2020 (9) TMI 540 - HC - Income Tax

Exercise of power of the Settlement Commission u/s 245D - Scope of enquiry - HELD THAT - Commission is required to give an opportunity to the applicant, the CIT, they are entitled to be represented by an Authorized Representative and after hearing them and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission, may, in accordance with the provisions of the Act, pass such order as it deems fit. Scope of enquiry is not confined to the statements made in the application, the response filed by the applicant to the report of the CIT, but also the submissions made during the personal hearing and any further evidence as may be placed before it by the applicant or obtained by the Settlement Commission in exercise of its power and then proceed to pass orders as it deems fit. Procedure at the (2C) stage is undoubtedly summary in nature and the application filed by the 1st respondent/writ petitioner could not have been declared as invalid at the said stage, as the issue requires adjudication, which can be done only when the application is decided under Section 245D(4) of the Act. Decision relied on by the Revenue in the case of Mr.Hassan Ali Khan 2008 (1) TMI 20 - HIGH COURT, BOMBAY would, in fact, support the conclusion, which we have arrived at in the preceding paragraph. It has been held that the Settlement Commission can treat the application as invalid meaning thereby non est, if the applicant is not made a full and true disclosure and further must disclose how the income has been derived. The expression invalid will have to be given a meaning of non est , in other words, as if not made on and from the inception. If on the material, it arrives at a conclusion even prima facie that there was no true and full disclosure, it has then a right to declare the application as 'invalid'. As rightly pointed out by the Hon'ble Division Bench, there is a prima facie opinion formed by the Commission at the (2C) stage and this can never substitute an order under sub-Section (4) of Section 245D. The issues, which were requested to be settled by the 1st respondent before the Commission qua , the report of the CIT cannot obviously be an issue for a prima facie decision at the (2C) stage. Appeal filed by the appellant-Revenue is dismissed.

Issues Involved:
1. Validity of the Settlement Commission's order under Section 245D(2C) of the Income Tax Act, 1961.
2. Interpretation of amended and unamended provisions of Section 245D.
3. Full and true disclosure of income by the applicant.
4. Nature of contracts (composite vs. bifurcated) and their implications on tax liability.

Detailed Analysis:

1. Validity of the Settlement Commission's Order under Section 245D(2C):
The appeal by the Revenue challenges the order passed by the Settlement Commission declaring the application of the 1st respondent as invalid under Section 245D(2C). The High Court analyzed whether the Settlement Commission's summary procedure at the (2C) stage was appropriate. It was noted that the Commission's decision was based on the report from the Commissioner of Income Tax (CIT) and the hearing provided to the applicant. The High Court concluded that the Commission's declaration of the application as invalid was premature, as the issue required a deeper adjudication process, which is only possible under Section 245D(4).

2. Interpretation of Amended and Unamended Provisions of Section 245D:
The High Court discussed the distinction between the provisions of Section 245D before and after the 2007 amendment. Under the unamended provision, the Settlement Commission had a year to decide on the application after issuing a notice to the Commissioner. Post-amendment, the Commission's decision to proceed with the application under Section 245D(1) is made after hearing the applicant alone. The High Court noted that the learned Single Bench rightly considered the legislative intent and the scope of powers under sub-Sections (2C) and (4) of Section 245D, emphasizing that the procedure under (2C) is summary and not adjudicatory.

3. Full and True Disclosure of Income by the Applicant:
The Revenue argued that the 1st respondent failed to make a full and true disclosure of income, justifying the Commission's decision to declare the application invalid. However, the High Court found that the issues raised by the 1st respondent, such as the taxability of income from offshore supplies and the determination of total income and tax liability, required detailed adjudication. The High Court held that the Commission's finding that the contracts were composite and bifurcated by NTPC for financial reasons could not lead to an invalidation of the application without a thorough examination under Section 245D(4).

4. Nature of Contracts (Composite vs. Bifurcated) and Their Implications on Tax Liability:
The High Court observed that the Settlement Commission's conclusion that the contracts were artificially bifurcated was based on the CIT's report. The High Court emphasized that determining whether a contract is composite or separate requires a detailed factual and legal analysis. The High Court concluded that such issues could not be decided summarily at the (2C) stage and required adjudication under Section 245D(4).

Conclusion:
The High Court upheld the learned Single Bench's decision to interfere with the Settlement Commission's order, allowing the writ petition. It emphasized that the Commission's summary procedure under Section 245D(2C) was not suitable for deciding complex issues requiring detailed adjudication. The appeal by the Revenue was dismissed, and the Settlement Commission was directed to proceed in accordance with law, affording the 1st respondent an opportunity to be heard. The High Court did not fix a specific timeframe for the Commission to act but urged it to decide the matter expeditiously.

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