Brief of the Case
Delhi High Court held In the case of Agson Global Pvt. Ltd. & Ors vs. Income Tax Settlement Commission & Ors that the powers and functions of an income tax authority which are to be exclusively exercised by the settlement commission must be in the context of and have a nexus with the settlement proceedings. 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. If the settlement commission is of the view that an assessee has not made a full and true declaration of the undisclosed income then the application is liable to be rejected.
Facts of the Case
The petitioners filed a settlement application before the income tax settlement commission, New Delhi. The e principal bench of the said settlement commission passed an order under section 245D (1) admitting the application made by petitioners. The CIT, Delhi furnished his consolidated report as required by the income tax settlement commission. The petitioners submitted their reply to the said consolidated report. As required by the settlement commission, the petitioners submitted their consolidated profit and loss account and balance sheets for the assessment year’s 2004-05 to 2011-12 before the assessing officer.
The CIT submitted a supplementary report in which he noted that after examining the accounts submitted by the petitioners, the assessing officer was of the opinion that the accounts were very complex in nature and that the same ought to be audited under section 142 (2A) for determining the correct income of the petitioner group. The Commissioner indicated that he was also of the opinion that owing to the complexity in the maintenance of accounts, to arrive at the correct income of the assessee group for all the assessment years for which settlement applications have been filed and admitted by the settlement commission, the accounts of the assessee group are required to be audited under section 142 (2A). The settlement commission was therefore requested to direct a special audit of the accounts of the assessee group. The petitioners argued that a special audit under section 142 (2A) could only be directed at the stage of assessment and cannot be conducted in the course of settlement proceedings. The settlement commission was of the view that the accounts were complex and that it was in the interest of the revenue that the special audit be ordered.
Contention of the Petitioners
The ld counsel of the petitioners submitted that there is a clear distinction between a settlement and an assessment. The procedure for assessment is provided in chapter XIV of the said act. On the other hand the procedure for settlement of cases is set out in chapter XIX-A of the said act. The requirement of a special audit is spelt out in section 142 (2A) which falls within the ambit of inquiry before assessment. It was contended that the proceedings under chapter XIX-A are entirely different from assessment proceedings and, therefore, the settlement commission which is concerned with settlement of cases would not have the jurisdiction to direct a special audit. It was also contended that merely because section 245F confers powers on the settlement commission which are vested in an income tax authority, does not mean that all the powers of an income tax authority under the said act vest in the income tax settlement commission. It was submitted that the powers conferred under section 245F ought to be construed keeping in mind the distinction between an assessment and a settlement. Reliance was placed on the following decisions: (1) CIT v. Om Prakash Mittal: (2005) 2 SCC 751; (2) Brij Lal & Ors v. CIT, Jalandhar: (2011) 1 SCC 1; (3) Picasso Overseas & Ors v. DGRI: WPC 1495/2007: decided on 03.08.2009; WPC 2927/2013 Page 6 of 38, (4) Ashwani Tobacco Pvt. Ltd v. Union of India: WPC 9104/2009 decided on 29.01.2010; (5) Union of India v. Dharampal & Ors.: WPC 4376/2012 decided on 27.09.2013; and (6) Director General of Central Excise Intelligence v. Murarilal Harishchandra Jaiswal Pvt. Ltd: (2010) 172 DLT 593 (DB).
Contention of the Revenue
The ld counsel of the revenue submitted that the settlement commission by virtue of the provisions of section 245F of the said act acquires exclusive jurisdiction in respect of a case when an application under section 245C is made before it and such jurisdiction comes to an end if an order under section 245D(1) is made whereby the settlement application is not proceeded with or, where the application is proceeded with, till the order is passed under section 245D (4). It was submitted that in respect of matters covered by the settlement application and all proceedings incidental thereto, the settlement commission has exclusive jurisdiction with regard to adjudication, orders and directions. It was also submitted, on the strength of Brij Lal (supra), that the filing of an application before the settlement commission is akin to the filing of a return before the assessing authority under section 139.
Thus, according to the learned counsel for the revenue, just as the assessing officer has a right to make any enquiry for proper assessment and can direct a special audit having regard to the nature and complexity of the accounts and keeping in mind the interest of the revenue, the settlement commission, which also has to determine the total income and thereby make an assessment, can, when it has exclusive jurisdiction over the case, certainly direct that a special audit be carried out. Reliance was also placed on the following decisions: – (1) CIT v. Express Newspapers Limited: (1994) 206 ITR 443 (SC) and (2) Parag Nivesh Private Limited v. DCIT: (1999) 240 ITR 419 (Cal).
Held by High Court
High Court held that as per 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. 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 there under 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.
Further 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. Thus, we reiterate that the powers which are vested in an income tax authority and could be exercised by the settlement commission are such which have a nexus with the settlement proceedings which does not include, in our view, the making of an assessment. In our view, the exclusivity of jurisdiction which is contemplated by the settlement 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.
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. If the settlement commission is of the view that an assessee has not made a full and true declaration of the undisclosed income then the application is liable to be rejected.
In Brij Lal v. CIT: (2011) 1 SCC 1, the Supreme Court held that assessment in law is different from assessment by way of settlement. The order under Section 245-D(4) is not an order of regular assessment. It is neither an order under Section 143(1) or Section 143(3) or Section 144. The making of the order of assessment is an integral part of the process of assessment. No such steps are required to be followed in the case of proceedings under Chapter XIX-A. The said chapter contemplates the taxability determined with respect to undisclosed income only by the process of settlement/arbitration. Thus, the nature of the orders under Sections 143(1), 143(3) and 144 is different from the orders of the Settlement Commission under Section 245-D (4).
Further in Canara Jewellers v. Settlement Commission:  315 ITR 328 (Madras), high court held that though the Settlement Commission is empowered to have all powers which are vested in an income-tax authority under the Act, in addition to the power conferred under Chapter XIX-A, but such power can be exercised for the purpose of procedure of settlement of application under section 245C and not for reassessment of tax of a particular year which is vested with the assessing authority.
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. Hence 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.
Accordingly appeals of the petitioners allowed.