2021 (12) TMI 993 - HC - Income Tax

Settlement Commission order - whether the communication dated 27/30th December, 2013 is a report which has to be construed as such in terms of Section 245D(3)? - HELD THAT - On a perusal of the said letter we find that is not a report but is an internal communication sent by the assessing officer to his Commissioner of Income Tax and on reading of the communication it is clear that the assessing officer has requested his commissioner to allow him to enquire and investigate the whole case through principals/beneficiaries and obtain correct picture of the business activities and interest income and factual position of assets of transparency and find out the income accurately. Further the assessing officer qualifies the communication by stating that the submission furnished is in the form of a report based on records without cross-checking or verification. AO states that due to lack of fairness on the part of the assessee in disclosing income, the Settlement Commissioner may reject the application. Thus by reading the said communication dated 27/30th December, 2013 it is clear that is not a report in terms of sub Section 3 of Section 245D which mandates that Commission should direct the Commissioner to submit a report which has never been done by the Commissioner. All those which we have pointed out above would go to show that the order passed by the Commissioner flows from serious illegality and irregularity calling for interference. That apart the alleged report dated 27th December, 2013 as admittedly been filed only on 15th January, 2014, the date on which the application was finally been heard by the Commission and orders were reserved. The assesee had stated that on 14th February 2014 and 24th February, 2014 they have filed their objection to the said letter which has not been dealt with by the Commission not even referred to by the Commission. Thus we can safely hold that there has been serious violation of principles of natural justice. On all the above grounds we are fully satisfied that the order passed by the Commission calls for interference and consequently we are required to interfere with the order passed by the learned Single Judge dismissing the writ petition. In the result, the appeal is allowed. The order passed in the writ petition is set aside and the order passed by the Settlement Commission is quashed and the assessment is relegated back to the assessing officer to get assessment in accordance with law after effective opportunity to the assessee and not being influenced in any of the these observations made in any of the letters and in any of the reports and any observation made by the Settlement Commission which order has been set aside by this Judgment.

Issues Involved:
1. Procedural irregularity by the Settlement Commission.
2. Addition of ?6.97 crore to the income of the assessee.
3. Adoption of an 8% profit rate by the Settlement Commission.
4. Increase in turnover considered by the Settlement Commission.
5. Scope of interference by the High Court under Article 226 of the Constitution.

Detailed Analysis:

1. Procedural Irregularity by the Settlement Commission:
The appellant argued that the Settlement Commission committed gross procedural irregularity, violating the provisions of the Income Tax Act, 1961, and causing prejudice to the assessee. It was contended that the Commission did not follow the mandated procedure under Section 245D(3) of the Act, which requires an enquiry or investigation before considering any matter not covered by the application. The Commission's failure to provide the assessee with an opportunity to respond to the communication dated 27/30th December 2013, which was not a report under Section 245D(3), constituted a violation of natural justice principles.

2. Addition of ?6.97 Crore to the Income of the Assessee:
The appellant contended that the addition of ?6.97 crore to the income for the assessment year 2001-2002 was made contrary to the provisions of the Act and without considering the assessee's submissions. It was argued that this sum was a balance sheet item and not covered by the Settlement Commission application. The Commission's decision to include this amount without proper enquiry or investigation was challenged as procedurally flawed and prejudicial.

3. Adoption of an 8% Profit Rate by the Settlement Commission:
The appellant argued that the Settlement Commission arbitrarily adopted an 8% profit rate for the assessment year 2001-2002 without providing independent reasons for rejecting the assessee's offered rate of 3.69%. It was contended that the Commission failed to consider the assessed net profit rate of 2.93% for the assessment year 2003-04, which should have been a basis for accepting the company's offer. The Commission's decision was challenged as lacking a nexus between the reasons given and the decision taken.

4. Increase in Turnover Considered by the Settlement Commission:
The appellant contended that the Settlement Commission's decision to increase the turnover was not covered in the application and was made without following the mandated procedure under the Act. It was argued that the Commission ventured into this aspect without proper enquiry or investigation, rendering the order procedurally unsustainable and prejudicial to the assessee.

5. Scope of Interference by the High Court under Article 226 of the Constitution:
The High Court examined the legal position regarding its scope of interference under Article 226 of the Constitution. It referred to the Supreme Court decisions, emphasizing that interference is warranted only if the Settlement Commission's order is contrary to the provisions of the Act, causes prejudice to the assessee, or involves bias, fraud, or malice. The Court concluded that the Settlement Commission's order violated the Act's provisions, caused grave prejudice to the assessee, and involved serious procedural violations, justifying interference under Article 226.

Conclusion:
The High Court allowed the appeal, set aside the writ petition's dismissal, quashed the Settlement Commission's order, and remanded the assessment back to the assessing officer for re-assessment in accordance with the law, ensuring effective opportunity for the assessee. The Court emphasized that the re-assessment should not be influenced by any observations made in the letters, reports, or the quashed Settlement Commission order.

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