Settlement Commission's Decision on Disclosure Validity Upheld

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Case Name:

Commissioner of Income Tax vs. RNS Infrastructure Ltd. (High Court of Karnataka)

Writ Petition No. 44007 of 2014 & 2745-2750 of 2015 (T-IT)

Date: 18th January 2016

Key Takeaways:

- The Settlement Commission can proceed with an application if it is satisfied with the disclosure, even if the CIT objects.

- The court emphasized the importance of full and true disclosure in applications under Section 245C (of Income Tax Act, 1961).

- The decision clarifies the procedural requirements for the Settlement Commission under Section 245D (of Income Tax Act, 1961).

Issue

Did the Settlement Commission err in proceeding with the application despite objections from the CIT regarding the disclosure's completeness and truthfulness?

Facts

- A search was conducted at RNS Infrastructure Ltd.'s premises, revealing undisclosed income.

- The Assessing Officer initiated proceedings under Section 153A (of Income Tax Act, 1961).

- RNS Infrastructure Ltd. filed an application under Section 245C (of Income Tax Act, 1961) for settlement.

- The Settlement Commission decided to proceed with the application after a preliminary report from the CIT, despite objections regarding the disclosure's completeness.

Arguments

- Petitioner (CIT): Argued that the application should be rejected due to incomplete disclosure and unpaid taxes. Claimed that the Settlement Commission must adjudicate objections before proceeding.

- Respondent (RNS Infrastructure Ltd.): Contended that the Settlement Commission is not required to adjudicate objections at the initial stage and can proceed if it finds the application not invalid.

Key Legal Precedents

- Ajmera Housing Corporation vs. Commissioner of Income Tax (2010) 326 ITR 642: Emphasized the need for full and true disclosure in settlement applications.

- Commissioner of Income Tax vs. Income Tax Settlement Commission (2014) 365 ITR 87 (Bom): Discussed the procedural aspects of the Settlement Commission's decision-making process.

Judgement

The court upheld the Settlement Commission's decision to proceed with the application, stating that the Commission had not violated any procedural requirements. The court found that the Commission had taken a prima facie view that the application was not invalid and that a final order would be passed only after further reports and satisfaction of full disclosure.

FAQs

Q1: What does this decision mean for RNS Infrastructure Ltd.?

A1: The decision allows RNS Infrastructure Ltd.'s application to proceed, potentially leading to a settlement of their undisclosed income issues.

Q2: Why didn't the court require the Settlement Commission to adjudicate the CIT's objections?

A2: The court found that the Settlement Commission's role at this stage is to determine if the application is prima facie valid, not to adjudicate objections.

Q3: What is the significance of full and true disclosure in this context?

A3: Full and true disclosure is crucial for the validity of a settlement application under Section 245C (of Income Tax Act, 1961), as it forms the basis for the Settlement Commission's decision to proceed.

The facts leading up to these petitions are as follows:-

The respondent is said to be an assessee within the jurisdiction of the petitioner. A search is said to have been conducted at the business premises of the respondent and the residential premises of its Directors, by the Income Tax Department, in exercise of power under Section 132 (of Income Tax Act, 1961) (Hereinafter referred to as the ‘IT Act’, for brevity) as on 16.2.2012. It transpires that incriminating material regarding undisclosed income was found and seized.

The assessing officer is said to have initiated proceedings under Section 153A (of Income Tax Act, 1961), for the Assessment years 2006-07 to 2011-12, by a notice dated 7.12.2012. The respondent is said to have filed a return of income pursuant thereto. And further, during the pendency of the said proceedings, the assessee is said to have filed an application under Section 245C (of Income Tax Act, 1961) before the Settlement Commission, as on 6.2.2014, in Form no. 34B.

The Settlement Commission is said to have issued notice to

Respondent no.1 under Section 245D(1) (of Income Tax Act, 1961). It had then

passed an order under Section 245D(1) (of Income Tax Act, 1961) to proceed with the

application vide proceedings dated 18.2.2014. The Settlement

Commission had then called for a report from the petitioner as

required under Section 245(D)(2B) (of Income Tax Act, 1961). The petitioner

is said to have submitted a report in compliance with the same.

The petitioner had objected to the application filed by respondent

no.1 on the ground that there was no true and full disclosure and

that the requisite tax had also not been paid. It was emphasized

that the unaccounted income detected during the course of search

was not fully disclosed. And hence sought that the application be

rejected. The Settlement Commission however chose to proceed

with the further enquiry. It is the petitioner's contention that the

Settlement Commission was required to adjudicate on the

objection filed by the petitioner. Such adjudication, it is asserted,

is mandatory and should be conducted with due application of

mind and must be followed by a reasoned order. For otherwise,

the exercise of calling for a report from the Commissioner of

Income Tax is rendered an empty formality.

It is in the above background that the present writ petition is

filed.

2. It is contended that the settlement Commission has failed

to take into consideration that the object of the provisions of

Chapter XIX-A is to enable an assessee, who comes clean with

full and true disclosure of his income and explains the manner in

which such income has been derived, to move the Settlement

Commission for settlement of the dispute. An applicant who fails

to disclose fully and truly the income which has not been

disclosed before the Assessing Officer and fails to explain the

manner in which such income has been derived and fails to pay

the additional amount of income tax payable on such income, the

Settlement Commission cannot proceed with the application. If

the Commissioner objects regarding compliance of the above

requirements, the Settlement Commission cannot assume

jurisdiction to consider the application without adjudicating the

objection. Hence, the progress in the application beyond Section

245D(2B) of the IT Act by the Settlement Commission is invalid

and without jurisdiction.

It is contended that the total short fall in the declaration

made by the respondent in the application before the Settlement

Commission with reference to the seized material available with

the Assessing Officer is Rs.105,13,76,527/-. The short fall in

declaration would clearly demonstrate that the declaration in the

application before the Settlement Commission is not a true and

full disclosure of the additional income.

Reliance is placed on the following authorities by the

learned counsel for the petitioner in seeking that the petition be

allowed.

1. Commissioner of Income Tax vs. Income Tax

Settlement Commission, (2014)365 ITR 0087(Bom);

2. Commissioner of Income Tax (Central) vs. Income

Tax Settlement Commission (ITSC),(2014) 361 ITR 068 (Bom);

3. Ajmera Housing Corporation and another vs.

Commissioner of Income Tax; (2010) 326 ITR 0642;

3. On the other hand, the learned counsel Shri A.Shankar

appearing for respondent no.1 would point out that Section

245D(2C) enjoins the Settlement Commission to declare an

application as invalid on the basis of the report of the

Commissioner. It does not contemplate "rejection" of the

application on the basis of the objection by the Commissioner. It

is asserted that Section 245D(2C) (of Income Tax Act, 1961) does not require the Settlement

Commission to adjudicate on the objection filed by the

Commissioner. It is contended that the Settlement Commission

has been empowered to declare whether the application under

consideration is invalid on the basis of the report of the

Commissioner and nothing more. There is no mandate

contemplated under Section 245D(2C) (of Income Tax Act, 1961), for an adjudication on the

objection filed.

It is pointed out that the Commissioner having objected to

the application on the ground that there was no full and true

disclosure, has provided the amount of unaccounted income said

to have been detected by the Investigation wing. The basis for

arriving at the unaccounted income by the Investigation Wing, is

not disclosed to this Court. There is no opportunity provided as

yet, to the respondent - by the Commissioner to dispute the

correctness of the unaccounted income detected.

It is contended that the Settlement Commission has only

taken a prima facie view that the application filed is not 'invalid'.

A final order would be passed under Section 245D(4) (of Income Tax Act, 1961) only after

obtaining the Report of the Commissioner under Rule 9 (of Income Tax Rules, 1962) of the

Income Tax Settlement Commission (Procedure) Rules, 1997

(Hereinafter referred to as the ‘1997 Rules’, for brevity) and on

being satisfied that there is full and true disclosure by the

applicant.

4. In the light of the above contentions, the point that arises

for consideration is, whether the Settlement Commission on

receipt of an application under Section 245C (of Income Tax Act, 1961), and on receipt of the

report called for from the Commissioner of Income Tax,

adjudicate on the report so filed and assign reasons in order to

allow the application to be proceeded with.

The Apex Court has in the case of Ajmera Housing

Corporation v. Commissioner of Income Tax, (2010) 326 ITR 642,

has while interpreting Section 245C(1) (of Income Tax Act, 1961) has held thus :

A bare reading of the provision would

reveal that besides such other particulars, as may

be prescribed, in an application for settlement, the

assessee is required to disclose (i) a full and true

disclosure of the income which has not been

disclosed before the AO; (ii) the manner in which

such income has been derived and (iii) the

additional amount of income tax payable on such

income.

22. 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 prerequisites for a valid application under

Section 245C(1) (of Income Tax Act, 1961). 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.”

The Settlement Commission has examined the application

and has opined thus in its order at Annexure -B to the petition:

“DECISION

10. We have carefully considered the

submissions of the learned A.R and the facts

available on record. It cannot prima facie be inferred

at this stage that the disclosure made in the

Settlement Application is not full and true. So far as

other conditions are concerned, they stand satisfied

by the Applicant. We, therefore, allow the

Settlement Application to be proceeded with under

Section 245D(1) (of Income Tax Act, 1961).”

From the above, it is evident that the Settlement

Commission has satisfied itself that the application of the assessee

has made, what is claimed as, a full and true disclosure of the

income which has not been disclosed before the Assessing

Officer; the manner in which such income has been derived and

the additional income tax payable on such income.

In so far as the procedure that is to be followed by the

Settlement Commission under Section 245D (of Income Tax Act, 1961), is

discussed by the Apex Court, in the above decision, thus :

“26. The procedure laid down in Section

245D of the Act, contemplates that on receipt of the

application under Section 245C(1) (of Income Tax Act, 1961), the

Settlement Commission is required to forward a

copy of the application filed in the prescribed form

(No.34B), containing full details of issues for which

application for settlement is made, the nature and

circumstances of the case and complexities of the

investigation involved, save and except the

annexures, referred to in item No.11 of the form and

to call for report from the CIT. The CIT is obliged

to furnish such report within a period of 45 days

from the date of communication by the Settlement

Commission. Thereafter, the Settlement

Commission, on the basis of the material contained

in the said report and having regard to the facts and

circumstances of the case and/or complexity of the

investigation involved therein may by an order,

allow the application to be proceeded with or reject

the application. After an order under Section

245D(1) is made, by the Settlement Commission, r.8 (of Income Tax Rules, 1962)

of the 1987 Rules mandates that a copy of the

annexure to the application, together with a copy of

each of the statements and other documents

accompanying such annexure shall be forwarded to

the CIT and further report shall be called from the

CIT. The Settlement Commission can also direct

the CIT to make further enquiry and investigations

in the matter and furnish his report. Thereafter,

after examining the record, CIT’s report and such

further evidence that may be laid before it or

obtained by it, the Settlement Commission is

required to pass an order as it thinks fit on the

matter covered by the application and in every

matter relating to the case not covered by the

application and referred to in the report of the CIT

under sub-section (1) or sub-section (3) of the said

section. It bears repetition that as per the scheme

of the Chapter, in the first instance, the report of

the CIT is based on the bare information

furnished by the assessee against item No.10 of the

prescribed form, and the material gathered by the

Revenue by way of its own investigation. It is

evident from the language of section 245C(1) (of Income Tax Act, 1961) of

the Act that the report of the CIT is primarily on

the nature of the case and the complexities of the

investigation, as the annexure filed in support of

the disclosure of undisclosed income against item

No.11 of the form and the manner in which such

income had been derived are treated as

confidential and are not supplied to the CIT. It is

only after the Settlement Commission has decided

to proceed with the application that a copy of the

annexure to the said application and other

statements and documents accompanying such

annexure, containing the aforesaid information

are required to be furnished to the CIT. In our

opinion even when the Settlement Commission

decides to proceed with the application, it will not

be denuded of its power to examine as to whether

in his application under Section 245C(1) (of Income Tax Act, 1961) of the

Act, the assessee has made a full and true

disclosure of his undisclosed income. We feel that

the report(s) of the CIT and other documents

coming on record at different stages of the

consideration of the case, before or after the

Settlement Commission has decided to proceed

with the application would be most germane to

determination of the said question. It is plain from

the language of sub-section (4) of section 245D (of Income Tax Act, 1961) 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 CIT 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

precondition for a valid application under section

245C(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.” (emphasis supplied)

Even assuming that the Settlement Commission has glossed

over the initial report submitted by the Commissioner of Income

Tax (CIT), as the procedure contemplates a further report to be

submitted by the CIT, after examination of the annexure to the

application, statements and other documents accompanying such

annexure and on the basis of a further enquiry, if any, all of which

is not made available to the CIT in the first instance, and the

Settlement Commission being in a position to still address the

question whether a full and true disclosure of the income which

was not disclosed before the Assessing Officer and being required

to pass an appropriate order, the Revenue cannot be said to be

prejudiced in any fashion.

Therefore, this court is of the opinion that no procedural

violation is caused by the Settlement Commission. It has only

taken a prima facie view that the application is not invalid. A

final order will necessarily have to be passed under Section

245D(4) only after obtaining the report of the Commissioner

under Rule 9 of the 1987 Rules and after being satisfied that there

is full and true disclosure by the applicant.

It is also to be noticed that the legislature in its wisdom

removed the provision of Sub-section (1A) of Section 245D (of Income Tax Act, 1961) by

Finance Act (no.2), 1991. The scope and effect of the amendment

was explained by the Board of Direct Taxes vide Circular no.621,

dated 21.12.1991, thus:

“Simplification of procedure subsequent to the

receipt of an application by the Settlement Commission

65. Under the existing provisions of sub-section (1)

of section 245D (of Income Tax Act, 1961), the Settlement

Commission, on receipt of an application under section

245C, has to call for a report from the Commissioner and

on the basis of the materials contained in such report and

having regard to the nature and circumstances of the case,

etc., the Settlement Commission may allow the application

to be proceeded with or reject the application. Further,

sub-section (IA) of Section 245D (of Income Tax Act, 1961) provides for filing of

objection by the Commissioner against proceeding with the

application made under section 245C (of Income Tax Act, 1961).

65.1 The above provisions cause delay, at times, in

the disposal of applications filed before the Settlement

Commission under section 245C (of Income Tax Act, 1961). In order to expedite the

disposal of such applications, sub-section (1) of section

245D has been amended to provide that the Commissioner

shall furnish the report within a period of one hundred and

twenty days of the receipt of communication from the

Settlement Commission in case of all applications made

under section 245C (of Income Tax Act, 1961) on or after the date on which the

Finance Act received the assent of the President (i.e., 27th

September, 1991) and if the Commissioner fails to furnish

the report within the said period, the Settlement

Commission may make the order on the application

without such report. The provisions relating to filing of

objection by the Commissioner against proceedings with

the application made under section 245C (of Income Tax Act, 1961) contained in

sub-section (1A) of section 245D (of Income Tax Act, 1961), have also been omitted.

65.2 Similar amendment has been made to the

corresponding provisions in section 22D (of Income Tax Act, 1961) of the Wealth-tax

Act.

65.3 These amendments take effect from 27th

September, 1991, i.e., the date on which the Act received

the assent of the President” (emphasis added).”

It would thus appear that the report submitted in the first

instance by the CIT is 'primarily on the nature of the case and the

complexities of the investigation, as the Annexure filed in support

of the disclosure of undisclosed income .... and the manner in

which such income had been derived are treated as confidential

and are not supplied to the CIT', as observed by the Apex Court.

The question of an 'adjudication' on the said report, which is

termed as 'objection', by the petitioner, at that stage - does not

arise.

Hence, the petition is without merit and is dismissed. The

interim order of stay granted has spent itself out.

Sd/-

JUDGE