Court : Bombay High Court
Brief : Rule 5 of the Settlement Commission Procedure Rules provides that the settlement application shall be presented in the form no.34(b), which provides that alongwith the application there should be confidential information in the annexure. Rule 6 provides that on receipt of the settlement application, copy of such application, excluding annexure, shall be forwarded by the Commission to the Commissioner with the direction to furnish report. Rule 9 provides that where an order is passed by the Commission under Section 245D(1) allowing the settlement application to be proceeded with, copy of the annexure to the said application together with a copy of each of the statements and other documents accompanying such annexures shall be forwarded to the Commissioner along-with the copy of the said order with the direction that the Commission shall furnish a further report, which may be done after making necessary inquiry or investigation.
Citation : CIT v. Income Tax Settlement Commission Appeal No.: Writ Petition Nos. 2192,2742,2778 to 2780 to 2835 of 1999 and 57,63 to 66,73,92,93, 161,177, 192,193 & 1965 of 2000, Decided on: July 8, 2009
RELEVANT PARAGRAPH
In perusal of the record, particularly different reports submitted by the Commissioner to the Settlement Commission and the final order passed by the Settlement Commission, it is no more in dispute that after the search of the premises of the Ajmera group as well as their accountant Vora on two occasions, application for settlement under Section 245C was made on 30th September, 1993 wherein additional income of Rs.1.94 crore was disclosed with confidential annexure. After receipt of that application, under Section 245D(1), report of the Income-tax Commissioner was called and as per that report additional income should have been Rs.223.56 crore. In that report, the Commissioner had contended that the assessee had not made true and full disclosures of his income as required under Section 245C and on that ground, application was liable to be rejected. However, the Settlement Commission passed the order on 17th November, 1994 accepting the application of their assessee for consideration and accordingly, further report of Commissioner, Income-tax was called and as per the report dated 30th August, 1995 corrected by Additional report and reconciliation note dated 20th October, 1997, undisclosed income was shown to be Rs.187.2 crore. The learned counsel for the Revenue pointed out that after the initial report under Section 245D (1) was submitted by the Commissioner, matter was heard on 12.9.1994. The order admitting application was passed on 17.11.1994. After the date of last hearing and before the admission order, on 19.9.1994, a revised confidential annexure declaring additional income of Rs.11.41 crore was submitted. It is contended that the confidential annexure dated 19.9.1994 was never made available to the Commissioner, Income-tax and he could not go through information provided by the assessee in the said disclosures and he also could not submit his report effectively. It is contended that this was in violation of Section 245D and the rules made thereunder.
9 Section 245C(1) provides that assessee may make an application in such a format and in such a manner as has been prescribed and containing full and true disclosure of his income which has not been disclosed before the Assessing Officer, manner in which such income has been derived, additional amount of income-tax payable on such income and such other particulars as has been prescribed to the Settlement Commission to have the case settled. Section 245D(1), as it stood before the amendment by the Finance Act, 2007 provided that on receipt of the application under Section 245C, the Settlement Commission shall call for the report from the Commissioner and on the basis of material contained in such report and having regard to the nature and circumstances of the case or the complicity of the investigation involved therein may pass an order either rejecting or allowing the application. If the application is not rejected and is allowed to be proceeded with, the Settlement Commission may call for the relevant 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 the report on the matters covered by the applications or any other matter relating to the case. Rule 5 of the Settlement Commission Procedure Rules provides that the settlement application shall be presented in the form no.34(b), which provides that alongwith the application there should be confidential information in the annexure. Rule 6 provides that on receipt of the settlement application, copy of such application, excluding annexure, shall be forwarded by the Commission to the Commissioner with the direction to furnish report. Rule 9 provides that where an order is passed by the Commission under Section 245D(1) allowing the settlement application to be proceeded with, copy of the annexure to the said application together with a copy of each of the statements and other documents accompanying such annexures shall be forwarded to the Commissioner alongwith the copy of the said order with the direction that the Commission shall furnish a further report, which may be done after making necessary inquiry or investigation. In the present case, application under Section 245C was made disclosing additional income of Rs.1.94 crore. On that basis commissioner’ s report was called under Section 245D(1) and on that basis, matter was heard and it was admitted. Before the order of admission was passed on 17.11.1994, the assessee revised their earlier application with Confidential annexure disclosing additional income of Rs.11.41 crore. In fact, this was revision of original application and, therefore, this revised application should have been sent to the Income-tax Commissioner for its report under Section 245D(1) but this was not done and admission order was passed on 17.11.1994. It is vehemently contended on behalf of the Revenue that the revised application and the confidential annexures dated 19.9.1994 were never made available to the Commissioner and this was violation of Rule 6 and 9 and thus, Revenue did not get sufficient opportunity of hearing in proceeding. There appears substance in this contention. In our opinion, non furnishing of that application and confidential annexures to the Commissioner amounted to violation of Rule 9 and on this count, it can be held that Revenue did not get sufficient opportunity to contest the application.
10. Leaned counsel for the Assessee harped upon the statement made before the Supreme Court that in the second report submitted by the Commissioner was admitted on 20th October, 1997, undisclosed income was estimated at Rs.42.5 crore and the Settlement Commission also noted approximately the same income. However, the learned counsel for the Revenue, on the basis of record, pointed out that the second report under Section 245D(4) read with Rule 9 was submitted on 30th August, 1995. As an objection was taken on behalf of the assessee about correctness or duplication of certain entries after removal of the errors, a note about reconciliation was submitted on 20th October, 1997 pertaining the second report submitted on 30th August, 1995. As per this rectified report, commissioner had assessed the undisclosed income of Rs.187.20 crore. This included annexures (A) and (B), which showed undisclosed income of Rs.42,56,78, 455/-on account of on money alone. Annexure (C) reveals amount of Rs.45,27,52, 985/-showing investment in cash, properties, drafts and others. Annexure (D) revealed details of cash receipts and its total was Rs.54,71,31, 828/-. Annexure (L) gave details of various cash payments by the respondents. This amount was assessed at Rs.39,20,41, 517/-. On perusal of the record, we find substance in the contention of the learned counsel for the respondents. It appears that what was pointed out before the Supreme Court was one part of the report and that part was in respect of on money only while other incomes, investments, receipts or payments were not covered in that part of the statement.
11. Perusal of the final order passed by the Settlement Commission, it appears that initially the respondents/ assessee had claimed that 90% of the on money was expenditure on different projects but for that expenditure, there was no documentary evidence. Paragraph
14.4 of the order reveals that according to the assessee unaccounted payments were made not only for the construction purpose but also to some buyers, architects, etc. to whom payments have also been made from regular account. Not only this, payment of Rs.64 lakh to Ajmera Steel Stripes and payment of Rs.4.34 lakh to Gujarat Printing Press, who are the sister concerns of the respondent, were also claimed. If the respondents had purchased the steel from Ajmera Steel Stripes worth Rs. 64 lakh for the purpose of construction of the projects, there were no reason to make payment without any receipts or documents. Order reveals that payment of Rs.4.34 lakh to Gujarat Printing Press was the extra money paid to the employees of that concern for the work done for the applicants/responde nts. It is impossible to believe that the respondents got the works done from certain employees of sister concern and for that purpose, payment was made without necessary receipts, vouchers or acknowledgments. 12 Paragraph 15.2 of the order of the Settlement Commission shows a summary of trial balances as on 17.11.1992. As per that summary, amount of Rs.734.02 lakh was shown as allowable expenses and amount of Rs.36.64 lakh was shown as expenses not allowable. It is difficult to understand how the amount of Rs.734.02 lakh could be treated as allowable expenses. It appears that consideration amount to the extent of 40% to 60 % was received as on money in cash while remaining amount was received by cheque or by receipts apparently to evade income tax on that part of income. But it is difficult to understand why the expenses were also made without any record. Manner in which expenses have been shown creates serious doubt about the expenditure of Rs.734.02 lakh.
15. Besides this, the said summary of trial balances reveals loans treated as unexplained to the extent of Rs.40.85 lakh. Thus, the total of the expenses and the loans which could not be properly allowed comes to Rs.911.51 lakh. Paragraph 17 of the order passed by the Settlement Commission gives a statement of receipts and expenses from 1.4.1981 to 17.11.1992. In this statement, amount of Rs. 488.98 lakh was shown as surplus money and it was claimed that the respondent was in the business of construction since 1960s and therefore, an amount of Rs.488 lakh could be easily available on 1.4.1981. This explanation was not accepted even by the Settlement Commission because during the search taken in 1989 and 1992, no such cash balance was found. In paragraph 19, the Commission noted that from 20.7.1990 to 17.11.92, personal expenditure was shown to be 823.91 lakh. However, personal expenditure during the period from 1981 to 20th July, 1990 was only Rs.14 lakh and, therefore, personal expenditure of Rs. 823.91 lakh within a span of 2 and half years could not be believed even by the Settlement Commission. In view of that discrepancy in the personal expenditure, respondents made a composite offer of further income of Rs.7 crore (1 crore in the assessment year 1992-93 and Rs.6 crore for the assessment year 1993-94) in the spirit of compromise and co-operation at the time of final hearing. That additional offer of Rs.7 crore would only take care of the amount of Rs.823.91 lakh on account of excessive personal expenditure during July, 1992 to November, 1992. However, on perusal of the order of the Settlement Commission, it appears that the amount of Rs.911.51 lakh on account of unexplained expenses and loan and the surplus amount of Rs.488.98 lakh were not taken care of while assessing the total undisclosed income of the respondents in the final order of the Settlement Commission. Thus, the total amount of Rs.14.49 crore appears to have been left out while assessing the undisclosed income of the respondents. We make it clear that we have not come to any conclusion about this amount of Rs.14.49 crore but it needs consideration and better explanation.
13. Taking into consideration the peace meal disclosures and the additional offers made by the respondents, one can easily come to conclusion that the respondents had not made full and true disclosure of the undisclosed income as required under Section 245C(1) and the huge income was concealed by them. Section 271(1)(c) provides that if the Assessing Officer is satisfied that any person has concealed particulars of the income or had furnished inaccurate particulars of such income, he may direct such person to pay penalty which shall not be less than but which shall not exceed three times amount of the tax sought to be evaded by the reason of the concealment of the income. In the present case, huge amount of income was concealed by the respondents. Even though amount of about Rs.14 crore, as pointed out above, was not taken into consideration and several other investments were not considered by the Settlement Commission, the Settlement Commission came to conclusion that leviable penalty would be Rs.562.87 lakh. Possibly this was the amount equal to the amount of tax which was sought to be evaded by not disclosing the income. If further amount of Rs.14 crore or any other amount would be added in the income, tax amount would substantially increase. As per the provisions of Section 271(1)(c), penalty could be equal to the tax amount or three times of the same. It is true that under Section 245H, Settlement Commission has a power to grant immunity from the prosecution and penalty if it is satisfied that the concerned person had made full and true disclosure of his income and the manner in which such income was derived. However, in the present case, it appears that the respondents had not made true and full disclosure. It is contended by the respondents that the revised application with annexure was submitted after availability of the documents, which were earlier seized by the income-tax authorities. However, on perusal of the application dated 19.9.1994, there is nothing to show that full and true disclosure could not be made earlier for want of necessary documents. Further the additional disclosure was only about on money. Respondents must have been aware about the receipts of the on money, even when original application was made under Section 245C. The Settlement Commission imposed, in its own words, token penalty of Rs.50 lakh as against the minimum penalty leviable Rs.562.87 lakh on account of cooperation given by him. The Settlement Commission observed in paragraph 25 thus:
“25……… ……… the applicant has extended the utmost cooperation in the proceedings. But for his help in analysing and explaining the various entries in the seized records in different ways, it would have been impossible to arrive at a correct
conclusion about the seized records….”
This was less than 10% of the minimum leviable penalty. The learned counsel for the Revenue contended that this part of the order shows perversity in the order of the Settlement Commission and that there could not be any justification to reduce the penalty so drastically as to make it just token or nominal penalty. After hearing the learned counsel for both the sides, we are also unable to find any logic or rational in waiver of penalty to such an extent particularly in view of the fact that the respondents had not made true and full disclosure at any stage. Even though power under Section 245H is given to the Settlement Commission to reduce the penalty, the power has to be exercised judiciously and not arbitrarily.
14. The learned counsel for the Revenue vehemently contended that in view of the facts and circumstances, it must have been held by the Settlement Commission that assessee had failed to make true and full disclosure of its income while making the application under Section 245C and on that count itself, application made by the respondents for settlement should have been rejected. He tried to find support from the judgment of this Court in Writ Petition No.1427 of 2007 Haji N. Abdulla v. Income-tax Settlement Commission decided on 8th October, 2007 wherein this Court had upheld the order passed by the Settlement Commission rejecting second application, after rejection of first, on the ground that he had not made true and full disclosure of his income in the first application. In the present case, though we find substance in the contention of the learned counsel for the Revenue that the respondents had not made true and full disclosure of the income at the first instance while making application under Section 245C and on that ground, application could have been rejected by the Settlement Commission, we find difficulties in rejection of the application at this stage. The Settlement Commission admitted the application for further proceedings and settlement by its order dated 17.11.1994. That order was never challenged by the Revenue and that order was acted upon by submission of a report under Rule 9 by the Commissioner (Income-Tax) . That report was again rectified in 1997. The admission of the application by the Settlement Commission and the further proceedings, resulting in the final order have changed the circumstances. This has its own consequences. For instance on the basis of the final order , respondent has made payment of income-tax, interest thereon and the penalty as per the installments fixed by the Settlement Commission. The learned counsel for the respondents contended that amount of almost Rs.9 crore has been already paid. According to him, not only the income-tax on the additional income for the assessment years 1989-90 to 1993-94 has been paid but also the tax has been paid on the on money, which was treated as advance in respect of certain uncompleted projects but which have been completed after 1993-94. 15 Besides this, more serious consequence is about disclosure of certain confidential information. As noted earlier, as per Rule 6 of the Settlement Commission Procedure Rules, on receipt of the settlement application, a copy of the application excluding the annexure shall be forwarded by the Commission to the Commissioner with the direction to furnish a report under Section 245D(1). After receipt of the report from the Commissioner and after hearing the parties, the Settlement Commission may either reject the application or admit the same for further proceedings by passing an order under Section 245D(1). If the application is allowed to be proceeded with, under Rule 9 a copy of the annexure to the said application together with a copy of each of the settlements and other documents accompanying such annexure shall be forwarded to the Commissioner with the direction to the Commissioner to furnish a further report . Annexure includes confidential document and information about additional income and the manner in which it was.
That information is not available to the income-tax authorities till the application under Section 245C is not allowed to be proceeded with. Therefore, if the application is rejected after receiving the first report from the Commissioner, he could not have access to the confidential information and documents submitted in the annexure. However, as soon as settlement commission passed the order dated 17.11.1994 allowing the application to be proceeded with, annexure was forwarded to the Commissioner as per Rule 9 and thus, the confidential information became available to the commissioner. When the second disclosure was made on 11.9.1994, it was also accompanied by the annexure. However, according to the Revenue, the annexure with the second application was not made available to the Commissioner. However, the fact remains that all these documents including confidential information supplied in 1993 as well as in 1994 is now available to the Revenue as that information has become public because of the reference of the same in the writ petitions before this Court. If the order passed by the Settlement Commission on 17.11.1994 allowing the application to be proceeded with is set aside, all the confidential information, being available with the Income-tax Commissioner may be utilised for taking action as per law. That information was submitted by the respondents because of assurance under the Rules and the provisions of the Act that the information would not be used by the Income-tax authorities for taking any action against him and would be used only for the purpose of the settlement of the disputes by the Settlement Commission. If now that application is rejected, it would cause serious prejudice to the respondents. In our considered opinion, because of the order passed by the Settlement Commission on 17.11.1994 allowing the application to be proceeded with and that order remaining unchallenged by the Revenue, parties have participated in the settlement proceedings and, therefore, it would not be in the interest of justice to set aside the order dated 17.11.1994 at this stage.
16. In view of the facts and the legal position noted above, even though we find that the respondents had not made full and true disclosure of their income while making applications under Section 245C, it would not be proper to set aside the proceeding. However, at the same time, the Commission appears to have misdirected itself on several important aspects while passing the final order. The Settlement Commission had not supplied the annexure dated 19.9.1994 declaring additional income of Rs.11.41 crore and thus, due opportunity was not given to the Revenue to plakhe its stand properly. Huge amount of unexplained expenses, unexplained loans and unexplained surplus, total of which is more than Rs.14 crore, was not taken into consideration while passing the final order. Thirdly, the Settlement Commission has imposed token penalty of Rs.50 lakh while in its own assessment leviable penalty would be 562.87. Infact the amounts, which were not taken into consideration while assessing the total undisclosed income, are also taken into consideration, the amount of leviable penalty may be much more. Taking into consideration the multiple disclosures and the fact that the respondents had failed to make true and full disclosure initially as well as at the time of second disclosure, we do not find any justifiable reasons to reduce or waive the amount of penalty so drastically. Taking into consideration all these circumstances, in our considered opinion, it will be in the interest of justice to set aside the final order passed by the Settlement Commission and to remand the matter back to the Settlement Commission for hearing parties afresh and to pass orders as per law. Facts and circumstances noted in respect of writ petition no.2191 of 1999 are also relevant for the remaining writ petitions and, therefore, it will be necessary that the final orders passed in all these proceedings should be set aside.
17 For the aforesaid reasons, writ petitions are allowed. Impugned orders dated 29.1.1999 passed by the Settlement Commission are hereby set aside and all the proceedings are hereby remanded back to the Settlement Commission for hearing afresh after giving due opportunity to the Revenue in the light of the observations made above. Parties shall appear before the Settlement Commission at Mumbai on 3rd August, 2009 and the Settlement Commission shall dispose off the proceedings within six months thereafter.
