Cases before the Settlement Commission: Full and True disclosure of Income u/s 245C and Immunity u/s 245H - Income Tax - F.No. 414/09/2012-IT (Inv-I)

F.No. 414/9/2012-IT (Inv-I) Government of India Ministry of Finance Department of Revenue Central Board of Direct toes New Delhi, 4th March 2013 To All the Chief Commissioners of Income Tax (Central) All the Directors General of Income Tax (Investigation) Sir/Madam, Sub : Cases before the Settlement Commission: Full and True disclosure of Income u/s 245C and Immunity u/s 245H- reg. I am directed to refer to the above mentioned subject and to say that the Board has come across several instances wherein necessary and prompt action was not taken in the cases which had gone before Settlement Commission. Besides, certain issues germane to the proceedings before the Commission appear to have escaped attention of the officers concerned. 2. In light of the above and with a view to ensure appropriate action in such cases, attention of all concerned is invited to the following important issues: i. Section 245C(1) of the IT Act, 1961 (the Act) lays down that an assessee may at any stage of a case relating to him make an application containing a full and true disclosure of his income which has not been disclosed before the A.O. the manner in which such income has been derived, the additional amount of income tax payable on such income and such other particulars as may be prescribed to the Settlement Commission to have the case settled. Full and true disclosure of income is the cardinal requirement for approaching the Commission. ii. Of late, it has been noticed in a large number of cases that assessee s are approaching the Settlement Commission by disclosing in the Statement of Facts (SoF) an amount which is just above the qualifying amount prescribed in the Act. After the case is admitted and the Commissioner submits the Rule 9 report, the assessee revises such disclosure of additional income during the course of the hearing (on account of the facts brought out in the Rule 9 report, oral submissions of the departmental officers, suggestion of the Bench or otherwise). In many cases it is noticed that the Commission has determined the incomes assessable for the AYs covered by the petition before it at several times the amount admitted in the application originally. Not only the income has been settled in such cases but immunity from penalty and prosecution has also been granted by the Commission. iii. Besides, there are several instances wherein the amounts additionally offered during the hearing relate to issues/sources which are not even connected/mentioned in the SoF originally submitted. Such determination of total incomes several times the amount admitted in the SOF as true and full disclosure of income appears to go against the basic rationale of the relevant provisions of the Act. Such assesses, by approaching the Commission with a low figure of disclosure, have been able to successfully scuttle investigation by the A.O., delayed the payment of tax on the undisclosed/ additional income and got away with immunity also on the amount of originally disclosed before the Commission. Thus the assessee s appear to have succeeded in obtaining the benefits in violation of letter and spirit of the statute regarding basic requirement of true and full disclosure. iv. It has also been noticed that the assessee s admit additional income for one of two assessment years in the SOF, but include many other years for which no additional income is offered for settlement. This pre-empts the Department from making enquiries even in respect of those years for which no additional income was offered. v. Instances of capitalization allowed by the Commission without appropriate evidence having been adduced before it have also been noticed. Consequences of such telescoping, and capitalization under the Wealth Tax Act and other provisions, if any, are not taken note of and, consequential remedial action not initiated. vi. The IT Act, 1961 determines income head-wise. Instances have come to the notice of the Board wherein set-off of the income of one head has been allowed against the other head in violation of the provisions of the Act. vii. Further, u/s 245H, the assessee has to satisfy three conditions. (cumulatively) to get immunity: a. Made full and true disclosure of its income; b. Full and true disclosures of the manner in which the income was derived and c. Cooperated with the Settlement Commission in the proceedings. In most of the cases the Commission is recording a satisfaction on the third condition only and granting immunity without recording any satisfaction on the other two conditions. viii. There are a number of judgments of High Courts including Mumbai and Madras which held that the Commission does not have such powers of determination of total income tax different from the disclosure . Summary of some of the decision of courts in this regard is as under: A full and true disclosure of income which has not been previously disclosed by the assessee being a pre-condition for a valid application u/s 245C(1), the scheme of chapter XIX - A does not contemplate revision of income so disclosed in the application. Disclosure of additional undisclosed income in the revised annexure alone was sufficient to establishes that application made by the assessee u/s 245C(1) could not be entertained as it did not contain a full and true disclosure of its undisclosed income and the manner in which such income was derived. [Ajmera Housing Coporation vs. CIT 326 ITR 642 (SC)] If the disclosure is not true and complete the Settlement Commission has no power to quantify income [G. Jayaraman vs. Settlement Commission, 1960 Taxman 552(Mad)] Once Settlement Commission found that applicant has not made true and full disclosure, the application itself becomes not maintainable and order passed by Settlement Commission is bad illegal and void [All Investments HCL vs. CIT, 264 ITR 571 (Mad)] Settlement Commission can take cognizance of application u/s 245C only where the assessee discloses income not disclosed by it before Income Tax authorities and the manner in which it was derived. Where IT authorities have gathered material which would disclose concealment of fraud on the part of the assessee, even though after the timing of application u/s 245C, the Commission has no jurisdiction to proceed with the application. [CIT Vs. Indian Express Pod, 206ITR 443 (SC)] There being piece meal disclosures and additional offers made by the assessee, there was no full and true disclosure of income. [CIT Vs. S.C., 326 ITR 626 (Mumbai)] Once the income disclosed by the assessee u/s 245C is not accepted as full and true disclosure, the application u/s 245C is not maintainable and therefore Settlement Commission has no jurisdiction to pass an order enhancing the income of the assesse, [Canara Jewellers vs. Settlement Commission, 315 ITR 328 (Mad)] Assesse has not come to Settlement Commission with clean hands. Commission came to conclusion that the attempt on the part of the assessee is to create a smoke screen in order to shut investigation. Penalty might be levied on additional income determined by Settlement Commission. [Major Metals Ltd. vs. UOI 69 ITR 274 (Bom.)] Settlement Commission has not applied its mind as to whether the assessee had made full and true disclosure of its income and the manner in which the income was derived and therefore the High Court can examine the legality of the order in writ jurisdiction. [CIT vs. SC 246 ITR 63(Bom.)] ix. It has also been reported that in several cases, submissions of CsIT (DR) are not taken note of by the Commission despite specific requests. x. There is also lack of prompt and proper action on the part of officers in the assessment side while defending the cases before the Commission and/or after receipt of its orders. There is undue delay in responding to the applications, extending requisite support to DRs by responding to their query properly and promptly and examining the orders of the Commission for appropriate action. Lack of supervision from senior officers in this regard is a matter of concern. 3. In view of the above, the CCsIT/DsGIT (Inv.) are requested to take immediate remedial measures to ensure that prompt necessary action is taken in the cases wherein applications have been filed before the Settlement Commission. The CsIT(DR), CsIT(Central) and other CsIT, DsIT concerned should ensure proper submissions in the hearings and in Rule 9 reports in the light of discussion supra. On receipt of the orders, the CsIT (DR). should send their brief comments on the acceptability of the order along-with their suggestions on the further course of action. The CsIT (DR) should also report to the CCIT/DGIT concerned as to whether their written and oral submissions were considered in the order. The orders passed by the Commission need to be examined by the CsIT concerned carefully in the light of statutory provisions and the discussion supra and wherever necessary remedial measures should be taken without any delay including by way of filing of Writ Petitions before the Hon ble High Courts. 4. This issues with the approval of Member (Inv). Yours faithfully, (Nikhil Verma) Under Secretary (Inv-I)