2018 (9) TMI 1033 - HC - Income Tax

Settlement Commission order rejecting the settlement applications of the petitioners under Section 245D(1) - judicial review and exercise of writ jurisdiction while examining an order of the Settlement Commission - Scope and ambit of the enquiry at the stage of passing of the order under Section 254D(1) - Held that - What is important and relevant at this stage is the observation of the Settlement Commission in the last sentence of paragraph 10 that the very foundation of the surrender made by the two petitioners appears to be concocted story etc. The word appears would reflect that the Settlement Commission had not reached or made any firm and final decision. The findings as per the observations were tentative and prima facie. In view of the legal position explained above, the settlement application at the initial stage cannot be dismissed when firm opinion as to frivolousness or concoction is lacking and merits of the settlement application cannot be ascertained and determined. Petitioner Nos. 4 and 5, have drawn our attention to returns filed by the two HUFs under Section 139 of the Act. It is submitted that other income mentioned in the returns included income earned by way of commission etc. from sale and purchase of property. In the settlement applications, fourth and fifth petitioner had given tabulations and details of the commission earned by them, which was duly corroborated and supported by evidence in the form of income tax returns filed by the petitioners prior to the date of search. Thus, the prima facie finding of the Settlement Commission that the fourth and the fifth petitioner had made a wrong declaration as to the manner of earning undisclosed income, is nothing but a surmise, which is incorrect and baseless. This contention is without prejudice to the contention of the fourth and fifth petitioners that the Settlement Commission had erroneously and contrary to law dismissed the application filed by the fourth and fifth petitioners on tentative opinion and prima facie assumption, without forming a conclusive and final opinion. We allow the present writ petition and set aside and quash the impugned order of the Settlement Commission dated 8th May, 2017 rejecting the settlement applications of the petitioners under Section 245D(1) of the Act, with an order of remand to the Settlement Commission to pass a fresh order under the said section within a period of fourteen (14) days from the date a copy of this order is received by them or served on them by the petitioners or the Revenue, whichever is earlier. In order to cut delay, we direct the parties to appear before the Settlement Commission on 20th of September, 2018, when a date of hearing would be fixed.

Issues Involved:
1. Legality of the search and seizure operations conducted under Section 132 of the Income Tax Act, 1961.
2. Validity of the Settlement Commission's rejection of the settlement applications under Section 245D(1) of the Income Tax Act, 1961.
3. Compliance with the statutory requirements for a valid settlement application under Section 245C(1) of the Income Tax Act, 1961.
4. Examination of the "full and true" disclosure requirement and the manner in which undisclosed income was derived.
5. Jurisdiction and procedural propriety of the Settlement Commission in handling the settlement applications.

Detailed Analysis:

1. Legality of the Search and Seizure Operations:
The search and seizure operations were conducted on 10.12.2015 under Section 132 of the Income Tax Act, 1961, targeting the petitioners and their associates. Cash and jewelry were seized, and incriminating documents were found. Trilok Chand Jain initially admitted and surrendered undisclosed income of more than ?18 Crores but later retracted the surrender.

2. Validity of the Settlement Commission's Rejection:
The Settlement Commission rejected the settlement applications on 8th May 2017, stating that the petitioners failed to establish the sources, extent, and manner of the undisclosed income. The Commission found the statements of affairs filed by the petitioners to be lacking credible evidence and unreliable, thereby not fulfilling the conditions prescribed in Section 245C(1).

3. Compliance with Statutory Requirements:
The statutory requirements under Section 245C(1) include making an application with a full and true disclosure of income not disclosed before the Assessing Officer, the manner of deriving such income, and the additional amount of tax payable. The petitioners argued that they had complied with these requirements and filed their returns after seeking extensions.

4. Examination of "Full and True" Disclosure:
The High Court examined the statutory provisions and case law regarding the "full and true" disclosure requirement. It was noted that the Settlement Commission has the authority to examine this requirement at multiple stages: initial scrutiny under Section 245D(1), after receiving the Principal Commissioner/Commissioner's report under Section 245D(2C), and finally under Section 245D(4). The Court found that the Settlement Commission's rejection at the initial stage was based on a tentative and prima facie view, lacking firm and conclusive findings.

5. Jurisdiction and Procedural Propriety:
The High Court emphasized the importance of a detailed examination and independent assessment by the Settlement Commission. It was observed that the Commission should have proceeded to the second stage, calling for a report from the Principal Commissioner/Commissioner for a more in-depth scrutiny. The Court also addressed the procedural aspects, stating that the rejection of the applications at the initial stage should be based on a definitive opinion, not a tentative one.

Conclusion:
The High Court allowed the writ petition, quashing the Settlement Commission's order dated 8th May 2017. The case was remanded to the Settlement Commission to pass a fresh order under Section 245D(1) within fourteen days. The Court directed the parties to appear before the Settlement Commission on 20th September 2018 for further proceedings, ensuring that the observations made in the judgment would not affect the merits of the case.

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