INCOME TAX SETTLEMENT COMMISSION IS HAVING NO POWER TO DIRECT SPECIAL AUDIT

[Mr. M. GOVINDARAJAN]

Settlement of disputes

Settlement of disputes relating to Income Tax is based on the objective of dispute resolution alternate. It is in the nature of mediation or arbitration. The Settlement orders passed by the Income Tax Settlement Commission are final and conclusive in nature.   The application for settlement can be made only during the pendency of the assessment proceedings, whereas an appeal can be filed only after conclusion of assessment proceedings, against an order of assessment. For approaching the settlement commission, an applicant is required to disclose income which he has not disclosed before the Income Tax Department and also to pay applicable tax and interest on it before filing the application. No such conditions are needed for filing an appeal. An application for settlement is statutorily required to be disposed of within 18 months failing which the same is abated to the concern Income Tax Authority. There is no statutory time limit for disposal of an appeal. The Settlement Commission provides quick and easy settlement of tax disputes of high revenue stake. This will save time and energy of both the litigant and the Department adding to the proverb ‘time saved is money saved’.

Powers of Settlement Commission

Section 245F of the Income Tax Act,1961 deals with the powers and procedures of the Settlement Commission.  Section 245F(1) provides that in addition to the powers conferred on Settlement Commission under the Act, it would also have all the powers which are vested in an income tax authority under the Act.  Section 245F (2) further stipulates that where an application under Section 245C has been allowed to be proceeded with under Section 245D, the Settlement Commission shall, until an order is passed, the Settlement Commission shall, until an order is passed under Section 245D (4), have, subject to the provisions of Section 245(3), exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority under the Act.

In ‘Canara Jewellers V. Settlement Commission’ – 2009 (7) TMI 93 - MADRAS HIGH COURT the High Court held that so far as Section 245F is concerned, though the Settlement Commission is empowered to have all powers which are vested in an income tax authority under the Act, in addition to the power conferred under Chapter XIX-A, but such power can be exercised for the purpose of procedure of settlement of application under Section 245C and not for reassessment of tax of tax of a particular year which is vested with the assessing authority.

Power of Settlement Commission to direct special audit   

The issue to be discussed in this article is whether the Settlement Commission under Income Tax Act, 1961 is empowered to direct special audit during the course of settlement proceedings.  The answer to this question is that the Settlement Commissioner under the Income Tax Act, 1961 is not having power to direct special audit.   This has been discussed in the following case law: 

In ‘Agson Global Private Limited and others V. Income Tax Settlement Commission and others’ – 2016 (1) TMI 256 - DELHI HIGH COURT the petitioners No. 1 to 7 filed a settlement application before the Income Tax Settlement Commission (‘Commission’ for short)  on 22.12.2011 and the petitioners No. 8 to 10 filed their application before the Commission on 22.12.2011.  Both the applications were admitted by the Commission.   On June 21, 2012 the Commissioner of Income Tax, Delhi furnished his consolidated report as required by the Commission.   The petitioners submitted their reply to the said report on 10.09.2012.  Also the petitioners submitted their consolidated profit and loss account and balance sheets for the assessments year 2004 – 05 to 2011 – 12 before the Assessing Officer, New Delhi as per the directions of the Commission.

The Commissioner of Income Tax submitted a supplementary report on 05.12.2012.  In that report he indicated that the Assistant Commissioner and himself were of the opinion that the accounts were complex in nature and therefore they had to be got audited under Section 142 (2A) of the Act for determining the correct income of the petitioner groups.  The Commissioner of Income Tax requested the Commission to direct a special audit of the accounts of the petitioner groups.

The Commission, after considering the material record, including the supplementary report, set a letter to the petitioners providing them an opportunity of being heard as to why their accounts should not be subjected to special audit.  The petitioners contended that a special audit under Section 142 (2A) could only be directed at the sage of assessment and cannot be conducted in the course of settlement proceedings.   The Commission rejected the contentions of the petitioners and held that the powers of the Settlement Commission under Section 245F(2) entail exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority.  This power includes the powers to direct audit under Section 142(2A) of the Act.  On 26.04.2013 the Commission directed that the special audit be carried out.

Aggrieved against the order of the Commission the petitioners filed the present petitions challenging the order of the Commission.  The petitioners put forth the following contentions before the High Court:

• The requirement of special audit is spelt out in Section 142(2A) of the Act which falls within the ambit of inquiry before assessment;
• The proceedings under Chapter XIX-A are entirely different from the assessment proceedings and therefore the Settlement Commission which is concerned with the Settlement of cases would not have jurisdiction to direct a special audit;
• Merely because Section 245F confers powers on the Settlement Commission which are vested in an income tax authority does not mean that all the powers of income tax authority under the said Act vest in Income Tax Settlement Commission;
• The powers conferred under Section 245F ought to be construed keeping in mind the distinction between an assessment and a settlement.

The petitioners relied on the following decisions:

1. Commissioner of Income Tax V. Om Prakash Mittal’ – 2005 (2) TMI 16 - SUPREME Court;

2. Brij Lal V Commissioner of Income Tax’ – 2010 (10) TMI 8 - SUPREME COURT

The Department put forth the following contentions before the High Court:

• The Settlement Commission by virtue of the provisions of Section 245F of the Income Tax Act acquires exclusive jurisdiction in respect of a case when an application under Section 245C is made before it;
• In respect of the matters covered by the Settlement application and all proceedings incidental thereto, the Settlement Commission has exclusive jurisdiction with regard to adjudication, orders and directions;
• Filing of an application before the Settlement Commission is akin to the filing of a return before the assessing authority under Section 143(3) of the Act;
• The Settlement Commission has to determine the income as is done by the Assessing Officer under Section 143 (3) of the Act;
• Just as the Assessing Officer has a right to make any enquiry for proper assessment and can direct a special audit having regard to the nature and complexity of the accounts and keeping in mind the interests of the Revenue, the Settlement Commission, which also has to determine the total income and thereby make an assessment, can, when it has exclusive jurisdiction over the case certainly direct that a special audit be carried out;

The High Court analyzed the provisions relating to the assessment and Settlement Commission.  The High Court held that it is evident that it is part of Chapter XIV which specifically details the procedure for assessment.  The said provision relates to the enquiry before assessment.  It is specifically for the purpose of making an assessment.  Sub Section (2A) stipulates that if at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of Chief Commissioner or Commissioner direct the assessee to get the accounts audited by an accountant prescribed under the Act and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require.   It is clear that the expression ‘at any stage of the proceedings before him’ has clear reference to the assessment proceedings.  Thus the Assessing Officer, subject to the pre conditions set out in the said provision could require a special audit to be conducted but this is with the sold and ultimate object of making an assessment under the Act.  The language employed in Section 142 clearly indicates that the steps, including that of special audit, taken there under are part and parcel of the assessment proceedings with the object and purpose of enabling the assessment made to be made under the Act by the Assessing Officer.

The High Court then analyzed the provisions relating to Settlement Commission.  It is apparent that the settlement application passes through several stages before the final order providing for the terms of settlement is passed by the Settlement Commission.  The first stage is under Section 245D(1).  This is followed by the next step under Section 245D(2C) and finally by the order passed under Section 245D(4).  The High Court then referred to the provisions of Section 245F.  The said section deals with the powers and procedures of the Commission which are as follows:

• In addition to the powers conferred on the Settlement Commission under the Act, it would also have all the powers which are vested in an income tax authority under the Act;
• Where an application under Section 245C has been allowed to be proceeded with under Section 245D, the Commission shall, until an order is passed, have subject to the provisions of Section 245D(3), exclusive jurisdiction to exercise the powers and perform the functions of an income tax authority under the Act in relation to the case.

The High Court held that the additional power entrusted with the Settlement Commission has to be read in the context of and the scope of settlement proceedings.   It does not entail that the power of regular assessment which are vested in an income tax authority can be exercised by the Settlement Commission.  The Settlement Commission does not engage itself in the process of assessment and cannot make an assessment order. The order that the Settlement Commission makes under Section 245D (4) is not in the nature of an assessment but by way of a settlement and contains the terms of settlement.  The High Court reiterated that the powers which are vested in an income tax authority and could be exercised by the Settlement Commission are such which have a nexus with the settlement proceedings which does not include the making of an assessment under the Act.

The High Court is of the view that the exclusivity of jurisdiction which is contemplated in Section 245F is that once an application for settlement is made before the Settlement Commission, no income tax authority would have jurisdiction to deal with the case.   It does not mean that the Settlement Commission from that date steps into the shoes of income tax authority.  The High Court held that in terms of provisions contained in Chapter XIX-A of the Act, exclusivity of jurisdiction stipulated in Section 245F entails two things-

• That from the point of time of filing the settlement application, no income tax authority can exercise jurisdiction over the case and it is only the Settlement Commission which could exercise such jurisdiction;
• The powers and functions of the income tax authority which can exclusively be exercised by the Settlement Commission must have a nexus with the settlement proceedings before it.

Since the requirement of a special audit falls under the procedure for assessment which is distinct and different from settlement proceedings, the Settlement Commission would not, in the view of the High Court, have jurisdiction to direct a special audit as it does not have any nexus with the settlement proceedings.   All that the Settlement Commission is required to do in the court of the settlement proceedings is to ensure that the assessee who has made the application for settlement of his case, has made a full and true declaration of his hitherto undisclosed income and the manner in which it was derived.  If the Settlement Commission is of the view that an assessee has not made a full and true declaration of the undisclosed income then the application is liable to be rejected and relegate the assessee to the normal provisions of assessment under the Act.  The Settlement Commission cannot be itself enter upon an assessment and step into the shoes of an Assessing Officer for the purposes of making assessment.

The High Court examined the decisions of Supreme Court in the case laws relied on by the petitioners.   In ‘Commissioner of Income Tax V. Om Prakash Mittal’ – 2005 (2) TMI 16 - SUPREME Court’ (supra) the Supreme Court held that the Settlement Commission assumes jurisdiction to deal with the matter after it decided to proceed with the application and continues to have the jurisdiction till it makes an order under Section` 245D.  Section 245D(4) is the charging section and Section 245D(6) prescribes the modalities to be adopted to give effect to the order.   It has to be noted that the language used in Section 245D is ‘order’ and not ‘assessment’.  The order is not described as the original assessment or regular assessment or re-assessment.   In that sense, the Commissioner exercises a plenary jurisdiction.

In ‘Brij Lal V Commissioner of Income Tax’ – 2010 (10) TMI 8 - SUPREME COURT’ (supra) the Supreme Court observed that there is a difference between assessment in law (regular assessment or assessment under Section 143 (1) and assessment by settlement under Chapter XIX-A of the Act.   The order under Section 245D (4) is not an order of regular assessment.   It is neither an order under Section 143 (1) or Section 143 (3) or Section 144.   Under Section 139 to 158, the process of assessment involves the filing of return under Section 139 or under Section 143; inquiry by the Assessing officer under Sections 142 and 143 and Section 143 (3) or under Section 144 and issuing of notice demand under Section 156 on the basis of assessment order.   The making of the order of assessment is an integral part of the process of assessment.   No such steps are required to be followed in the case of proceedings for Settlement.  Chapter XIX-A contemplates the taxability determined with respect to undisclosed income only by the process of settlement.  Thus the nature of the orders under Sections 143 (1), 143(3) and 144 is different from the orders of Settlement Commission under Section 245D(4).  The Supreme Court further held that the proceedings before the Settlement Commission are similar to arbitration proceedings.   It contemplates assessment by settlement and not by way of regular assessment or assessment under Section 143(1) or under Section 143 (3) under Section 144 of the Act.  It does not begin with the filing of the return but by filing the application for settlement.  The procedure for settlement under Chapter XIX-A is entirely different from the procedure for assessment.

The High Court held that the Income Tax Settlement Commission does not have the power to direct a special audit under Section 142(2A) in the course of settlement proceedings under Chapter XIX-A of the Act.  The impugned order to the extent it directs the conduct of a special audit is quashed by the High Court and the matter is placed before the Settlement Commission for further consideration of the petitioners’ settlement applications in accordance with the prescribed procedure under Chapter XIX-A of the Act.