2025 (4) TMI 1088 - HC - Income Tax

Order of the Income Tax Settlement Commission granting immunity to the private respondents from prosecution and penalty - HELD THAT - For the Commission to grant immunity under Section 245H there are three requirements - (i) full and true disclosure of the income not disclosed to AO; (ii) the manner in which the income was derived and (iii) that the applicant cooperated in the proceedings before the Settlement Commission. The Commission on being satisfied that applicant cooperated during the proceedings coupled with the fulfillment of two conditions as required under Section 245C may grant immunity to the applicant from prosecution and penalty subject to the conditions it may deems fit. The proceedings filed by the private respondents were admitted u/s 245D(1) and by order the application was declared not to be invalid. The application culminated in order dated 31.03.2013 whereby the terms and conditions for settlement were determined. It would be relevant to mention that the portion of the order fixing the terms and conditions of the settlement has attained finality. The acceptance of the application bring us to the obvious conclusion that the first two conditions of section 245H which are common to the pre-requisite of section 245C(1) have been complied with. The contention of counsel for the petitioner that there was failure of the private respondents to make a full and true disclosure under Section 245C deserves rejection. The revenue accepted the order of the Commission whereby the applications have been allowed and the challenge is limited to grant of immunity. Meaning thereby the satisfaction of Commission that two pre-conditions of Section 245C(1) were complied is not in dispute. Commission has recorded a satisfaction that the applicant cooperated during the settlement proceedings and there is no challenge to this finding. In absence of challenge to fulfillment of three conditions required under Section 245H the argument that there was no true and full disclosure of income does not arise. WP Dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Income Tax Settlement Commission (the Commission) erred in granting immunity from prosecution and penalty to the private respondents under Section 245H of the Income Tax Act, 1961, despite allegations that the respondents failed to make full and true disclosure of undisclosed income as required under Section 245C(1) of the Act.

(b) Whether the Commission had jurisdiction to entertain and pass the settlement order when there was purported non-compliance with the twin conditions of full and true disclosure of income and the manner in which such income was derived.

(c) Whether the immunity granted from prosecution and penalty under Section 245H was justified in light of the facts and evidence, including incriminating material seized during search proceedings indicating bogus expenses, non-compliance with TDS provisions, and siphoning off of funds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Immunity Granted under Section 245H

Relevant Legal Framework and Precedents: Chapter XIXA of the Income Tax Act provides for settlement of cases by the Commission. Section 245C(1) mandates that an assessee seeking settlement must make a full and true disclosure of undisclosed income and the manner in which it was derived. Section 245H empowers the Commission to grant immunity from prosecution and penalty if it is satisfied that the applicant has cooperated and made such full and true disclosure. The Supreme Court in Ajmera Housing Corporation emphasized that full and true disclosure of particulars and the manner of derivation of income are prerequisites for a valid application under Section 245C(1), and the Commission must be satisfied on this aspect before passing any order.

Court's Interpretation and Reasoning: The Court observed that the acceptance of the application by the Commission under Section 245D(1) and the subsequent declaration that the application was not invalid under Section 245D(2C) indicated that the twin conditions under Section 245C(1) were fulfilled. The Court noted that the petitioner (revenue) accepted the Commission's order allowing the application, limiting the challenge only to the grant of immunity. Therefore, the satisfaction of the Commission regarding full and true disclosure and cooperation was not disputed.

Key Evidence and Findings: The Commission's order dated 31.03.2013, which finalized the terms and conditions of the settlement and granted immunity, was not challenged in its entirety. The incriminating material seized during the search was relevant to the underlying income tax proceedings but did not negate the Commission's satisfaction regarding disclosure and cooperation during the settlement process.

Application of Law to Facts: Since the Commission had jurisdiction and was satisfied on the statutory conditions, and since the petitioner did not dispute these findings, the immunity granted under Section 245H was held to be valid. The Court rejected the contention that immunity was wrongly granted due to alleged failure of full and true disclosure.

Treatment of Competing Arguments: The petitioner argued that the respondents failed to make full and true disclosure and that figures offered were enhanced by the Commission, implying incomplete disclosure. The Court rejected this argument, emphasizing that the Commission's acceptance of the application and satisfaction of conditions was final and binding, especially in absence of any challenge to these findings.

Conclusion: The immunity granted under Section 245H was justified and valid, as the statutory conditions were fulfilled and accepted by the petitioner.

Issue (b): Jurisdiction of the Commission to Entertain and Pass Orders

Relevant Legal Framework and Precedents: Section 245D prescribes the procedure for dealing with applications under Section 245C. It mandates issuance of notice, opportunity of hearing, supply of reports from the Commissioner, and examination of records before passing orders. The validity of the application can be examined at multiple stages: initially under Section 245D(1), after receipt of Commissioner's report under Section 245D(2C), and at the time of passing final order under Section 245D(4). The Supreme Court's ruling in Ajmera Housing Corporation underscored the necessity of full and true disclosure as a jurisdictional prerequisite.

Court's Interpretation and Reasoning: The Court noted that the Commission admitted the application on 22.09.2011 and declared it not invalid on 08.11.2011, thereby exercising jurisdiction. The Court held that failure to comply with the twin conditions would have rendered the application invalid, causing the Commission to lose jurisdiction. Since the application was admitted and not declared invalid, the Commission retained jurisdiction to pass the settlement order.

Key Evidence and Findings: The procedural compliance by the Commission in admitting the application, calling for reports, and passing the final order was undisputed. The petitioner did not challenge the jurisdictional findings or procedural compliance.

Application of Law to Facts: The Commission's jurisdiction was properly invoked and exercised in accordance with the Act's provisions. The Court found no merit in the contention that the Commission lacked jurisdiction due to incomplete disclosure.

Treatment of Competing Arguments: The petitioner's argument that the Commission erred in granting immunity implicitly questioned jurisdiction. The Court clarified that jurisdiction depends on the validity of the application, which was upheld by the Commission and not challenged by the petitioner.

Conclusion: The Commission had valid jurisdiction to entertain the application and pass the settlement order.

Issue (c): Justification of Immunity in Light of Search and Seizure Material

Relevant Legal Framework: Immunity under Section 245H is conditioned on cooperation and full disclosure. The existence of incriminating material seized during search proceedings does not automatically preclude immunity if the statutory conditions are met.

Court's Interpretation and Reasoning: The Court acknowledged the incriminating material indicating bogus expenses, non-compliance with TDS provisions, and siphoning off funds. However, the Court emphasized that the settlement process is designed to resolve such disputes by requiring full and true disclosure. The Commission's satisfaction that these conditions were met and that the applicants cooperated was decisive.

Key Evidence and Findings: The search and seizure material was part of the underlying investigation but did not negate the Commission's findings. The Commission's order granting immunity had attained finality and was not challenged in its entirety.

Application of Law to Facts: The Court applied the principle that immunity is granted as a quid pro quo for full disclosure and cooperation, which the Commission found to be present. The existence of adverse material does not invalidate the immunity if the statutory conditions are satisfied.

Treatment of Competing Arguments: The petitioner argued that the incriminating material contradicted the claim of full disclosure. The Court rejected this, holding that the Commission's satisfaction on disclosure and cooperation was conclusive.

Conclusion: The immunity granted was justified despite the incriminating material, as the statutory requirements were fulfilled and accepted.

3. SIGNIFICANT HOLDINGS

"It is clear that disclosure of 'full and true' particulars of undisclosed income and 'the manner' in which such income had been derived are the prerequisites for a valid application under Section 245-C(1) of the Act. Additionally, the amount of income tax payable on such undisclosed income is to be computed and mentioned in the application. It needs little emphasis that Section 245-C(1) of the Act mandates 'full and true' disclosure of the particulars of undisclosed income and 'the manner' in which such income was derived and, therefore, unless the Settlement Commission records its satisfaction on this aspect, it will not have the jurisdiction to pass any order on the matter covered by the application."

Core principles established include:

(i) The twin conditions of full and true disclosure of undisclosed income and the manner of its derivation are jurisdictional prerequisites for the Commission to entertain and decide an application under Sections 245C and 245D.

(ii) Immunity under Section 245H can only be granted if the Commission is satisfied that the applicant cooperated during proceedings and complied with the twin disclosure conditions.

(iii) Once the Commission accepts the application and records satisfaction on these conditions, its jurisdiction to pass orders including granting immunity is established and not open to collateral attack unless challenged on the record.

(iv) The existence of incriminating material seized during search proceedings does not by itself negate the Commission's satisfaction regarding full disclosure and cooperation, nor does it preclude grant of immunity if statutory conditions are met.

Final determinations:

The Court dismissed the writ petition challenging the grant of immunity, holding that the Commission did not err in granting immunity from prosecution and penalty under Section 245H, as the statutory conditions of full and true disclosure and cooperation were fulfilled and accepted by the petitioner. The Commission had valid jurisdiction to entertain the application and pass the settlement order.