Supreme Court Rules Material Disclosed to Settlement Commission Need Not Differ from Assessing Officer's FindingsThe Supreme Court has decreed that Section 245H of the Income Tax Act, 1961, which grants the Settlement Commission the authority to provide immunity from prosecution and penalty to the assessee on the condition of their cooperation and making a "complete and accurate disclosure...
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Supreme Court Rules Material Disclosed to Settlement Commission Need Not Differ from Assessing Officer's Findings
The Supreme Court has decreed that Section 245H of the Income Tax Act, 1961, which grants the Settlement Commission the authority to provide immunity from prosecution and penalty to the assessee on the condition of their cooperation and making a "complete and accurate disclosure of income," should not be burdened with an arbitrary condition that the information "disclosed" by the assessee before the Commission must be distinct from what was "discovered" by the Assessing Officer.
Justices B.V. Nagarathna and Ujjal Bhuyan, presiding over the Bench, made this observation while overturning the Karnataka High Court's decision. The High Court had nullified the Settlement Commission's ruling that granted immunity to Kotak Mahindra Bank, the assessee, from penalty imposition and the commencement of prosecution proceedings. The High Court had then sent the case back to the Commission for a re-evaluation of the immunity issue.
The Supreme Court asserted that the High Court should not have assumed the role of an appellate body in assessing the adequacy of the information and details presented before the Commission. The Commission had relied on this information to make its decision to grant immunity from prosecution and penalties under Section 245H of the Act.
The Court also underlined the need to minimise undue interference with the Settlement Commission's orders and proceedings. It held that the High Court should refrain from scrutinising a Settlement Commission's order or proceeding as if it were an appellate court.
“Unsettling reasoned orders of the Settlement Commission may erode the confidence of the bonafide assessees, thereby leading to multiplicity of litigation where settlement is possible. This larger picture has to be borne in mind,” the Apex Court said.
The Bench pointed out that the Supreme Court has delineated a highly limited scope for judicial review of the Commission's orders issued through the exercise of its discretionary authority. It asserted that, except for cases where the Settlement Commission's order violates provisions of the Income Tax Act, causes harm to the opposing party, or is tainted by fraud, bias, or malice, the court, when exercising its authority under Articles 32, 226, or 136 of the Constitution of India, should refrain from intervening in an order made by the Commission under its discretionary powers.
In the background of the case, a notice was issued to Kotak Mahindra Bank in 2000 under Section 148 of the Income Tax Act. This notice was to reassess the bank's income for the pertinent assessment years. Subsequently, the Assessing Officer took further action by issuing a penalty order, imposing a penalty under Section 271(1)(c). This penalty was imposed on the grounds that the bank had concealed its income.
While the appeal against the assessment order and the ongoing re-assessment proceedings were still pending, Kotak Mahindra Bank decided to pursue an alternative avenue for resolving its income tax liabilities. It approached the Settlement Commission to explore the possibility of settling its income tax obligations under Section 245C(1) of the Act.
The Settlement Commission, after confirming the admissibility of the application submitted by the bank, issued an order on March 4, 2008, under Sections 245D(1) and 245D(4). In this order, the Commission determined additional income for the bank. Additionally, the Commission granted immunity, as per Section 245H(1), shielding the bank from facing penalties and prosecution under both the Income Tax Act and the relevant sections of the Indian Penal Code.
Furthermore, the Settlement Commission voided the penalty that had been imposed by the Assessing Officer under Section 271(1)(c) for the respective assessment year. This penalty was originally imposed due to the non-disclosure of lease rental income by the bank.
The Revenue Department contested the order dated March 4, 2008, by filing a writ petition before the Karnataka High Court. In the subsequent proceedings, a Single Judge of the High Court affirmed the jurisdiction of the Settlement Commission to consider the application and upheld the tax liability determined by it. However, the Single Judge overturned the part of the order that had granted immunity to the assessee-bank from penalty imposition and the commencement of prosecution.
The Single Judge held that the rationale provided by the Settlement Commission was unclear, lacked a solid foundation, and contradicted established principles.
The Single Judge's ruling determined that the responsibility rested with the assessee-bank to demonstrate that there had been no concealment of income or deliberate negligence on its part. In the absence of such substantiating evidence presented before the Settlement Commission, the Single Judge considered the order that granted immunity from penalties and prosecution to be illegal.
Consequently, the Single Judge ordered that the matter be remanded to the Settlement Commission for a fresh consideration of both the issue concerning immunity from penalty and prosecution, as well as the question of immunity from the penalty imposed by the Assessing Officer's order.
Kotak Mahindra Bank contested the remand order before the Division Bench of the High Court, and the Division Bench affirmed the decision made by the Single Judge. In response to this, the assessee-bank filed an appeal before the Supreme Court.
The Supreme Court noted that according to Section 245H(1) of the Act, if the Settlement Commission is convinced that an assessee who files an application for settlement under Section 245C has actively cooperated with the Settlement Commission throughout the proceedings and has provided a comprehensive and accurate account of their income and how it was earned, the Commission has the authority to grant immunity from prosecution or the imposition of penalties, either in full or in part.
The Court also pointed out that although Section 245C mandates that the disclosures about income "not disclosed before the Assessing Officer" must be included with the application submitted to the Settlement Commission, Section 245H specifies that if the assessee has actively cooperated with the Settlement Commission and has provided a "full and true disclosure of his income," then the Commission has the discretion to grant immunity from prosecution and penalty.
The Revenue Department argued that, in the current case, the information disclosed in the application by the assessee-bank was identical to what had been discovered by the Assessing Officer. Therefore, according to the Revenue Department, the Commission should not have considered the assessee's application. Additionally, the department contended that immunity under Section 245H should not have been extended to the assessee.
Regarding this matter, the Court clarified that even if the prerequisites outlined in Section 245C are to be applied to Section 245H, it cannot be concluded that in every instance, the information disclosed by the assessee before the Commission must be distinct from what was uncovered by the Assessing Officer. The Bench further emphasised that the crucial aspect is whether the assessee has proposed to include additional income, beyond what was originally reported in the income tax return.
“Section 245C read with Section 245H only contemplates full and true disclosure of income to be made before the Settlement Commission, regardless of the disclosures or discoveries made before/by the Assessing Officer,” the Apex Court said.
The Bench also emphasised that in every instance, the information provided by the assessee to the Commission must be distinct from what was uncovered by the Assessing Officer appears to be an arbitrary requirement. The Court pointed out that not every case necessarily involves additional income that the assessee can offer beyond what the Assessing Officer has already discovered.
The Court commented that the primary aim of Chapter-XIXA of the Act is to resolve cases and minimise disputes, rather than protracting legal proceedings. Consequently, instead of opting for an appeal against the assessment order, the assessee can choose to approach the Settlement Commission. By providing a comprehensive and honest declaration of income, the assessee may propose to include income that was not originally disclosed in the income tax return.
The Court noted that the Settlement Commission, after recognising that the non-disclosure was due to compliance with RBI guidelines that necessitated a distinct standard of disclosure, had chosen to bestow immunity upon the assessee, safeguarding them from prosecution and penalties.
The Court concluded that the Settlement Commission had appropriately considered the pertinent facts and evidence when deciding to grant immunity to the assessee. Furthermore, it stated that the findings of the Settlement Commission illustrated its careful consideration of whether there was a deliberate concealment of income by the assessee or not.
In this context, the Bench expressed that the Single Judge's assertion that the reasoning of the Settlement Commission was unclear, flawed, and inconsistent with established principles was not accurate. The Court further stated that the Division Bench was also not justified in upholding the Single Judge's perspective. As a result, the Apex Court nullified the High Court's order and reinstated the order made by the Settlement Commission.