commission and not prior to the same. The Commission’s power of settlement has to be exercised in accordance with the provisions of the Act. However, the Commission has sufficient elbow room to assess the applicant’s income. The Settlement Commission cannot make an order which would conflict with the mandatory provisions of the Act like in the quantum and payment of tax and interest, as is held in Commissioner of Income Tax v. Hindustan Bulk Carriers [(2003) 3 SCC 57].
10.2 Therefore, what is contemplated under clause (4) of Section 245D is that the Commission has to pass the order in accordance with the provisions of the Act, but the Commission is not precluded from considering the other evidence and material which was not before the Assessing Officer if same is brought before the Commissioner to determine the true and correct undisclosed income of the applicant and this is amply clear from the language employed in sub-section (4) of Section 245D of the Act. Therefore, I find no substance in the submission of the learned Counsel for the petitioner that the Commission was barred from considering the material evidence which was not discovered during the search and seizure operation.
11. The settlement procedure commenced by filing the application by the assessee under Section 245C. The statutory mandate to the assessee is that the application shall contain “full and true disclosure” of the income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the source of income, etc.
11.1 The jurisdiction of the Settlement Commission commences after it passes an order under Section 245D(1) admitting the case. The Order under Section 245D(4) is not an order of regular assessment. It is neither an order under Section 143(1) or Section 143(3) or Section 144. Under Sections 139 to 158, the process of assessment involves the filing of the return under Section 139 or under Section 142; inquiry by the Assessing Officer under Sections 142 and 143 and making of the order of assessment by the Assessing Officer under Section 143(3) or Section 144 and issuing of a notice of demand under Section 156 on the basis of the assessment order. No such steps are required to be followed in the case of the proceedings under Chapter XIXA. The said Chapter is a complete code in itself. Under this Chapter, taxability is determined by the Commission with respect to the undisclosed income only through the process of settlement/arbitration. [Brij Lal v. Commissioner of Income Tax – [(2011) 1 SCC]].
11.1.1 Paragraph 23 of the said judgment is extracted hereunder:
“23. Descriptively, it can be stated that assessment in law is different from assessment by way of settlement. If one reads Section 245-D(6) with Section 245-I, it becomes clear that every order of settlement passed under Section 245-D(4) shall be final and conclusive as to the matters contained therein and that the same shall not be reopened except in the case of fraud and misrepresentation. Under Section 245F(1), in addition to the powers conferred on the Settlement Commission under Chapter XIX-A, it shall also have all the powers which are vested in the Income Tax Authority under the Act. In this connection, however, we need to keep in mind the difference between “procedure for assessment” under Chapter XIV and “procedure for settlement” under Chapter XIX-A (see Section 245-D). Under Section 245-F(4), it is clarified that nothing in Chapter XIX-A shall affect the operation of any other provision of the Act requiring the applicant to pay tax on the basis of self-assessment in relation to matters before the Settlement Commission.”
11.2 As mentioned above, the full and true particulars and disclosure of undisclosed income and the manner in which such income had been derived are the prerequisites for valid application under Section 245C(1) of the Act. From the plain reading of section 245D(4) of the Act, the jurisdiction of the Settlement Commission to pass such orders as it may think fit is confined to the matters covered by the application. It can extend to such matters which are referred to in the report of the Commissioner of Income Tax under Section 245D(1) or Section 245D(3). A full and true disclosure of the income which has not been previously disclosed by the assessee, being a precondition for a valid application under Section 245C(1) of the Act, the scheme of Chapter XIXA does not contemplate non-revision of the income so disclosed in the application against item no.11 of the Form. It is well settled that under the power of judicial review of the High Court, the High Court cannot interfere with the finding of facts recorded by the Settlement Commission.”
As seen from the aforesaid extracted portion of the impugned judgment, the learned Judge dismissed the writ petition essentially on finding that there was no scope for interfering with the impugned order of the IBS in proceedings under Article 226 of the Constitution of India.
7. Before us, it is the submission of Sri.R.Sivaraman, the learned senior counsel appearing on behalf of the appellant, relying on Commissioner of Income Tax v. Abhisar Buildwell (P) Ltd. – [(2023) 149 Taxmann.com 399 (SC)] that the learned Single Judge erred in not considering the ground urged by the appellant, that no addition can be made in the absence of incriminating material in relation to completed assessments, and further in finding that the ratio in Abhisar (supra) could not be applied to cases that had been decided by the Settlement Commission. He points out that in situations where the Settlement Commission passes orders which conflict with the mandatory provisions of the I.T. Act, this Court was bound to exercise its jurisdiction under Article 226 of the Constitution of India to set aside such orders of the Settlement Commission. He relies on the judgment in Commissioner of Income Tax v. Hindustan Bulk Carriers – [(2003) 3 SCC 57] in support of the said contention. The argument advanced before the learned Single Judge, as regards the legality of the finding of the IBS that amounts treated as deemed dividend could be treated as undisclosed income of the appellant, were also reiterated before us at the time of hearing of the Writ Appeal.
8. Per contra, it is the submission of Smt.Susie B. Varghese, the learned Standing Counsel for the Income Tax Department, that the orders of the Settlement Commission cannot be lightly interfered with by this Court in exercise of its discretionary powers under Article 226 of the Constitution of India. It is her submission that unless the defect in the order of the Settlement Commission is one that constitutes a grave error of law or a flagrant disregard for the provisions of the I.T. Act, this Court would not ordinarily interfere with an order that was passed in the spirit of settlement and with a view to put a quietus to litigation. She, therefore, supported the impugned judgment of the learned Single Judge that found that the writ petition was not maintainable as such.
9. We have considered the rival submissions and also gone through the pleadings in the instant case. Before dealing with the arguments of the learned counsel, we might briefly notice the precedents that deal with the jurisdiction that is to be exercised by this Court while dealing with challenges to orders passed by the Income Tax Settlement Commission. It is trite that this Court, in exercise of its jurisdiction under Article 226 of the Constitution of India, does not assume the role of an appellate authority to conduct a merit review of orders passed by the Settlement Commission. Its role is confined to one of judicial review, of the orders of the Settlement Commission, by applying the well-settled principles that inform the exercise of such a jurisdiction. Accordingly, this court would be concerned with the decision making process, adopted by the Commission, and not the decision itself. The scope of enquiry of this Court, in matters involving a challenge to orders passed by the Settlement Commission, is only to see whether the order of the Commission complies with the statutory provisions of Chapter XIX-A of the I.T. Act. The Supreme Court in the case of Jyotendrasinhji v. S. I. Tripathi and Others – [1993 (201) ITR 611 (SC)], observed as follows at page 623:
“…. Be that as it may, the fact remains that it is open to the Commission to accept an amount of tax by way of settlement and to prescribe the manner in which the said amount shall be paid. It may condone the defaults and lapses on the part of the assessee and may waive interest, penalties or prosecution, where it thinks appropriate. Indeed, it would be difficult to predicate the reasons and considerations which induce the Commission to make a particular order, unless the Commission itself chooses to give reasons for its order. Even if it gives reasons in a given case, the scope of enquiry in the appeal remains the same as indicated above, viz., whether it is contrary to any of the provisions of the Act. In this context, it is relevant to note that the principle of natural justice (audi alteram partem) has been incorporated in section 245D itself. The sole overall limitation upon the Commission, thus, appears to be that it should act in accordance with the provisions of the Act. The scope of enquiry, whether by the High Court under article 226 or by this Court under article 136, is also the same – whether the order of the Commission is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category, has it prejudiced the petitioner/appellant….. ”
The Karnataka High Court in N.Krishnan (Decd. By legal representative, K.Badrinarayan, and others) v. Settlement Commission and Others – [1989 (180) ITR 585] observed as follows at page 597:
“The provision for settlement would show that it is in the nature of statutory arbitration to which a person may submit himself voluntarily. Hence, many of the grounds on which an arbitration award could be set aside would not be available in view of the nature and jurisdiction of the Settlement Commission. A decision of the Settlement Commission could be interfered with only (i) if grave procedural defects such as violation of the mandatory procedural requirements of the provisions in Chapter XIXA of the Income-tax Act, 1961, and/or violation of the rules of natural justice are made out; or (ii) if it is found that there is no nexus between the reasons given and the decision taken by the Settlement Commission. The court cannot interfere either with an error of fact or error of law alleged to have been committed by the Settlement Commission.”
Thereafter, the Supreme Court in Union of India and Others v. Ind-Swift Laboratories Limited – [(2011) 4 SCC 635] observed as follows at page 643:
“An order passed by the Settlement Commission could be interfered with only if the said order is found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the Commission or question of facts are concerned, the same is not open for examination either by the High Court or by the Supreme Court. In the present case the order of the Settlement Commission clearly indicates that the said order, particularly, with regard to imposition of simple interest @ 10% per annum was passed in accordance with the provisions of Rule 14 but the High Court wrongly interpreted the said Rule and thereby arrived at an erroneous finding. So far as the second issue with respect to interest on Rs.50 lakhs is concerned, the same being a factual issue should not have been gone into by the High Court exercising the writ jurisdiction and the High Court should not have substituted its own opinion against the opinion of the Settlement Commission when the same was not challenged on merits.”
It is clear, therefore, that the power of judicial review is not to be exercised to decide the issue on facts or on an interpretation of the documents available before the Court. In the instant case, therefore, the enquiry by this Court can only be with regard to whether or not the Settlement Commission exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it erred in the exercise of that jurisdiction. In the latter event, this Court would also have to bear in mind the nature of the jurisdiction exercised by the Settlement Commission, which is akin to a statutory arbitration.
10. When we consider the arguments advanced before us in the light of the above principles, we are of the view that while the appellant/assessee may perhaps be able to demonstrate that the loans availed by him for the sister concerns were for the furtherance of the business of the group as a whole, and therefore, would not attract the concept of deemed dividend, the fact remains that from another perspective the said amount can be seen as income that was not disclosed for the purposes of settlement. We say this because an argument that an assessee may ordinarily raise in adjudication proceedings before the hierarchy of statutory authorities under the I.T. Act may not be available for him to raise in proceedings before the Settlement Commission where the object behind the proceedings is not to determine the correctness of the legal contentions raised by the assessee but to settle a dispute between the assessee and the Department so as to bring about a quietus to litigation. One cannot also overlook the fact that notwithstanding the contentions that may have been taken in normal adjudication proceedings under the I.T. Act, based on returns filed by the assessee or orders already passed by the Income Tax Authorities, when it comes to an assessee opting for a settlement and choosing to prefer an application by voluntarily disclosing previously undisclosed income exceeding Rs.50,00,000/-, the enquiry that follows is entirely directed towards ascertaining whether or not the disclosure by the assessee was a full and true disclosure for the purposes of settlement. The perspective to be held by the Settlement Commission, while adjudicating on a settlement application is, therefore, entirely different from the perspective that would ordinarily be held by an adjudicating officer, who is called upon to adjudicate an issue under the I.T. Act.
11. In our view, even an erroneous finding in law by the Settlement Commission, in relation to one of many issues that arose in a case for settlement before it, would not suffice for setting aside the order of the Settlement Commission that settles a case. This is because, as rightly found by the learned Single Judge, the settlement envisaged under the settlement provisions under the I.T. Act is of a case as a whole and not in parts. A defect that vitiates a settlement must be one that vitiates the whole and not merely any part of the settlement. It follows, therefore, that if the defect pointed out by a person who challenges an order of settlement is merely that the Settlement Commission has chosen to take one of two possible views that can be legally taken in respect of an issue, then this Court would not be justified in interfering with that order of settlement passed by the Settlement Commission. In the spirit of settlement, and more so when the assessee does not choose to contest the rest of the terms of the settlement, the assessee cannot be permitted to contend so. A settlement partakes the nature of a negotiated contract, and there is always a certain “give and take” in every settlement. The test is to see whether on an overall assessment the parties to the settlement are satisfied. The settlement, in other words, must fail or succeed as a whole. A partial acceptance of a settlement is not envisaged under the I.T. Act, and the courts must defer to that scheme of statutory finality envisaged for settlement under the I.T. Act while exercising the jurisdiction of judicial review under Article 226 of the Constitution.
We, therefore, see no reason to interfere with the impugned judgment of the learned Single Judge, and for the reasons stated in the said judgment as supplemented by the reasons in this judgment, the Writ Appeal fails, and is accordingly dismissed.
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