By TIOL News Service

NEW DELHI, SEPT 18, 2018: THE ISSUE BEFORE THE BENCH IS - Whether legal provisions mandate Settlement Commission to enjoy the luxury of rejecting an application under section 245D(1) merely on the basis of tentative findings. AND THE VERDICT IS NO.

Facts of the case

THE assessee, a partnership firm engaged in production and trading of mustard oil and related items. A search and seizure operation was conducted in the case assessee and others associated with them as principle assessee and simultaneously, survey operations at some locations were undertaken. During such operations, cash of around Rs. 34.89 lakhs and jewellery worth around Rs. 1.49 Cr were found out of which Rs.34 lakhs in cash and jewellery valued at around Rs.23.53 lakhs was seized. Incriminating documents in the form of loose papers, registers, dairy were also found and seized. Apart from that, one Mr Trilok Chand Jain in his statement had admitted and surrendered undisclosed income of more than Rs. 18 Crores for the entire group in the hands of different assessees. Subsequently, Trilok Chand Jain had retracted the surrender.

Consequent to the search, the assessee's were served with notices u/s 153A for the assessment years 2010-11 to 2015-16. As returns were not filed, notices for prosecution u/s 276CC were also issued and served on the assessees. However, the assessees on the other hand claim that they had filed their returns after seeking extension of time on two occasions. Thereafter, five separate applications u/s 245C (1) were filed by the assessee and other allies before the Income Tax Settlement Commission. However, the Commission rejected the settlement applications, holding that "prima facie" the conditions prescribed in Section 245C (1) were not fulfilled.

The HC held that,

++ the Settlement Commission can examine the questions and issues of maintainability of the settlement application at three different stages. The first is a very initial stage, when it in terms of Section 245D(1) of the Act, the Settlement Commission examines whether or not to allow an application to be proceeded with. The second stage is after the Principal Commissioner/Commissioner has filed its report before the Settlement Commission and the Settlement Commission passes an order under Section 245D(2C) of the Act. The third stage is when the final order under Section 245D(4) of the Act is passed. In the present writ petition, we are concerned with the first stage, i.e. under Section 245D(1) of the Act;

++ the Settlement Commission should consist of members of integrity and outstanding ability having special knowledge and experience in problems relating to direct taxes and business accounts, who can dwell into intricate issues and questions in a pragmatic and practical way, without being strictly bound by strict rules of procedure. Further, the assessee must fully cooperate, and make "full and true" disclosure and state the manner in which he had derived undisclosed income. The object and purpose is that the undisclosed income, which is brought to tax must be the fair and true income of the assessee, which was hitherto not declared and taxed. If an order is obtained by fraud or misrepresentation of fact, it cannot be said that there was true and fair disclosure. Neither will there be a true and fair disclosure in case the undisclosed income is revised upwards. The provisions do not postulate revision of the undisclosed income. Declaration contemplated under Section 245C(1) of the Act is in the nature of warranty that a disclosure made must be true and fair disclosure. This is the necessary pre-condition for invoking jurisdiction of the Settlement Commission

++ an order under Section 245D(1) of the Act has to be passed within a rigid time frame of 15 days. Principal Commissioner/Commissioner is unrepresented at this stage. The scrutiny or the inquiry at this stage, is summary in nature. This however, does not take away or dilute the power of the Settlement Commission to reject the application for settlement which in its opinion does not satisfy the legal requirements and more particularly the two pre-conditions mentioned in Sub-Section(1) of section 245C of the Act. We must affirmatively acknowledge and accept that the Settlement Commission at the stage of 245D (1) can examine and go into the question whether the applicant fulfils the legal requirements and conditions for invoking jurisdiction of the Settlement Commission; like pendency of proceedings, payment of tax and interest on the undisclosed income etc. The Settlement Commission would also without doubt examine the two core conditions, "full and true" disclosure of undisclosed income and the manner in which the said income was derived. Onus to show that the pre-conditions for allowing the application to be proceeded with is on the applicant. Application can be rejected or not allowed to be proceeded with where the Settlement Commission forms an "opinion" that "full and true" disclosure of undisclosed income and manner in which it was derived has not been made or for other grounds and stipulations set out in the proviso or on failure to furnish the particulars prescribed;

++ an order under 245D(1) when allowing an application for settlement to be proceeded with, is interim or interlocutory in nature for there is no finality attached to the preliminary findings recorded as the proceeding do not come to a closure and end, but an order of rejection concludes the proceedings and has different consequences. In this sense the opinion formed by the Settlement Commission in case of rejection under Section 245D(1) is conclusive and final. Notwithstanding that the onus to show and establish that the application should be allowed to be proceeded with, the negative finding cannot be merely a "tentative" or "prima facie" as in case if the proceedings are allowed to be proceeded with. Necessarily and as a sequitur it follows that if the Settlement Commission is unable to form a decisive opinion to give a definitive finding for rejection after the initial and preliminary hearing, proceeding to the second stage is the only option. The deemed approval provision when the Settlement Commission is unable to decide and form an opinion supports the above interpretation;

++ the assessee had declared undisclosed income of Rs.3,20,40,338/-. Order records admission of the first assessee that they had inflated their expenses, i.e. payments made to the farmers/traders to procure oilseeds, and in this manner they had reduced or deflated their gross profits. There was substantial difference in 'moisture content' acceptable and found, 'oil content' acceptable and found, extent of dust in oil seeds, type of bardana used etc. and manipulations of price to inflate the purchases. The assessee had however expressed inability to precisely work out and give an exact figure of the undisclosed income earned in absence of 'duplicate accounts'. Therefore, they had deduced or computed the undisclosed income on basis of the gross profit rate in the comparable or same line of business. The second admission made by the first assessee was that the gross profit rate earlier declared by them was lower when compared with other cases in the same line;

++ the finding of the Settlement Commission that the assessee had not declared and made full and true disclosure is not an affirmative but an inconclusive and plausible view, which required a deeper and detailed scrutiny at the second stage. The Settlement Commission should have as per the statutory mandate called the Principal Commissioner/Commissioner to submit their report as second stage examination under Section 245D(2C) was required. It is at that second stage after the Revenue has submitted their report that more in-depth scrutiny and verification takes place, notwithstanding the earlier preliminary scrutiny under Section 245D(1) of the Act. At each passing stage, the scrutiny and examination becomes more extensive and decisive. The relevance of rejection at the initial stage under sub-section (1) to Section 245D is to throw out frivolous applications and applications palpably not maintainable for want of full and true disclosure and manner in which the undisclosed income was earned;

++ the observation of the Settlement Commission in the last sentence of paragraph 10 that "the very foundation of the surrender made by the two assessees appears to be concocted story" etc. The word "appears" would reflect that the Settlement Commission had not reached or made any firm and final decision. The findings as per the observations were tentative and prima facie. In view of the legal position explained above, the settlement application at the initial stage cannot be dismissed when firm opinion as to frivolousness or concoction is lacking and merits of the settlement application cannot be ascertained and determined;

++ the Settlement Commission was itself uncertain and has not given any firm or conclusive opinion as it has observed that "the role of the HUFs in the transactions, if any, was doubtful to say the least". The Settlement Commission had also observed that the claim was lacking evidentiary backing, notwithstanding the fact that the Settlement Commission itself had recorded that rough sheets seized indicated property dealings and payment of commission. Statement that the two assessees had not made any reference or given particulars of the deals as well as full details of the commission/brokerage earned, is contested. The assessees had accepted that they had not kept complete records of the brokerage/commission earned as the papers were destroyed or torn off after the deal had materialized. However, they had filed details and calculations;

++ uncertainty in the mind of the Settlement Commission is clearly reflected when they had used the word "doubtful" with reference to the role of the HUFs in the transactions. Therefore, it was urged that the claim did have evidentiary backing. Thus, the Settlement Commission was doubtful and uncertain as to whether the HUFs had earned the income by way of commission. We would observe that question could well arise whether the property transactions were sales and purchases made by the two assessees, and not mere earnings as commissions earned. However, this is not an aspect examined and the reason given for rejection;

++ the ''prima facie'' finding of the Settlement Commission that the fourth and the fifth assessee had made a wrong declaration as to the manner of earning undisclosed income, is nothing but a surmise, which is incorrect and baseless. This contention is without prejudice to the contention of the fourth and fifth assessees that the Settlement Commission had erroneously and contrary to law dismissed the application filed by the fourth and fifth assessees on tentative opinion and ''prima facie'' assumption, without forming a conclusive and final opinion. The scope of judicial review and exercise of writ jurisdiction while examining an order of the Settlement Commission is limited and primarily confined to considering whether the Settlement Commission has committed grave or patent error of jurisdiction and failed to abide by and act in accordance with the provisions of the Act;

++ the Settlement Commission is a fact finding body, whose orders have been given finality. A writ court would hesitate and not go into the merit of the decision taken by the Settlement Commission to reappraise disputed questions of fact, specially, in view of the nature of the jurisdiction and questions, which come up before the Settlement Commission. What is amiable and can be scrutinized while exercising power of judicial review is the decision making process and not merits of the decision. While examining and scrutinizing the decision making process, there is a limited scope for the writ Court to appreciate the facts under the grounds of illegality, irrationality and pre-procedural impropriety.

(See 2018-TIOL-1937-HC-DEL-IT)