2016 (1) TMI 256 - HC - Income Tax

Powers of income tax settlement commission - whether the income tax settlement commission has the power to direct a special audit under section 142 (2A) in exercise of its power vested in section 245F of the Income Tax Act, 1961? - Held that - The exclusive jurisdiction of the settlement commission to exercise the powers and perform the functions of an income tax authority, in terms of section 245F(2) of the said Act, is to be exercised and performed for the purpose of settlement of the case under Chapter XIX-A and not for assessment under Chapter XIV. That being the case, the powers and functions which are in the exclusive jurisdiction of the settlement commission are circumscribed by the object and role which has been ascribed to the settlement commission, which is to settle the case in terms of the procedure stipulated in Chapter XIX-A. Since assessment of the type contemplated under section 143(3) is outside the purview of settlement proceedings, a special audit under section 142(2A), which is in aid of assessment, would also be beyond the scope of settlement proceedings. The other decisions referred to by the learned counsel for the revenue do not militate against the view we have taken. In sum, we hold that the income tax settlement commission does not have the power to direct a special audit under section 142(2A) in the course of settlement proceedings under Chapter XIX-A of the said Act. Consequently, the impugned order dated 26.04.2013, to the extent it directs the conduct of a special audit, is quashed. The matter be placed before the settlement commission for further consideration of the petitioners settlement applications in accordance with the prescribed procedure under Chapter XIX-A. The writ petition is allowed to the aforesaid extent. We are making it clear that we have not commented upon the merits of the settlement applications.

Issues Involved:
- Whether the Income Tax Settlement Commission has the power to direct a special audit under section 142(2A) in exercise of its power vested in section 245F of the Income Tax Act, 1961?

Detailed Analysis:

1. Jurisdiction of the Settlement Commission to Direct Special Audit:
The primary issue is whether the Income Tax Settlement Commission (ITSC) can direct a special audit under section 142(2A) during settlement proceedings. The petitioners argued that a special audit under section 142(2A) could only be directed at the stage of assessment and not during settlement proceedings. They contended that the procedures for assessment and settlement are distinct, and the ITSC, which deals with settlement of cases, does not have the jurisdiction to direct a special audit.

2. Provisions and Powers under the Income Tax Act:
Section 142(2A) pertains to the procedure for assessment and allows the assessing officer to direct a special audit if the accounts are complex and in the interest of revenue. This provision is part of Chapter XIV, which deals with the procedure for assessment. On the other hand, Chapter XIX-A deals with the settlement of cases and includes sections 245A to 245L. Section 245F, which is central to this case, states that the ITSC has all the powers vested in an income tax authority under the Act.

3. Interpretation of Section 245F:
The court examined whether the powers conferred on the ITSC under section 245F include the power to direct a special audit under section 142(2A). It was noted that while section 245F(1) gives the ITSC all the powers of an income tax authority, these powers must be exercised within the context and scope of settlement proceedings. The court emphasized that the ITSC does not engage in the process of regular assessment but settles the case by determining the terms of settlement.

4. Exclusive Jurisdiction of the Settlement Commission:
Section 245F(2) stipulates that once an application for settlement is made, the ITSC has exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority in relation to the case. However, this exclusivity is limited to the context of settlement proceedings and does not extend to conducting regular assessments or directing special audits, which are part of the assessment process.

5. Case Law and Judicial Precedents:
The court referred to several judgments, including CIT v. Om Prakash Mittal and Brij Lal v. CIT, to highlight the distinction between assessment and settlement proceedings. The Supreme Court in Brij Lal clarified that the process of settlement under Chapter XIX-A is different from regular assessment under Chapter XIV, and the ITSC's role is to settle the case rather than make an assessment order.

6. Conclusion:
The court concluded that the ITSC does not have the power to direct a special audit under section 142(2A) as it falls under the procedure for assessment, which is distinct from settlement proceedings. The powers and functions of the ITSC are circumscribed by the objective of settling cases and do not include making assessment orders or directing special audits.

Judgment:
The court quashed the impugned order dated 26.04.2013, to the extent it directed the conduct of a special audit. The matter was remitted to the ITSC for further consideration of the petitioners' settlement applications in accordance with the prescribed procedure under Chapter XIX-A. The writ petition was allowed to the aforesaid extent, with no comments on the merits of the settlement applications, and the parties were left to bear their own costs.

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