Court Upholds Rejection of Tax Settlement Applications, Citing Lack of Complexity

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Case Name:

Dix Francis vs Income Tax Settlement Commission & Anr. (High Court of Madras)

W.P.Nos.21757 & 21758, 21997 to 21999, 22041 to 22043 of 2005

Date: 12th August 2016

Key Takeaways:

1. The Settlement Commission has broad discretion in deciding whether to admit or reject settlement applications.
2. Courts are generally reluctant to interfere with the Settlement Commission’s decisions unless there are grave procedural defects.
3. Filing a “NIL” return to meet the technical requirements of Section 245C(1) is not acceptable when seeking settlement.
4. The complexity of a case is determined by the Commission based on the nature and circumstances, not just the number of parties involved.

Issue:

Did the Income Tax Settlement Commission err in rejecting the petitioners’ applications for settlement under Section 245C of the Income Tax Act, 1961?

Facts:

• The petitioners are members of a family engaged in various jewelry businesses and other ventures.
• A search was conducted on 13.08.2002, resulting in the seizure of gold, documents, and other assets.
• The petitioners filed NIL returns on 09.07.2004 in response to notices under Section 158BC.
• About a month later, they filed Settlement Applications offering undisclosed income as additional income.
• The Settlement Commission rejected their applications on 26.04.2005.

Arguments:

Petitioners:

• The case involves complex investigations due to multiple business activities and intermingling of funds.
• The NIL returns were filed to comply with the “technical requirement” of Section 245C(1).
• The Commission erred in not considering the complexity of the case.

Revenue:

• There was large-scale suppression of stock and unaccounted investments.
• The petitioners did not cooperate with post-search enquiries or block assessment proceedings.
• The case does not present any complexity of investigation.

Key Legal Precedents:

1. N.Krishnan vs. Settlement Commission [1989] 180 ITR 585
2. Shyam Glass Works vs. Income Tax Settlement Commission and Anr. [1997] 228 ITR 672
3. Harphool Singh vs. Income Tax Settlement Commission and Ors. [1995] 215 ITR 216
4. Ashish Kumar Ahuja vs. UOI & Ors. [2005] 278 ITR 399 (Delhi)
5. CIT vs. Express Newspapers Ltd. 206 ITR 443 (SC)

These cases establish that courts should be slow to interfere with Settlement Commission orders unless there are grave procedural defects or violations of natural justice.

Judgement:

The High Court dismissed the petitions, upholding the Settlement Commission’s decision. Key points:

1. The Commission’s finding of no complexity in the investigation was based on valid considerations.
2. The court should not substitute its views for those of the Commission.
3. Filing NIL returns to meet “technical requirements” is not acceptable.
4. The Commission’s decision was within its jurisdiction under Section 245D of the Income Tax Act.

FAQs:

Q: Can the High Court overrule the Settlement Commission’s decision?

A: Generally, no. The court only interferes if there are grave procedural defects or violations of natural justice.

Q: Is filing a NIL return acceptable when seeking settlement?

A: No, the court clearly stated that this practice is not acceptable and doesn’t meet the requirements of Section 245C(1).

Q: What determines the complexity of a case for settlement?

A: The Commission considers the nature and circumstances of the case, materials in the Commissioner’s report, and the complexity of the investigation involved.

Q: Can petitioners appeal this decision further?

A: While not mentioned in the judgment, generally, decisions of High Courts can be appealed to the Supreme Court if there’s a substantial question of law.

Q: What’s the significance of this judgment for future settlement applications?

A: It emphasizes the need for full and true disclosure of income and warns against using NIL returns as a tactic when seeking settlement.

1. In all these Writ Petitions, the petitioners have challenged the common order passed by the Additional Bench of the Income Tax Settlement Commission, Chennai, dated 26.04.2005, under Section 245D(1) of the Income Tax Act, 1961 (Act). Since the contentions raised by all the petitioners are identical and they are aggrieved by the common order, these Writ Petitions were heard together and are disposed of by this common order.

2. For the purpose of disposal of these Writ Petitions, the Writ Petition filed by M/s.Tharakan's Royal Jewellery in W.P.No.21758 of 2005, is taken up as the lead case. The petitioner filed a Settlement Application under Section 245C(1) of the Act on 30.07.2004 for settlement of its case for the block period 01.04.1996 to 13.08.2002. The Settlement Application was numbered and after hearing the petitioner, the Commission passed an order under Section 245D(1) of the Act, dated 26.04.2005, rejecting the Settlement Application. Similarly, the Settlement Applications filed by the other petitioners were also rejected and challenging the same, these Writ Petitions have been filed.

3. Before I go into the contentions raised by the parties, it would be necessary to take note of the following facts:-

The petitioner M/s.Tharakan's Royal Jewellery is a partnership firm engaged in the manufacture and sale of gold and silver ornaments at Kunamkulam Trichur District, Kerala State. It is stated that the firm consists of about 13 partners, who admittedly, belong to the same family i.e., they are brothers and their respective spouses. It is stated that the business activities of the brothers and their spouses are manufacture and sale of gold and silver ornaments under the names of Tharakan's Royal Jewellery, Kunnamkulam, (Petitioner) Tharakan's Royal Jewellery, Trichur, Fashion Jewellery, Chavakkad, Royal Jewellery, Chavakkad, and Wilson Jewellery Chavakkad; money lending individually and in partnership in the name and style Kottappadi Kshemodayam Co., Chavakkad, M/s.Royal Financing Company, Chavakkad and Wilson Trading Company, Chavakkad;

manufacture and sale of furniture under the trade name Tharakan's Fashion Furniture, Chavakkad; Chit business under the name M/s.Bhakta Priya Kuries Pvt Ltd., Chavakkad. According to the petitioner, there is intermingling of funds between the family members and business concerns mentioned above. A search was conducted under Section 132 of the Act on 13.08.2002, in all the business establishment workshops, residential premises etc., in which about 12kgs of gold were seized apart from that fixed deposit receipts, cash certificates, books of accounts, etc. Pursuant to the search and seizure operation, notices were issued under Section 158BC of the Act, calling upon the petitioners and others to furnish returns setting forth total income including undisclosed income for the said block period. Uniformly all the petitioners filed NIL returns in Form-2B on 09.07.2004, before the Assessing Officer and after about a month, filed Settlement Application before the Settlement Commission, offering undisclosed income as additional income. The petitioners through their authorised representative appeared before the Commission and submitted regarding the nature and circumstances of the case and the complexity of the investigation involved. They submitted that in view of multiple business activities carried on by the group and intermingling of funds between the individuals as well as the firms, in which they are partners, the determination of undisclosed income involves complexity of investigation. The Settlement Commission did not agree with this submission and by the impugned order has rejected the applications.

4. Mr.T.N.Seetharaman, learned counsel appearing for the petitioner would contend that the findings rendered by the Settlement commission stating that the case does not present any complexity of investigation, is erroneous and invited the attention of this Court to paragraphs 5 and 6 of the affidavit filed in support of the Writ Petition to demonstrate the nature of multiple business activities carried on by the group and intermingling of funds of the individuals as well as firms,to show the determination of undisclosed income involves complexity of investigation. Therefore, it is submitted that the Commission ought to have allowed the matter to be proceeded with. The learned counsel referred to Section 245D of the Act, as it stood at the relevant point of time and submitted that the three factors mentioned therein have to be taken into consideration and the Commission has sufficient powers to call for the relevant records from the Commissioner. After examination of the records, it may direct the Commissioner to make further enquiry or investigation and furnish report and this power has been conferred on the Commission in terms of sub-section (3) of 245D of the Act and therefore, factually since there is complexity of investigation, the Commission erred in not entertaining the application.

Further, it is submitted that the Commission erred in observing that additional income offered in the application is not prima facie full and true without considering the facts of the case. Therefore, the learned counsel submitted that the impugned order may be set aside and the Commission may be directed to allow the application to be proceeded with. The learned counsel placed reliance on the decision of the Bombay High court in the case of Centurion Bank of Punjab Ltd., vs. Income Tax Settlement Commission & Ors., reported in [2007] 290 ITR 555 (Bom).

5. Mr.T.Pramod Kumar Chopda, learned Standing counsel appearing for the respondent submitted that Section 245D(1) of the Act confers unfettered liberty to the Settlement Commission to reject the application or allow the application to be proceeded with. For arriving at any of the conclusions mentioned above, the Commission is further authorised to call a report from the Commissioner and consider such a report and having regard to the nature and circumstances of the case, to decide the complexity of this case. In the instant case, the said process has been fully followed and the Commission rightly came to a conclusion that the case does not have any complexity. It is further submitted that the Settlement Commission has rightly noted that though assessee had filed the return after a lapse of one year of the service of notice, the Assessing Officer had issued a detailed questionnaire and on receipt of the reply was ready to complete the block assessment within the period allowed by the provisions of the Act and that the assessee after having belatedly filed the return, did not furnish the reply, apart from retracting their sworn statements given at the time of search and seizure action. Further, it is submitted that the provisions of Section 245C(1) requires that the application contains a full and true disclosure of the income not disclosed before the Assessing Officer. Therefore, partial or untrue or false disclosure would dis-entitle the assessee to invoke the remedy before the Commission. In support of his contention, reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Express Newspapers Ltd., reported in 206 ITR 443 (SC), and submitted that an application under Section 245C, is maintainable, only if it is discloses income which has not been disclosed before the Assessing Officer and the provision contemplates the disclosure of the nature of voluntary disclosure of concealed income. On the above grounds, the learned counsel sought to sustain the impugned order.

6. In reply, the learned counsel for the petitioner by referring to the reply affidavit submitted that the averments set out in the counter affidavit, are without any basis and the order of rejection of the application by the Commission was erroneous. Further, it is submitted that a bare reading of the Section 245D(1) of the Act, clearly indicates that there are three circumstances under which the Settlement Commission can entertain an application for settlement viz., (1) on the basis of the materials contained in the Commissioner's report; (2) having regard to the nature and circumstances of the case; or (3) the complexity of the investigation involved therein. The facts and circumstances set out in paragraphs 5 to 5.2, of the impugned order of the first respondent Settlement Commission and the submissions of the departmental representative before the Settlement Commission recorded in paragraph 6 of the impugned order regarding suppression of stocks and unaccounted investments and seizure of huge unaccounted stock will themselves indicate that the Settlement Applications deserves to be admitted in order to determine the “undisclosed income” in a realistic and reasonable manner and the rejection of the Settlement Application was unwarranted.

7. Further, it is submitted that the petitioner had filed a 'NIL' return of income to comply with the technical requirement of clause (a) of the Proviso to Section 245C(1), which stipulates furnishing of a return of income as a pre-requisite for a valid Settlement Application. Further, the reasons assigned by the Commission in the impugned order, are not at all relevant having regard to the norms prescribed in Section 245D(1) of the Act for admissibility of the Settlement Application.

8. Heard Mr.T.N.Seetharaman, assisted by Mr.R.Kumar, learned counsel appearing for the petitioner and Mr.T.Pramod Kumar Chopda, assisted by Mr.Raj Kumar Jhabakar, learned Standing counsels for the respondents and perused the materials placed on record.

9. The order impugned in these Writ Petitions is an order passed by the Settlement Commission constituted under the provisions of the Income Tax Act, 1961. Chapter XIX-A of the Act deals with the Settlement of cases. Section 245A is the definition section, which defines “case” under clause (b) of the Section to mean any proceedings under the Act for the assessment or re-assessment of any person in respect of any year or years, or by way of appeal or revision in connection with such assessment or reassessment, which may be pending before the Income Tax Authority on the date on which an application under sub-section (1) of Section 245C is made. Proviso states that where any appeal or application for revision has been preferred after the expiry of the period specified for the filing of such appeal or application for revision and which has not been admitted, such appeal or revision shall not be deemed to be a proceedings pending within the meaning of this clause.

10. It is not in dispute that the application filed by the petitioners before the Settlement Commission would fall within the definition of case as defined under Section 245A(b). Section 245C deals with 'Application for Settlement of cases', which provision was invoked by the petitioners, while filing their applications, dated 30.07.2004. Section 245D, stipulates the procedure to be followed by the Commission on receipt of an application under Section 245C, which reads as follows:-

An Assessee may, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, and containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income-tax payable on such income and such other particulars as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of in the manner hereinafter provided.

11. The Settlement Commission has rejected the petitioner's application by the impugned orders, the correctness of which are being tested in these Writ Petitions. The submission made by the Department representative before the Commission that the undisclosed income could have been offered by the petitioners before the Assessing Officer, was found to be of considerable force. The Commission was of the view that determining the petitioners' income for the block period based on the aggression of their net wealth and cash flow statement does not present any complexity of investigation and that all the petitioners have rushed to the Commission soon after filing their block returns declaring NIL income and this buttress an attitude of non-cooperation with the department on the part of the petitioners and appears to be an attempt to obstruct the department's enquiry and examination pursuant to the facts, which came to light as a result of search. Further, the Commission was of the view that having regard to the huge seizure of unaccounted assets at the time of search, additional income offered by the petitioners in their settlement applications is not prima facie full and true. Therefore, the applications were rejected.

12. Section 245D postulates three circumstances, which the Commission would take note for either rejecting or entertaining an application for settlement, they being (i) on the basis of the materials contained in the Commissioner's report; (ii) having regard to the nature and circumstances of the case; or (iii) the complexity of the investigation involved therein. The Commission, in the impugned order, has considered the nature and circumstances of the case taken note of and the observations contained in the Commission's report and held that there is no complexity of investigation.

13. The question would be whether this Court exercising Writ jurisdiction would re-examine such factual finding recorded by the Commission. The Division Bench of the Karnataka High Court in the case of N.Krishnan vs. Settlement Commission reported in [1989] 180 ITR 585, has held that the Court should be slow in interfering with the Settlement Commission's order and can be interfered if there are grave procedural defects, such as violation of mandatory procedural requirements of the provisions in Chapter XIX of the Act and/or violation of the rules of natural justice are made out or if it is found that there is no nexus between the reasons given and the decision taken by the Commission and that the Court cannot interfere either with an error of fact or error of law alleged to have been committed by the Commission.

14. In Shyam Glass Works vs. Income Tax Settlement Commission and Anr., reported in [1997] 228 ITR 672, the Division Bench of the Allahabad High Court, while dismissing a Writ Petition challenging an order of the Settlement Commission rejecting an application for want of full and true disclosure, held that whether the application under Section 245C(1), could or could not be allowed was a matter, which was to be decided by the Settlement Commission giving due weight to the matters mentioned therein and in Section 245D. The High Court, in a writ petition, is concerned only with the legality of the procedure followed, that is, the decision making process and not with the merits of the order passed by the Settlement Commission.

15. Bearing in mind the above legal principles, I proceed to examine the contention raised by the petitioners. The Commission, on examination of the facts, the Commissioner's report, the nature and circumstances of the case, thought fit to reject the applications, as it is not a case worth to be proceeded with. The specific finding of the Commission is that there is no complexity of investigation involved. The learned counsel for the petitioner sought to project the complexity of the case by referring to the number of firms, which were carrying on business and the number of partners. Would this factor alone lead to a complexity of investigation.

16. The Commission in the impugned order took note of the submission of the Revenue that there was a large scale suppression of stock deducted at the time of search and unaccounted gold ornaments were seized, other documents relating to unaccounted investments were seized and the partner of Dix Francis admitted deriving undisclosed income in his sworn statement recorded at the time of search and the subsequent retraction after nearly a year, can be given no credence. Further, that despite the seizure of huge unaccounted stock of gold ornaments and other unaccounted investments, none of the petitioners declared any undisclosed income in the block returns filed by them. They never cooperated in post search enquiries or in the block assessment proceedings.

17. Thus, the Revenue contended that there is no complexity of investigation and it is a case of sheer non-cooperation by the petitioners to complete the block assessment proceedings. This submission by the Revenue found favour with the Settlement Commission to examine the nature and circumstances of the case. The Commission noted the conduct of the petitioners and comparing the huge seizure of unaccounted assets at the time of search and the additional income offered in the Settlement Application is not prima facie full and true. Thus, the conclusion arrived at by the Commission stating that there is no complexity of investigation having been rendered taking note of the nature and circumstances of the case and on the basis of the materials contained in the Commissioner's report, the said findings cannot be disagreed on the mere fact that there are several partners and several firms alone would not result in complexity of investigation, especially when the Revenue has clearly set out as to what is the nature and circumstances of the case.

18. In Harphool Singh vs. Income Tax Settlement Commission and Ors., reported in [1995] 215 ITR 216, a Writ Petition filed challenging an order of Settlement Commission was dismissed holding that whether the application filed under Section 245C of the Act is to be admitted or not, would depend on the facts and circumstances of the each case and the Commission having regard that most of the controversial issues had already been settled and no pending investigation of such complex nature, as would require intervention of the Settlement Commission, the order will not be interfered by the High Court.

19. In Ashish Kumar Ahuja vs. UOI & Ors., reported in [2005] 278 ITR 399 (Delhi), the Division Bench of the Delhi High Court following the decision in the case of Deen Dayal Didwania vs. UOI, reported in [1986] 160 ITR 12 (Delhi), dismissed a Writ Petition filed to direct the Commission to proceed expeditiously with the application submitted by the assessee under Section 245C holding that since Section 245D of the Act gives jurisdiction to the Settlement Commission to proceed or not to proceed with the Settlement Application filed before it, the High Court has no jurisdiction to direct the Settlement Commission to proceed expeditiously with the application submitted by the petitioner under Section 245C of the Act.

20. Thus, Courts have shown restraint in the matter and refused even to direct the Commission to expedite the process. If such is the position of law as propounded in the above referred decisions, the question would be as to whether this Court should exercise its jurisdiction and interfere with the impugned order. Considering the power granted to the Commission under Section 245D(1) coupled with the law referred to in the preceding paragraphs, the only answer to the question should be in the negative. The reasons accorded by the Commission will not be substituted by a Writ Court, more so when there is no allegation of violation of principles of natural justice nor any plea of malafide raised by the petitioners.

21. In my view, merely because there are number of partners and several firms, itself will not make the matter complex. The expression complexity of investigation connotes a different meaning and the complexity will be decided by the Commission considering the materials, contained in the Commission's report and having regard to the circumstances of the case. This having been done by the Commission, this Court does not propose to substitute its views to that of the views recorded by the Commission.

22. The decision in the case of Centurion Bank of Punjab Ltd., vs. Income Tax Settlement Commission & Ors., (supra), referred by the learned counsel for the petitioner is clearly distinguishable on facts. In the said case, the Commissioner of Income Tax submitted a report under Section 245D(1) and categorically held that the complexity of the investigations were involved. In the said case, the assessment spread over 15 assessment years involving 1900 lease transactions and case required examination and cross examination of multiple parties, who were spread across the length and breadth of the country and the case involved Rs.420 crores and disputed additions and dis-allowance and the documents were admittedly lost owing to fire etc., Inspite of such being the materials contained in the Commissioner's report, the Settlement Commission rejected the petition merely on the ground that the petitioner therein had not made full and true disclosure. Thus, under the said facts and circumstances, the Division Bench of the Bombay High Court held that the Settlement Commission committed an error coming to the conclusion that there are no complexities of investigation.

23. Thus, such an order would fall within the exception carved out as to under which circumstances, a Writ Court would interfere with the orders of the Settlement Commission. If the order suffers from grave procedural defects such as violation of mandatory procedural requirements, violation of Rules of natural justice and if there is no nexus between the reasons given and the decision taken, the Court would interfere. The case relating to Centurion Bank of Punjab Ltd., vs. Income Tax Settlement Commission & Ors., (supra), would fall within one of such exceptions, as the finding of the Commission had no nexus to the reasons given in the report of the Commissioner. Therefore, the said decision is clearly distinguishable and would not apply to the facts and circumstances of these cases.

24. The learned counsel for the petitioner submitted that the petitioner's had filed a NIL return of income to comply with the “technical requirement” of clause (a) of the proviso to Section 245C(1). It is the submission of the learned counsel that in all the search and seizure operations, the assessees, who proposed to file application before the Settlement Commission would file NIL returns.

25. In my view, the contention of the petitioner that NIL return has been filed to comply with the “technical requirements”, cannot be countenanced. Section 245C(1) of the Act, states that an assessee may at any stage of the matter relating to him, make an application containing full and true disclosure of his income, which has not been disclosed before the Assessing Officer, explaining the manner in which such income has been derived, additional amounts of income tax payable on such income and such other particulars, as may be prescribed to the Settlement Commission to have the case settled. To be entitled to file such an application under sub-section (1) of Section 245C, the assessee is required to comply with the conditions provided in the proviso, which are as hereunder:-

(a) the assessee has furnished the return of income which he is or was required to furnish under any of the provisions of this Act; and

(b) the additional amount of income-tax payable on the income disclosed in the application exceeds one hundred thousand rupees.

26. Therefore, the return of income, which is contemplated under clause (a) of the proviso mandates the assessee to file a return, which he is or was required to furnish under any of the provisions of the Act and (b) the additional amount of income tax payable on the income disclosed in the application exceeds one hundred thousand rupees. Therefore, I do not agree with the learned counsel for the petitioner to state that the petitioners were justified in filing NIL returns before the Assessing Officer as clause (a) under the proviso is only a technical requirement.

27. In my view the requirement is a pre-requisite to be entitled to file the application before the Commission and cannot be reduced to an insignificant or a mere technical requirement.

28. For all the above reasons, the petitioners have not made out any case for interference with the orders passed by the Settlement Commission. Accordingly, Writ Petitions fail and they are dismissed.

No costs. Consequently, interim orders are vacated and the Miscellaneous Petitions are dismissed.

12.08.2016

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