TMI Blog2016 (1) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope of settlement proceedings. The other decisions referred to by the learned counsel for the revenue do not militate against the view we have taken. In sum, we hold that the income tax settlement commission does not have the power to direct a special audit under section 142(2A) in the course of settlement proceedings under Chapter XIX-A of the said Act. Consequently, the impugned order dated 26.04.2013, to the extent it directs the conduct of a special audit, is quashed. The matter be placed before the settlement commission for further consideration of the petitioners’ settlement applications in accordance with the prescribed procedure under Chapter XIX-A. The writ petition is allowed to the aforesaid extent. We are making it clear that we have not commented upon the merits of the settlement applications. - W. P. (C) 2927/2013 - - - Dated:- 6-1-2016 - Badar Durrez Ahmed And V. Kameswar Rao, JJ. For the Petitioners : Mr M. S. Syali, Sr Advocate with Ms Gayatri Verma, Ms Husnal Syali, Mr Mayank Nagi and Mr Harkunal Singh For the Respondents : Ms Suruchi Aggarwal, Adv. with Ms Lakshmi Gurung, Ms Radhika Gupta and Mr Abhishek Sharma JUDGMENT Badar Durrez ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore requested to direct a special audit of the accounts of the assessee group. 4. After considering the material on record, including the supplementary report dated 05.12.2012 requesting for a special audit under section 142 (2A), the settlement commission sent a letter dated 17.04.2012 to the petitioners providing them an opportunity of being heard as to why their accounts should not be subjected to the said special audit. Arguments were heard on this aspect by the settlement commission on 25.04.2013. It was inter alia argued on behalf of the petitioners that a special audit under section 142 (2A) of the said act could only be directed at the stage of assessment and cannot be conducted in the course of settlement proceedings. This argument was rejected by the settlement commission in the following manner: (V) The powers of the settlement commission u/s 245F (2) entail exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority. This, in our view, includes the powers to direct audit u/s 142 (2A). The contention of the applicants that Sec 142(2A) can be conducted only in assessment proceedings and not settlement proceedings under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by virtue of the provisions of section 245F of the said act acquires exclusive jurisdiction in respect of a case when an application under section 245C is made before it and such jurisdiction comes to an end if an order under section 245D(1) is made whereby the settlement application is not proceeded with or, where the application is proceeded with, till the order is passed under section 245D (4). It was submitted that in respect of matters covered by the settlement application and all proceedings incidental thereto, the settlement commission has exclusive jurisdiction with regard to adjudication, orders and directions. It was also submitted, on the strength of Brij Lal (supra), that the filing of an application before the settlement commission is akin to the filing of a return before the assessing authority under section 139 of the said act. It was submitted that the settlement commission has to determine the income as is done by the assessing officer under section 143(3) of the said act. Thus, according to the learned counsel for the revenue, just as the assessing officer has a right to make any enquiry for proper assessment and can direct a special audit having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts; (b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year. (2) For the purpose of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such enquiry as he considers necessary. (2-A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of Section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases.-(1) An assessee may, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, and containing 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, the additional amount of income tax payable on such income and such other particulars as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of in the manner hereinafter provided: Provided that no such application shall be made unless,- (i) in a case where proceedings for assessment or reassessment for any of the assessment years referred to in clause (b) of sub-section (1) of Section 153-A or clause (b) of sub-section (1) of Section 153-B in case of a person referred to in Section 153-A or Section 153-C have been initiated, the additional amount of Income Tax payable on the income disclosed in the application exceeds fifty lakh rupees, (i-a) in a case where- (A) the applicant is related to the person referred to in clause (i) who has filed an application (hereafter in this sub-section referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson, has a substantial interest in the business or profession of that person; or (B) where the specified person being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person; (b) a person shall be deemed to have a substantial interest in a business or profession, if- (A) in a case where the business or profession is carried on by a company, such person is, on the date of search, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (B) in any other case, such person is, on the date of search, beneficially entitled to not less than twenty per cent of the profits of such business or profession. (1-A) For the purposes of sub-section (1) of this section, the additional amount of income tax payable in respect of the income disclosed in an application made under sub-section (1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , issue a notice to the applicant requiring him to explain as to why the application made by him be allowed to be proceeded with, and on hearing the applicant, the Settlement Commission shall, within a period of fourteen days from the date of the application, by an order in writing, reject the application or allow the application to be proceeded with: Provided that where no order has been passed within the aforesaid period by the Settlement Commission, the application shall be deemed to have been allowed to be proceeded with. (2) A copy of every order under sub-section (1) shall be sent to the applicant and to the Commissioner. (2-A) Where an application was made under Section 245-C before the 1st day of June, 2007, but an order under the provisions of sub-section (1) of this section, as they stood immediately before their amendment by the Finance Act, 2007, has not been made before the 1st day of June, 2007, such application shall be deemed to have been allowed to be proceeded with if the additional tax on the income disclosed in such application and the interest thereon is paid on or before the 31st day of July, 2007. Explanation.-In respect of the application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Commission, in respect of- (i) an application which has not been declared invalid under sub-section (2-C); or (ii) an application referred to in sub-section (2-D) which has been allowed to be further proceeded with under that sub-section, may call for the records from the Commissioner and after examination of such records, if the Settlement Commission is of the opinion that any further enquiry or investigation in the matter is necessary, it may direct the Commissioner to make or cause to be made such further enquiry or investigation and furnish a report on the matters covered by the application and any other matter relating to the case, and the Commissioner shall furnish the report within a period of ninety days of the receipt of communication from the Settlement Commission: Provided that where the Commissioner does not furnish the report within the aforesaid period, the Settlement Commission may proceed to pass an order under sub-section (4) without such report. (4) After examination of the records and the report of the Commissioner, if any, received under- (i) sub-section (2-B) or sub-section (3), or (ii) the provisions of sub-section (1) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount remaining unpaid from the date of expiry of the period of thirty-five days aforesaid. (6-B) The Settlement Commission may, at any time within a period of six months from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (4): Provided that an amendment which has the effect of modifying the liability of the applicant shall not be made under this sub-section unless the Settlement Commission has given notice to the applicant and the Commissioner of its intention to do so and has allowed the applicant and the Commissioner an opportunity of being heard. (7) Where a settlement becomes void as provided under sub-section (6), the proceedings 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, may, notwithstanding anything contained in any other provision of this Act, complete such proceedings at any time before the expiry of two years from the end of the financial year in which the settlement became void. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of self-assessment in relation to the matters before the Settlement Commission. (4) For the removal of doubts, it is hereby declared that, in the absence of any express direction by the Settlement Commission to the contrary, nothing in this Chapter shall affect the operation of the provisions of this Act in so far as they relate to any matters other than those before the Settlement Commission. (5) [Omitted] (6) [Omitted] (7) The Settlement Commission shall, subject to the provisions of this Chapter, have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings. 9. On examining the provisions of section 142, it is evident that it is part of Chapter XIV which specifically details the procedure for assessment. The said provision relates to the enquiry before assessment. It is specifically for the purpose of making an assessment under the said act. Sub-section (2A) stipulates that if at any stage of the proceedings before him, the assessing officer, having regard to the nature a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case settled, the same is to be disposed of in the manner as indicated in the said Act. 7. Section 245D of the said Act sets out the procedure which is to be adopted by the Settlement Commission on receipt of an application under Section 245C. Section 245D(1) stipulates that on receipt of an application under Section 245C, the Settlement Commission is required to, within seven days from the date of receipt of the application, issue a notice to the applicant requiring him to explain as to why the application made by him be allowed to be proceeded with. Thereafter on hearing the applicant, the Settlement Commission is required to, within a period of 14 days from the date of the application, by an order in writing, reject the application or allow the application to be proceeded with. The proviso to Section 245D(1) stipulates that where no order is passed within the above mentioned period by the Settlement Commission, either allowing the application or rejecting the application, the application shall be deemed to have been allowed to be proceeded with. 8. Sub-section (2B) of Section 245D of the said Act stipulates that the Settlement Commission shall call for a report fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 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. 11. Section 245D(6) is also of some importance. It provides that every order passed under sub-section (4) of Section 245D is to provide for the terms of settlement including any demand by way of tax, penalty or interest, the manner in which any sum due under the settlement is to be paid and all other matters to make the settlement effective. It is specifically provided that the terms of settlement are to indicate that the settlement would be void if it was subsequently found by the Settlement Commission that it had been obtained by fraud or misrepresentation of facts. As a corollary to sub-section (6), sub-section (7) of Section 245D provides that where a settlement becomes void under sub-section (6), the proceedings in 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, may, notwithstanding anything contained in any other provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 245C-(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. 11. Section 245F of the said act calls for closer scrutiny as that is the provision which has been invoked by the settlement commission as also the learned counsel for the revenue for supporting the order with regard to the conducting of a special audit. Sub-section (1) of section 245F stipulates that in addition to the powers conferred on the settlement commission under chapter XIX A, it shall have all the powers which are vested in an income tax authority under the said act. But, in our view, this has to be read in the context of and the scope of settlement proceedings. It does not entail that the powers of regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r would have done? We do not think so. The settlement commission does not carry out the function of assessment and does not make an assessment order. It settles the case in terms of the provisions contained in chapter XIX-A of the said act. Therefore, the exclusivity of jurisdiction stipulated in section 245F entails two things: (1) that from the point of time of filing of the settlement application, no income tax authority can exercise jurisdiction over the case and it is only the settlement commission which could exercise such jurisdiction; (2) the powers and functions of the income tax authority which can exclusively be exercised by the settlement commission must have a nexus with the settlement proceedings before it. 13. We also note that the exclusive jurisdiction of the settlement commission in terms of sub-section (2) of section 245F of the said act is subject to the provisions of section 245D(3) of the said act. That provision entails that the settlement commission, in respect of, inter alia, an application which has not been declared invalid under section 245D(2C), may call for the records from the Commissioner and after examination of such records, if the settlement co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing officer for the purposes of making an assessment. 15. Let us now examine the decisions cited at the bar. In CIT v. Om Prakash Mittal: (2005) 2 SCC 751 the Supreme Court observed as under: 13. Section 245-F dealing with powers and procedure of the Settlement Commission provides that in addition to the powers conferred on the Settlement Commission under Chapter XIX-A, it has all the powers which are vested in the Income Tax Authority under the Act. Sub-section (2) is of vital importance and provides that where an application made under Section 245-C has been allowed to be proceeded with under Section 245-D, the Commission shall until an order is passed under sub-section (4) of Section 245-D, subject to the provisions of sub-section (3) of that section, have exclusive jurisdiction to exercise the powers and perform the functions of the Income Tax Authority under the Act in relation to the case. In essence, the Commission assumes jurisdiction to deal with the matter after it decides to proceed with the application Now, the exclusive jurisdiction is from the date on which the application is made . and continues to have the jurisdiction till it makes an order under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of proceedings under Chapter XIX-A. The said chapter contemplates the taxability determined with respect to undisclosed income only by the process of settlement/arbitration. Thus, the nature of the orders under Sections 143(1), 143(3) and 144 is different from the orders of the Settlement Commission under Section 245-D(4). xxxx xxxxx xxxxx xxxxx 44. As stated, proceedings before the Settlement Commission are similar to arbitration proceedings. It contemplates assessment by settlement and not by way of regular assessment or assessment under Section 143(1) or under Section 143(3) or under Section 144 of the Act. In that sense, it is a code by itself. It does not begin with the filing of the return but by filing the application for settlement. As stated above, under the Act, the procedure for assessment falls in Chapter XIV (in which Section 154 falls) which is different from the procedure for settlement in Chapter XIX-A in which Sections 245-C and 245-D fall. Provision for levy of interest for default in payment of advance tax under Section 234-B falls in Chapter XVII (Section F) which deals with collection and recovery of tax which as stated above is incidental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h interest thereon; the filing of settlement application indicating the amount of income returned in the return of income and the additional income tax payable on the undisclosed income to be aggregated as total income shows that Chapter XIX-A indicates aggregation of incomes so as to constitute total income which indicates that the special procedure under Chapter XIX-A has an in-built mechanism of computing total income which is nothing but assessment (computation of total income). 26. To elaborate, under Section 245-C(1-B), if the applicant has furnished a return in respect of his total income, tax shall be calculated on the aggregate of total income returned and the income disclosed in the settlement application as if such aggregate were total income. Under the Act, tax is payable on the total income as computed in accordance with the provisions of the Act. Thus, Section 143(3) provision is sought to be incorporated in Section 245-C. When Parliament uses the words as if such aggregate would constitute total income , it presupposes that under the special procedure the aggregation of the returned income plus income disclosed would result in computation of total income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , though the Settlement Commission is empowered to have all powers which are vested in an income-tax authority under the Act, in addition to the power conferred under Chapter XIX-A, but such power can be exercised for the purpose of procedure of settlement of application under section 245C and not for reassessment of tax of a particular year which is vested with the assessing authority. 21. We have already expressed a similar view above. The exclusive jurisdiction of the settlement commission to exercise the powers and perform the functions of an income tax authority, in terms of section 245F(2) of the said Act, is to be exercised and performed for the purpose of settlement of the case under Chapter XIX-A and not for assessment under Chapter XIV. That being the case, the powers and functions which are in the exclusive jurisdiction of the settlement commission are circumscribed by the object and role which has been ascribed to the settlement commission, which is to settle the case in terms of the procedure stipulated in Chapter XIX-A. Since assessment of the type contemplated under section 143(3) is outside the purview of settlement proceedings, a special audit under section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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