2014 (11) TMI 734 - HC - Income Tax

Interference made in the order of Settlement Commission u/s 245D - Nature of jurisdiction exercised - Whether the exercise of its jurisdiction under Article 226 of the Constitution of India, will interfere with orders passed by the Settlement Commission under Section 245D of the Income Tax Act, 1961 and if so, to what extent Held that - This court would be concerned with the decision making process, adopted by the Commission, and not the decision itself in Jyotendrasinhji v. S. I. Tripathi and Others - 1993 (4) TMI 1 - SUPREME Court it has been held that the scope of enquiry, whether by the High Court under article 226 or by this Court under article 136, is also the same - the power of judicial review is not to be exercised to decide the issue on facts or on an interpretation of the documents available - the enquiry by this Court can only be with regard to whether or not the Settlement Commission exercised a jurisdiction that it did not have or, alternatively, if it did have the jurisdiction, whether it erred in the exercise of that jurisdiction. Full and true disclosure of income made or not Jurisdiction of Commission opportunity to conduct further investigation refused by Settlement Commission - Held that - The department had not adduced cogent evidence to substantiate their contentions with regard to alleged unaccounted transactions of the assessees with goldsmiths/manufacturers - there was no instance of unaccounted sales or purchases detected - There was also no difference noticed in the quantitative stock in any of the branches of the assessees - There was only the uncorroborated deposition of two employee goldsmiths of the assessees that pointed to a possibility of some transactions having been unaccounted - the offer of additional amounts made by the assessees was only to put a quietus to the litigation with the department and in the spirit of settlement - The suggestions by the Settlement Commission, and the acceptance of the offer of additional amounts from the assessee for the purposes of settlement, cannot be seen as having rendered invalid the original declaration made by the assessees before the Commission either for the purposes of settlement of the tax liabilities or for the grant of immunity from penalty and prosecution under the Act, especially when the Commission finds that the assessees had co-operated in the proceedings before it - there was no requirement of any further investigation and that a verification, of the material already available, would suffice for the purposes of determining whether the assessees had failed to disclose any income for the purposes of settlement - The department, which did not participate in the verification proceedings, or raise any timely objection to it before the Settlement Commission, cannot be heard to complain of any violation of procedure by the Settlement Commission, at this belated stage - the order of the Settlement Commission to be legal and valid in all respects, including the grant of immunity to the assessees, and not liable to be interfered. Undervaluation of closing stock - Whether the findings of the Settlement Commission with regard to the alleged undervaluation of closing stock by two of the assessees is liable to be interfered with Held that - The settlement commission found that the accounting method was followed consistently for many years in the past and, had been accepted by the department as well - the AS-2 accounting standard did not prohibit the LIFO method, and further, the AS-2 accounting standard was not mandatory for the purposes of the IT Act, the assessees had not committed any irregularity by following the LIFO method - it has dealt with the objections of the department at some length and given reasons as to why it felt that there was no merit in the contention of the department that the adoption of the LIFO method of valuation of closing stock did not have the effect of distorting the real profits earned by the assessees - the commission found that the declaration of the assessees, vis-a-vis this objection of the department, was full and true disclosure for the purposes of settlement the order of the Commission is upheld Decided against revenue.

Issues Involved:
1. Jurisdiction of the High Court under Article 226 to interfere with orders passed by the Settlement Commission under Section 245D of the Income Tax Act, 1961.
2. Impact of the offer of additional amounts by the assessees on the validity of their original disclosure of income.
3. Justification of the Settlement Commission in refusing further investigation by the department.
4. Validity of the Settlement Commission's findings on the alleged undervaluation of closing stock by the assessees.

Issue-wise Detailed Analysis:

Issue 1: Jurisdiction under Article 226
The High Court's role in reviewing orders of the Settlement Commission is confined to examining the decision-making process rather than the decision itself. The Court must ensure that the Settlement Commission's orders comply with statutory provisions and principles of natural justice. The power of judicial review is limited to checking for jurisdictional errors or violations of statutory provisions, not re-evaluating facts or interpretations of documents. The High Court cannot act as an appellate authority but can interfere if the Settlement Commission acts beyond its jurisdiction or violates statutory provisions.

Issue 2: Offer of Additional Amounts and Full Disclosure
The department argued that the offer of additional amounts by the assessees implied that their original disclosure was not full and true, thus invalidating the application. The Supreme Court in Ajmera Housing Corporation v. Commissioner of Income Tax emphasized that a full and true disclosure is a prerequisite for a valid application. However, the Court distinguished between cases where assessees revise their disclosures suo motu and cases where additional amounts are offered at the suggestion of the Settlement Commission. The latter does not necessarily imply that the original disclosure was not full and true, especially if the additional amounts are offered to avoid litigation and in the spirit of settlement.

Issue 3: Refusal of Further Investigation
The Settlement Commission found that the department had sufficient time to conduct investigations before the assessees filed their applications. The Commission determined that further investigation was unnecessary based on the material available. The department's failure to participate in the verification process and its lack of timely objections to the Settlement Commission's proceedings weakened its case for further investigation. The Commission's decision to proceed without additional investigation was deemed appropriate and within its jurisdiction.

Issue 4: Findings on Undervaluation of Closing Stock
The department contended that the assessees' use of the Last-in-First-Out (LIFO) method for valuing closing stock was not acceptable and led to undervaluation. However, the Settlement Commission found that the LIFO method had been consistently used and accepted by the department in the past. The Commission noted that the AS-2 accounting standard did not prohibit the LIFO method and was not mandatory for the purposes of the Income Tax Act. The Commission concluded that the assessees' use of the LIFO method did not distort their real profits and constituted a full and true disclosure for settlement purposes. The High Court found no valid grounds to interfere with this finding.

Conclusion:
The High Court dismissed the writ petitions, upholding the Settlement Commission's order dated 05.08.2013. The Court found no jurisdictional errors or violations of statutory provisions by the Settlement Commission. The Commission's decisions on the assessees' disclosures, the need for further investigation, and the method of valuing closing stock were deemed appropriate and within its jurisdiction. The assessees were granted immunity from penalty and prosecution, and the additional amounts offered were accepted in the spirit of settlement.

← Previous Next →