Court Upholds Settlement Commission's Decision, Limits Judicial Review Scope

Case Name**: Commissioner of Income Tax vs. Settlement Commission (IT & WT) **Key Takeaways**: 1. The power of judicial review is limited in cases involving Settlement Commission orders. 2. Courts should focus on the decision-making process, not the decision itself. 3. Offering additional amounts during settlement doesn't necessarily invalidate the original disclosure. 4. The Settlement Commission has wide discretion in accepting settlements and granting immunity. **Issue**: To what extent can the High Court, under Article 226 of the Constitution of India, interfere with orders passed by the Income Tax Settlement Commission? **Facts**: - The Income Tax department conducted searches on the premises of several assessees between March and July 2012. - The assessees filed settlement applications with the Settlement Commission in March 2013. - The Settlement Commission accepted the applications and granted immunity from penalties and prosecution. - The Commissioner of Income Tax challenged this decision in the High Court. **Arguments**: Income Tax Department: - The assessees didn't make a full and true disclosure of their income. - The Settlement Commission erred in not allowing further investigation. - The method of accounting (LIFO) used by some assessees was incorrect. Assessees: - The Settlement Commission acted within its jurisdiction. - Additional amounts offered were to avoid litigation, not due to incomplete disclosure. - The LIFO method of accounting was consistently followed and accepted previously. **Key Legal Precedents**: 1. Jyotendrasinhji v. S.I. Tripathi and Others [1993 (201) ITR 611 (SC)] 2. N. Krishnan v. Settlement Commission [1989 (180) ITR 585] 3. Union of India and Others v. Ind-Swift Laboratories Limited [(2011) 4 SCC 635] 4. Ajmera Housing Corporation and Another v. Commissioner of Income Tax [2010 (326) ITR 642 (SC)] **Judgement**: The High Court dismissed the writ petitions, upholding the Settlement Commission's decision. It ruled that: 1. The court's power of judicial review is limited in such cases. 2. The Settlement Commission acted within its jurisdiction. 3. Offering additional amounts during settlement doesn't necessarily invalidate the original disclosure. 4. The Commission's findings on the LIFO method of accounting were reasonable. **FAQs**: 1. Q: What is the scope of judicial review in Settlement Commission cases? A: The court focuses on whether the Commission followed proper procedures and acted within its jurisdiction, not on the merits of the decision itself. 2. Q: Does offering additional amounts during settlement invalidate the original disclosure? A: Not necessarily. If the additional amounts are offered to avoid litigation or in the spirit of settlement, it doesn't automatically mean the original disclosure was incomplete. 3. Q: Can the Settlement Commission grant immunity from penalties and prosecution? A: Yes, if it's satisfied that the assessee has cooperated and made a full and true disclosure of income. 4. Q: What is the significance of this judgment for future cases? A: It reinforces the limited scope of judicial review in Settlement Commission cases and gives the Commission wide discretion in accepting settlements. 5. Q: Can the Income Tax Department appeal this decision? A: While the judgment doesn't mention it explicitly, generally, decisions of High Courts can be appealed to the Supreme Court of India.

As these writ petitions involve a common issue, they are taken up together for consideration and disposed by this common judgment.

2. The Commissioner of Income Tax (Central), Cochin is the petitioner in all the writ petitions, which impugn the common order dated 05.08.2013 of the Income Tax Settlement Commission, Chennai (hereinafter referred to as the 'Settlement Commission'), accepting the settlement applications preferred by (i) Sri.P.A.Jose, (ii) Smt.P.P.Alphonsa, (iii) Josco Gold Corporation Pvt. Ltd. and (iv) Josco Jewellers (P) Limited (hereinafter referred to as the 'assessees'), and granting the said applicants immunity from penalty and prosecution under the Income Tax Act.

3. The brief facts, that are necessary for a disposal of the writ petitions, are as follows;

Connected cases

Pursuant to a search conducted by the Income Tax authorities, between 21.03.2012 and 20.07.2012, in the premises of the assessees, notices under Section 153A of the Income Tax Act (hereinafter referred to as the 'IT Act'), were issued to them on 29.11.2012. The assessees are stated to have filed returns of income, for the period covered by the notices issued to them, on 15.03.2013, by declaring the same income as was originally returned by them in the course of regular assessment. Immediately thereafter, on 19.03.2013, the assessees preferred applications before the Settlement Commission offering additional income for the purposes of settlement. The application was allowed to be proceeded with by the Settlement Commission, by an order dated 28.03.2013 passed under Section 245D (1) of the Act. Thereafter, a report was called for from the Commissioner of Income Tax. The Settlement Commission then called for reports in terms of Rule 9 of the Settlement Commission Procedure Rules on 17.05.2013. Pursuant to this, the Commissioner of Income Tax is stated to have filed reports on 20.06.2013, 15.07.2013 and 23.07.2013. These reports, while giving details of the investigation carried out by the department against the assessees, and their prima facie findings in respect thereof, also contained the Connected cases objections of the department to accepting the applications preferred by the assessees for the purposes of settlement. The Settlement Commission, thereafter, heard the matter on 25.07.2013 and 26.07.2013 and passed its final order, under Section 245D (4) of the Act, on 05.08.2013.

4. The grievance of the petitioner, in the writ petitions, is essentially against the manner in which the Settlement Commission proceeded to deal with its objections against accepting the applications preferred by the assessees for settlement. The objections raised before the Commission were as follows:

● The assessees, against whom the department had launched an investigation, and unearthed material, to show that there had been undisclosed income had, in the applications filed before the Settlement Commission, not effected a full and true disclosure of their unaccounted income for the purposes of settlement.

● While the department had worked out the undisclosed income of the assessees under five different heads namely, (i) undervaluation of closing stock, (ii) unaccounted transaction with gold merchants/manufacturers, (iii) suppression of sales turnover, (iv) difference in purchases and (v) amount involved in the purchase of old gold in violation of the provisions of Section 40A (3) of the IT Act, the assessees had disclosed additional income only under the head of purchase of old gold in violation of the provisions of Section 40A (3) of the IT Act, and even in that they had not effected a true disclosure.

● In the case of the proprietary concerns of Sri.P.A.Jose and Smt.P.P.Alphonsa, the department had collected material to show that these concerns had resorted to undervaluation of closing stock of jewellery by adopting the Last-in-First-Out (LIFO) method of valuation. The said method of valuation was not acceptable as per accounting standards and was not in consonance with the weighted average cost method that was usually adopted by others engaged in the same line of business.

● The department had gathered evidence that showed that the assessees were not accounting all their transactions with the goldsmiths/manufacturers in a proper manner and a quantification of the unaccounted income under this head would have been possible, if the department was given some time. The assessees had not, however, offered any additional income under this head in their applications for settlement.

● There was material available with the department to show that the assessees had suppressed their sales turnover while returning their taxable income. The material seized included data that was in digital format and, given some time, the data could have been analysed to quantify the extent of sales suppression. The assessees had not offered any additional income under this head in their applications for settlement.

● An analysis of the digital data that was obtained by the department showed that there was a significant difference between the amounts shown in the returns filed by the assessees, and that shown in the digital data recovered by the department, towards purchase of old gold. It was clear, therefore, that the assessees had resorted to an inflation of the purchase price so as to show reduced gross profit for tax purposes. The assessees had not offered any additional income under this head in their applications for settlement.

● Evidence available with the department showed that the assessee had understated those transactions where they had purchased old gold from customers without complying with the provisions of Section 40A (3) of the IT Act. The undisclosed income that was attributable to the said transactions was huge but the assessees had shown only a small amount towards undisclosed income and offered the same as additional income for the purposes of settlement.

5. The Settlement Commission, while dealing with the objections of the department, and deciding to allow the applications of the assessees by accepting the additional amounts offered by them for settlement, found as follows with respect to the said objections:

● As per the scheme of settlement under the IT Act, the decision, as to whether or not any further investigation was required in any particular case, was one that had to be taken by the Settlement Commission before which an application for settlement had been filed by an applicant.

● The search carried out by the department in the instant case was spread over four months and, thereafter, the department was seized of the matter for almost a year, before the assessees filed their application for settlement on 18.03.2013. Whatever enquiries or investigations had to be made by the department to find against the assessees on undisclosed income, could have been done within that period. That not having been done, the department could not insist on a further enquiry or investigation once the Settlement Commission was seized of the matter. Further, based on the material available on record, the Commission was of the view that a further investigation was not required in the matter.

● As regards the adoption of LIFO method of accounting, adopted by two of the assessees for the purposes of valuation of closing stock in their proprietary concerns, the said accounting method was followed consistently for many years in the past and, had been accepted by the department as well. That being the case, and in view of the fact that the AS-2 accounting standard did not prohibit the LIFO method, and further, the AS-2 accounting standard was not mandatory for the purposes of the IT Act, the assessees had not committed any irregularity by following the LIFO method.

● The department has not adduced cogent evidence to substantiate their contentions with regard to alleged unaccounted transactions of the assessees with goldsmiths/manufacturers. During the search of the assessees’ premises, there was no instance of unaccounted sales or purchases detected. There was also no difference noticed in the quantitative stock in any of the branches of the assessees. The deposition of two employee goldsmiths of the assessees would however point to a possibility of some transactions having been unaccounted. To cover this, and to avoid any litigation, the assessees were required to offer an additional amount of Rs.20,00,00,000 for all the years covered by their settlement applications.

● With regard to the alleged sales suppression for the period from 01.04.2010 to 21.04.2010, it was seen that, on account of a software defect that persisted for the said period, there was a difference in the sales value, including value addition, shown in the estimate and in the final bill. On account of this the rupee value of sales was initially entered incorrectly in the books of account. This was, however, rectified subsequently by the assessees and the income that had not been reflected in the books of account was offered for settlement. The Commission was of the view that the disclosure made by the assessees under this head was correctly done.

● As regards the alleged difference in the figures showing purchase of old gold in the returns filed by the assessees and the data obtained from the software that was seized by the department during the search, the discrepancy pointed out by the department was a matter of verification to be done by the Settlement Commission.

This verification was done in the office of the Commission and the department was also asked to be present at the time of verification. The department, however, chose not to be present at the time of verification and, further, did not choose to submit any report on the said aspect either. Their request for some more time for recovery of relevant data from the seized computers did not merit consideration because the report submitted by them under Rule 9, indicated that the recovery of the data had already been done using experts. Further, the verification done by the Commission revealed that there was no discrepancy and this was fortified by the fact that there was no difference in stock or cash balance found at the time of search of the assessees’ premises. No additional disclosure from the assessees under this head was, therefore, necessitated.

● The amounts shown by the department as representing transactions of purchase of gold where the procedure under Section 40A (3) of the IT Act had not been followed, were incorrect. The overstatement of these amounts was on account of the fact that the department had not taken into account the Customer Advance Register maintained in the Advance Soft Software maintained at the Head Office. The said Register contained details of receipt of old gold ornaments for future exchange under the old gold advance scheme, as also details of the cash advances given by the customers under the cash advance scheme. Although the department has a case that the Advance Soft Software was a fabricated one and did not really exist, the deposition of Sri.P.A.Jose did point to the existence of the scheme. The appraisal report of the department also indicates that there was such a scheme in existence. There was also the possibility of the department not having found the software at the time of search as there were three other softwares that were not seized and it was not the case of the department that they did not exist. An analysis of the software, however, disclosed that there was no mechanism for linking an advance made under the old gold advance scheme to the corresponding future sale and this was a shortcoming in the maintenance of supporting records. However, the explanation of the assessees with regard to the non- requirement of mentioning the name of the customer who deposited the gold, when the transaction could be linked with the purchase bill number where the date and time of advance receipt is mentioned, was found acceptable by the Commission. The Commission also noted that the department only had material with regard to alleged violations under this head for the assessment years 2011- 12 and 2012-13 and for the assessment years 2006-07 to 2010-11, the department had not detected any such violation and further, for the said years scrutiny assessments had taken place where the department did not find any discrepancy on this count. Having stated that, the Commission proceeded to observe that it was possible that the assessing officer was guided by the audit reports while conducting the scrutiny assessments and hence the possibility of there having been violations of Section 40A (3) in the previous years could not be ruled out. The additional income that was required to be offered by the assessees under this head, for the purposes of settlement, would be Rs.20,94,00,000 for the assessment years 2006-07 to 2010-11 and Rs.9,24,00,000 for the assessment years 2011-12 and 2012-13.

● As regards the contentions of the department regarding the assessees running a parallel scheme, along with the cash advance scheme, for introducing their own cash by showing bogus customers, there was no evidence to support such an allegation. There was no such suggestion in the appraisal report or in the reports submitted under Section 245D (B) or under Rule 9.

● The Settlement Commission found the assessees entitled for the benefit of immunity from penalty and prosecution under the IT Act, insofar as the assessees had effected a full and true disclosure and the additional amounts offered for settlement were with a view to bring a quietus to the matter and in the spirit of settlement. The prayer for waiver of interest, however, was rejected.

6. It is these findings of the Settlement Commission that are impugned in the writ petitions preferred on behalf of the Revenue.

7. I have heard Sri.P.K.Ravindranath Menon, the learned Senior Counsel appearing on behalf of the Income Tax department as well as Sri.Abhishek Manu Singhvi, the learned Senior Counsel appearing on behalf of the assessees in all the writ petitions.

8. The submissions of the learned Senior Counsel for the Income Tax department, briefly put, are as follows:

● The settlement commission erred in not giving an opportunity to the department to complete the investigation, with regard to the income that was allegedly suppressed consequent to an erroneous basis, adopted by two of the assessees, for valuation of closing stock. This amounted to a violation of the procedure under the Act, especially when there were no valid reasons to deny the department an opportunity to complete the investigation.

● The department had material with it which would show that the system of accounting followed by two of the assesses, with respect to the valuation of closing stock, was wrong and not in conformity with the provisions in the IT Act. It had been established that the LIFO method of valuation of closing stock adopted by the said assessees was not in conformity with the practice adopted by others in the same trade. The system of accounting followed by the assessee did not even conform to the accounting practice that was known as LIFO since the necessary pre-conditions, for qualifying as LIFO, did not exist in the instant case. Further, the mere fact that the assessees were following the said practice of accounting consistently would not insulate them from a demand of tax if the accounting practice followed by the assessee was contrary to the provisions of the IT Act. Under these circumstances, the settlement commission ought to have noted that the assessees had not offered any additional income in the applications filed before the settlement commission and hence their application merited rejection on the ground that it did not contain a full and true disclosure of undisclosed income as contemplated under the scheme of settlement under the IT Act. Reliance is placed on the decisions in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax – [1997 (227) ITR 172 (SC)] and Minister of National Revenue v. Anaconda American Brass Ltd. – [1956 (30) ITR 84 (PC)] in support of the said contention.

● In respect of the undisclosed income detected by the department under the heads of Additions under Section 68 of the IT Act, purchases from goldsmiths/manufacturers and disallowances under Section 40A (3) of the IT Act, the Settlement Commission had suggested the addition of various amounts under these heads, towards undisclosed income, and this was accepted by the assessees who offered the said amounts, albeit stating that they were doing it to put an end to litigation and in the spirit of settlement. Whatever, may have been the reasons for the offering of additional amount by the assessees, the fact that they offered additional amounts showed that their initial disclosure was not a full and true disclosure of their income and hence the settlement commission ceased to have any jurisdiction to proceed with the matter. Reliance is placed on the decisions of the Supreme Court in Ajmera Housing Corporation and Another v. Commissioner of Income-Tax – [2010 (326) ITR 642 (SC)].

● The Settlement Commission also erred in granting immunity from penalty and prosecution to the assessees without even recording their satisfaction with regard to the assessees having complied with the requirements of full and true disclosure. This was serious jurisdictional error committed by the Settlement Commission.

● When it is found that the Settlement Commission had acted in excess of jurisdiction while allowing the applications preferred by the assessees to be proceeded with and passing orders thereon, this Court would be acting in accordance with its powers under Article 226 of the Constitution of India to quash the order of the settlement commission as one passed in excess of jurisdiction. The matter would accordingly have to be remanded to the settlement commission for considering the application afresh, after conducting an investigation with regard to the actual amount of undisclosed income of the assessees.

9. Per contra, the learned Senior Counsel appearing on behalf of the respondent assessees would contend as follows:

● The contention of the petitioner, based on the decision of the Supreme Court in Ajmera Housing Corporation's case (supra), that whenever there is an offer of additional amounts made by an assessee during the course of the proceedings before the commission, it would necessarily imply that the original disclosure made by him was not full and true, cannot be legally countenanced. Such an interpretation of the judgment of the Supreme Court would render the whole scheme of settlement under the IT Act meaningless.

● The decision of the Supreme Court in Ajmera Housing Corporation's case (supra) has been interpreted as one that is applicable to the facts of that case and not as laying down a general proposition that additional amounts cannot be offered by an assessee during the course of settlement proceedings, in order to avoid protracted litigation and in the spirit of settlement. The decision of the Bombay High Court in Director of Income-Tax (International Taxation) v. Income-Tax Settlement Commission and Others – [2014 (365) ITR 108 (Bom)] is cited in support of the said contention.

● As regards the objections pointed out by the petitioner with regard to the method of accounting that was adopted by two of the assessees namely, the LIFO method, it was not in dispute that the said method of accounting was one that was in vogue and followed by others in the same trade. The acceptance of the said method of accounting for income tax purposes was recognised in many decisions of the High Courts and Income Tax Appellate Tribunals. Further, in terms of Sections 145 and 145A of the IT Act, the LIFO method adopted by the assessees could be justified on account of it being the consistent method followed by the assessees for over 30 years. The settlement commission was, therefore, justified in not insisting on any additional offer from the assessees under this head.

● As regards the income arising from a disallowance under Section 40A (3) of the IT Act, it was relevant to note that the cases under Section 40A (3) covered two kinds of transactions with regard to purchase of old gold. Firstly, there were purchases of old gold made outright from the customer against cash payments. In such cases, where the payment to the customer exceeded the prescribed limit, the procedure under Section 40A (3) was complied with. In the second category of cases, the purchase of old gold from customers was under a scheme of exchange, whereby a customer could deposit his old gold with the assessees and purchase gold ornaments, of the same weight as the gold deposited, on a later date, irrespective of any upward revision of the price of gold in the interregnum. In such cases, the provisions of Section 40A (3) would not get attracted on account of Rule 6DD (d) of the IT Rules that excluded cases, where payment was made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee, from the ambit of Section 40A (3) of the IT Act. The existence of the exchange scheme was established through evidence that was available with the department and the settlement commission found that the customer advance software that was maintained by the assessees at their head office contained the details of all such transactions. The additional amounts offered by the assessees under this head were only towards a probability that income that might have escaped assessment on account of a shortcoming in the software used. The additional amounts offered were at the suggestion of the settlement commission and not pursuant to any revision of undisclosed income by the assessees.

● With regard to the allegations of the petitioners against the findings of the settlement commission under the heads of “Differences in purchases” and “Additions under Section 68”, there is no challenge in the writ petition against the findings of the settlement commission on the issue of difference in purchases. As regards the additions made under Section 68 of the IT Act, although there is a challenge to the findings of the settlement commission under this head in the writ petition, no objections were raised before the settlement commission at the appropriate stage of the proceedings before that forum. The settlement commission nevertheless considered these aspects in their order and gave reasons for their decision on these issues.

● As regards the jurisdiction of this Court, to interfere with the orders passed by the settlement commission, under Article 226 of the Constitution of India, reliance is placed on the decisions in Jyotendrasinhji v. S.I.Tripathi – [1993 (201) ITR 611 (SC)]; N.Krishnan v. Settlement Commission – [1989 (180) ITR 585 (Kar)]; R.B. Shreeram Durga Prasad and Fatehchand Nursing Das v. Settlement Commission (IT & WT) and Another – [1989 (176) ITR 169 (SC)]; Shriyans Prasad Jain (decd. by legal representative) v. Income-Tax Officer and Others – [1993 (204) ITR 616 (SC)]; Union of India and Others v. Ind-Swift Laboratories Limited – [(2011) 4 SCC 635] and Commissioner of Income-Tax v. Gopal Gupta – [2014 (364) ITR 446 (Delhi)] to contend that the scheme of settlement contained in Chapter XIX-A of the IT Act is in the nature of a self contained code. It is self contained in that it contemplates a finality to issues settled, it is to be done in a time bound manner and the orders passed thereunder are not subjected to any appellate or revisional remedy. It follows, therefore, that in exercise of the powers of judicial review, this Court must keep in mind the above features of Chapter XIX-A of the Act and exercise its power of review only on limited grounds such as violation of statutory provisions by the commission or jurisdictional errors committed by the commission [See: Syed Yakoob v. K.S.Radhakrishnan and Others - [AIR 1964 SC 477]]. This Court would not, in exercise of the power of judicial review, assume the role of an appellate or revisional authority (See: Nirmala J. Jhala v. State of Gujarat and Another - [(2013) 4 SCC 301] and Kalinga Mining Corporation v. Union of India and Others - [(2013) 5 SCC 252]).

10. On a consideration of the facts and circumstances of the case, as also the submissions made across the bar, I am of the view that the following issues arise for consideration in this case, namely;

(1) Whether this court, in exercise of its jurisdiction under Article 226 of the Constitution of India, will interfere with orders passed by the Settlement Commission under Section 245D of the Income Tax Act, 1961 and if so, to what extent?

(2) Whether, on account of the offer of additional amounts by the assessees towards undisclosed income, at the instance of the Settlement Commission, it could be inferred that the assessees had not made a full and true disclosure of their income for the purposes of settlement and thereby denuded the Commission of its jurisdiction to proceed with the matter?

(3) Whether, in the instant case, the Settlement Commission was justified in refusing to the department an opportunity to conduct further investigation to ascertain the exact amount of income that had been allegedly undisclosed by the assessees?

(4) Whether the findings of the Settlement Commission with regard to the alleged undervaluation of closing stock by two of the assessees is liable to be interfered with?

Issue 1:

The first issue to be considered is the nature of the jurisdiction that is to be exercised by this court while dealing with a writ petition filed under Article 226 of the Constitution of India, challenging the orders passed by the Settlement Commission under the IT Act, 1961. 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. It would be apposite to notice some of the judgments that clearly indicate that 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 IT 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 XIX- A 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.”

More recently, 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.”

Hence, it is well settled 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. It follows, therefore, that in the instant case, 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.

Issues 2 and 3:

It is the case of the department in the writ petitions that the offer of additional amounts by the assessees, over and above the amounts initially disclosed by it as undisclosed income in their applications before the settlement commission, and pursuant to the suggestions of the settlement commission in the course of the proceedings before it, rendered the original disclosure made by them as one that was not “ a full and true disclosure” of the income that was not disclosed by it before the assessing officer or the manner in which such income was derived. The petitioner relies heavily on the decision of the Supreme Court in Ajmera Housing Corporation and Another v Commissioner of Income Tax – [2010 (326) ITR 642 (SC)] in support of its said contention.

11. Before embarking upon a consideration of the merits of the said contention of the petitioner, I feel it would be apposite to notice the scheme of Chapter XIX-A of the IT Act, 1961 that deals with Settlement of Cases. As observed by a Constitutional Bench of the Supreme Court in Commissioner of Income-Tax v. Anjum M. H. Ghaswala and Others – [2001 (252) ITR 1 (SC)], Chapter XIX-A of the Act was introduced by the Taxation Laws (Amendment) Act, 1975 with effect from 01.04.1976, for the purpose of quick settlement of cases, so that the tax due to the department is collected at the earliest. On a perusal of the relevant provisions under the Act, I note that the scheme provides for the preferring of an application by an assessee, that contains 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 and the additional amount of income tax payable on such income. Such application is to be made to the Settlement Commission, which is then to proceed with the application in the manner detailed thereafter. The settlement commission is required to take a preliminary decision, after hearing the applicant, as to whether the application deserves to be rejected or whether it should allow the application to be proceeded with. If it is the latter, then the Settlement Commission is required to call for a report from the Commissioner, who has to submit the said report within thirty days. On a consideration of the report of the Commissioner, the Settlement Commission can, after hearing the applicant, declare the applications as invalid. If it is not declared invalid, then the Settlement Commission proceeds to call for records from the Commissioner. On receipt of the records from the Commissioner and after examining it, if the Settlement Commission feels that any further enquiry or investigation is required in the matter, it may direct the Commissioner to make or cause to be made such further enquiry or investigation and furnish a report on the matters covered by the application and any other matter relating to the case. The Commissioner has then to furnish the said report to the Settlement Commission within a period of ninety days. The settlement commission then proceeds to pass final orders in the matter, after perusing the report of the Commissioner, if any, and after giving the assessee and the Commissioner an opportunity of being heard. The settlement commission can also pass orders granting immunity to the applicant from penalty and prosecution under the IT Act. Such orders can be passed on the Settlement Commission being satisfied that the applicant has co-operated with the Commission in the proceedings before it and has made a full and true disclosure of his income and the manner in which such income has been derived. The orders passed by the Settlement Commission, are to be conclusive as to matters stated therein, in terms of Section 245-I of the IT Act, and will be rendered void only if it is subsequently found by the Settlement Commission that the orders were obtained by fraud or misrepresentation.

12. It is apparent from a perusal of the scheme of Chapter XIX-A of the IT Act that the jurisdictional fact that confers the settlement commission with the jurisdiction to proceed with an application is the filing by an applicant, of an application that that contains 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 and the additional amount of income tax payable on such income. If, at any stage of the proceedings before the settlement commission, it finds that the disclosure made by the applicant is not a full and true disclosure, then the said authority cannot proceed further with the application. It gets denuded of its jurisdiction to proceed with the matter. It is in the backdrop of this fact that I must analyse the decision of the Supreme Court in the case of Ajmera Housing Corporation (Supra) that has been relied upon by the petitioner. It must, at once be noted that the provisions of Chapter XIX-A that were analysed by the Supreme Court in that case were slightly different from those under consideration in the instant case in that, it was the provisions, as they stood prior to the amendments introduced by the Finance Act, 2007, that were considered by the Supreme Court. Moreover, the Supreme Court was considering the case of an assessee who had suo motu revised his declaration, by making offers of additional amounts by way of disclosure of income at various stages of the proceedings before the Settlement Commission. Under those circumstances, the Court found that, judging by the assessee’s own conduct, his original application could not be seen as containing a full and true disclosure of his income for the purposes of settlement under the Act. The relevant observations in the judgment of the Supreme Court are to be found in paragraphs 27, 31, 36 and 39 and are extracted hereunder:

“27. It is clear that disclosure of “full and true” particulars of undisclosed income and “the manner” in which such income had been derived are the pre-requisites for a valid application under section 245C(1) of the Act. Additionally, the amount of income-tax payable on such undisclosed income is to be computed and mentioned in the application. It needs little emphasis that section 245C(1) of the Act mandates “full and true” disclosure of the particulars of undisclosed income and “the manner” in which such income was derived and, therefore, unless the Settlement Commission records its satisfaction on this aspect, it will not have the jurisdiction to pass any order on the matter covered by the application.”

31. ....... It is plain from the language of sub-section (4) of section 245D of the Act that the jurisdiction of the Settlement Commission to pass such orders as it may think fit is confined to the matters covered by the application and it can extend only to such matters which are referred to in the report of the Commissioner under sub-section (1) or sub- section (3) of the said section. A “full and true” disclosure of income, which had not been previously disclosed by the assessee, being a pre-condition for a valid application under section 245(1) of the Act, the scheme of Chapter XIX -A does not contemplate revision of the income so disclosed in the application against item no.11 of the Form. Moreover, if an assessee is permitted to revise his disclosure, in essence, he would be making a fresh application in relation to the same case by withdrawing the earlier application. In this regard, section 245(3) of the Act which prohibits the withdrawal of an application once made under sub-section (1) of the said section is instructive inasmuch as it manifests that an assessee cannot be permitted to resile from his stand at any stage during the proceedings. Therefore, by revising the application, the applicant would be achieving something indirectly what he cannot otherwise achieve directly and in the process rendering the provision of sub-section (3) of section 245C of the Act otiose and meaningless. In our opinion, the scheme of the said Chapter is clear and admits of no ambiguity.

36. We are convinced that, in the instant case, the disclosure of Rs.11.41 crores as additional undisclosed income in the revised annexure, filed on September 19, 1994 alone was sufficient to establish that the application made by the assessee on September 30, 1993 under Section 245C (1) of the Act could not be entertained as it did not contain a “true and full” disclosure of their undisclosed income and “the manner” in which such income had been derived. However, we say nothing more on this aspect of the matter as the Commissioner, for reasons best known to him, has chosen not to challenge this part of the impugned order.”

39. ..... Apart from the fact, as explained above, not contemplated in the scheme, withholding of the information regarding filing of the revised annexure, disclosing undisclosed income of Rs.11.41 crores as against the income of Rs.1.94 crores, disclosed in the annexure forming part of the application, deprived the commissioner of his right to object to the maintainability of the assessee's application on the ground that the assessee had not made true and full disclosure of their income in the previous application, the foundational requirement of a valid application under section 245C(1) of the Act. Accordingly, we have no hesitation in rejecting the argument.”

13. The issue to be considered here is whether, the observations of the Supreme Court in the aforementioned judgment are to be taken to mean that in every case where an applicant makes an offer of additional amounts, even at the instance or suggestion of the settlement commission, it would follow that the original declaration made by the applicant did not contain a full and true disclosure of his income and thereby rendering it invalid and, consequently, denuding the settlement commission of its jurisdiction to proceed further in the matter? In my view, such an interpretation would render meaningless the scheme of settlement that is envisaged under the IT Act. One cannot discount the possibility of the Settlement Commission finding the disclosure of income made by an assessee as being full and true and yet requiring minor adjustments to include even those amounts, which though disputed by the assessee, would nevertheless be offered by the assessee in the interests of putting an end to litigation and in the spirit of settlement. These could be amounts, in respect of which, neither the department nor the assessee have sufficient material to substantiate their contentions, but the assessee is nevertheless willing to give up his claim in the interests of finality to litigation. The consent by an assessee to forgo such amounts, at the suggestion of the Settlement Commission, cannot have the effect of rendering his original disclosure dubious for the purposes of settlement under the Act. In my opinion, it is only in those cases where an assessee resiles from his original declaration of undisclosed income, by suo motu effecting revisions thereto, that he renders his application invalid for the purposes of settlement. In cases where additional amounts are offered by an assessee, pursuant to a relinquishment of his claims with regard to the non-taxability of such income, it would not be a case where the assessee is resiling from his original stand as regards undisclosed income. In the latter type of cases, the Settlement Commission would be well within its jurisdiction to include such amounts in the final amount for which the case before it is settled with the assessee. In taking the said view, I am fortified by the decision of the Bombay High Court in Director of Income-Tax (International Taxation) v. Income-Tax Settlement Commission and Others – [2014 (365) ITR 108 (Bom)].

14. I must now turn to the proceedings before the Settlement Commission in the instant case to ascertain the circumstances under which the suggestion with regard to the offer of additional income was made to the assessees and the reasons therefor. This is to ensure that the Settlement Commission acted bonafide and, therefore within its jurisdiction, while directing the assesses to make the offer of additional amounts. The additional amounts, it will be noted, were offered under the heads of (i) “unaccounted transactions of the assessees with goldsmiths/manufacturers” and (ii) “transactions of purchase of gold where the procedure under Section 40A (3) of the IT Act had not been followed”.

15. As regards (i) above, it is clear from a perusal of the Settlement Commission’s order that the department had not adduced cogent evidence to substantiate their contentions with regard to alleged unaccounted transactions of the assessees with goldsmiths/manufacturers. During the search of the assessees’ premises, there was no instance of unaccounted sales or purchases detected. There was also no difference noticed in the quantitative stock in any of the branches of the assessees. There was only the uncorroborated deposition of two employee goldsmiths of the assessees that pointed to a possibility of some transactions having been unaccounted. To cover this, and to avoid any litigation, the assessees were required to offer an additional amount of Rs.20,00,00,000 for all the years covered by their settlement applications.

16. As regards (ii) above, the Settlement Commission found that the amounts shown by the department, as representing transactions of purchase of gold where the procedure under Section 40A (3) of the IT Act had not been followed, were incorrect. The overstatement of these amounts was on account of the fact that the department had not taken into account the Customer Advance Register maintained in the Advance Soft Software maintained at the Head Office. The said Register contained details of receipt of old gold ornaments for future exchange under the old gold advance scheme, as also details of the cash advances given by the customers under the cash advance scheme. Although the department had a case that the Advance Soft Software was a fabricated one and did not really exist, the deposition of Sri.P.A.Jose did point to the existence of such a scheme. The appraisal report of the department also indicated that there was such a scheme in existence. There was also the possibility of the department not having found the software at the time of search as there were three other softwares that were not seized and it was not the case of the department that they did not exist. Thereafter, the Settlement Commission proceeded to verify the data contained in the software that was not seized by the department with the data in the software that was seized. This verification was done through the officers in the Settlement Commission itself. It is significant to note that the department did not choose to participate in the said verification process for reasons best known to them. Thereafter, the assessee was asked to demonstrate the working of the software before the assessing officer in Cochin. This was also done but the department chose not to file any objections with the Settlement Commission with regard to the data contained in the software. It was thereafter, that the Settlement Commission, on an analysis of the software, found that there was no mechanism for linking an advance made under the old gold advance scheme to the corresponding future sale and this was a shortcoming in the maintenance of supporting records. However, the explanation of the assessees with regard to the non-requirement of mentioning the name of the customer who deposited the gold, when the transaction could be linked with the purchase bill number where the date and time of advance receipt is mentioned, was found acceptable by the Commission. The Commission also noted that the department only had material with regard to alleged violations under this head for the assessment years 2011-12 and 2012-13 and for the assessment years 2006-07 to 2010-11, the department had not detected any such violation and further, for the said years scrutiny assessments had taken place where the department did not find any discrepancy on this count. Under the said circumstances, the Commission proceeded to observe that it was possible that the assessing officer was guided by the audit reports while conducting the scrutiny assessments and hence the possibility of there having been violations of Section 40A (3) in the previous years could not be ruled out. The additional income that was required to be offered by the assessees under this head, for the purposes of settlement, was fixed at Rs.20,94,00,000 for the assessment years 2006-07 to 2010-11 and Rs.9,24,00,000 for the assessment years 2011-12 and 2012-13.

17. A consideration of the circumstances under which the assessee was called upon to offer additional amounts for the purposes of settlement under heads (i) and (ii) above would clearly reveal that the offer of additional amounts made by the assessees was only to put a quietus to the litigation with the department and in the spirit of settlement. The suggestions by the Settlement Commission, and the acceptance of the offer of additional amounts from the assessee for the purposes of settlement, cannot be seen as having rendered invalid the original declaration made by the assessees before the Commission either for the purposes of settlement of the tax liabilities or for the grant of immunity from penalty and prosecution under the Act, especially when the Commission finds that the assessees had co-operated in the proceedings before it. Further, the Settlement Commission had examined the material available with the department to find that there was no requirement of any further investigation and that a verification, of the material already available, would suffice for the purposes of determining whether the assessees had failed to disclose any income for the purposes of settlement. The department, which did not participate in the verification proceedings, or raise any timely objection to it before the Settlement Commission, cannot be heard to complain of any violation of procedure by the Settlement Commission, at this belated stage. I find the order of the Settlement Commission to be legal and valid in all respects, including the grant of immunity to the assessees, and not liable to be interfered with in the present proceedings.

Issue 4:

Lastly, I must deal with the issue as to whether the findings of the Settlement Commission with regard to the alleged undervaluation of closing stock by two of the assessees is liable to be interfered with. In deciding this issue, I must remind myself of the jurisdiction that I am called upon to exercise, as already noted while answering Issue 1 above. The contention of the department before the Settlement Commission was that it had material to show that the business concerns of two of the assessees had resorted to undervaluation of closing stock of jewellery by adopting the Last-in-First-Out (LIFO) method of valuation. The said method of valuation, according to the department, was not acceptable as per accounting standards and was not in consonance with the weighted average cost method that was usually adopted by others engaged in the same line of business. The settlement commission found that the said accounting method was followed consistently for many years in the past and, had been accepted by the department as well. That being the case, and in view of the fact that the AS-2 accounting standard did not prohibit the LIFO method, and further, the AS-2 accounting standard was not mandatory for the purposes of the IT Act, the assessees had not committed any irregularity by following the LIFO method. As a matter of fact, it will be seen from a perusal of the order of the settlement commission that it has dealt with the objections of the department at some length and given reasons as to why it felt that there was no merit in the contention of the department that the adoption of the LIFO method of valuation of closing stock did not have the effect of distorting the real profits earned by the assessees. It was under those circumstances that the commission found that the declaration of the assessees, vis-à-vis this objection of the department, was full and true disclosure for the purposes of settlement. I do not find any valid ground to interfere with the said finding of the Settlement Commission.

Resultantly, the writ petitions, in their challenge to the final order dated 05.08.2013 of the Income Tax Settlement Commission, fail and are accordingly dismissed. No costs.

A.K.JAYASANKARAN NAMBIAR

JUDGE