IN THE HIGH COURT OF KERALA
WA No. 858 of 2015
THE COMMISSIONER OF INCOME TAX
1) SETTLEMENT COMMISSION
(IT AND WT), ADDITIONAL BENCH, 488, 489
2) SRI K T P MOHAMMED
MAZHAR, JOHN MILL ROAD, KANNUR
K Vinod Chandran & Ashok Menon, JJ
Dated: February 11, 2019
Appellant Rep by: Sri P K R Menon, Sr Counsel For Goi Taxes Sri Jose Joseph, SC For Income Tax, Adv.
Respondent Rep by: Sri T N Seetharaman, Sri S Arun Raj, Advs.
Income Tax – Sections 245C & 245D(4)
Keywords – Block assessment – Cash flow statements – Full and true disclosure – Settlement Commission
The Revenue conducted a search operation upon the assessee which led to issue of notices u/s 158BC. In reply, the assessee filed the return for the block period. During the pendency of assessment proceeding, the assessee moved an application before the Settlement Commission offering additional income not disclosed before. The Commission directed the AO and the assessee to sit and settle their disputes. As Commission after such reconciliation, offered further additions which the assessee acceded to. The Commission hence concluded the proceedings by reaching the figure of undisclosed income which included the original income and the income the conceded later. The Revenue, approached the Single Judge, High Court contending that when additional amounts were offered by the assessee before the Settlement Commission, it should’ve been obvious that the original application u/s 245C did not contain a full and true disclosure of the undisclosed income or how it was derived. The Single Judge however, rejected such averments.
Having heard the parties, the High Court held that,
Whether the Settlement Commission has got the carte blanche of authority to proceed with the application u/s 245 even when the question of full and true disclosure of income is tainted by the presence of further declaration of additional income in excess of that the one disclosed earlier – NO: HC
++ even though the Commission was initially satisfied to proceed with the matter, the question of full and true disclosure in the application always looms large in the proceeding and at any time could be a reason for restraining itself from proceeding further if found in the negative. The Commission is not divested of power to make additions when considering an application u/s 245C. It cannot also be that when the Commission so makes additions the Commission would have to necessarily dismiss the application finding no full and true disclosure of income in the application filed u/s 245C. However what distinguishes the present case from a mere consent to a suggestion of the Commission, is that dehors any suggestion, the assessee had offered an additional income in excess of that disclosed in the application under Section 245C;
Whether a disclosure of further income which was not available in the original application u/s 245C leads to an undeniable conclusion that there was no full and true disclosure of undisclosed income in the first place – YES: HC
++ in the present case, even before the assessee was directed to sit along with the AO and the officer of the Commission to reconcile the differences, a disclosure of further income was made, which was not available in the original application made u/s 245C. This leads to a definite conclusion that there was no full and true disclosure of the undisclosed income and the source from which it derived in the application filed u/s 245C. The Commission ought not to have proceeded with the application when the assessee made a voluntary offer of additional income, when the application was pending, in addition to that disclosed in its application u/s 245C. Hence, the judgment of the Single Judge is set aside as also the order of the Settlement Commission.
Revenue’s writ appeal allowed
Ajmera Housing Corporation v. C.I.T. – 2010-TIOL-66-SC-IT
Per: Vinod Chandran:
The appeal is filed by the Commissioner of Income Tax from the judgment of the learned Single Judge, which sustained the order of the Settlement Commission passed under Section 245D(4). The premises of the assessee was searched under Section 132 of the Income Tax Act, 1961 (for short “the Act”) and notices were issued under Section 158BC. The respondent-assessee filed a return of income on 12.07.2000, showing a total income of Rs.78,210/- for the block period. The assessee, when the block assessment proceedings were pending, filed an application before the Settlement Commission on 14.03.2002, offering an additional income of Rs.17,43,900/-. The Assessing Officer (for short “A.O.”) framed an assessment determining undisclosed income of Rs.1,17,85,885/-.
2. In the course of the verification proceedings, the assessee offered a further additional income aggregating Rs.5,81,066/- vide its letter dated 02.08.2004. Later on 13.03.2008 in the course of hearing, the Commission directed the applicant’s representative and the A.O. to sit with the Additional Director of Income Tax (Investigation) (of the Settlement Commission) to reconcile the disputes. As a result of the exercise, the Commission suggested certain further additions on the basis of the cash flow statements, as also the evidences pointed out by the A.O., which resulted in a further addition of Rs.11,25,000/- under various heads. The assessee acceded to the said additions of undisclosed income. The Settlement Commission, hence, concluded the proceedings under Section 245D by an order finding the total undisclosed income to be Rs.34,49,966/-. This included the original income as submitted by the respondent coming to Rs.17,43,900/- in his application under Section 245C, as also the amounts conceded later of Rs.5,81,066/- and Rs.11,25,000/- as suggested by the Commission.
3. The learned Single Judge noticed the reliance placed by the Department on the decision of the Hon’ble Supreme Court in Ajmera Housing Corporation v. C.I.T.,  326 ITR 642 (SC) = 2010-TIOL-66-SC-IT, but, found the same distinguishable on facts. Though there was a preliminary objection raised on the maintainability of challenge raised under Article 226, the learned Single Judge found the same to be permissible. The constrained jurisdiction exercised insofar as a judicial review was rightly recalled as consideration of the decision making process and not the decision as such. Whether the Settlement Commission exercised a jurisdiction properly conferred on it and if it is so found, whether there was any error in such exercise was what could be looked into. We do not see any reason to interfere with that portion of the judgment, nor was the same assailed by the respondent.
4. On merits, it was found that the only contention raised by the learned Senior Counsel for the Department was that when additional amounts were offered by the assessee before the Settlement Commission, it should be presumed that the original application under Section 245C, did not contain a full and true disclosure of the undisclosed income or how it was derived. The learned Single Judge referred to his own decision in W.P.(C) No.2637/2014 and found that in the instant case the Commission found, there was no material with the Department to justify a further demand from the assessee. The amounts were offered by the assessee to settle the matter finally and it was difficult to accept the contention of the Department that merely by offering additional amounts; that too at the suggestion of the Commission, the original declaration becomes one that was not full and true, for the purpose of Section 245C. The order of the Settlement Commission was upheld, which also granted immunity from penalty and prosecution to the respondent-assessee.
5. The operative portion of the judgment in W.P. (C) No.2637/2014 was extracted. Ajmera Housing Corporation was specifically referred to and distinguished, finding that there the assessee had been consistently making applications before the Commission offering more amounts as undisclosed income than that offered in the original application. The facts in the present case was found to differ and reliance was placed on the decision of the Bombay High Court in Director of Income Tax (International Taxation) v. Income Tax Settlement Commission,  365 ITR 108 (Bom). The Division Bench of the High Court of Bombay also had distinguished the decision in Ajmera Housing Corporation.
6. The learned Senior Counsel for the Department would argue that the offers made by the assessee insofar as the additional undisclosed income ought to have resulted in a definite conclusion that the application made under Section 245C did not have full and true disclosure. On that conclusion there could be no further consideration made by the Settlement Commission. The learned Counsel for the assessee, however, would point out that it cannot be the position that, in every case of additions made by the Commission after referring to the report under Section 9, there would be a rejection of the application on grounds of full and true particulars of income having not been disclosed. If that be the case, there could be no settlement by the Commission and Chapter XIX-A itself would be rendered meaningless. As a matter of practice, it is pointed out, that the Commission on a hearing; not on law but only on the figures as offered by the assessee and objected to in the report filed under Rule 9, would compute the undisclosed income and determine an amount. This is the spirit and tenor of the settlement contemplated under Chapter XIX-A. In the present case also, it is submitted that the assessee had not voluntarily offered any amounts in addition to that disclosed in the application under Section 245C. The Commission had specifically directed the assessee to sit along with the A.O., as also the Additional Director, an officer of the Settlement Commission, to reconcile those issues, which were arising from the report of the Commissioner. The consent as recorded by the Commission is again only to arrive at an agreed settlement. It cannot be taken as an admission of absence of full and true disclosure of income in the application under Section 245C.
7. We agree with the learned Single Judge that the jurisdiction conferred on the Commission under Chapter XIX-A, is akin to a statutory settlement. We are also of the opinion that in exercise of that jurisdiction the Commission is empowered to make adjustments and additions to the income as disclosed in the application under Section 245C. Sufficient support for the above view is available from the procedure as delineated in Section 245D. At the initial stage of consideration as to whether the application is to be proceeded with or not, the Revenue is not participated. As per the then existing provision a report is called for from the Commissioner; but the applicant-assessee alone is heard. It is then, that the relevant records are called for from the Commissioner and after examination of the same, if necessary, there could be directions issued to the Commissioner to make further enquiry and furnish a report. Ajmera Housing Corporation noticed; at the initial stage, when the Commission considers whether to proceed or not, the report called for from the Commissioner is based on the bare information furnished by the assessee and the annexure wherein the disclosure of income is made by the assessee is kept confidential. We pause here to notice that, even the initial report called for from the Commissioner was later given up by Finance Act, 2007. It is after examination of the records, the reports filed by the Commissioner as also further evidences placed before it and after affording a personal hearing to the applicant and the Commissioner that the Commission passes an order under Section 245D; we emphasize; as it thinks fit. The examination of records, the reports and further evidences as also the hearing, cannot be understood as a mere exercise to decide on whether the application under Section 245C has fully and truly disclosed the income and how it was derived. The power conferred to make orders, as the Commission thinks fit, is a carte-blanche to determine the undisclosed income of the applicant, as deemed fit and reasonably arising from the materials before it.
8. The provisions under Chapter XIXA has been considered by the Hon’ble Supreme Court in Ajmera Housing Corporation, which was on quite distinct facts, but according to us not distinguishable on facts from the instant case. The proceedings therein also commenced with a search under Section 132. The assessments were completed for three years from 1989-90 to 1991-92 determining the total income and prior to completion of that assessment, under Section 132(5) concealed income of the group was determined at Rs.200.60 crores for the assessment year 1993-94.
9. The assessee then filed an application under Section 245C before the Settlement Commission disclosing an additional income of Rs.1,94,33,580/- for the assessment years 1989-90 to 1993-94. The Revenue objected to the same assailing the full and true disclosure of income in the application and suggested settlement shall be at not less than Rs.223.55 crores. Arguments in the application were concluded and the matter was reserved. Later to which, the assessee offered a further additional income of Rs.11.41 crores. The Settlement Commission reopened the proceedings and directed the Commissioner to submit a further report under Rule 8 of the 1987 Rules. During the course of the proceedings the assessee voluntarily offered various amounts as undisclosed income for the assessment years, repeatedly. The Settlement Commission eventually, concluded the proceedings determining the total income of the assessee at Rs. 42.58 crores for the subject years and imposed a ‘token’ penalty of Rs.50 lakhs and granted immunity to the assessee against prosecution. The High Court agreed with the Department that the first revision of income was not put to the Commissioner and remanded the matter. The Supreme Court interfered with the remand, finding that the High Court failed to notice that the income determined by the Commission was in tune with a subsequent report of the Commissioner. On fresh consideration a further remand was made by the High Court for determination of total income, penalty etc. without going into the maintainability of the application.
10. The Hon’ble Supreme Court found so on the full and true disclosure mandated by Section 245C:
“26.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 assessing officer; (ii) the manner in which such income has been derived; and (iii) the additional amount of income tax payable on such income.
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 prerequisites for a valid application under Section 245-C(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 245-C(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 powers of the Commission as available under Chapter XIXA was delineated and stated so by the Hon’ble Supreme Court:
“31. xx xx 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 245-C(1) of the Act, the assessee has made a full and true disclosure of his undisclosed income. We feel that the report(s) of the Commissioner 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 the determination of the said question. It is plain from the language of sub-section (4) of Section 245-D 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 subsection (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 245-C(1) of the Act, the scheme of Chapter XIX-A does not contemplate revision of the income so disclosed in the application against Item 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-C(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 which he cannot otherwise achieve directly and in the process rendering the provision of sub-section (3) of Section 245-C of the Act otiose and meaningless. In our opinion, the scheme of said Chapter is clear and admits no ambiguity.”
Hence though the Commission was initially satisfied to proceed with the matter; the question of full and true disclosure in the application always looms large in the proceeding and at any time could be a reason for restraining itself from proceeding further if found in the negative.
11. The decision in Director of Income Tax (International Taxation) was in a circumstance, where at the conclusion of the hearing, the applicant made an additional offer of Rs.150 crores in the spirit of settlement, which was accepted by the Commission. The Division Bench of the Bombay High Court distinguished the facts in Ajmera Housing Corporation and held:
“The above observations of the apex court may at first blush seem to cover the petitioner’s case completely. However, before the above observations being relied upon by the petitioner can be applied to the present facts, the following further observations of the apex court should be taken note of which read as under:
“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.”
It would, therefore be noted that the aforesaid issue of whether or not by virtue of disclosure of additional income, there was a failure to make a true and full disclosure was not an issue for consideration before the apex court. This is so as it was not a subject matter of challenge by the Revenue either before the High Court or before the Supreme Court. In view of the above, the above observations of the apex court in Ajmera Housing (supra), cannot be said to be a ratio decidendi of the decision. It is trite law that a decision of a court is not to be read as a statutory provision. The observation of the court must be read in the context of the facts before the court.”
12. We cannot, with due respect, agree with the finding of the High Court of Bombay that the observations of the Apex Court with respect to the the revision of income in addition to that disclosed in the application under Section 245C would jeopardize the application itself, cannot be treated to be the ratio decidendi of the above decision.
13. The learned Judges of the Apex Court made a declaration insofar as one such disclosure in the application under Section 245C being sufficient to find absence of true and full disclosure as seen from the underlined portion in the above extract. Though it was found that the Commissioner had not challenged the directions of the High Court and hence there was no reason to interfere with that part of the impugned order; it was not a casual observation. The observations made where after due deliberation in the previous paragraph as seen herein below:
“39. Before addressing the other issues, at the outset, we record our disapproval with the view of the High Court that it would not be proper to set aside the proceedings before the Settlement Commission even though it was convinced that the assessee had not made full and true disclosure of their income while making application under Section 245-C of the Act. As stated above, in its earlier order dated 28-7-2000 while declaring the order dated 17-11-1994 as ab initio void and setting aside the order dated 29-1-1999, the High Court had remitted the case to the Settlement Commission to decide the entire matter afresh, including the question of maintainability of the application under Section 245-C(1) of the Act. The said order of the High Court was put in issue before this Court and was set aside vide order dated 11-7-2006 and the case was remanded back to the High Court for fresh consideration. Nevertheless, all points raised by the parties, including the plea of the Revenue that the application filed by the assessee before the Settlement Commission was not maintainable as the assessee had not made a full and true disclosure of their undisclosed income were kept open. The High Court addressed itself on the said issue and found that the assessee had not made a full and true disclosure of their income while making the application under Section 245-C(1) of the Act, yet did not find it proper to set aside the proceedings on that ground. Having recorded the said adverse finding on the very basic requirement of a valid application under Section 245-C(1) of the Act, the High Court’s opinion that it would not be proper to set aside the proceedings is clearly erroneous. The High Court appears to have not appreciated the object and scope of the scheme of settlement under Chapter XIX-A of the Act.”
14. The High Court of Bombay, in Director of Income Tax (International Taxation) noticed two decisions of the same court, in C.I.T. v. Income Tax Settlement Commission,  365 ITR 68 = 2013-TIOL-498-HC-MUM-IT andC.I.T. v. Income Tax Settlement Commission,  365 ITR 87 (Bom), the latter a decision rendered by the very same Division Bench on that day itself, wherein a contrary view had been taken. The decisions above referred had taken the view that at the stage of admission under Section 245D(2C), the Commission must decide on the validity of the application for settlement and the issue cannot be postponed to the stage of final hearing under Section 245D(4) of the Act, even though the requirement of making a true and full disclosure remains a continuous requirement to be satisfied at all times in settlement proceedings. We are in perfect and respectful agreement with this proposition which we have already noticed. The Hon’ble Judges while reiterating that the law set out by the above two decisions as the correct law, took a different path in Director of Income Tax (International Taxation). This was since there an additional income of Rs.150 crores was offered at the instance of the Commission with a view to end the litigation at the earliest. The learned Judges also noticed many distinguishing aspects from Ajmera Housing Corporation; which we do not find in the case before us. We, in fact are of the opinion that it is the Bombay High Court decision in Director of Income Tax (International Taxation that is distinguishable on facts.
15. As held in the impugned judgment, we agree that the Commission is not divested of power to make additions when considering an application under Section 245C. It cannot also be that when the Commission so makes additions the Commission would have to necessarily dismiss the application finding no full and true disclosure of income in the application filed under Section 245C. However what distinguishes the present case from a mere consent to a suggestion of the Commission, is that dehors any suggestion, the assessee had offered an additional income in excess of that disclosed in the application under Section 245C.
16. The application under Section 245C was filed on 14.03.2002. The Commission directed a report to be filed, which the Commissioner (Appeals) under Rule 9, filed on 30.12.2002. The applicant’s reply thereto was filed on 03.08.2004. There was also a letter filed by the applicant agreeing to surrender further additional income aggregating to Rs.5,81,066/- by a letter dated 02.08.2004. This in fact is the distinguishing aspect of the instant case from the Bombay High Court decision. Suggestions made by the Commission were later to this additional disclosure of undisclosed income made by the assessee, which was not available in the application filed under Section 245C. We again see from the order of the Settlement Commission that the applicant’s representative, the A.O. and the Additional Director of Income Tax (Investigation), the officer of the Settlement Commission, were directed to sit together to reconcile those irreconcilable issues during the course of hearing on 13.03.2008, much after the additional disclosure of Rs.5,81,066/-. It was later to this that under various heads the Commission suggested an addition of Rs.11,25,000/-, which was acceded to by the assessee. Hence, this is not a case in which the assessee had merely accepted the additions suggested by the Commission, to settle the matter once and for all times. At the first stage, even before the assessee was directed to sit along with the A.O. and the officer of the Commission to reconcile the differences, which led to the suggestions from the side of the Commission; a disclosure of further income was made, which was not available in the original application made under Section 245C. This leads to a definite conclusion that there was no full and true disclosure of the undisclosed income and the source from which it derived in the application filed under Section 245C as held in Ajmera Housing Corporation. We hence set aside the judgment of the learned Single Judge, as also the order of the Settlement Commission for reason of the assessee having not made full and true disclosure under Section 245C. The Commission ought not to have proceeded with the application when the assessee made a voluntary offer of additional income, when the application was pending, in addition to that disclosed in its application under Section 245C.
17. The learned Counsel appearing for the assessee would submit that the application filed under Section 245C was made pending assessment proceedings and it was later that the assessment was made of the undisclosed income. The Settlement Commission having proceed with the matter and the matter having been settled as per the impugned order in the above proceedings, the assessee had not filed an appeal from the assessment order. Especially noticing the long pendency of the matter before the Settlement Commission and before this Court, it is only proper that the assessee be permitted to file an appeal from the assessment order. The assessee shall be permitted to file an appeal within thirty days from the date of receipt of a copy of the judgment of this Court in the Writ Appeal and if the same is so filed, the delay occasioned shall not fetter the C.I.T. (Appeals) in considering the issue on merits. With the above observations, the Writ Appeal is allowed. No order as to costs.