2023 (4) TMI 1178 - HC - Income Tax

Settlement of case - full and true disclosure - Application rejected by the Income Tax Settlement Commission - objection of the revenue was that the petitioner had not provided for interest on non-performing assets, purity of gold which had been sold in various auctions, was estimated at 80% for working out the income of the petitioner under this head - HELD THAT - Writ petition is liable to be allowed. The procedure for settlement, as contemplated by Chapter XIX-A of the Income Tax Act, 1961 as it then stood, was a procedure enabling assessees to declare their previously undisclosed income and arrive at a settlement of their case. After considering the reports of the Department, the Settlement Commission would proceed to adjudication to arrive at a conclusion as to whether any further tax is to be paid by the assessee under any head. While the assessee is required to make a full and true disclosure, the Settlement Commission is also authorised to render findings on any additional income that must be brought to tax and, consequently, the amount of tax, penalty or interest payable by the assessee that should be paid in addition to the tax, penalty or interest already paid on the income offered in the application for settlement. This is clear from a reading of Sub-Sections (4) and (6) of Section 245-D of the Act. It is clear that the Settlement Commission does not proceed merely on the basis of the statements contained in the application for settlement or any further pleadings before it and can, for reasons to be recorded, come to a conclusion that some higher income had to be offered by the assessee for arriving at a settlement. Therefore, taking into consideration the spirit and mandate of the provisions contained in Chapter XIX and merely for the reason that further amounts had to be offered by the assessee, the Settlement Commission cannot reject the application for settlement. This is not to say that the assessee is not required to make full and true disclosure. One of the main reasons which weighed with the Settlement Commission is the alleged non-disclosure owing to the fact that the purity of gold which was sold in the auction was determined at 80% (on average) to arrive at the previously undisclosed income under this head. There appears to be some material on record to suggest that the yardstick adopted by the assessee was correct. Similarly, the documents produced by the Department could also be scrutinised by the Commission to determine whether the purity of gold sold in auction should be taken at some higher value than 80% for the purpose of determining whether the assessee is required to disclose further income and to pay tax, interest and penalty on the same. However, it was wrong on the part of the Settlement Commission to come to the conclusion that merely because the purity of gold recorded at the time of issuing the loan in favour of one P.M. Reji was higher than the average recorded or disclosed in the settlement application, there was failure to make a full and true disclosure. Failure to offer the interest accruing on Non-Performing Assets as part of the income - The decision of the Supreme Court in Vasisth Chay Vyapar Ltd 2018 (3) TMI 56 - SUPREME COURT is the authority for the proposition that the instructions issued by the Reserve Bank of India on income recognition will take precedence over any contrary provision in the Income Tax Act, 1961. Therefore finding of the Settlement Commission that the failure to offer interest income on non-performing assets constitutes a failure to make a full and true disclosure for the purpose of Section 245-C of the Act, is unsustainable. Settlement Commission has ceased to exist - whether, in a case like this (where the order of the Settlement Commission is required to be quashed), the matter can be reconsidered by the Interim Board ? - As relying on K.S. Thirumalaivasan v. The Chairman, Income Tax Settlement Commission and others case 2022 (7) TMI 438 - MADRAS HIGH COURT the application filed by the Appellant would have to be treated as a pending application and appropriate orders are to be passed after giving the appellant sufficient opportunity and by considering all the materials placed by him. The effect of an order quashing the order passed by the Settlement Commission would result in the application for settlement filed by the petitioner being treated as a pending application which has to be disposed of by the interim board. Order of the Settlement Commission has been quashed, will be considered afresh by the Interim Board after affording an opportunity to the petitioner and to the respondent Department.

Summary

Issues Involved:
1. Rejection of the application for settlement by the Income Tax Settlement Commission.
2. Non-accounting of interest on non-performing assets.
3. Purity of gold sold in auctions and its impact on income disclosure.

Summary:

1. Rejection of the Application for Settlement:
The petitioner challenged the Ext.P12 order of the Income Tax Settlement Commission, which rejected the application for settlement. The application covered Assessment Years 2010-11 to 2017-18 and included disclosures under three heads: excess realization of gold, an ad-hoc voluntary disclosure, and disallowance of interest on debentures.

2. Non-accounting of Interest on Non-performing Assets:
The Settlement Commission's rejection was partly based on the petitioner's failure to account for interest on non-performing assets. The petitioner argued that Section 45Q of the Reserve Bank of India Act prohibits recognizing such interest as income. The Supreme Court's judgment in CIT v. Vasisth Chay Vyapar Ltd. established that RBI provisions take precedence over the Income Tax Act. The court found the Settlement Commission's decision unsustainable, as the petitioner was not required to disclose interest on non-performing assets.

3. Purity of Gold Sold in Auctions:
The Settlement Commission also rejected the application due to discrepancies in the purity of gold sold in auctions. The petitioner disclosed an average purity of 80%, but the Commission questioned this based on a single instance involving one P.M. Reji, where the purity was recorded as 85%. The court found this reasoning flawed, noting that the petitioner had sold 29.6 tons of gold, and the single instance could not represent the entire quantity. The court held that the Commission should scrutinize documents to determine the correct purity for income calculation, but it was wrong to conclude there was no full and true disclosure based on one instance.

Conclusion:
The court allowed the writ petition, quashing Ext.P12 order and directing the Interim Board to reconsider the application for settlement afresh. The court emphasized that the Settlement Commission's role includes adjudication and determining additional income, and merely requiring further amounts does not justify rejecting the application for lack of full and true disclosure. The court clarified that the Interim Board should dispose of the application in accordance with the law, without being influenced by the quashed order.