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TMI Blog2014 (11) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... .Alphonsa, (iii) Josco Gold Corporation Pvt. Ltd. and (iv) Josco Jewellers (P) Limited (hereinafter referred to as the 'assessees'), and granting the said applicants immunity from penalty and prosecution under the Income Tax Act. 3. The brief facts, that are necessary for a disposal of the writ petitions, are as follows; Pursuant to a search conducted by the Income Tax authorities, between 21.03.2012 and 20.07.2012, in the premises of the assessees, notices under Section 153A of the Income Tax Act (hereinafter referred to as the 'IT Act'), were issued to them on 29.11.2012. The assessees are stated to have filed returns of income, for the period covered by the notices issued to them, on 15.03.2013, by declaring the same income as was originally returned by them in the course of regular assessment. Immediately thereafter, on 19.03.2013, the assessees preferred applications before the Settlement Commission offering additional income for the purposes of settlement. The application was allowed to be proceeded with by the Settlement Commission, by an order dated 28.03.2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. The said method of valuation was not acceptable as per accounting standards and was not in consonance with the weighted average cost method that was usually adopted by others engaged in the same line of business. The department had gathered evidence that showed that the assessees were not accounting all their transactions with the goldsmiths/manufacturers in a proper manner and a quantification of the unaccounted income under this head would have been possible, if the department was given some time. The assessees had not, however, offered any additional income under this head in their applications for settlement. There was material available with the department to show that the assessees had suppressed their sales turnover while returning their taxable income. The material seized included data that was in digital format and, given some time, the data could have been analysed to quantify the extent of sales suppression. The assessees had not offered any additional income under this head in their applications for settlement. An analysis of the digital data that was obtained by the department showed that there was a significant difference between the amounts shown in the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and, had been accepted by the department as well. That being the case, and in view of the fact that the AS-2 accounting standard did not prohibit the LIFO method, and further, the AS-2 accounting standard was not mandatory for the purposes of the IT Act, the assessees had not committed any irregularity by following the LIFO method. The department has not adduced cogent evidence to substantiate their contentions with regard to alleged unaccounted transactions of the assessees with goldsmiths/manufacturers. During the search of the assessees' premises, there was no instance of unaccounted sales or purchases detected. There was also no difference noticed in the quantitative stock in any of the branches of the assessees. The deposition of two employee goldsmiths of the assessees would however point to a possibility of some transactions having been unaccounted. To cover this, and to avoid any litigation, the assessees were required to offer an additional amount of Rs. 20,00,00,000 for all the years covered by their settlement applications. With regard to the alleged sales suppression for the period from 01.04.2010 to 21.04.2010, it was seen that, on account of a software defect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd did not really exist, the deposition of Sri.P.A.Jose did point to the existence of the scheme. The appraisal report of the department also indicates that there was such a scheme in existence. There was also the possibility of the department not having found the software at the time of search as there were three other softwares that were not seized and it was not the case of the department that they did not exist. An analysis of the software, however, disclosed that there was no mechanism for linking an advance made under the old gold advance scheme to the corresponding future sale and this was a shortcoming in the maintenance of supporting records. However, the explanation of the assessees with regard to the non- requirement of mentioning the name of the customer who deposited the gold, when the transaction could be linked with the purchase bill number where the date and time of advance receipt is mentioned, was found acceptable by the Commission. The Commission also noted that the department only had material with regard to alleged violations under this head for the assessment years 2011- 12 and 2012-13 and for the assessment years 2006-07 to 2010-11, the department had not det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here were no valid reasons to deny the department an opportunity to complete the investigation. The department had material with it which would show that the system of accounting followed by two of the assesses, with respect to the valuation of closing stock, was wrong and not in conformity with the provisions in the IT Act. It had been established that the LIFO method of valuation of closing stock adopted by the said assessees was not in conformity with the practice adopted by others in the same trade. The system of accounting followed by the assessee did not even conform to the accounting practice that was known as LIFO since the necessary pre-conditions, for qualifying as LIFO, did not exist in the instant case. Further, the mere fact that the assessees were following the said practice of accounting consistently would not insulate them from a demand of tax if the accounting practice followed by the assessee was contrary to the provisions of the IT Act. Under these circumstances, the settlement commission ought to have noted that the assessees had not offered any additional income in the applications filed before the settlement commission and hence their application merited rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on behalf of the respondent assessees would contend as follows: The contention of the petitioner, based on the decision of the Supreme Court in Ajmera Housing Corporation's case (supra), that whenever there is an offer of additional amounts made by an assessee during the course of the proceedings before the commission, it would necessarily imply that the original disclosure made by him was not full and true, cannot be legally countenanced. Such an interpretation of the judgment of the Supreme Court would render the whole scheme of settlement under the IT Act meaningless. The decision of the Supreme Court in Ajmera Housing Corporation's case (supra) has been interpreted as one that is applicable to the facts of that case and not as laying down a general proposition that additional amounts cannot be offered by an assessee during the course of settlement proceedings, in order to avoid protracted litigation and in the spirit of settlement. The decision of the Bombay High Court in Director of Income-Tax (International Taxation) v. Income-Tax Settlement Commission and Others - [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that might have escaped assessment on account of a shortcoming in the software used. The additional amounts offered were at the suggestion of the settlement commission and not pursuant to any revision of undisclosed income by the assessees. With regard to the allegations of the petitioners against the findings of the settlement commission under the heads of "Differences in purchases" and "Additions under Section 68", there is no challenge in the writ petition against the findings of the settlement commission on the issue of difference in purchases. As regards the additions made under Section 68 of the IT Act, although there is a challenge to the findings of the settlement commission under this head in the writ petition, no objections were raised before the settlement commission at the appropriate stage of the proceedings before that forum. The settlement commission nevertheless considered these aspects in their order and gave reasons for their decision on these issues. As regards the jurisdiction of this Court, to interfere with the orders passed by the settlement commission, under Article 226 of the Constitution of India, reliance is placed on the decisions in Jyotendrasinhji v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was justified in refusing to the department an opportunity to conduct further investigation to ascertain the exact amount of income that had been allegedly undisclosed by the assessees? (4) Whether the findings of the Settlement Commission with regard to the alleged undervaluation of closing stock by two of the assessees is liable to be interfered with? Issue 1: The first issue to be considered is the nature of the jurisdiction that is to be exercised by this court while dealing with a writ petition filed under Article 226 of the Constitution of India, challenging the orders passed by the Settlement Commission under the IT Act, 1961. It is trite that this court, in exercise of its jurisdiction under Article 226 of the Constitution of India, does not assume the role of an appellate authority to conduct a merit review of orders passed by the Settlement Commission. Its role is confined to one of judicial review, of the orders of the Settlement Commission, by applying the well- settled principles that inform the exercise of such a jurisdiction. Accordingly, this court would be concerned with the decision making process, adopted by the Commission, and not the decision itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on award could be set aside would not be available in view of the nature and jurisdiction of the Settlement Commission. A decision of the Settlement Commission could be interfered with only (i) if grave procedural defects such as violation of the mandatory procedural requirements of the provisions in Chapter XIX- A of the Income-tax Act, 1961, and/or violation of the rules of natural justice are made out; or (ii) if it is found that there is no nexus between the reasons given and the decision taken by the Settlement Commission. The court cannot interfere either with an error of fact or error of law alleged to have been committed by the Settlement Commission." More recently, the Supreme Court in Union of India and Others v. Ind-Swift Laboratories Limited - [(2011) 4 SCC 635] observed as follows at page 643: "An order passed by the Settlement Commission could be interfered with only if the said order is found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the Commission or question of facts are concerned, the same is not open for examination either by the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of the Supreme Court in Commissioner of Income-Tax v. Anjum M. H. Ghaswala and Others - [2001 (252) ITR 1 (SC)], Chapter XIX-A of the Act was introduced by the Taxation Laws (Amendment) Act, 1975 with effect from 01.04.1976, for the purpose of quick settlement of cases, so that the tax due to the department is collected at the earliest. On a perusal of the relevant provisions under the Act, I note that the scheme provides for the preferring of an application by an assessee, that contains 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 and the additional amount of income tax payable on such income. Such application is to be made to the Settlement Commission, which is then to proceed with the application in the manner detailed thereafter. The settlement commission is required to take a preliminary decision, after hearing the applicant, as to whether the application deserves to be rejected or whether it should allow the application to be proceeded with. If it is the latter, then the Settlement Commission is required to call for a report from the Commissioner, who has to submit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enuded of its jurisdiction to proceed with the matter. It is in the backdrop of this fact that I must analyse the decision of the Supreme Court in the case of Ajmera Housing Corporation (Supra) that has been relied upon by the petitioner. It must, at once be noted that the provisions of Chapter XIX-A that were analysed by the Supreme Court in that case were slightly different from those under consideration in the instant case in that, it was the provisions, as they stood prior to the amendments introduced by the Finance Act, 2007, that were considered by the Supreme Court. Moreover, the Supreme Court was considering the case of an assessee who had suo motu revised his declaration, by making offers of additional amounts by way of disclosure of income at various stages of the proceedings before the Settlement Commission. Under those circumstances, the Court found that, judging by the assessee's own conduct, his original application could not be seen as containing a full and true disclosure of his income for the purposes of settlement under the Act. The relevant observations in the judgment of the Supreme Court are to be found in paragraphs 27, 31, 36 and 39 and are extracted here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of no ambiguity. 36. 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." 39. Apart from the fact, as explained above, not contemplated in the scheme, withholding of the information regarding filing of the revised annexure, disclosing undisclosed income of Rs. 11.41 crores as against the income of Rs. 1.94 crores, disclosed in the annexure forming part of the application, deprived the commissioner of his right to object to the maintainability of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts in the final amount for which the case before it is settled with the assessee. In taking the said view, I am fortified by the decision of the Bombay High Court in Director of Income-Tax (International Taxation) v. Income-Tax Settlement Commission and Others - [2014 (365) ITR 108 (Bom)]. 14. I must now turn to the proceedings before the Settlement Commission in the instant case to ascertain the circumstances under which the suggestion with regard to the offer of additional income was made to the assessees and the reasons therefor. This is to ensure that the Settlement Commission acted bonafide and, therefore within its jurisdiction, while directing the assesses to make the offer of additional amounts. The additional amounts, it will be noted, were offered under the heads of (i) "unaccounted transactions of the assessees with goldsmiths/manufacturers" and (ii) "transactions of purchase of gold where the procedure under Section 40A (3) of the IT Act had not been followed". 15. As regards (i) above, it is clear from a perusal of the Settlement Commission's order that the department had not adduced cogent evidence to substantiate their contentions with regard to alleged una ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections with the Settlement Commission with regard to the data contained in the software. It was thereafter, that the Settlement Commission, on an analysis of the software, found that there was no mechanism for linking an advance made under the old gold advance scheme to the corresponding future sale and this was a shortcoming in the maintenance of supporting records. However, the explanation of the assessees with regard to the non-requirement of mentioning the name of the customer who deposited the gold, when the transaction could be linked with the purchase bill number where the date and time of advance receipt is mentioned, was found acceptable by the Commission. The Commission also noted that the department only had material with regard to alleged violations under this head for the assessment years 2011-12 and 2012-13 and for the assessment years 2006-07 to 2010-11, the department had not detected any such violation and further, for the said years scrutiny assessments had taken place where the department did not find any discrepancy on this count. Under the said circumstances, the Commission proceeded to observe that it was possible that the assessing officer was guided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon to exercise, as already noted while answering Issue 1 above. The contention of the department before the Settlement Commission was that it had material to show that the business concerns of two of the assessees had resorted to undervaluation of closing stock of jewellery by adopting the Last-in-First-Out (LIFO) method of valuation. The said method of valuation, according to the department, was not acceptable as per accounting standards and was not in consonance with the weighted average cost method that was usually adopted by others engaged in the same line of business. The settlement commission found that the said accounting method was followed consistently for many years in the past and, had been accepted by the department as well. That being the case, and in view of the fact that the AS-2 accounting standard did not prohibit the LIFO method, and further, the AS-2 accounting standard was not mandatory for the purposes of the IT Act, the assessees had not committed any irregularity by following the LIFO method. As a matter of fact, it will be seen from a perusal of the order of the settlement commission that it has dealt with the objections of the department at some length and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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