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2015 (5) TMI 1060 - JHARKHAND HIGH COURT

2015 (5) TMI 1060 - JHARKHAND HIGH COURT - 2015 (326) E.L.T. 493 (Jhar.) - Validity of settlement commission order - Held that:- Settlement Commission cannot exercise substantive powers of Income Tax Authorities, but, only the procedural powers vested in the Income Tax Authorities can be exercised by the Settlement Commission under Section 245F of the Income Tax Act. - We quash and set aside the order passed by the Settlement Commission dated 27th/28th June, 2013 (Annexure6 to the memo of th .....

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I. - We also quash the garnishee notice issued upon the debtors of this petitioner as contained in Annexure13 series and 14 series, which are consequent upon the orders passed by the Settlement Commission.Thus, all interlocutory applications as well as the writ petition are disposed of. The matter is remanded to the Settlement Commission for fresh decision. This writ petition is hereby, allowed to the aforesaid extent as the impugned orders are at Annexure6 and 7 are hereby, quashed. - W.P. .....

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3 under Section 245D(4) of the Income Tax Act, 1961 (hereinafter referred to as the Act, 1961 for the sake of brevity) which is at Annexure6 to the memo of this writ petition. By this order additions have been made of ₹ 62,50,000/and ₹ 73,50,663/in respect of assessment years 201011 and 201112 respectively, over and above income declared by this petitioner in its settlement application preferred for the aforesaid period under Section 245C (1) of the Act, 1961. 2. Factual Matrix Petit .....

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ome of ₹ 1,04,00,000/. The Settlement Commission passed an order under Section (preferred by the assesee under Section 245C) 245D(2C) of the Act, 1961 has allowed an application to proceed with. This order is dated 27th March, 2012/3rd April, 2012 (Annexure4 to the memo of this petition). This order was passed after calling for report from the Commissioner of Income Tax. The report given by the Commissioner of Income Tax is at Annexure3 and 5 of this writ petition. Thereafter adequate oppo .....

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sment years 201011 and 201112 respectively over and above the declared income of this petitioner. This is being reflected from para 11 of the order passed by the Settlement Commission. This order has been passed under Section 245D(4) of the Act, 1961. A recall/rectification petition was preferred by this petitioner before the Settlement Commission under Section 245D(6B) of the Act, 1961. This application was dismissed by the Settlement Commission vide order dated 24th September, 2013. This is at .....

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e Settlement Commission dated 27/28th June, 2013 as well as against the order passed by the Settlement Commission dated 24th September, 2013 and also being aggrieved by the notices issued by the respondents, the present writ petition alongwith I.A. No. 835 of 2015 has been preferred by this petitioner. 3. Arguments canvassed by the counsel for the petitioner : It is submitted by the counsel for the petitioner that the Settlement Commission has exceeded its jurisdiction, by additions of ₹ 6 .....

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ed out by the counsel for the petitioner upon paragraph nos. 6, 7, 8 and 9 of the impugned order at Annexure6, passed by the Settlement Commission. It is submitted by the counsel for the petitioner that if the Settlement Commission is of the opinion that there is no true and full disclosure of the income by the assessee in its application under Section 245C(1) of the Act, 1961, after looking to the report given by the Commissioner of Income Tax which are at Annexure3 and 5 the Settlement Commiss .....

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1 of Section 245D and another report given by the Commissioner of Income Tax at Annexure5 is under Rule of the Income Tax Settlement Commission (Procedure) Rules, 1997. One more chance was given to the Settlement Commission to reject the application preferred by this petitioner after the perusal of report given by the Commissioner of Income Tax and after admission of the application before the Settlement Commission. In the facts of the present case initially an order was passed by the Settlement .....

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powers of the Assessing Officer in the garb of powers under Section 245F of the Act, 1961 to be read with Section 44 AD of the Act, 1961. It is further submitted by the counsel for the petitioner that addition of income totaling at ₹ 1,36,00,663/for the assessment years 201011 and 201112, over and above the income declared by the petitioner and that too on the basis of the presumptions and surmises and in absence of any cogent and convincing evidence on record tantamounts that Settlement C .....

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as High Court reported in [2009] 315 ITR 328(Madras). On the basis of this judgment it is submitted by the counsel for the petitioner that the Settlement Commission cannot play the role of the Assessing Officer. Power under Section 245F is given to the Settlement Commission only for adopting the procedural powers vested in the Income Tax Authorities and not the substantive powers which are vested in the Income Tax Authorities can be grabed by the Settlement Commission. Counsel for the petitioner .....

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set aside as per the prayers made in Interlocutory Application No. 835 of 2015. 4. Arguments canvassed by the counsel for the respondents: Counsel for the Income Tax Department submitted that no error has been committed by the Settlement Commission while passing the order dated 27th/28th June, 2013 whereby there is an additions of income, over and above the income declared by this petitioner, totaling at ₹ 1,36,00,663/for assessment years, 20102011 and 201112. It further appears by the cou .....

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ction 1 of Section 245C or under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997, the Settlement Commission can always make additions, over and above the income declared by the petitioner in exercise of powers under Section 245F of the Act, 1961. This is a discretion vested in the Settlement Commission. It is submitted by the counsel for the respondents that huge turnover was kept outside the books of accounts and therefore, as per paragraph 6, 7, 8 and 9 of the order pass .....

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ent in the form of notice under Section 3 of Section 226 of the Act, 1961 and therefore, neither this petition nor the I.A. may be allowed by this Court. Both deserves to be dismissed. Counsel for the respondents is heavily relied upon paragraph no. 16 of the counter affidavit filed by the respondents Income Tax Department and has submitted that once the order is passed by the Settlement Commission, this type of writ petitions are not tenable at law. Reasons: 5. Having heard counsels for both th .....

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i) The petitioner is engaged in the business of trading in hardware items in the name and style of M/s Prasad Hardware. Petitioner is sole proprietor thereof who filed his income tax returns for the assessment years 201011 and 201112 on 23rd September, 2010 and on 29th September, 2011, respectively. (ii) Survey was conducted by the Income Tax Department under Section 133A on 21st/22nd October, 2011 and this petitioner preferred settlement application under Section 245C of the Act, 1961. On 30th .....

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). For ready reference Section 245D(2C) of the Income Tax Act reads as under: 245D. Procedure on receipt of an application under Section 245C.8 (2C) Where a report of the Commissioner called for under subsection (2B) has been furnished within the period specified therein, the Settlement Commission may, on the basis of the report and within a period of fifteen days of the receipt of the report, by an order in writing, declare the application in question as invalid, and shall send the copy of such .....

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ent Commission. Paragraph 8 and 9 of the order dated 27th March, 2012 read as under: 8. We have heard both the sides, perused the documents filed by the Ld. CIT(DR) and Ld. AR and considered the facts of the case. We are of the view that the pendency of the proceedings for A.Y. 201011 is there in view of the cited Board's Circular and as per the recent Hon'ble Single Bench decision of Hon'ble Calcutta High Court in the case of OUTOTEC Group. The disclosure made in the application als .....

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r has been, prima facie, accepted by the Settlement Commission. This is always a step no. 1 in the proceedings before the Settlement Commission. It is also popularly known as Admission of the application before the Settlement Commission. Thus, prima facie, it cannot be said that there is no full and true disclosure by the applicant. Now procedure for step no. 2 starts. (v) In a 2nd step the Settlement Commission will call for the report under Rule 9 of the Income Tax Settlement Commission (Proce .....

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totaling ₹ 1,36,00,663/), in respect of assessment years 201011 and 201112, respectively over and above the income declared by the petitioner. The reasons for this additions have been given in para 6, 7, 8 and 9 as under: 6. We have considered the facts of the case carefully. We have also taken into account the documents available on record. The submissions made on behalf of the applicant as well as the Department have been taken note of by us. We find that the applicant has disclosed addi .....

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undisclosed trade debtors as on 31st March, 2011/1st April, 2011 was ₹ 87,08,211/. It is appellant's contention that the trade debtors of ₹ 88,59,517 as on 30th March, 2010 represented clandestinely earned income for A.Yr. 2010.11. It is noted that the additional income of ₹ 90,00,000/disclosed in the A.Yr. 201011 just about covers the undisclosed trade debtors as on 1st April, 2010. Unfortunately, the amount of the unaccounted turnover for A.Yr. 201011 is not available. Ho .....

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taxed in the A. Yr. 201011. Similarly, the gross profit from the turnover of ₹ 1.98 crore has to be taken into account in respect of A.Yr. 201112. 7. As stated above, the books of account maintained by the applicant are no good. We find that for A. Yr. 201011, the applicant has shown net profit of ₹ 7,80,388/on sales of ₹ 5,49,25,594/which works out to 1.42%. It is not possible to accept that the profitability in the trade that the applicant is engaged in would be so low. For t .....

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possibility of a part of the clandestinely earned income having been spent, invested elsewhere cannot be discounted. An addition of ₹ 45,00,000/is made on this account. However, as the additional gross profit (worked out by applying gross profit rate of 12%) is less than the undisclosed trade debtors as at the end of the relevant accounting year, no separate G.P. additions is called for. 9. In so far as A.Yr. 201112 is concerned, additional gross profit, over and above the gross profit sh .....

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sion that books of accounts has not been maintained truly and correctly and thereby reasonably estimated unaccounted turnover for the assessment year 201011 at ₹ 1.75 crore. This figure of estimated unaccounted turnover has been arrived at looking to the turnovers for the assessment year 201112 and turnover for the assessment year 201213, no record for assessment year 201213 was before the Settlement Commission. This assessment year 201213 was not to be assessed or judged by the Settlement .....

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hodology is not permissible under the Income Tax Act. These are extraneous considerations which are considered by the Settlement Commission for presuming unaccounted turnover for the assessment year 201011. This process of consideration, of irrelevant considerations, in the eye of law known as wensbury unreasonableness. This is not permissible in the eye of law on the basis of the turnover of the assessment year 201112 and for the assessment year 20122013 a graph can be drawn and thereafter ther .....

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t may be favourable for this assessee who is a sole proprietor of M/s Prasad Hardware for his trading in the hardware items and there may be recession for the assessment year 201112 and for the assessment year 201213. In this eventuality the estimated unaccounted turnover for the assessment year 201011 may be double or triple than the turnover of the year 201112 or 201213. All depends upon the market also. There may be a very good period for this type of trading business in the year 201011 and f .....

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refore, evidences are must. Unless there are evidences on record this type of estimation of unaccounted turnover by the methodology adopted by the Settlement Commission of extrapolation of the graph is absolutely absurd. This is known as wensbury unreasonableness. The factors ought should have been considered if are considered by any authority, his orders will be said to have been suffered by this wensbury unreasonableness principle. If this type of powers are permitted by the Settlement Commiss .....

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ogic advanced and the reason given in paragraph no. 6 of the impugned order at Annexure6 dated 27/28 June, 2013 is absolutely illegal and unlogical and suffers from wensbury unreasonableness principle irrelevant consideration have been considered by this Settlement Commission. (ix) Looking to the reasons given in para nos. 7, 8 and 9 of the impugned order at Annexure6 it appears that not only the estimated unaccounted turnover has been presumed, but, the percentage of the profit has also been pr .....

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e of law too much wide discretion is known as arbitrariness and that too without any guidance. Whenever there is discretion given without guidance such type of exercise of discretion leads to discrimination. For few assessees percentage of the profit may be presumed 10% and for some of the assessees it may be 12% and for rest of the assessees it may go even higher to 12%. There is no basis why the Settlement Commission has chosen profit rate of 12%, otherwise as per Section 45AF of the Income Ta .....

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igher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession : Provided that nothing contained in this subsection shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year. (2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of subsection .....

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if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The provisions of Sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in subsection (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded. (5) Notwithstanding anything contained in the foregoing provisions .....

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rom the aforesaid para 6, 7, 8 and 9 without any basis, without any evidence, both, estimated unaccounted turnover as well as rate of profit has been presumed. This type of presumptions are not permissible and therefore, in this eventuality, the Settlement Commission should have been dismissed the application preferred by this petitioner observing that after receiving report of the Commissioner of Income Tax under Rule 9 of the Rules, 1997, finally, the Settlement Commission is arrived at conclu .....

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nt Commission has presumed profit at the rate of 12%. For the ready reference Section 44AD of the Income Tax Act 1961 reads as under: 44AD. Special provision for computing profits and gains of business on presumptive basis.-(1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such bus .....

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at where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under subsection (1) subject to the conditions and limits specified in clause (b) of Section 40. (3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The pro .....

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and other documents as required under subsection (2) of Section 44AA and get them audited and furnish a report of such audit as required under Section 44AB (Emphasis Supplied) (xii) It appears that the Settlement Commission has presumed that 8% of the net profit which is permitted under Section 44AD or 5% of the net profit permitted under Section 44AF = 12% of the gross profit. This is an absurd presumption. This is permissible only for conversion from centigrade to fahrenheit and from foot to .....

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ii) It has been held by Hon'ble Madras High Court in Canara Jewellers Vs. Settlement Commission reported in [2009] 315 ITR 328 (Madras) in para no. 11 and 12 as under: 11 So far as section 245F is concerned, though the Settlement Commission is empowered to have all powers which are vested in an Incometax Authority under the Act, in addition to the power conferred under Chapter XIXA, but such power can be exercised for the purpose of procedure of settlement of application under section 245C a .....

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s judgment shall not stand in the way of the Assessing Officer/Competent Authority to proceed in accordance with law, if otherwise it is not barred by limitation. We may also add that we have noticed the provision of section 153(3)(v) of the Incometax Act as referred to by the learned Senior Standing Counsel. The writ appeals are allowed with the aforesaid observations, but there shall be no order as to costs. (Emphasis supplied) In view of the aforesaid decision, the Settlement Commission canno .....

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to the facts of the present case, mainly for the following reasons: (a) In absence of any evidence before the Settlement Commission, it has estimated unaccounted turnover for the assessment year 201011. (b) Looking to the provisions of Section 245D(4)(ii) evidence before the Settlement Commission is a must. For the ready reference Section 245D(4) of the Act read as under: 245D Procedure on receipt of an application under section 245C …..................................................... .....

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y be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, 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. (4A) The Settlement Commission shall pass an order under subsection (4)(i) in respect of an application referred to in subsection (2A) or subsection (2D), on or before the 31st day .....

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