2024 (4) TMI 1029 - HC - Income Tax

Scope of challenge to orders passed by the ITSC - Validity of exercising discretion by the ITSC in granting relief to the assessee - Granting immunity from prosecution and certain penalties - Revenue is unhappy with the findings of the ITSC on 8 points viz. income-Revised percentage of profit cash loans bogus purchase from Dwish Enterprise disallowance under Section 14A NCDs / shares issued to Cyprus and Mauritius based entities NCDs issued to Kolkata based entities claim of marketing expenses and penalty and prosecution. HELD THAT - In the case of income revised percentage of profit data considered are documents/materials that were seized by the department. Considering the evidence and material before them and the submissions made the ITSC restricted the additional account of on money at 20% of total money receipts and allowed claimed expenditure to the extent of 80%. It is a discretion that the ITSC exercised and there was nothing wrong in that. Whether to examine and how much to examine should be left to the discretion of the ITSC. Similarly for item (ii) cash loans (iii) Bogus Purchase from Dwish Enterprises and (iv) Penalty and prosecution. The Apex Court in Jyotendrasinhji Vs. S. I. Tripathi 1993 (4) TMI 1 - SUPREME COURT held that the order of the ITSC is in the nature of a package deal and that it may not be ordinarily possible to dissect its order and accept what is favourable and reject what is not. Moreover it is open to the ITSC to accept an amount of tax by way of settlement and to prescribe the manner in which it is to be paid. ITSC has the discretion to condone the defaults penalties or prosecution where it thinks appropriate. Thus the sole limitation upon the ITSC is to act in accordance with the provisions of the Act. Even if the interpretation placed by the ITSC on documents is not correct it would not be a ground for interference since a wrong interpretation of documents cannot be said to be a violation of the provisions of the Act. The Apex Court has held that the scope of enquiry by the High Court under Article 226 should be restricted to i) whether the ITSC has acted in accordance to the provisions of the Act and ii) whether the order passed by it has prejudiced assessee apart from the ground of bias fraud and malice which constitute a separate and independent category. In N. Krishnan vs. Settlement Commission And Others 1989 (3) TMI 77 - KARNATAKA HIGH COURT it is held that the ITSC is the forum for self surrender and seeking relief and not a forum for challenging the legality of assessment order or orders passed in any other proceedings. The Karnataka High Court held that the power conferred on the settlement commission is so wide that it can take any view on any questions of law which it considers appropriate having regard to the facts and circumstances of a case including giving immunity against prosecution or imposition of penalty. Therefore in our view ITSC was entitled to exercise discretion while passing the impugned order and has exercised its discretion. In our view there is neither violation of any mandatory procedure prescribed under any of the sections of Chapter XIX-A of the Act nor any violation of any of the Rules of natural justice. Further it cannot be said that the reasons assigned by the ITSC for granting relief sought for by assessee have no nexus to the decision taken. As held by the Apex Court in Kotak Mahindra Bank Ltd 2023 (9) TMI 1231 - SUPREME COURT the members of the ITSC have been appointed by Central Government in accordance with Section 245B (3) of the Act for their integrity and outstanding ability and for special knowledge and experience in problems relating to direct taxes and business accounts. The members of the ITSC therefore cannot be questioned for their decision or for exercising their discretion. In the circumstances as it is evident from Section 245 of the Act that the Central Government has appointed the members as their representatives to settle the disputes with assessee which reflects the confidence they had in the members because the persons appointed are of integrity and known for their outstanding ability and expertise and for the special knowledge and experience in problems relating to direct taxes and business accounts. Therefore these members have been authorised to settle the disputes on behalf of the Government and it does not lie in the mouth of the Government to challenge the decision taken by their own representatives without making allegations of bias or fraud or malice. Rule discharged. Petition dismissed.

Summary

Issues Involved:
1. Income revised percentage of profit
2. Cash loans
3. Bogus purchase from Dwish Enterprise
4. Disallowance u/s 14A of the Act
5. NCDs/shares issued to Cyprus and Mauritius based entities
6. NCDs issued to Kolkata based entities
7. Claim of marketing expenses
8. Penalty and prosecution

Summary:

Income revised percentage of profit:
The ITSC applied a profit rate of 20% on the total estimated on-money receipts, allowing claimed expenditure to the extent of 80%. The revenue contended that 100% of on-money should be taxed and that the ITSC did this without examining the details, nature, and purpose of such expenses.

Cash loans:
The ITSC accepted the genuineness of cash loans amounting to Rs. 234.05 Crores despite the revenue's argument that these should be added u/s 68 of the Act as unexplained income. The revenue argued that the applicants failed to produce sufficient confirmations and that the ITSC did not direct any inquiry into the identity or creditworthiness of the lenders.

Bogus purchase from Dwish Enterprise:
The ITSC taxed 20% of the bogus purchases made from Dwish Enterprise, contrary to the revenue's stance that 100% should be taxed. The revenue cited the Apex Court judgment in N K Proteins Ltd. vs. Deputy Commissioner of Income Tax (2017) 250 Taxman 22 (SC), asserting that only the profit element in bogus purchases should be taxed.

Disallowance u/s 14A of the Act:
The ITSC brought to tax an additional income of Rs. 2.19 crores towards disallowance u/s 14A of the Act, following its decision in the assessee's own case for A.Y. 2012-13. The revenue argued that the disallowance should not be restricted to the extent of exempt income, although the law as on date supports such restriction.

NCDs/shares issued to Cyprus and Mauritius based entities:
The ITSC did not discuss the genuineness of funding from Cyprus and Mauritius based entities as the revenue's report indicated no evidence to establish that the funding was doubtful, rendering this issue a non-issue.

NCDs issued to Kolkata based entities:
The ITSC did not find it necessary to discuss the issuance of NCDs to Kolkata based entities as the applicants' portfolio managers confirmed the genuineness of the transactions.

Claim of marketing expenses:
The ITSC allowed the deduction of marketing expenses for AY-2013-14 to AY-2016-17, which the revenue objected to, citing violations of principle of consistency and matching principles as per AS-1 and Section 145A of the Act. The revenue did not provide detailed explanations for these violations.

Penalty and prosecution:
The ITSC granted immunity from prosecution u/s 245H (1) of the Act and levy of penalty u/s 271(1)(c) of the Act, while imposing penalties of Rs. 8 crores and Rs. 2 crores u/s 271D and 271E, respectively. The revenue failed to demonstrate how the ITSC's order was contrary to any provisions of the Act.

Conclusion:
The High Court upheld the ITSC's discretion and found no violation of mandatory procedures or rules of natural justice. The court emphasized that the ITSC's decisions, based on seized documents and evidence, should not be interfered with unless there is a clear violation of the Act's provisions or evidence of bias, fraud, or malice. The petition was dismissed, reinforcing the ITSC's role as a forum for settlement rather than for challenging assessment orders.