Income Tax Settlement Commission's Purpose Is To Give Assessee Chance To Disclose Undisclosed Income To Seek Immunity : Supreme Court

A Division bench of the Supreme Court, while hearing an appeal, discussed the objective and purpose behind setting up a Settlement Commission under the Income Tax Act 1961. The Court opined:

“We find that there is a real object and purpose of setting up of the Settlement Commission as an Assessee, who is given an opportunity to disclose the undisclosed income in order to seek benefit in the form of immunity from penalty and prosecution.”

The Bench comprised Justices B.V. Nagarathna and Ujjal Bhuyan.

Brief Background and Case History

In the present case, the assessee/ appellant is a partnership firm, and a survey was conducted by the Department under Section 133A (Power of survey) of the Income Tax Act, 1961 (Act) at its project site. In the said survey, Department discovered incriminating material.

Pursuant to this, the appellant moved the Settlement Commission seeking settlement of its case. The Settlement Commission passed an order under Section 245(D) (1) (Procedure on receipt of an application for settlement of cases) of the Act allowing the case to proceed further. However, the Department objected to the offer of settlement of Rs. 34 lacs being offered as additional income and contended that there was no full disclosure of the material particulars.

It is imperative to mention that the appellant’s representative ultimately offered Rs.56 lacs as additional income. Accepting the said amount as additional income, the Settlement Commission passed its order. Thereafter, the respondent/ Department approached the High Court in its writ jurisdiction. The High Court observing that Settlement Commission had not passed a just and proper order, set aside its order. Thus, the assessee/ appellant preferred this present appeal.

Contentions of the Parties

Senior Advocate Ramesh P. Bhatt, appearing for the appellant, submitted that the additional amount of Rs.56 lacs was offered for taxation, and a settlement was arrived at on that basis, but the High Court has by setting aside the order of the Settlement Commission denied the benefit of settlement to the assessee.

However, Additional Solicitor General (ASG) Aishwarya Bhati, appearing for the respondent, contended that while accepting the additional amount of Rs.56 lacs, there was no complete determination of the income as such of the undisclosed income with accuracy.

Court’s Observations

At the outset, the Court observed that the High Court has, by setting aside the order of the Settlement Commission, denied the benefit of settlement to the assessee.

The Court also noted that initially, only Rs.34 lacs was offered as the disclosed income spread over three Assessment years. But, after the conduct of the survey and recovery of incriminating documents, Rs.56 lacs was offered as an additional income for taxation. Based on these circumstances, the Court acceded to the contention of the ASG and observed that there is no real determination of the undisclosed income.

At this stage, the Court pointed out that instead of setting aside the order of the Settlement Commission, the matter could have been remanded back to the Commission for re-determination of undisclosed income. The Court explained that this would have allowed the appellant/assessee to benefit from settlement, if any. It elucidated:

“Therefore, when the High Court set aside the order of the Settlement Commission, the matter had to be remanded to the Settlement Commission for re-consideration and re-determination of the undisclosed income, after giving an opportunity to both sides.”

Relying on the said principle, the Apex Court set aside the order of the High Court as well as the order of the Settlement Commission and remanded the matter to the Settlement Commission, which is now substituted by Interim Board for Settlement-V (IBS-V), Mumbai or Interim Board for Settlement – VI (IBS-VI), Mumbai.

Case Title: SHREE NILKANTH DEVELOPERS v. PRINCIPAL COMMISSIONER OF INCOME TAX

Citation : 2023 LiveLaw (SC) 648

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