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TMI Blog2012 (4) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in transactions in which the petitioner would locate sellers in the grey market who would sell goods to prospective buyers. According to the petitioner, the goods would be delivered directly by the seller to the buyer; and payment would be routed through the petitioner who in turn would effect payment to the seller after deducting its share. This activity, it was stated, was undertaken in respect of items which did not form part of the inventory of the petitioner. The difference, it is stated, was earned in cash and was not accounted in the regular books of account. The petitioner stated that the activity was since discontinued, but in order to "buy peace of mind" the petitioner was willing to offer the income earned from the activity during Assessment Years 2008-09 and 2009-10, each in the amount of Rs. 10 lacs to tax. The terms of settlement which the petitioner proposed were that (i) the total income of the petitioner be determined at the amount disclosed in the petition; (ii) a waiver of interest be granted under the provisions of the Income Tax Act, 1961 as may be permissible; (iii) Immunity be granted to the petitioner from the levy of penalty and prosecution under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be verified, bearing in mind the modus operandi adopted by the group. During A.Y. 2008-09 the petitioner claimed to have received two loans of Rs. 2.0 crores from two companies by the name of Oleander Manufacturing Credit Pvt. Ltd. and Tristar Agency Pvt. Ltd. During the course of AY 2009-10 further amounts of each of Rs. 90 lacs were received from the two companies. During AY 2009-10, the petitioner allotted 30,000 shares each to the two companies on 13 March 2009 of a face value of Rs. 10 at a premium of Rs. 990 per share. This resulted in share capital of Rs. 3 lacs and share premium of Rs. 2.97 crores being realized from each of the two companies. The Settlement Commission noted from the sketchy details that were available on record, it was difficult to understand the loan transactions which resulted in the conversion of loans into share capital and share premium particularly since the petitioner is not a listed company. The CIT was accordingly directed to submit a factual report under Section 245D(3) on several aspects including, inter alia, the following: "(b) To verify the genuineness of loans and credit worthiness of the entities who are said to have given loans of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on has, in the course of its order, noted that "the adequacy of the income from the commodity trading is like an inconsequential sub plot in the bigger saga of the genuineness of funds credited as loans, share application and share premium moneys." The Settlement Commission has adverted to the fact that the Department failed to carry out any meaningful investigation on the specious ground of a paucity of time. However, during the course of the proceedings the petitioner was called upon to produce relevant documentary evidence in order to enable the Commission to examine the genuineness of the transactions alleged to have been entered into by the petitioner. After duly considering the material which has been produced by the petitioner, the Settlement Commission has, on the basis of nearly fourteen grounds and after considering the evidence in its totality, come to the conclusion that the purported transactions were not genuine. The Settlement commission held that the claim of having received such high premium on shares is fictitious and an attempt by the petitioner to launder its own unaccounted funds in the guise of such receipts. The Commission has, therefore, come to the conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report that was submitted in pursuance of the direction under Section 245D(3) the Commissioner stated that due to paucity of time he had no occasion to investigate into the genuineness of the transactions. In this view of the matter, the Settlement Commission would have no jurisdiction to travel beyond the subject matter of the application and the report of the Commissioner which found, as a matter of fact that the parties which had advanced the loans to the petitioner were income tax assessees and had been sufficiently identified; (4) An addition under the provisions of Section 68 of the Income Tax Act could not be made by the Settlement Commission since it is a well settled position of law that share application moneys received even from bogus share holders would have to be assessed in the hands of the share holders themselves. In the present case the identities of the shareholders were established duly as found in the report of the Commissioner submitted under Section 245D(3). In any event, the Settlement Commission has not been able to deduce that the funds of the petitioner have in fact flowed back through the conduit of the two companies which had advanced moneys initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial review under Article 226 of the Constitution in respect of an order passed by the Settlement Commission is restricted. The jurisdiction of the Court is only to determine as to whether the order of the Commission is contrary to the provisions of the Act and in absence of such a case, the Court would not be justified in substituting its own view for the view of the Settlement Commission. In the present case the Settlement Commission has extensively considered the material which was produced by the petitioner and even when applying the provisions of Section 68, it has justifiably relied on the test of human probabilities. The Court would not be within its jurisdiction in interfering with the order of the Commission unless it is found to be perverse or founded on no evidence at all; (5) In the present case the moneys which were realized by the petitioner allegedly by way of share application moneys were not in the context of a public issue of share capital but essentially in the nature of a private placement. The distinction between the two cases has been accepted in the decisions of several High Courts. The Settlement Commission has relied upon nearly fifteen circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of Section 245C an assessee may at any stage of a case relating to him make an application to the Settlement Commission to have the case settled. The main requirements of Section 245C are that the application must contain (i) a full and true disclosure of the income of the assessee which has not been disclosed before the Assessing Officer; (ii) a full and true disclosure of the manner in which such income has been derived and; (iii) the additional amount of income tax payable on such income together with such other particulars as may be prescribed. The proviso to sub-section (1) of Section 245C lays down certain monetary thresholds in regards to the additional amount of income tax payable on the income disclosed in the application. Under clause (ii) of the proviso, the additional amount of income tax payable on the income disclosed in the application must exceed ten lakh rupees. 12. Section 245D provides for the procedure to be followed on the receipt of an application under Section 245C. Under sub-section (1) of Section 245D the Settlement Commission on receipt of an application has to issue a notice to the applicant requiring him to explain as to why the application made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the Commissioner to make or cause to be made such further inquiry or investigation and to furnish a report on the matters covered by the application and any other material relating to the case. The Commissioner thereupon has to furnish the report within ninety days of the receipt of the communication from the Settlement Commission. Once again the proviso stipulates that the Settlement Commission may proceed to pass an order under sub-section (4) even without such a report of the Commissioner where the Commissioner has not furnished his report within the period stated. 13. Sub-section (4) of Section 245D upon which the controversy in the present case turns provides as follows: "(4) After examination of the records and the report of the Commissioner, if any received under- (i) sub-section (2B) or sub-section (3), or (ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007, and after giving an opportunity to the applicant and to the Commissioner to be heard, either in person or through a representative duly authorized in this behalf, and after examining such further evidence as may be placed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder sub-section (6), the proceeding with respect to the matters covered by the settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission and the Income Tax authority concerned is permitted, notwithstanding anything contained in the Act, to complete the proceedings within two years from the end of the financial year in which the settlement became void. The assessment proceedings are revived where the settlement becomes void. Sub-section (8) of Section 245D provides that nothing contained in Section 153 shall apply to an order passed under sub-section (4) or to any order of assessment, reassessment or recomputation required to be made by the Assessing Officer in pursuance of any directions contained in such order passed by the Settlement Commission. Explanation 1(v) to Section 153 stipulates that in computing the period of limitation for the purpose of the section, in a case where an application made before the Settlement Commission under Section 245C is rejected or is not allowed to be proceeded with, the period commencing from the date on which such application was made and ending with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the object underlying the constitution of the Settlement Commission is the settlement of cases under the chapter. A case, as noted earlier is defined to mean any proceeding for assessment under the Act which is pending before the Assessing Officer on the date when an application for settlement is made under Section 245C. The assessment is the subject of the case which is to be settled. An applicant who moves the Settlement Commission under Section 245C has to do so on the basis of a true and full disclosure of his income which has not been disclosed before the Assessing Officer. Disclosure of income which has not been disclosed before the Assessing Officer is essential to the validity of the application. The application is to have the case settled. Under sub-section (1B) of Section 245C, where the income disclosed in the application relates to one previous year, if the applicant has furnished a return in respect of total income of that year, the tax has to be calculated on the aggregate of the total income returned and the income disclosed in the application as if such aggregate were the total income. The Settlement Commission is empowered to call for a report of the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions as a whole is now a matter of judicial pronouncement. In Commissioner of Income Tax v. Express Newspaper Ltd. AIR 1994 SC 1389 the Supreme Court emphasised firstly that an assessee cannot approach the Commission for the settlement of his case with respect to income already disclosed before the Assessing Officer. The second principle which emerges from the decision is that proceedings before the Commission are not confined to the income disclosed before it alone. The Supreme Court held that once an application is allowed to be proceeded with by the Commission, the proceedings pending before any authority under the Act relating to that Assessment Year have to be transferred to the Commission and the entire case for that Assessment Year will be dealt with by the Commission itself. The Supreme Court also emphasised that while filing of an application by the assessee is a unilateral act, the Commission is not prevented from looking into material collected by the income tax authorities even subsequent to the submission of the report by the Commissioner if such a course is called for in the interest of justice. In the subsequent decision of the Constitution Bench in Brij Lal v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplate an assessment by settlement and not by way of regular assessment or assessment under Section 143(1), 143(3) or Section 144 of the Act. 17. Now if the challenge to the jurisdiction of the Settlement Commission is considered in this background, it is evident that the petitioner had, within the meaning of Section 245C, moved the Commission for a settlement of the case. The case which was sought to be settled was the pending assessment proceedings for AYs 2008-09 and 2009-10. The Settlement Commission directed the Commissioner initially in exercise of its powers under Section 245D(2B) to submit a report. No report was submitted to the Settlement Commission by the Commissioner. Thereafter once again the Settlement Commission called upon the Commissioner to cause an investigation to be made and to furnish a report under Section 245D(3). The Settlement Commission was justifiably anguished at the absence of co-operation on the part of the Commissioner, in the second instance on what the Commission considered was a specious explanation that there was a paucity of time. Be that as it may, the Commission had the entire assessment proceedings before it and of which it was seized u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing advanced loans to the petitioner; that all persons were income tax assessees and, therefore, the identity of the persons who had advanced the loans was established. The genuineness of the loan transactions, the credit worthiness of the entities who had allegedly advanced the loans and the genuineness of the conversion of the loans into share capital and share premium against the issuance of shares specifically formed a subject matter of the reference made to the Commissioner under Section 245D(3). The Commissioner dealt with a part of his mandate leaving the rest not analyzed, for reasons of time. These were all matters relating to the case - not covered by the application - but nonetheless referred to in the report of the Commissioner. The Commissioner, by the terms of reference, had to verify the genuineness of the transactions and credit worthiness of the parties. If the Commissioner were to hold that the transactions were genuine and parties were credit worthy, that would be an input before the Commission, but would not conclude the issue. Contrariwise, if the Commissioner were to hold that the transactions were sham and fictitious, it would still be for the Settlement Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Before we deal with the merits of the challenge, it must be noted at the outset that the extent of judicial review in a determination made by the Settlement Commission must fall with the parameters settled by decided cases. In Jyotendrasinhji v. S.I. Tripathi AIR 1993 SC 1991 the Supreme Court emphasised that the only ground upon which an order passed by the Settlement Commission can be interfered with is that the order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant. This would be apart from grounds of bias, fraud or malice which would constitute a separate category. The Supreme Court held as follows: "16. ...The scope of enquiry, whether by High Court under Article 226 or by this Court under Article 136 is also the same - whether the order of the Commission is contrary to any of the provisions of the Act and if so, has it prejudiced the petitioner/appellant. Apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category. Reference in this behalf may be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement Commission, 176 ITR 169 : (AIR 1989 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to scrutinise the genuineness of the transactions it had directed the petitioner to produce relevant records such as minute books, attendance registers of AGMs, dispatch registers, share certificates and authorization of proxy forms amongst other documentary material. The order of the Settlement Commission indicates at least fourteen reasons on the basis of which the Commission formed its view in regard to the genuineness of the transactions. These may be now briefly summarized: (i) A premium of Rs. 990 per share on a face value of Rs. 10 was alleged to have been paid in the case of an unlisted company with a level of assets and earnings per share as displayed by the petitioner. No dividends have ever been declared by the company. For 2008-09 the company had a profit of Rs. 1.59 lacs and an earning per share of Rs. 14.48 as against which share premium of Rs. 18.84 crores was collected. For 2009-10 as against a profit of Rs. 70.19 lacs and earning per share of Rs. 6.06 the share premium collected was Rs. 24.78 crores. Neither the past performance of the company nor its present earnings justify the amount of premium which had been charged; (ii) Even the most reputed companies i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against a lot of 60,000 shares was recorded as a fair premium considering the future potential and expected growth of non ferrous metals business in times to come. The fact that the Board had decided to initiate meetings with Merchant Bankers (in future) indicated that at the time when the price was fixed, no such meeting had taken place. Hence the claim that the experts had been consulted in fixing the price of the issue was not borne out by facts; (x) The Resolution authorizing the issuance of shares under Section 81(1A) of the Companies Act, 1956 was passed on 17 March 2009 and was intimated to the Registrar of Companies on 16 April 2009. However, the execution of the share application forms by the two companies was much before the date on which the issue was approved by the passing of a Special Resolution at the AGM on 17 March 2009. In other words it not clear as to how the two buyer companies could have applied for allotment of shares at premium even before such an issue was proposed and authorized. For that matter the company could not also have issued share application forms before the authorization of the issue took place; (xi) Both the Resolutions of Oleander Manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 of the Income Tax Act provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. The Supreme Court held as follows: "It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. [See : Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536). But, 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 satisfactor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other. In the case of allotment of shares of a public company, the company may have no material other than the application forms and the bank transaction details to furnish some indication of the identity of the subscribers. This distinction between a public issue of share capital and private placement has been made out in the following observations of the Delhi High Court: "15. There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue. Equally, where the preponderance of evidence indicates absence of culpability and complexity (sic) of the assessee it should not be harassed by the Revenue's insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The Company must, however, maintain and make available to the Assessing Officer for his perusal, all the information contained in the statutory share application documents. In the case of private placemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assessments in the case of alleged bogus shareholders in accordance with law and is not remediless. This would be more so when the assessee is a public limited company and has issued share capital to the public at large as in such cases the company cannot be expected to know every detail pertaining to the identity and financial worth of the subscriber. However, the initial burden on the assessee would be some what heavy in case the assessee is a private limited company where the shareholders are closely related because in such a case the assessee cannot feign ignorance about the status of the parties. The judgment of a Division Bench of this Court in The Commissioner of Income Tax v. M/s Creative World Telefilms Ltd. [Income Tax Appeal (Lodging) No.2182 of 2009] is along the same lines. 26. In the present case it needs to be emphasised that the Settlement Commission has considered all the material on record including the material which had a bearing on the credit worthiness and financial standing of the alleged subscribing companies to the share capital of the petitioner. None of the companies was held to have a financial standing or credit worthiness which would justify making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erse or based on no evidence, no question of law as such would arise for consideration. The Court further observed thus: "25. ...The doubtful nature of the transaction and the manner in which the sums were found credited in the books of accounts maintained by the assessee have been duly taken into consideration by the authorities below. The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence." 28. In a more recent judgment of the Supreme Court in Vijay Kumar Talwar v. CIT [2011] 1 SCC 673 the same principle was applied in the following observations: "24. ...All the authorities below, in particular the Tribunal, have observed in unison that the assessee did not produce any evidence to rebut the presumption drawn against him under Section 68 of the Act, by producing the parties in whose name the amounts in question had been credited by the assessee in his books of account. In the absence of any cogent evidence, a bald explanation furnished by the assessee about the source of the credits in question viz., realisation from the debtors of the er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e unless the assessee has been heard or has been given a reasonable opportunity of being heard. Evidently the assessee here was cognizant of the fact that the very object and purpose of the application was, inter alia, to seek a waiver of the imposition of a penalty and the assessee went before the Settlement Commission in the present case armed with such a request. Secondly, as the order passed by the Settlement Commission indicates, the assessee was heard specifically on the issue of penalty. The contention of the petitioner which has been recorded in para 28 of the decision of the Settlement Commission was that it had fully co-operated in the proceedings of the Commission and that it had made a full and true disclosure of the particulars of its income. The Commission considered the submission and held that looked at from the perspective of the test of human probabilities laid down by the Supreme Court and on the totality of the evidence, the contention of the assessee that it had genuinely received such high share premiums must fail. The Commission held that the assessee had not come clean before it. The assessee had offered an amount of Rs. 10 lacs in each of the Assessment Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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