2024 (2) TMI 1551 - HC - Income Tax

Validity of order of settlement passed u/s 245D(4) - additions made u/s 2(22)(e) treating loan advances obtained by the petitioner from companies in which he held substantial shareholding and voting rights as deemed dividends - HELD THAT - The settlement procedure commenced by filing the application by the assessee u/s 245C. The statutory mandate to the assessee is that the application shall contain 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 the source of income etc. The jurisdiction of the Settlement Commission commences after it passes an order u/s 245D(1) admitting the case. The Order u/s 245D(4) is not an order of regular assessment. It is neither an order under Section 143(1) or Section 143(3) or Section 144. Under this Chapter taxability is determined by the Commission with respect to the undisclosed income only through the process of settlement/arbitration. See Brij Lal 2010 (10) TMI 8 - SUPREME COURT From the plain reading of section 245D(4) of the Act the jurisdiction of the Settlement Commission to pass such orders as it may think fit is confined to the matters covered by the application. It can extend to such matters which are referred to in the report of the Commissioner of Income Tax under Section 245D(1) or Section 245D(3). A full and true disclosure of the income which has not been previously disclosed by the assessee being a pre- condition for a valid application under Section 245C(1) of the Act the scheme of Chapter XIXA does not contemplate non-revision of the income so disclosed in the application against item no.11 of the Form. It is well settled that under the power of judicial review of the High Court the High Court cannot interfere with the finding of facts recorded by the Settlement Commission. The conditions as contemplated in Section 2(22)(e) are fully satisfied in the present case. The petitioner has allegedly obtained loans from Companies where he has majority shares and more than 10% voting rights. The petitioner has a substantial interest as the beneficial owner of majority shares in the Companies. Therefore unless the petitioner could prove by leading cogent and credible evidence before the Commission that the loan he obtained was for business purposes the said loan amount is to be treated as a deemed dividend in the hands of the petitioner. Except for one year the petitioner has not been able to prove that the said advances/loan were given in the ordinary course of business. The Commission after examining the record has disallowed the claim of the petitioner in respect of two years and this Court finds no ground to interfere with such a finding. WP dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Settlement Commission/Interim Board for Settlement was justified in considering materials and evidence beyond those seized during the search operation under Section 132 of the Income Tax Act, 1961 (the Act) while passing the impugned order under Section 245D(4) of the Act.

- Whether additions made under Section 2(22)(e) of the Act treating certain loan advances obtained by the petitioner from companies in which he held substantial shareholding and voting rights as deemed dividends were justified.

- Whether the Settlement Commission had jurisdiction to make additions or revisit completed assessments for the Assessment Years 2014-15 and 2018-19 in the absence of incriminating material found during the search operation.

- Whether the finality clause under Section 245-I of the Act bars the High Court's jurisdiction under Article 226 of the Constitution to entertain the writ petition challenging the Settlement Commission's order.

- Whether the petitioner was denied an opportunity to have his objections regarding additions under Section 2(22)(e) duly considered by the Settlement Commission.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Consideration of Material Beyond Seized Documents by the Settlement Commission

The legal framework under Chapter XIX-A of the Act, particularly Sections 245C, 245D(4), 245E, 245F, and 245I, governs the procedure and powers of the Settlement Commission. Section 245D(4) explicitly empowers the Commission to pass an order after examining not only the records and reports but also "such further evidence as may be placed before it or obtained by it." The Commission is thus not confined to the incriminating material seized during the search under Section 132.

The petitioner contended that the Settlement Commission ought to have restricted itself to considering only the materials seized during the search operation and that reliance on other evidence was without jurisdiction. The Court rejected this submission, relying on the plain language of Section 245D(4), which allows the Commission to consider additional evidence. The Court held that the Settlement Commission's mandate is to ensure a "fair and true disclosure" of undisclosed income for all years covered by the application, irrespective of whether incriminating material was found during the search for those years.

Precedents such as Brij Lal v. Commissioner of Income Tax were cited to emphasize that the settlement procedure is distinct from regular assessment proceedings and that the Commission has broad powers to determine the true undisclosed income. The Court found no merit in the petitioner's argument that the Commission was barred from considering material not seized during the search.

Issue 2: Additions under Section 2(22)(e) - Treatment of Loans as Deemed Dividends

Section 2(22)(e) of the Act defines deemed dividend as any sum paid by a closely held company to a shareholder holding at least 10% of voting rights by way of loan or advance to the extent of accumulated profits. The petitioner, holding substantial shareholding and voting rights in the companies from which loans were obtained, had availed loans for the relevant assessment years.

The petitioner argued that these loans were business advances and should not be treated as deemed dividends, relying on the Delhi High Court's decision in Commissioner of Income-Tax v. Creative Dyeing and Printing (P) Ltd, which held that bona fide business loans do not attract deemed dividend provisions.

The Court examined the evidence and found that except for the Assessment Year 2013-14, the petitioner failed to produce cogent and credible evidence proving that the loans were for business purposes. The Board had accepted the petitioner's claim for 2013-14 but disallowed it for 2014-15 and 2018-19, treating the loans as deemed dividends. The Court upheld this finding, emphasizing that the conditions of Section 2(22)(e) were satisfied and that the petitioner bore the burden of proof to establish the business nature of the loans.

Issue 3: Jurisdiction to Revisit Completed Assessments in Absence of Incriminating Material

The petitioner relied on a recent Supreme Court judgment in Principal Commissioner of Income Tax v. Abhisar Buildwell (P) Ltd, which held that in block assessments under Section 153A, no addition can be made in respect of completed assessments in the absence of incriminating material found during search or requisition under Section 132/132A.

The Court distinguished the present case, noting that the cited judgment pertains to block assessments and not to settlement proceedings under Chapter XIX-A. The Settlement Commission's powers and procedure are distinct and broader, allowing it to consider undisclosed income beyond incriminating materials found during search. The Court held that the petitioner's contention that additions could not be made for completed years without incriminating material was not applicable to settlement proceedings.

Issue 4: Finality Clause under Section 245-I and Jurisdiction of the High Court

Section 245-I declares that orders passed under Section 245D(4) by the Settlement Commission are final and conclusive and generally not subject to reopening. The Revenue argued that this finality clause bars the High Court's jurisdiction under Article 226.

The Court referred to the Supreme Court's decision in Jyotendrasinhji v. S I Tripathi, which held that the finality clause in Section 245-I does not oust the High Court's jurisdiction under Article 226 or the Supreme Court's jurisdiction under Articles 32 and 136 of the Constitution. Therefore, the writ petition challenging the Settlement Commission's order is maintainable.

Issue 5: Consideration of Petitioner's Objections Regarding Additions under Section 2(22)(e)

The petitioner contended that the Interim Board for Settlement did not deal with his objections to the additions made under Section 2(22)(e), rendering the impugned order bad in law. The Court noted that the Settlement Commission is not required to provide detailed reasons akin to regular tribunals but must consider objections sufficiently.

In the present case, the Court found that the Commission had examined the petitioner's submissions and evidence regarding the loans and made findings accordingly. The petitioner's failure to produce adequate evidence for business purpose loans justified the additions. The Court found no merit in the contention that objections were not considered.

3. SIGNIFICANT HOLDINGS

"Section 245D(4) of the Income Tax Act empowers the Settlement Commission to 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 Principal Commissioner or Commissioner, after examining such further evidence as may be placed before it or obtained by it."

"The Settlement Commission is not confined to the incriminating material found during the search operation; it may consider other materials to determine the true and correct undisclosed income of the applicant."

"The conditions contemplated in Section 2(22)(e) are fully satisfied where the shareholder holds not less than ten per cent of the voting rights and the company is not one in which the public is substantially interested. Unless the shareholder proves by cogent evidence that the loan was for business purposes, the loan amount is to be treated as deemed dividend."

"The finality clause under Section 245-I does not bar the jurisdiction of the High Court under Article 226 of the Constitution to entertain writ petitions challenging orders passed under Section 245D(4)."

"The Settlement Commission's order is a package deal; an assessee cannot accept favourable parts and reject others. The scope of judicial review is limited to whether the order is contrary to the provisions of the Act or tainted by bias, fraud or malice."

"The judgment in Principal Commissioner of Income Tax v. Abhisar Buildwell (P) Ltd, which restricts additions in block assessments in absence of incriminating material, does not apply to settlement proceedings under Chapter XIX-A."

Final determinations:

- The Settlement Commission was justified in considering evidence beyond seized materials.

- Additions under Section 2(22)(e) treating loans as deemed dividends for Assessment Years 2014-15 and 2018-19 were upheld due to insufficient proof of business purpose.

- The Settlement Commission's jurisdiction to revisit completed assessments in settlement proceedings is broader than that of Assessing Officers in block assessments.

- The writ petition challenging the Settlement Commission's order is maintainable despite the finality clause.

- The petitioner's objections were duly considered, and no procedural infirmity was found in the impugned order.