2012 (3) TMI 102 - HC - Income Tax

Order of settlement commission - assessee filed an application before the ITSC under Section 245C of the Act seeking a settlement of its income for the assessment year 2005-06 - assessee also submitted that its case involved complexity of investigation arising because of the fact that various loose papers were seized during the survey and heavy additions would in all probability be made leading to protracted litigation - After accepting all the submissions of the assessee as noted above, the ITSC settled the additional income of the assessee at Rs. 15 lacs as per the statement of facts filed by the assessee - ITSC has merely observed and accepted the assessee s explanation that the word cash has been erroneously mentioned instead of the word cheque - The manner in which the ITSC has set out to dispose of the assessee s application before them and the report of the CIT shows that the procedure adopted by them is vitiated and is certainly not in accordance with law - ITSC could not have been satisfied as to the acceptability of the assessee s explanation with regard to the various issues raised before it in the report of the CIT merely on the basis of the reports of the JDIT - Decided in favor of the assessee by way remand to ITSC

Issues Involved:
1. Validity of the ITSC's order admitting the application for settlement.
2. Full and true disclosure of income by the assessee.
3. Computation of net profit.
4. Share capital receipts under Section 68.
5. Cash transactions and unaccounted sales.
6. Discrepancies in stock and other entries.
7. Procedural compliance and judicial review.

Detailed Analysis:

1. Validity of the ITSC's Order Admitting the Application for Settlement
The CIT(A) IV, New Delhi filed a writ petition challenging the ITSC's order dated 20th October 2008, which allowed the application of the assessee, M/s Godwin Steels Pvt. Ltd., to be proceeded with. The CIT argued that the ITSC failed to provide a detailed, reasoned order addressing the objections raised, particularly the lack of full and true disclosure by the assessee and the complexity of the case.

2. Full and True Disclosure of Income by the Assessee
The CIT objected to the admission of the assessee's application on grounds that the assessee did not make a full and true disclosure of its income. The CIT's report highlighted several discrepancies, including unaccounted cash transactions, discrepancies in stock records, and unreliable books of accounts. The ITSC, however, admitted the application without adequately addressing these objections, leading to the present writ petition.

3. Computation of Net Profit
The ITSC concluded that no adjustment was required for the net profit computation, based on the JDIT's verification and the absence of objections from the department. The ITSC's order stated, "Having regard to the facts and circumstances of the case, no adjustment is required to be made on this account and the issue stands settled."

4. Share Capital Receipts Under Section 68
The assessee submitted confirmations and affidavits from companies that invested in its shares, supported by documentary evidence. The ITSC accepted these submissions, citing the Supreme Court's judgment in CIT v. Lovely Exports (Pvt.) Ltd. However, the ITSC did not independently verify the blank transfer forms found during the survey, which indicated potential misuse of Section 68.

5. Cash Transactions and Unaccounted Sales
The ITSC accepted the assessee's explanation that the word "cash" was mistakenly used instead of "cheque" in the seized documents. For unaccounted sales to Kumar & Co., Jai Iron Steels, and Harbhajan Singh & Co., the ITSC accepted the assessee's peak cash theory without adequately addressing the CIT's objections that the entire cash sales should be added as undisclosed income.

6. Discrepancies in Stock and Other Entries
The ITSC accepted the assessee's submissions regarding discrepancies in stock and other entries, including transactions with Kundan Iron Steel and Mahajan Alloys, and the issuance of the same invoice number to different parties. The ITSC concluded that no further adjustments were needed, stating, "On careful consideration of the submission made by both the parties as well as the observations made by the CIT in the report and the evidence furnished during the course of hearing, we are of the view that no adjustment is required to be made on the above accounts."

7. Procedural Compliance and Judicial Review
The High Court scrutinized the ITSC's decision-making process, emphasizing that judicial review under Article 226 focuses on the decision-making process rather than the merits of the decision. The Court found that the ITSC failed to independently examine the materials and evidence, instead relying heavily on the JDIT's reports, which were non-committal and lacked detailed analysis. The Court observed that the ITSC did not apply its mind to the CIT's serious objections and the copious materials collected during the survey.

Conclusion:
The High Court quashed the ITSC's order dated 20th October 2008, issuing a writ of certiorari and remitting the matter to the ITSC for a fresh order in accordance with law. The Court emphasized the need for the ITSC to independently verify the materials and evidence and provide a reasoned order addressing all objections. The revenue was awarded costs of Rs. 20,000/-.

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