Settlement Commission’s Jurisdiction Trumps Penalty Order

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Case Name:

Tahiliani Design Private Limited Vs Joint Commissioner of Income Tax (High Court of Delhi)

W.P.(C) 285/2020, CM Nos. 857/2020

Date: 19th January 2021

Key Takeaways:

• The Settlement Commission has exclusive jurisdiction once an application is made under Section 245C.
• Penalties related to violations discovered during search and seizure operations can be included in the Settlement Commission’s proceedings.
• The court emphasized the broad jurisdiction of the Settlement Commission to cover related matters, even if not explicitly mentioned in the application.

Issue:

Does the Income Tax Settlement Commission have exclusive jurisdiction over penalty proceedings once an application is made under Section 245C, even if the penalty relates to a violation not explicitly covered in the application?

Facts:

• A search and seizure operation was conducted on the petitioner, leading to allegations of violating Section 269ST by accepting cash payments over Rs.2 lakhs.
• The petitioner applied to the Settlement Commission on November 1, 2019, seeking to settle various assessment years.
• Despite this, a penalty order was issued on November 4, 2019, under Section 271DA for the alleged violation.
• The petitioner argued that the Settlement Commission had exclusive jurisdiction from the date of application.

Arguments:

• Petitioner: Argued that the Settlement Commission had exclusive jurisdiction from November 1, 2019, and the penalty order was without jurisdiction.
• Respondent: Contended that the Settlement Commission’s jurisdiction is limited to matters explicitly covered in the application and does not extend to penalties for violations not disclosed.

Key Legal Precedents:

• Commissioner of Income Tax vs. Income Tax Settlement Commission (2014) 360 ITR 407 (Delhi): This case was referenced to support the argument that the Settlement Commission assumes jurisdiction from the date of application.
• Agson Global Pvt Ltd Vs Income Tax Settlement Commission (2016) 380 ITR 343: Highlighted the Settlement Commission’s powers in relation to the context of settlement proceedings.

Judgement:

The court quashed the penalty order, ruling that the Settlement Commission had exclusive jurisdiction from the date the application was made. The court directed that the Settlement Commission should decide on the penalty issue, and if immunity is granted, the penalty proceedings would lapse.

FAQs:

Q1. What is Section 269ST?

A1. Section 269ST prohibits cash transactions of Rs.2 lakhs or more from a single person in a day, or in respect of a single transaction or event.

Q2. What does the Settlement Commission do?

A2. The Settlement Commission allows taxpayers to settle tax disputes by making a full disclosure of income and paying the additional tax due.

Q3. Why was the penalty order quashed?

A3. The court found that the Settlement Commission had exclusive jurisdiction over the matter once the application was made, making the penalty order invalid.

Q4. What happens next for the petitioner?

A4. The Settlement Commission will decide on the penalty issue, and if immunity is granted, the penalty proceedings will not proceed further.

1. The petition impugns the order dated 4th November, 2019 for the assessment year 2018-19, under Section 271DA of the Income Tax Act, 1961 ("Act"), imposing penalty on the petitioner in the sum of Rs.14,27,96,270/-.

2. The petition came up first before this Court on 10th January, 2020, when on the contention of the counsel for the petitioner that the order dated 4th November, 2019 imposing penalty was passed after the petitioner had made an application before the Settlement Commission under Section 245C of the Act on 1st November, 2019, under intimation to the Assessing Officer, the petition was entertained, counter affidavit directed to be filed and the order imposing penalty was stayed; it was however clarified that the proceedings before the Settlement Commission shall go on, uninfluenced by the pendency of this petition.

3. No counter affidavit has been filed inspite of two opportunities. The counsel for the respondent states that a counter affidavit has been filed but has not come on record. The counsel for the petitioner states that he has received advance copy of the same. The counsel for the respondent draws attention to CM No.34968/2020 filed by the respondent, for vacation of the stay granted on 10th January, 2020 and expresses urgency, contending that the petitioner has obtained stay of the order imposing penalty, by misrepresenting / suppressing facts. We have however enquired from the counsel for the petitioner, whether not the hearing on the application for vacation of stay as well as on the main petition itself, would be substantially similar. The counsel for the petitioner then states that the writ petition itself can be heard today, without the counter affidavit coming on record in as much as the outcome of the writ petition depends upon the interpretation of the statutory provisions and the respondent does not need to refer to any documents other than those annexed to the petition and in fact the respondent, along with its counter affidavit has not annexed any documents and the pleadings in the counter affidavit are also confined to law, which can be argued. We have thus proceeded to hear the counsels on the writ petition.

4. It is the case of the petitioner, (a) that a search and seizure operation under Section 132 of the Act as well as survey under Section 133A of the Act was carried out on 29 th May, 2018 in the case of the petitioner and thereafter the investigation wing referred the case of the petitioner to the concerned Assessing Officer; (b) the respondent, being the Range Head of the Assessing Officer of the petitioner, after going through the seized material, presumed that the petitioner had violated the provisions of Section 269ST of the Act and issued a notice dated 30th September, 2019 to the petitioner, for assessment years 2018-19 and 2019-20, calling upon the petitioner to show cause why penalty under Section 271DA of the Act, for violating the provisions of Section 269ST of the Act, be not imposed on the petitioner and fixed the case for hearing on 10th October, 2019; (c) the petitioner vide letter dated 10th October, 2019 requested for adjournment and the case was adjourned to 16th October, 2019; (d) in the meanwhile, in pursuance to the search and seizure operation, notices under Section 153A of the Act were issued to the petitioner for the assessment years 2013-14 to 2018-19; (e) the petitioner, on 16th October, 2019 also, requested for adjournment of the hearing and sought time to file reply to the show cause notice dated 30th September, 2019; the hearing was adjourned to 21st October, 2019; (f) the petitioner, vide letter dated 18th October, 2019 requested the respondent to supply the relevant documents on the basis of which show cause notice under Section 271DA had been issued; (g) on 21st October, 2019, the petitioner contended that it had not received the document sought and sought for the proceedings to be kept in abeyance; (h) the petitioner, vide letter dated 30th October, 2019, again reminded the respondent to supply the relevant documents so that the petitioner could prepare a reply to the show cause notice dated 30th September, 2019; (i) the petitioner, to buy peace of mind and to avoid litigation, on 1st November, 2019 approached the Income Tax Settlement Commission for assessment years 2012-13 and 2013-14 to 2019-20; (j) the petitioner, in accordance with the provisions of the Act, on 1st November, 2019 itself also informed the Assessing Officer about the filing of the application before the Settlement Commission; (k) the petitioner, though not required to, by way of abundant caution, vide e-mail dated 4th November, 2019, at 9:46 AM, also informed the respondent of having approached the Settlement Commission; (l) the respondent however proceeded to thereafter pass the impugned penalty order dated 4th November, 2019 and communicated the same to the petitioner from the same e-mail ID, at around 10:30 AM i.e. immediately on receipt of petitioner’s e-mail; (m) vide the impugned penalty order, penalty under Section 271DA for the assessment years 2018- 19 and 2019-20 has been imposed on the petitioner, ignoring the fact that the petitioner had already preferred an application before the Settlement Commission; (n) the respondent, vide e-mail dated 7th November, 2019 informed the petitioner that the Settlement Commission assumes jurisdiction only after it allows the application to be proceeded with, as provided under Section 245F(2) of the Act and there is no bar on any proceeding till then, in view of Section 245F(4) of the Act; (o) the Settlement Commission, after the hearing on 8th November, 2019, passed a detailed order dated 11th November, 2019 allowing the application of the petitioner under Section 245C(1) to be proceeded with further; and, (p) as the impugned penalty order is in contravention of the provisions of the Act, the petitioner moved an application dated 22nd November, 2019 under Section 154 of the Act but the same has been rejected by the respondent vide e-mail dated 26th November, 2019 merely observing that the application for rectification is untenable. Contending that order imposing penalty could not have been passed after the petitioner had approached the Settlement Commission, this petition has been filed.

5. We have considered the provisions of the Act to which the counsels have drawn our attention during the hearing.

6. Chapter XIX-A titled “Settlement of Cases” of the Act, in Section 245C thereunder provides that an assessee, “at any stage of a case relating to him” may make an application “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”. Section 245D lays down the procedure to be followed on receipt of application under Section 245C and vide Section 245D(4) empowers the Settlement Commission to, after examination of records and report of the Principal Commissioner and after giving an opportunity to the applicant and the Principal Commissioner to be heard and after examining such further evidence as may be placed before it or obtained by it, in accordance with the provisions of the Act, “pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Principal Commissioner or Commissioner”. Section 245F titled “Powers and Procedure of Settlement Commission”, in Sub-Section (1) thereof provides that the Settlement Commission, in addition to the powers conferred on it under Chapter XIX-A, shall have all the powers which are vested “in an Income Tax Authority under this Act” and in Sub-Section (2) thereof inter alia provides:

“(2) Where an application made under section 245C has been allowed to be proceeded with under section 245D, the Settlement Commission shall, until an order is passed under sub-section (4) of section 245D, have, subject to the provisions of sub-section (3) of that section, exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority under this Act in relation to the case:

Provided that where an application has been made under Section 245C on or after the 1st day of June, 2007, the Settlement Commission shall have such exclusive jurisdiction from the date on which application was made.”

Section 245H titled “Power of Settlement Commission to grant immunity from prosecution and penalty” empowers the Settlement Commission to, if satisfied that the applicant has co-operated with the Settlement Commission in the proceedings and has made a full and true disclosure of his income and the manner in which such income has been derived, “grant to such person, subject to such conditions as it may think fit to impose for the reasons to be recorded in writing, immunity from prosecution for any offence under this Act or under the Indian Penal Code (45 of 1860), or under any other Central Act for the time being in force and also either wholly or in part from the imposition of any penalty under this Act, with reference to the case covered by the settlement”.

7. The contention of the counsel for the petitioner is, that the petitioner, on 1st November, 2019 having made an application to the Settlement Commission, with effect from the said date, vide the proviso to Section 245(2), the Settlement Commission has exclusive jurisdiction in the matter of imposition of penalty, as has been imposed on the petitioner by the respondent vide the impugned order and thus the impugned order is without jurisdiction. It is argued that it is the Settlement Commission, which is to still finally decide on the application of the petitioner, which will deal with the matter of penalty if any also.

8. Per contra, the counsel for the respondent, not controverting the factual position as noted above, has argued that it is not as if the Settlement Commission is a panacea for all illegalities committed under the Act. It is stated that the Settlement Commission is concerned only with the case before it and not with other matters. It is contended that the petitioner, in the application made under Section 245C of the Act before the Settlement Commission, did not disclose the notice to show cause dated 30th September, 2019 aforesaid and did not cover the violations of Section 269ST of the Act alleged against him and thus the same do not form the subject matter of "case" before the Settlement Commissioner and the respondent thus remained entitled, notwithstanding the petitioner on 1st November, 2019 having approached the Settlement Commission, to pass the penalty order pursuant to the show cause notice dated 30th September, 2019. The counsel for the petitioner in this regard has drawn our attention to Section 245A(b), also under Chapter XIX-A, defining "case", for the purposes of the said Chapter, as meaning "any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub section (1) of section 245C is made". Attention has also been invited to the Explanation to the said definition to contend that the same would not cover a violation of Section 269ST of the Act. The contention of the counsel for the respondent is that the Settlement Commission is concerned only with assessment of undisclosed income and penalties and prosecutions with respect thereto and the penalty under Section 269ST of the Act is independent thereof. On enquiry, whether even in the case of disclosed income, the provisions of Section 269ST of the Act would be attracted, the counsel for the respondent answers in the affirmative and on further enquiry whether the said aspect can be referred to the Settlement Commission, if there is no case of undisclosed income, the counsel for the respondent replies in the negative.

9. We may at this stage record that Section 269ST prohibits receiving an amount of Rs.2 lacs or more, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion, from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system to a bank account. We may further record that the notice dated 30th September, 2019 was issued, stating that during the course of search and seizure operation in the case of the petitioner it had been found from the seized documents that the petitioner had grossly violated the provisions of Section 269ST of the Act by way of cash receipts of Rs.2 lacs or more from a single person by splitting the invoices against the sale of goods at its stores, thus rendering itself liable for penalty proceedings under Section 271DA of the Act. It was further elaborated in the notice that the tally data available in seized digital devices showed cash component of receipts of Rs.2 lacs or more from a single person on a single day, totalling Rs.2,99,33,314/- in assessment year 2019-20, amounting to violation of Section 269ST.

10. The counsel for the petitioner, responding to the argument of the counsel for the respondent, has contended that the whole purpose of going before the Settlement Commission would be lost if the petitioner were to be harassed in this fashion and it is contended that all these aspects will be considered by the Settlement Commission. The counsel for the petitioner otherwise, on enquiry, fairly states that there is no specific mention of the notice dated 30th September, 2019 or the proceedings of violation of Section 269ST of the Act, in the application of the petitioner to the Settlement Commission.

11. We have considered the rival contentions.

12. Though undoubtedly (a) the application under Section 245C is to have a case pending assessment settled and the Settlement Commission in exercise of powers under Section 245D(4) is to pass orders as it thinks fit on the matters “covered by the application” before it and which application of the petitioner in the present case admittedly does not cover the notice dated 30th September, 2019 and in pursuance to which penalty under Section 269ST has been levied on the petitioner; and, (b) the argument of the counsel for the respondent that in pursuance to such an application the Settlement Commission in exercise of powers under Section 245F and 245H has no case of violation of Section 269ST before it and thus does not have exclusive jurisdiction in the matter of levy of penalty under Section 269ST and / or to grant immunity with respect thereto, is attractive but on further consideration we find ourselves unable to accept the same for the reasons:

A. Though the petitioner in the present case, in its application to the Settlement Commission has brought only the case pursuant to notices under Section 153A admittedly issued to it, but the powers of the Settlement Commission under Section 245D(4) to pass such order as it thinks fit are not confined to matters covered by the application but also extend to “any other matter relating to the case not covered by the application, but referred to in the report of the Principal Commissioner or Commissioner” presented to the Settlement Commission under Section 245D(3) of the Act.

B. We have thus enquired from the counsels, whether the Principal Commissioner / Commissioner, in the present case, in response to the application of the petitioner to the Settlement Commission, has submitted any report and if so, whether in the said report the aforesaid aspect of violation of Section 269ST of the Act has been reported; if it is so, the Settlement Commission would have jurisdiction to pass orders with respect to violation alleged of Section 269ST also. However neither counsel has instructions on the said aspect.

C. It is not deemed necessary to adjourn the hearing to enable counsels to take instructions on the aforesaid aspect, because the powers of the Settlement Commission under Section 245D(4) also extend to “examining such further evidence as may be placed before it or obtained by it” and the Settlement Commission in the present case is still seized of the matter and would be within its rights to, if so deems apposite, also deal with the aspect of violation of Section 269ST of the Act and either to grant exemption from penalty therefor or to pass such other order as it thinks fit in relation thereto as well and it is felt that the said power and jurisdiction of the Settlement Commission should not be permitted to be interdicted by the impugned order.

D. In this context we may also notice that the notices under Section 153A as well as under Section 271DA of violation of Section 269ST, both have their origin in the search, seizure and survey conducted qua the petitioner, as evident from a bare reading of the notice under Section 271DA referred to hereinabove by us for this reason. Merit is thus found in the contention of the counsel for the petitioner that both are part of the same case.

E. The counsel for the respondent, on enquiry fairly states that if the violation of 269ST of the Act is detected as a result of a search and seizure operation, as it is in the present case, then it is open to a applicant before the Settlement Commission to also include in the application, the violation of Section 269ST of the Act and to seek settlement qua that also.

F. A Coordinate Bench of this Court in Agson Global Pvt. Ltd. Vs. Income Tax Settlement Commission (2016) 380 ITR 343 held that the powers and functions of an Income Tax Authority which are to be exclusively exercised by the Settlement Commission must be in the context of and have a nexus with the settlement proceedings. We respectfully concur. The penalty proceedings initiated against the petitioner, as evident from the notice dated 30th September, 2019, were in the context of and had a nexus with the search, seizure and survey carried out qua the petitioner and pursuant whereto notices under Section 153A were also issued to the petitioner and in which context the petitioner had approached the Settlement Commission.

G. Though undoubtedly Section 245A(b) while defining “case” refers to a proceeding for assessment pending before an Assessing Officer only and therefrom it can follow that penalties and prosecutions referred to in Section 245F and Section 245H are with respect to assessment of undisclosed income only, but (i) Section 245F vests exclusive jurisdiction in the Settlement Commission, to exercise the powers and perform the functions “of an Income Tax Authority under this Act in relation to the case”; and, (ii) Section 245H vests the Settlement Commission with the power to grant immunity from “imposition of any penalty under this Act with respect to the case covered by the settlement”. The words “of an Income Tax Authority under this Act in relation to the case” and “immunity from; imposition of any penalty under this Act with respect to the case covered by the settlement” are without any limitation of imposition of penalty and immunity with respect thereto only in the matter of undisclosed income and in our view would cover also penalties under other provisions of the Act, detection whereof has the same origin as the origin of undisclosed income.

H. Not only so, the words “in relation to the case” and “with respect to the case” used in the aforesaid provisions, are words of wide amplitude and which, in our opinion, in the facts of the present case may allow the Settlement Commission to, notwithstanding the petitioner having not expressly referred to the notice dated 30th September, 2019 and proceedings for violation of Section 269ST pending against it in its application, pass such orders as it may thinks fit in relation / with respect thereto and the said powers of the Settlement Commission cannot be permitted to be interdicted by the impugned order. We reiterate that the proceedings of violation of Section 269ST, as per the notice dated 30th September, 2019, are a result of what was found in the search and survey qua the petitioner and are capable of being treated as part and parcel of the case taken by the petitioner by way of application to the Settlement Commission.

I. Supreme Court, in Doypack Systems Pvt. Ltd. Vs. Union of India (1988) 2 SCC 299 held that the expression “in relation to” has been interpreted to be the words of widest amplitude and is in the nature of a deeming provision and is intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions. Again, in Thyssen Stahlunion Gmbh Vs. Steel Authority of India Ltd. (1999) 9 SCC 334 it was held that the phrase “in relation to arbitral proceedings” cannot be given a narrow meaning to mean only pendency of the arbitration proceedings before the Arbitrator; it would cover not only proceedings pending before the Arbitrator but also proceedings before the Court and any proceedings which are required to be taken under the old Act for award becoming decree and also appeal arising thereunder; if narrow meaning of the phrase “in relation to arbitral proceedings” is to be accepted, it is likely to create great deal of confusion with regard to the matters where the award is made under the old Act. Applying the said law and reasoning, we hold that if we were to interpret the words “in relation to” and “with respect to” narrowly, the same also would not only cause confusion as to prosecution and penalty under which provisions of the Act is the subject matter of settlement proceedings and which provisions not and the same is also likely to negate the objective and purpose for introduction of Chapter XIX-A in the Act and of settlement of cases. The said view has been followed in Tamil Nadu Kalyana Mandapam Association Vs. Union of India (2004) 5 SCC 632, National Textile Corporation (MN) Ltd. Vs. Durga Trading Company (2015) 12 SCC 558 and Maxopp Investment Ltd. Vs. Commissioner of Income Tax (2018) 15 SCC 523.

13. The stand of the respondent in its e-mail dated 7th November, 2019 that the Settlement Commission assumes jurisdiction from the day when an order under Section 245D(1) is made when the application under Section 245C(1) is ordered to be proceeded with further, and which in the present case was on 8th November, 2019 and before the said date the Settlement Commission did not have exclusive jurisdiction and the respondent remained entitled to impose penalty, was / is not only contrary to the provisions of the proviso to Section 245F(2) but also contrary to the law laid down by this Court in Commissioner of Income Tax Vs. Income Tax Settlement Commission (2014) 360 ITR 407 (Delhi).

14. Once it is so, the Settlement Commission, under the proviso to Section 245F(2), with effect from 1st November, 2019 when the petitioner admittedly made the application under Section 245C before it, had the exclusive jurisdiction to deal with the matter relating to violation of Section 269ST of the Act also and the respondent, on 4th November, 2019 did not have the jurisdiction to impose penalty for violation of Section 269ST on the petitioner and the impugned order is without jurisdiction and liable to be set aside and is hereby quashed.

15. We are of the view that it should be left to the Settlement Commission to, in exercise of its powers under Section 245D(4), Section 245F and Section 245H, consider whether the matter of penalty for violation of Section 269ST of the Act is to be looked into by the Settlement Commission while deciding the application of the petitioner, or not.

16. We accordingly direct, that without prejudice to the right of the Income Tax Authorities to contend before the Settlement Commission that the petitioner having not disclosed the aforesaid facts before the Settlement Commission, has not made a full and true disclosure within the meaning of Section 245C(1), the proceedings initiated by the respondent against the petitioner for violation of Section 269ST of the Act should await the decision of the Settlement Commission on the application of the petitioner and to abide by the same. If the Settlement Commission grants immunity from penalty within the meaning of Section 245H, for violation of Section 269ST, needless to state, the notices issued by the respondent to the petitioner shall automatically lapse and/or would not remain actionable. However if no immunity with respect thereto is granted, the respondent shall be entitled to take further proceedings in pursuance to the said notices.

17. The petition is allowed in above terms.

RAJIV SAHAI ENDLAW, J.

SANJEEV NARULA, J.

JANUARY 19, 2021