2015 (5) TMI 1060 - HC - Income Tax

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 this petition). As the order at Annexure6 is hereby, quashed and set aside, the consequent orders passed by the Settlement Commission dated 24th September, 2013 in recall/rectification petition preferred by this petitioner is also quashed and set aside. We also allow the prayer in this writ petition by quashing and setting aside two garnishee notices both dated 27th January, 2015 issued under sub section 3 of Section 226 of the Income Tax Act, 1961 by the Deputy Commissioner of Income Tax, CircleII. 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.

Summary

Issues Involved:
1. Jurisdiction of the Settlement Commission.
2. Basis of income additions by the Settlement Commission.
3. Procedural and substantive powers of the Settlement Commission.
4. Validity of presumptions made by the Settlement Commission.
5. Applicability of Section 245D(4) and Section 245F of the Income Tax Act, 1961.
6. Validity of consequential orders and notices issued by the Income Tax Department.

Detailed Analysis:

1. Jurisdiction of the Settlement Commission:
The petitioner challenged the Settlement Commission's order dated 27th/28th June, 2013, which added Rs. 62,50,000 and Rs. 73,50,663 for the assessment years 2010-11 and 2011-12, respectively. The petitioner argued that the Settlement Commission exceeded its jurisdiction by making these additions, asserting that the Commission should have rejected the application if it found no true and full disclosure of income.

2. Basis of Income Additions by the Settlement Commission:
The Settlement Commission's additions were based on presumptions and surmises without any evidence. The Commission estimated unaccounted turnover for the assessment year 2010-11 at Rs. 1.75 crore by extrapolating data from subsequent years. This methodology was criticized as being speculative and not grounded in evidence.

3. Procedural and Substantive Powers of the Settlement Commission:
The petitioner argued that the Settlement Commission improperly assumed the role of an Assessing Officer, which is not permitted under Section 245F. The Madras High Court's decision in Canara Jewellers vs. Settlement Commission was cited, emphasizing that the Settlement Commission can only exercise procedural, not substantive, powers of the Income Tax Authorities.

4. Validity of Presumptions Made by the Settlement Commission:
The Court found the Settlement Commission's methodology of estimating unaccounted turnover and presuming a 12% profit rate to be unreasonable and unsupported by evidence. This approach was deemed arbitrary and in violation of Section 44AF of the Income Tax Act, which prescribes a different method for profit estimation.

5. Applicability of Section 245D(4) and Section 245F of the Income Tax Act, 1961:
The Court highlighted that Section 245D(4) requires evidence before the Settlement Commission for making any additions. The Commission's failure to base its conclusions on evidence rendered its order invalid. The Court also emphasized that Section 245F does not allow the Settlement Commission to assume the substantive powers of an Assessing Officer.

6. Validity of Consequential Orders and Notices Issued by the Income Tax Department:
The Court quashed the consequential orders and notices issued by the Income Tax Department, including the garnishee notices dated 27th January, 2015, as they were based on the invalidated order of the Settlement Commission.

Conclusion:
The Court quashed and set aside the Settlement Commission's orders dated 27th/28th June, 2013, and 24th September, 2013, as well as the garnishee notices issued by the Income Tax Department. The matter was remanded to the Settlement Commission for a fresh decision, emphasizing the need for evidence-based conclusions and adherence to the procedural limits of the Commission's authority.