TMI Blog2012 (4) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Assessment Years in question based on a story of having earned income for which no records were available - Settlement Commission complyied with the principles of natural justice and after furnishing to the assessee an opportunity of being heard specifically on the issue of penalty - Settlement Commission has imposed a penalty of ₹ 2.75 crores u/s Section 271(1)(c) where the assessee has mis-stated or concealed the particulars of his income - penalty shall not be less than the amount of tax sought to be evaded but shall not exceed three times the amount of tax sought to be evaded - total income tax demand in the present case, according to the petitioner, which has been arrived at on behalf of the Revenue works out to ₹ 1.96 crores for AY 2008-09 and ₹ 82.40 lacs for AY 2009-10. The total penalty of ₹ 2.75 crores has been clarified by a corrigendum issued by the Settlement Commission to be on a pro rata basis as an amount of ₹ 1.92 crores for AY 2008-09 and ₹ 82.50 lacs for AY 2009-10 - The penalty which has been imposed is thus commensurate with the provisions of Section 271(1)(c) – no merit in the challenge to the order on the aspect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 the Settlement commission passed an order under the provisions of Section 245D(1) directing that the application be proceeded with. On 30 December 2009 the Settlement Commission sought a report from the Commissioner of Income Tax under Section 245D(2B). In terms of the provisions of Section 245D(2B) the report of the Commissioner was required to be submitted within a period of thirty days from the order of the Settlement commission. The period stipulated in the provision expired on 29 January 2010 in spite of which no report was received. By an order dated 23 February 2010 the Commission directed that further proceedings shall take place in the matter and that the application could not be regarded as invalid. On 21 September 2010 a report was submitted by the CIT under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997. Under Section 245D(1), as it stood prior to amendment, the Settlement Commission was under a mandate to call for a report from the Commissioner on receipt of an application under Section 245C. This procedure was modified when Parliament substituted the provisions of Sub-section (1) as they now stand by the Finance Act, 2007 with effect from 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inquire into the genuineness of conversion of the loans to share capital and share premium by issue of shares." 5. The Commissioner of Income Tax by his letter dated 22 November 2010 adverted to the order of the Settlement Commission and stated that the Assessing Officer (DCIT, CC-20, Mumbai) had carried out an investigation but that due to a shortage of time a complete inquiry could not be made. The report stated that the Assessing Officer was prevented by shortage of time from inquiring into the creditworthiness of the persons who had advanced moneys to the petitioner in the form of loans and share applications. However, he noted that all the parties had confirmed having advanced the loans; that all persons were income tax assessees whose identity was established. The Commissioner also noted in his report that the petitioner had disclosed an income each of Rs. 10 lacs for the two Assessment Years which was stated to be commission income earned out of the transactions involving purchase and sale of non ferrous metals. It was stated that the petitioner had not furnished any details of this income and the names of the parties from whom it had earned commission, rate of commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the provision of Section 68. In certain areas the Commission has accepted the contention of the petitioner. As a consequence a total amount of Rs. 6.18 crores has been added to the income of the petitioner for Assessment Years 2008-09 and 2009-10. On the aspect of the imposition of penalty the Commission has furnished reasons for rejecting the contention of the petitioner and has come to the conclusion that the offer of the petitioner of Rs. 10 lacs for each of the Assessment Years, based on a story of having earned income for which no records are available and without touching upon the real issues for which the petitioner was being pursued by the Department, is merely an attempt to create a smoke screen to shut out further investigation. Consequently the Commission has come to the conclusion that the petitioner would not be entitled to a waiver of penalty under Section 271(1)(c) and a penalty of Rs. 2.75 crores has been imposed on the petitioner. The petitioner has, however, been granted an immunity under Section 245H from prosecution for offences punishable under the Income Tax Act, 1961. The taxes due and consequent upon the order have been directed to be paid within a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Section 68 cannot be justified; (5) The imposition of a penalty under Section 271(1)(c) is contrary to law since the Settlement Commission did not furnish a notice to show cause to the petitioner before the penalty was imposed. It is a settled principle of law that assessment proceedings are distinct from proceedings for the imposition of penalty. Consequently there has been a violation of the principles of natural justice on the part of the Settlement Commission in imposing a penalty upon the petitioner. 8. On the other hand, it has been urged on behalf of the Union of India by the learned Additional Solicitor General that: (1) Following the law laid down by the Supreme Court, it is an established position in law that the Settlement Commission has the jurisdiction to render a complete assessment and the entire assessment is transferred to the Settlement Commission upon which the Commission exercises exclusive jurisdiction; (2) An application under Section 245C(1) is to have the case settled. The expression "case" is defined in clause (b) of Section 245A to mean any proceeding for assessment under the Act in respect of any assessment year which may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own funds in the form of share application money; (6) There has been no violation of the principles of natural justice in the imposition of a penalty under Section 271(1) (c). The petitioner invoked the jurisdiction of the Settlement Commission, seeking a waiver of the penalty otherwise liable to be imposed under the diverse provisions of the Act. The Settlement Commission heard the petitioner before it proceeded to impose a penalty under Section 271(1)(c). Having regard to the parameters which have been set out in the statutory provisions in question, the quantum of the penalty is not in any event disproportionate. Alternatively no prejudice has been shown by the petitioner as a result of the non issuance of a separate show cause notice before a penalty came to be imposed. 9. The rival submissions fall for consideration. 10. Chapter XIX-A of the Income Tax Act, 1961 provides for a settlement of cases. The expression "case" is defined in clause (b) of Section 245A to mean any proceeding for assessment under the 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the application, to pass an order in writing either rejecting the application or allowing the application to be proceeded with. If the Settlement Commission passes no such order within the aforesaid period, the proviso creates a deeming fiction that the application shall be deemed to have been allowed to be proceeded with. Prior to its substitution by the Finance Act 2007, Section 245D as it originally stood provided that upon receipt of an application under Section 245C the Settlement Commission shall call for a report from the Commissioner and on the basis of the materials contained in the report and having regard to the nature and circumstances of the case and of the complexity of the investigation involved, either reject the application or allow it to proceed. The requirement of calling for a report from the Commissioner at the stage of the initial consideration of the application under Section 245D(1) has now been dispensed with as a result of the amended provision. Under sub-section (2B) of Section 245D, it has been stipulated, inter alia, that in respect of an application which is allowed to be proceeded with under sub-section (1), the Settlement Commission shall, withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner." Simply put, under sub-section (4) the Settlement Commission is empowered to pass orders in accordance with the provisions of the Act after examining the records and the report of the Commissioner, if any and upon examining such further evidence as may be placed before it or obtained by it. The Settlement Commission is upon the plain language of the provision not confined merely to examining the report of the Commissioner. As seen earlier, the Commission is not constricted from proceeding further where the Commissioner does not submit a report at all. The evidence which the Commission examines is that which is placed before it or obtained by it. Evidence which is obtained by the Commission is that which emerges on the initiative or directions of the Commission. The Commission is in other words not designed to act as a passive spectator - confined to what the assessee discloses. The Commission can act proactively in gathering or obtaining evidence. The statute confers upon it the power to settle a case, which is nothing but an assessment. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the powers conferred on the Settlement Commission by the Chapter, it shall have all the powers which are vested in an income tax authority under the Act. Under sub-section (2) of Section 245F, 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 the Section 245, 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 the Act in relation to the case. Under Section 245H the Settlement Commission is empowered to grant immunity from prosecution under the Penal Code or under any other Central Act to any person who has made an application for settlement under Section 245C. The grant of immunity is, however, conditional upon the requirement that the applicant has cooperated with the Settlement Commission in the proceedings before it and has made a full and true disclosure of his income and of the manner in which such income has been derived. Section 245HA provides for the abatement of proceedings before the Settlement Commission in certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under sub-section (1). There, the Settlement Commission shall call for a report. The second stage is under sub-section (3) of Section 245D where, inter alia, the Settlement Commission has not declared an application as invalid under sub-section (2C). In both the cases the report of the Commissioner is not a condition precedent for the Settlement Commission to proceed further with the settlement of the case. If the Commissioner does not submit his report to the Commission, that does not bring an end to the proceeding before the Commission. On the contrary, both the second proviso to sub-section (2C) and the proviso to sub-section (3), make it abundantly clear that the Settlement Commission is empowered to proceed further even in a situation where the Commissioner does not furnish a report within the prescribed period. Once the Settlement Commission is seized of the proceedings and an application under Section 245C has been allowed to be proceeded with under Section 245D, the Settlement Commission has exclusive jurisdiction to exercise the powers and to perform the functions of an income tax authority under the Act in relation to the case. When the Settlement Commission decides to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission under Chapter XIX-A, whether interest should be computed upto the stage of Section 245D(1) or upto the date of order of Commission under Section 245D(4) and whether the Commission could reopen its concluded proceedings by invoking Section 153 so as to levy interest under Section 234-B, though interest was not levied in the original proceedings. The Constitution Bench of the Supreme Court held that (i) Sections 234-A, 234-B and 234-C are applicable to the proceedings before the Settlement Commission under Chapter XIX-A; (ii) The terminal point for the levy of interest was held to be the date of the order under Section 245D(1); and (iii) The Settlement Commission could not reopen concluded proceedings by invoking Section 154, particularly in view of Section 245(1). In the course of the discussion, the Supreme Court held that Chapter XIX-A is a self contained Code and the procedure to be followed by the Settlement Commission under Section 245C and Section 245D in the matter of computing undisclosed income, the additional income tax payable on such income with interest and the filing of a settlement application indicating the amount of income returned in the return of income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings having decided to proceed with the application under Section 245D(1). Under sub-section (4) of Section 245 D the Settlement Commission was entitled to act on the basis of (i) an examination of the records; (ii) the report of the Commissioner, if any, received under sub-section (2B) or sub-section (3); (iii) such further evidence as may be placed before it or obtained by it. On the basis of this material the Settlement Commission was empowered, in accordance with the provisions of the Act, 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 the Commissioner. 18. The submission which has been urged on behalf of the petitioner is that since the petitioner had moved the Settlement Commission only with an offer of a disclosure of income amounting to Rs.10 lacs each in the two Assessment Years and since the Commissioner was not in a position to determine either the genuineness or the authenticity of the alleged transaction entered into by the petitioner with the two companies, the Settlement Commission acted outside its jurisdiction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the jurisdiction of the Commission. The expression relating to the case is an expression of width and amplitude. The report of the Commissioner furnished in pursuance of the directions of the Settlement Commission under Section 245D(3) cannot be read in a sense disjointed from the terms of reference made by the Commission to him. The report refers to the matters upon which he was called upon to investigate. All those matters would fall within the jurisdiction of the Commission as matters relating to the case and referred to in the report of the Commissioner. Consequently even on a literal and textual construction of Section 245D(4), we are satisfied that the Settlement Commission acted within the parameters of its jurisdiction in the present case. The position which emerges on a plain and literal construction of the language of the statute is supported by even a contextual construction. Parliament intended that the entire assessment is before the Settlement Commission. The Commission completes the process of assessment - as the decision in Brij Lal holds - as part of the settlement of the case. Until the Settlement Commission is seized of the proceedings, there is no parallel ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench comprising himself and S.R. Pandian, J. observed that in such a case this Court is "concerned with the legality of procedure followed and not with the validity of the order." The learned Judge added "judicial review is concerned not with the decision but with the decision-making process." Reliance was placed upon the decision of the House of Lords in Chief Constable of the N.W. Police v. Evans [1982] 1 WLR 1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant..." 20. The same principle has since been reiterated in a more recent judgment rendered in relation to the powers of the Settlement Commission constituted under the Central Excise Act in Union of India v. Ind-Swift Laboratories Ltd. [2011] 4 SCC 635 by the Supreme Court: "22. An order passed by the Settlement Commission could be interfered with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on their share value which would be about 1/5th of the applicant company; (iii) During the course of a statement under Section 131 the Executive Director of the petitioner stated that the value of the premium was worked out on the basis of the advice of financial consultants and advisors but he could not remember their names; (iv) During the course of proceedings under Section 245D(4) when the same question was put to the Executive Director, he was unable to furnish any details of the persons or institutions on whose advice the share premium amount was fixed; (v) The net worth as disclosed by the balance sheet, the potential earnings as disclosed by earnings per share or even the vague protestations of future prospects would not justify a high premium of Rs. 990/- per share. If such a high figure was fixed in consultation with experts or financial institutions, it is inconceivable as to why petitioner was unable to provide even the barest of details of such consultation; (vi) The only inference that could be drawn was that no such consultation took place, the rate of premium was fixed unilaterally by the petitioner without any reference point to past records, present earnings or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Both the Resolutions were in the same format and couched in identical language including the same grammatical mistakes; (xii) Although share applications made by Oleander Manufacturers were filled up by hand, the ones that were typed had the same type face as those in the application of Tristar Agencies. Some of the printed forms which were used were of the year 2000. It was surprising that the company was still using eight year old forms when its networth was such that it commanded a premium of Rs. 990/- per share of Rs. 10/-; (xiii) The attendance register for the AGM held on 25 September 2009 contained over writings. One of the Directors who attended on behalf of Oleander Manufacturers was actually not a Director of the company. The relevant proxy authorisation forms were not produced nor was any proof of communication to the share holders in regard to the convening of the AGM or even for the despatch of the share certificates produced; (xiv) Both Oleander and Tristar are companies being run from a single room as mentioned in their addresses. Initially the promoters of Oleander Manufactures were two brothers and in the case of Tristar Agencies, spouses who were no longer assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of money, and if he fails to rebut it, the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably." 24. But, it has been urged on behalf of the petitioner that an addition within the meaning of Section 68 would not be justified in law in its hands even if the share application money was received from bogus share holders. Counsel appearing on behalf of the petitioner submitted that in the present case the report submitted by the Commissioner under Section 245D(3) showed that the two companies were duly identified being income tax assessees whose PANs were also furnished. Consequently, relying on the decision of the Delhi High Court in the case of Commissioner of Income Tax v. Lovely Exports 299 ITR 268 and the order rendered by the Supreme Court in a Special Leave Petition arising therefrom, it was urged that recourse to the provisions of Section 68 was not in order. Now, in order to appreciate the submission it would be necessary to consider the Judgment of the Delhi High Court in Lovely Exports. The Division Bench of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while walking the tightrope of Sections 68 and 69 of the Income Tax Act. The burden of proof can seldom be discharged to the hilt by the assessee; if the Assessing Officer harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company." (Emphasis supplied). 25. Now, it is this decision of the Delhi High Court against which a Special Leave Petition before the Supreme Court came to be dismissed on 11 January 2008. In Commissioner of Income Tax v. Lovely Exports Pvt. Ltd. [2008] 6 DTR (SC) 308 while dismissing the Special Leave Petition the Supreme Court observed that if the share application money was received by the assessee from allegedly bogus share holders whose names were given to the Assessing Officer, the department was free to proceed to reopen their individual assessments in accordance with law. On this ground, the Supreme Court while dismissing the Special Leave Petition found no infirmity in the judgment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 990/- per share. The allotment of shares, it must be noted, has taken place in pursuance of a private placement. The principles which have been applied in relation particularly to the public subscription of shares of a public limited company can obviously have no application to the facts of a case such as the present. The view which has been taken by the Settlement Commission is consequently borne out on the basis of the material on record. This is not a case where the Commission has proceeded contrary to law or on the basis of no evidence. There is no perversity in the findings of the Settlement Commission. 27. Before leaving this aspect of the matter, it would be necessary to advert to two decisions of the Supreme Court, the first being in Commissioner of Income Tax v. P. Mohanakala AIR 2007 SC 2116. While considering the scope of Section 68, the Supreme Court observed as follows: "15. ...When and in what circumstances Section 68 of the Act would come into play? That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessing officer, was not satisfactory. It is well settled that in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory." 29. In the exercise of the power of judicial review particularly against the findings of the Settlement Commission this Court would not be justified in re-appreciating the findings of fact which, in any event, are based on the material on record. The view taken is consistent with the law laid down by the Supreme Court. 30. Finally that leaves the Court to deal with the penalty which has been imposed upon the petitioner. The submission which has been urged on behalf of the petitioner is that no notice to show cause was issued to the petitioner before the Settlement Commission proceeded to impose a penalty and there was hence a violation of the principles of natural justice. 31. The first aspect of the matter which merits emphasis is that the petitioner move ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a story of having earned income for which no records were available, without touching upon the real issues for which the applicant was being pursued by the Revenue. The Commission has, in our view, with justification come to the conclusion that the attempt on the part of the assessee was merely to create a smoke screen in order to shut out further investigation. In these circumstances, the view which has been taken by the Settlement Commission has been after complying with the principles of natural justice and after furnishing to the assessee an opportunity of being heard specifically on the issue of penalty. The Settlement Commission is bound by the mandate of the Act, which includes Section 274. The Settlement Commission has to hear the applicant on the question of penalty. The proceeding before the Settlement Commission cannot be disjointed into parts, particularly having regard to the time limit set for disposal. The Commission has furnished a reasonable opportunity of hearing to the assessee and has heard him. No prejudice is shown. The Settlement Commission has imposed a penalty of Rs. 2.75 crores. Section 271(1)(c) provides for the imposition of a penalty where the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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