Gujarat High Court
Principal Commissioner Of Income Tax - ... vs Shree Nilkanth Developers & on 23 August, 2016
Author: Akil Kureshi
Bench: Akil Kureshi
C/SCA/14239/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 14239 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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PRINCIPAL COMMISSIONER OF INCOME TAX - VADODARA -
3....Petitioner(s)
Versus
SHREE NILKANTH DEVELOPERS & 1....Respondent(s)
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Appearance:
MR KM PARIKH, ADVOCATE for the Petitioner(s) No. 1
MR J P SHAH WITH MR MANISH J SHAH, ADVOCATE for the Respondent(s)
No. 1
RULE SERVED for the Respondent(s) No. 2
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
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C/SCA/14239/2015 JUDGMENT
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
Date : 23/08/2016
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. This petition is filed by the Income Tax Department challening an order dated 04.02.2015 passed by the Income Tax Settlement Commission ['Settlement Commission' for short] under Section 245D(4) of the Income Tax Act, 1961 ['the Act' for short] concerning respondent-assessee for assessment years 2011-12 to 2013-14.
2. Brief facts are as under:
Respondent No.1-assessee is a partnership firm. The Income Tax department conducted a survey under Section 133A of the Act at the project site of the firm on 11.01.2013 which continued till 12.01.2013. During the survey, statements of manager and one of the partners of the firm were recorded. Authorities also seized and impounded documents and other materials.
3. On 21.01.2014, the firm filed an application before the Settlement Commission for the assessment years 2011-12 to 2013-14 requesting for settlement of the case. On 29.01.2014, the Settlement Commission passed order under Section 245D(1) Page 2 of 14 HC-NIC Page 2 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT of the Act allowing the application to proceed further. On 12.03.2014, the Settlement Commission passed a further order under Section 245D(2C) of the Act. On 16.06.2014, the Commissioner of Income Tax filed a report under Rule 9 of the Income Tax Rules, 1962. On 19.01.2015, the petitioner filed a rejoinder to such report. The Settlement Commission thereafter, fixed the hearing of the application on 20.01.2015.
4. On 04.02.2015, the Settlement Commission passed impugned order under Section 245D(4) of the Act. In such order, the Settlement Commission ignored the pleas of the Revenue that the assessee had not disclosed true and full particulars of the income and allowed the request of the assessee for settlement. The Settlement Commission accepted the assessee's declaration of further additional income of Rs. 56 lacs, over and above what was already declared in the application for settlement and permitted the assessee to make payment of the tax on such income in two installments in months of February and March 2015. In the process, the Settlement Commission levied interest upto the date of passing of the order under Section 245D(1) of the Act but granted immunity from penalty and prosecution.
5. It is this order of the Settlement Commission which the Revenue has challenged in this petition mainly on two grounds. First is, according to the Revenue, the assessee having disclosed income of Rs. 34 lacs for the three assessment years 2011-12 to 2013-14 while filing the application for settlement, could not Page 3 of 14 HC-NIC Page 3 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT have revised such income by a further declaration of Rs. 56 lacs which would go to show that the initial disclosure of income itself was not accurate. The Revenue, in this context, would rely on the decision of Ajmera Housing Corporation and anr vs. Commissioner of Income Tax reported in 326 ITR 642. The second ground pressed by the counsel for the Revenue before us was that the Settlement Commission had completely ignored the materials on record while accepting the assessee's pleas with respect to the undisclosed income. Counsel submitted that the Revenue had produced sizable materials collected during the survey to show that the assessee had earned undisclosed income worth crores of rupees. The materials produced by the Revenue and its contention in this regard were completely ignored. The Settlement Commission, without giving adequate reasons, merely accepted the version of the assessee which was not supported by any evidence and discarded the cogent materials produced by the Revenue. Reliance, in this respect, was placed on the decision of Jharkhand High Court in case of Pawan Kumar vs. Union of India and ors reported in 326 ELT 493.
6. On the other hand, learned counsel Mr. J.P.Shah for the assessee opposed the petition contending that the assessee had made further disclosures at the suggestion of the Settlement Commission keeping in mind the spirit of settlement. This would not imply that the disclosures essentially made for the settlement were inaccurate. In this respect, he relied on the Page 4 of 14 HC-NIC Page 4 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT decision of learned Single Judge of Kerala High Court in case of Commissioner of Income Tax vs. Settlement Commission (IT & WT) and anr reported in 369 ITR 606.
7. Counsel further submitted that the Settlement Commission has given sufficient reasons. The scope of judicial review in the writ petition against the order of Settlement Commission is extremely narrow. This Court would not act as an appellate forum.
8. Having thus heard learned counsel for the parties and having perused the documents on record, we may take up the question of disclosures made by the assessee. Chapter XIX-A introduced in the Act w.e.f. 01.04.1976 pertains to settlement of cases. An assessee, at any stage of the case relating to him could make an application for settlement as provided under sub section (1) of Section 245C of the Act containing 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. Section 245D lays down the procedure to be followed on receipt of an application under Section 245C. After crossing various stages provided under Section 245D, the Settlement Commission would pass a final order under sub section (4) of Section 245D of the Act which provides that the Settlement Commission, after examination of the records and the report of the Principal Page 5 of 14 HC-NIC Page 5 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT Commissioner or Commissioner, if any, received and after giving an opportunity to the applicant and to the Commissioner to be heard, and after examining such further evidence as may be placed before it or obtained by it, pass such order as he 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 Principal Commissioner or the Commissioner.
9. We may recall the Revenue had filed report under Rule 9 of the Income Tax Rules. In such report, the Commissioner had strongly opposed the application for settlement inter alia on the ground that the applicant had not disclosed full and true undisclosed income. It was pointed out that during the survey, incriminating documents were found and impounded. On the basis of such materials, the statement of the partner of the firm was recorded, under which, he had admitted the practice of receiving undisclosed amount and had offered additional income of Rs. 3 crores for tax over and above the normal income. He had stated that such disclosure was only tentative and he would make a complete disclosure later on. In this report, the allegations of such statement not being free were refuted. It was further pointed out that during the survey, even a diary was impounded which recorded undisclosed income. During his statement, manager, Shri Jagdish Jhalawadia had explained the entries in such diary. It was further pointed out that the assessee had deliberately disclosed the income in such a Page 6 of 14 HC-NIC Page 6 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT manner that the additional tax payable on such income exceeds Rs. 10 lacs which is one of the requirements for filing application for settlement under sub section (1) of Section 245C of the Act.
10. We have noticed that during the course of hearing of the settlement application, at the stage of Section 245D(4) of the Act, the assessee had made further offer in following terms:
"1. Increasing the turnover (on-money) by an amount of Rs.1.25 crores.
2. Apportionment of the enhanced turnover of Rs. 1.25 Crores in the same ratio as offered by the applicant in the SOF for various years.
3. Increasing the profit rate applied at the level of profit before allowance of interest and remuneration to partners to 15%."
11. As recorded by the Settlement Commission in the impugned order, the effect of this proposal translated into the following further declaration of income.
A.Y Turn On Further Total Profit @ Profit Further
over as money increase 15% before addition
per estimate in the on before interest al
books d in the money interest + income
SOF & remuner (6-7)
Remune ation as
ration already
(Col disclose
5*15%) d
(1) (2) (3) (4) (5) (6) (7) (8)
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2011-12 1.31 0.69 0.30 0.20 0.35 0.35 0.35
2012-13 4.27 0.33 0.15 4.75 0.71 0.52 0.19
2013-14 3.74 1.90 0.80 6.44 0.97 0.65 0.32
Total 9.32 2.92 1.25 13.49 2.03 1.47 0.56
12. The Settlement Commission, in the impugned order, noted that
keeping in view of the submissions made by the department as well as the discussions made in the course of hearing, the representative of the assessee had come forward with the further offer to bring quietus to the issue in the spirit of settlement. The assessee had thus, voluntarily admitted an additional income of Rs. 56 lacs and requested for grant of immunity from penalty and prosecution as the amounts have been surrendered in the spirit of settlement.
13. The Settlement Commission, in the impugned order, accepted such an offer observing that the Commission would agree with the representative of the applicant's view point that arriving at the exact undisclosed income from the impounded documents is very difficult and estimation has to be resorted to. Even there is discrepancy of the cash receipts in the report of the CIT (Appeals). It is not clear whether even the Revenue wanted to arrive at such income by affixing two zeros or three to the entries found in the documents. The Settlement Commission recorded that "under the situation the estimation of Page 8 of 14 HC-NIC Page 8 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT undisclosed receipts has been rightly resorted to by the applicant". The Settlement Commission concluded as under:
"8.1 As has been pointed out by the applicant, the word 'receipt' has been wrongly used as 'income' in the accounts and the estimation of profits at 8% was agitated by the department which means the expenditures are allowed @92%. Several case laws quoted by the AR have been considered and as per the discussion in the course of hearing, the applicant has come forward voluntary for further offer by increasing the receipts by an amount of Rs. 1.25 crores and also by applying a higher net profit rate of 15% at the level of profit before allowance of interest and remuneration to partners. Keeping in view the extent of business operation of the applicant and the higher estimation of turnover, the revised net profit rate is considered quite reasonable and hence accepted. We are of the view that the order of additional income (including the further additional offer made during the course of this proceeding) is true and full. Hence, the issue, thus get settled."
14. It can thus be seen that the Settlement Commission permitted the assessee to revise its disclosure of income previously not disclosed during the course of hearing of the application under Section 245D (4) of the Act primarily on two grounds. Firstly, that such revision was offered keeping in mind the discussions during the course of hearing and in spirit of settlement. Secondly, that it was difficult to arrive at an exact undisclosed income from the impounded documents. We may recall, the initial disclosure of undisclosed income of the assessee alongwith the application for settlement was total of Rs. 34 lacs for three years under consideration. The assessee, later on, at the Page 9 of 14 HC-NIC Page 9 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT stage of hearing of application under Section 245D(4) of the Act, made what can be categorized as substantial revision, by offering an additional income of Rs. 56 lacs to tax. This was done by disclosing a further turnover of on-money receipt by an amount of Rs. 1.25 cores and increase in the profit rate to 15%. Even if we were to discard the fair rate of return on the on- money receipts, the fact remains that the assessee made a further disclosure of on-money receipt of Rs. 1.25 crores at a belated stage. This effectively resulted into a further income of Rs. 56 lacs being disclosed by the assessee over and above the initial disclosure of Rs. 34 lacs made at the time of filing of the application for settlement. This is not a case where, during the course of the settlement, to put an end to the dispute, the assessee made minor adjustments in the disclosures already made. When we compare the initial disclosure of income with the further disclosures, it would reveal that the further declaration was more than 150% of the initial disclosure.
15. One of the prime requirements for settlement is of filing an application under sub section (1) of Section 245C of the Act by the assessee which would contain a full and true disclosure of his income which has not been disclosed before and the manner, in which, such income has been derived. If the assessee fails in this requirement, the application would have to be rejected. In this context, we may refer to the decision of Supreme Court in case of Ajmera Housing Corporation and anr vs. Commissioner of Income Tax (supra) in which it was observed that a full and Page 10 of 14 HC-NIC Page 10 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT true disclosure of income which has not been previously disclosed by the assessee, being a pre-condition for a valid application under Section 245C(1) of the Act, the scheme of Chapter XIX-A does not contemplate revision of income as disclosed in the application. If an assessee is permitted to revise his disclosure, in essence, he would be making a fresh application in relation to the same case by withdrawing the earlier application. It was further observed that, in the scheme of Chapter XIX-A, there is no stipulation for revision of an application filed under Section 245C(1) and the determination of income by the Settlement Commission has necessarily to be with reference to the income disclosed in the application filed under that section. Revision of income would tantamount to revision of application, not contemplated in the scheme. We are conscious that in the said decision, the assessee had made multiple revised disclosures which were drastic in nature as compared to the initial disclosure made in the application for settlement. Nevertheless, the Supreme Court frowned upon any revision in disclosures initially made which would tantamount to the initial disclosure being not true and full disclosure. It was observed as under:
"35. Before addressing the other issues, at the outset, we record our disapproval with the view of the High Court that it would not be proper to set aside the proceedings before the Settlement Commission even though it was convinced that the assessee had not made full and true disclosure of their income while making application under Section 245C of the Act. As stated above, in its earlier order dated 28th July, 2000 while Page 11 of 14 HC-NIC Page 11 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT declaring order dated 17th November, 1994, as ab initio void and setting aside order dated 29th January, 1999, the High Court had remitted the case to the Settlement Commission to decide the entire matter afresh, including the question of maintainability of the application under Section 245C(1) of the Act. The said order of the High Court was put in issue before this Court and was set aside vide order dated 11th July, 2006 and the case was remanded back to the High Court for fresh consideration. Nevertheless, all points raised by the parties, including the plea of the revenue that the application filed by the assessee before the Settlement Commission was not maintainable as the assessee had not made a full and true disclosure of their undisclosed income were kept open. The High Court addressed itself on the said issue and found that the assessee had not made a full and true disclosure of their income while making the application under Section 245C(1) of the Act, yet did not find it proper to set aside the proceedings on that ground. Having recorded the said adverse finding on the very basic requirement of a valid application under Section 245C(1) of the Act, the High Court's opinion that it would not be proper to set aside the proceedings is clearly erroneous. The High Court appears to have not appreciated the object and scope of the scheme of settlement under Chapter XIXA of the Act. At this juncture, it would be appropriate to notice a few illuminating observations in W T Ramsay Ltd. Vs. Inland Revenue Commissioners10, which was considered to be a turning point in the interpretation of tax laws in England and was a significant departure from Inland Revenue Commissioners Vs. Duke of Westminster11 dictum, noted in the passage extracted below :-
"Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of Inland Revenue Comrs v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259, 19 Tax Cas 490. This is a cardinal principle but it must not be overstated or over-extended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in Page 12 of 14 HC-NIC Page 12 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded; to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transactions to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded."
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 19th September, 1994 alone was sufficient to establish that the application made by the assessee on 30th September, 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."
16. In case of Commissioner of Income Tax vs. Settlement Commission (IT & WT) and anr, the learned Single Judge of Kerala High Court was of the opinion that in every case, where the assessee made an offer of additional amounts, even at the instance or suggestion of the Settlement Commission, it would not follow that the original declaration made by the applicant did not contain a full and true disclosure of any income thereby rendering such an application invalid. This Court also in case of Page 13 of 14 HC-NIC Page 13 of 14 Created On Thu Aug 25 05:03:31 IST 2016 C/SCA/14239/2015 JUDGMENT Commissioner of Income Tax-I vs. Income Tax Settlement Commission & anr in a judgement dated 12.07.2016 in Special Civil Application No. 11909 of 2014 had, in facts of the case, taken a somewhat similar view. It was found that the assessee had made marginal improvements in the original disclosure.
17. In the present case, however, the disclosures revised by the assessee during the course of the settlement proceedings were substantial and, in fact, far greater than the initial disclosure made. The Settlement Commission completely ignored the opposition of the Revenue in this respect on the ground that it is difficult to ascertain with degree of accuracy the undisclosed income on the basis of impounded documents, a ground which in our opinion is not valid.
18. In the result, the order of Settlement Commission is set aside only on this ground. It is, therefore, not necessary to examine the second contention of the Revenue. Petition is disposed of.
(AKIL KURESHI, J.) (A.J. SHASTRI, J.) Jyoti Page 14 of 14 HC-NIC Page 14 of 14 Created On Thu Aug 25 05:03:31 IST 2016