2017 (10) TMI 600 - HC - Income Tax

Application to Income Tax Settlement commission ITSC - reasons given by the ITSC for rejection of the application that the questionnaire issued by the AO was not answered - Held that - Insofar as the first reason is concerned, once the ITSC proceeds with the settlement application, as per Section 245D (4), the proceedings before the AO comes to a standstill. This is clear from a reading of Section 245F (2) of the Act. Thus, no adverse inference can be drawn from the fact that the questionnaire issued by the AO was not answered. Insofar as the second reason i.e. full and true disclosure is concerned, even the report of the CIT does not point to a great variance in the income disclosed. The difference between the two amounts as disclosed by the Petitioner and as deduced by the CIT from the documents seized is approximately ₹ 14,621,882/- which constitutes less than 1.5% difference in the amount disclosed and the amount computed by the CIT. It is possible that the said amount can be reconciled before the ITSC if the application is proceeded with and heard finally. The difference is too minimal when compared to the total amount disclosed, to constitute a failure to make full and true disclosure of the income Applicant has taken contradictory stand regarding whether it is a successor company or a new set up to explain the sale of assets - ITSC appears to have proceeded on a wrong premise. There is no doubt that Shetkari is an earlier avatar of the Petitioner. The Joint Venture Agreement clearly shows that 100% of shareholding of Shetkari was owned by Ridhi Sidhi and that was intended to be diluted with investments from the other companies including Enn Vee. The application of Enn Vee is pending before the ITSC. The primary ground for rejection is that Enn Vee is a conduit and that it has received the substantial amount of share capital from bogus/non-existent companies. If this is so, it would have consequences for Enn Vee as well. The dismissal of the Petitioner s applications by the ITSC would result in a failure to examine the matter comprehensively and in entirety. It is not in dispute that the Petitioner company was undergoing restructuring. The restructuring of the shareholding is different from a company being newly setting up. The term process of setup is merely a misdescription by the Petitioner of the restructuring process, in its response dated 1st April 2013, to the notice of the ITSC dated 8th February 2013. The ITSC appears to have borrowed this terminology from the said document and has non-suited the Petitioner on that ground. What indeed is clear from the facts is that the shareholding pattern of the Petitioner company was being restructured/changed and it was not an establishment of a new company. While the shareholding of any company is being changed, there is no bar on depreciation being claimed as permissible in law. Thus, this could not be a ground for rejection of the application We deem it appropriate to set aside the impugned order of the ITSC. It is clarified that this Court has not examined the merits of the dispute which shall be examined by the ITSC in accordance with law.

Summary

Issues Involved:
1. Rejection of the settlement application by the Income Tax Settlement Commission (ITSC).
2. Allegations of failure to make a full and true disclosure of income.
3. Contradictory stands taken by the Petitioner regarding its corporate status.
4. The relationship and financial transactions between the Petitioner and Enn Vee Holdings Pvt. Ltd.

Detailed Analysis:

1. Rejection of the Settlement Application by the ITSC:
The Petitioner challenged the ITSC's order dated 3rd April 2013, which rejected its application for settlement under Section 245D (2C) of the Income Tax Act, 1961. The ITSC's rejection was based on the grounds that the Petitioner failed to make a full and true disclosure of income and took contradictory stands regarding its corporate status.

2. Allegations of Failure to Make a Full and True Disclosure of Income:
The ITSC, supported by the Commissioner of Income Tax (CIT) report, concluded that the Petitioner did not fully disclose its income. The CIT's report highlighted discrepancies, including substantial share capital received from bogus/non-existent companies, specifically through Enn Vee Holdings Pvt. Ltd. The report stated that the Petitioner disclosed an additional income of ?11,60,96,390/- and paid additional tax and interest aggregating to ?97,29,856/-. However, the CIT argued that the total undisclosed income was ?105,57,12,727/-, suggesting a significant shortfall in the Petitioner's disclosure.

3. Contradictory Stands Taken by the Petitioner Regarding Its Corporate Status:
The ITSC noted that the Petitioner had taken contradictory positions regarding its corporate status. On one hand, the Petitioner claimed to be a successor company to justify the sale of assets, while on the other, it stated that it was in the process of setting up to explain the issuance of fresh share capital. The ITSC found these contradictory claims problematic and indicative of a lack of full and true disclosure.

4. The Relationship and Financial Transactions Between the Petitioner and Enn Vee Holdings Pvt. Ltd.:
The ITSC's rejection also hinged on the financial relationship between the Petitioner and Enn Vee Holdings Pvt. Ltd. The CIT's report indicated that Enn Vee Holdings received its shareholding from bogus companies and acted as a conduit for unaccounted money. The Petitioner argued that the application of Enn Vee Holdings was still pending before the ITSC, and it would be appropriate for both applications to be considered together. The Petitioner cited audited accounts and balance sheets to show that investments from Enn Vee Holdings were duly reflected, arguing that there was no failure to disclose.

Court's Analysis and Findings:

1. Questionnaire Issued by the AO:
The Court noted that once the ITSC proceeds with a settlement application, proceedings before the Assessing Officer (AO) come to a standstill as per Section 245F (2) of the Act. Therefore, no adverse inference could be drawn from the fact that the Petitioner did not answer the AO's questionnaire.

2. Full and True Disclosure:
The Court observed that the difference between the income disclosed by the Petitioner and the amount computed by the CIT was minimal (less than 1.5%). This small discrepancy did not constitute a failure to make a full and true disclosure.

3. Contradictory Stands:
The Court found that the ITSC had misunderstood the situation regarding the Petitioner's corporate status. The restructuring of shareholding was different from setting up a new company. The term "process of setup" was a misdescription by the Petitioner, and the ITSC had erroneously used this to reject the application.

Conclusion:
The Court set aside the ITSC's impugned order, directing that the Petitioner's application be proceeded with and considered along with the application filed by Enn Vee Holdings Pvt. Ltd. The Court clarified that it had not examined the merits of the dispute, which would be addressed by the ITSC in accordance with the law. The writ petition was allowed, and the pending stay application was disposed of.