2002 (7) TMI 71 - HC - Income Tax

Settlement Of Cases - The petitioners in these petitions under article 226 of the Constitution of India have challenged the orders dated February 25 1999 and February 23 1999 respectively passed by the designated authority rejecting the petitioners declaration filed under section 89 of the Finance (No. 2) Act 1998. The said declaration was filed by the petitioners under the Kar Vivad Samadhan Scheme 1998 - It is true that the designated authority cannot consider the merits of that appeal but it is equally true that only for the purposes of availing of the benefit under the KVS Scheme frivolous appeal/revision was filed though there was no occasion to file such appeal/revision. In this view of the matter the designated authority is certainly justified in rejecting the impugned declaration. - it is not necessary for us to go into the other aspects of the matter. We therefore confirm the orders passed by the designated authority rejecting the declaration filed by the petitioners of both the cases.

Issues Involved:
1. Validity of the rejection of declarations under the Kar Vivad Samadhan Scheme (KVSS), 1998.
2. Applicability of section 95(i)(b) of the Finance (No. 2) Act, 1998.
3. Validity of appeals filed under section 246A of the Income-tax Act.
4. Relationship between the orders passed by the Settlement Commission and the partners' tax liabilities.

Detailed Analysis:

1. Validity of the rejection of declarations under the Kar Vivad Samadhan Scheme (KVSS), 1998:
The petitioners challenged the rejection of their declarations filed under the KVSS, 1998. The designated authority had rejected these declarations on the grounds that the income in the petitioners' cases had been determined pursuant to an order under section 245D(4) of the Income-tax Act, and that section 95(i)(b) of the Finance (No. 2) Act, 1998, precludes the application of the KVSS in such cases. The court upheld the designated authority's rejection, stating that section 95(i)(b) of the Act squarely applies to the facts of the petitioners' case, as the orders passed by the Settlement Commission in the case of the partnership firms had a consequential effect on the petitioners' tax liabilities.

2. Applicability of section 95(i)(b) of the Finance (No. 2) Act, 1998:
Section 95(i)(b) stipulates that the KVSS does not apply in cases where an order has been passed by the Settlement Commission under section 245D(4) of the Income-tax Act. The court concluded that this provision applies to the petitioners' cases since the Settlement Commission had passed orders in the cases of the partnership firms, and the petitioners, as partners, were affected by these orders. The court reasoned that there is an in-built mechanism in the Act which implies that if the firm is prohibited from approaching the designated authority due to the Settlement Commission's order, the partners are equally prohibited concerning their share income from the firm.

3. Validity of appeals filed under section 246A of the Income-tax Act:
The petitioners had filed appeals under section 246A of the Income-tax Act against the orders passed under section 155 of the Act. The court observed that these appeals were not valid, as there was no genuine grievance against the orders passed by the Assessing Officer, which merely gave effect to the Settlement Commission's orders. The court emphasized that the designated authority cannot consider the merits of the appeal but can reject frivolous appeals filed solely to avail benefits under the KVSS.

4. Relationship between the orders passed by the Settlement Commission and the partners' tax liabilities:
The court addressed the argument that the firm and the partner are separate legal entities under the Income-tax Act. However, it concluded that the orders passed by the Settlement Commission in the case of the firm directly impacted the partners' tax liabilities. The court noted that the allocation and computation of the share income from the partnership firm must be read in conjunction with section 95(i)(b) of the Act. Consequently, the partners could not avail the benefits of the KVSS for their share income from the firm, although they could approach the designated authority for other income not related to the firm.

Conclusion:
The court confirmed the orders passed by the designated authority rejecting the declarations filed by the petitioners under the KVSS, 1998. The court held that section 95(i)(b) of the Finance (No. 2) Act, 1998, applies to the petitioners' cases, and the appeals filed under section 246A of the Income-tax Act were not valid. The petitions were rejected, and the rule was discharged with no order as to costs.

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