Issue involved:- Whether the Income Tax Settlement Commission is empowered in law to direct a special audit under section 142(2A), in exercise of the power vested under Section 245F of the Income Tax Act, 1961?
Importance: This is a nascent issue tested for the first time by any High Court in India with far reaching effects as regards the power to direct a special audit. It had been the stand of the Department that special audit u/s 142(2A) can be ordered by an Authority, other than the Assessing Officer. Negating the said contention, the Hon’ble Court adjudicated thereon vide present judgment dated 06.01.2016.
Decided on 06.01.2016 – by Court No. 2 of Hon’ble Delhi High Court comprising of Hon’ble DR. Justice Badar Durrez Ahmed & Hon’ble Mr. Justice V. Kameshwar Rao.
Mr. M. S. Syali, Sr. Advocate along with Ms. Husnal Syali, Mayank Nagi Advocates successfully represented the Assessee / Petitioner. The Revenue / Respondent was represented by Ms. Suruchi Aggarwal, Senior Standing Counsel.
Outcome:- Allowing the Writ Petition filed by the Petitioner, the Hon’ble DHC held that:-
-“9.On examining the provisions of section 142, it is evident that it is part of Chapter XIV which specifically details the procedure for assessment. The said provision relates to the enquiry before assessment. It is specifically for the purpose of making an assessment under the said act….. It is obvious that the expression “at any stage of the proceedings before him” has clear reference to the assessment proceedings. Thus, the assessing officer, subject to the pre-conditions set out in the said provision, could require a special audit to be conducted but this is with the sole and ultimate object of making an assessment under the said act. The language employed in section 142 clearly indicates that the steps, including that of special audit, taken thereunder are part and parcel of the assessment proceedings with the object and purpose of enabling the assessment to be made under the said act by the assessing officer.”
– As regards Section 245F of the Act the Hon’ble Court observed that “11.Sub-section (1) of section 245F stipulates that in addition to the powers conferred on the settlement commission under chapter XIX – A, it shall have all the powers which are vested in an income tax authority under the said act. But, in our view, this has to be read in the context of and the scope of settlement proceedings. It does not entail that the powers of regular assessment which are vested in an income tax authority can be exercised by the settlement commission. What we mean to say is that the settlement commission does not engage itself in the process of assessment and cannot make an assessment order. The order that the settlement commission makes under section 245D(4) is not in the nature of an assessment but by way of a settlement and contains the terms of settlement…”
“ 12……. In our view, the exclusivity of jurisdiction which is contemplated by the said provision is that once an application for settlement is made before the settlement commission, no income tax authority would have jurisdiction to deal with the case. It does not mean that the settlement commission from that date steps into the shoes of the income tax authority who was hitherto dealing with the case…..The settlement commission does not carry out the function of assessment and does not make an assessment order. It settles the case in terms of the provisions contained in chapter XIX-A of the said act. Therefore, the exclusivity of jurisdiction stipulated in section 245F entails two things: (1) that from the point of time of filing of the settlement application, no income tax authority can exercise jurisdiction over the case and it is only the settlement commission which could exercise such jurisdiction; (2) the powers and functions of the income tax authority which can exclusively be exercised by the settlement commission must have a nexus with the settlement proceedings before it.”
“14. It is, therefore, clear that the powers and functions of an income tax authority which are to be exclusively exercised by the settlement commission (subject to the provisions of section 245D (3)) must be in the context of and have a nexus with the settlement proceedings. That being the case, since the requirement of a special audit falls under the procedure for assessment which is distinct and different from settlement proceedings, the settlement commission would not, in our view, have jurisdiction to direct a special audit as it does not have any nexus with the settlement proceedings.”
“21.The exclusive jurisdiction of the settlement commission to exercise the powers and perform the functions of an income tax authority, in terms of section 245F(2) of the said Act, is to be exercised and performed for the purpose of settlement of the case under Chapter XIX-A and not for assessment under Chapter XIV. That being the case, the powers and functions which are in the exclusive jurisdiction of the settlement commission are circumscribed by the object and role which has been ascribed to the settlement commission, which is to settle the case in terms of the procedure stipulated in Chapter XIX-A. Since assessment of the type contemplated under section 143(3) is outside the purview of settlement proceedings, a special audit under section 142(2A), which is in aid of assessment, would also be beyond the scope of settlement proceedings.
22. In sum, we hold that the income tax settlement commission does not have the power to direct a special audit under section 142(2A) in the course of settlement proceedings under Chapter XIX-A of the said Act. Consequently, the impugned order dated 26.04.2013, to the extent it directs the conduct of a special audit, is quashed. The matter be placed before the settlement commission for further consideration of the petitioners’ settlement applications in accordance with the prescribed procedure under Chapter XIX-A. The writ petition is allowed to the aforesaid extent…”