Material Disclosed To Income Tax Settlement Commission Needn't Be Something Which Wasn't Discovered By Assessing Officer : Supreme Court

The Supreme Court has ruled that Section 245H of the Income Tax Act, 1961, which empowers the Settlement Commission to grant immunity from prosecution and penalty to the assessee if he has co-operated with the Settlement Commission and has made “full and true disclosure of his income”, cannot be saddled with an artificial requirement that the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer.

The bench of Justices B.V. Nagarathna and Ujjal Bhuyan made the observation while setting aside the Karnataka High Court’s order, where the High Court had set aside the order of the Settlement Commission granting immunity to the assessee, Kotak Mahindra Bank, from levy of penalty and initiation of prosecution, and had remanded the matter to the Commission for reconsidering the issue of immunity.

The top court said that the High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty under Section 245H of the Act.

The court also expressed that frequent interference with the orders or proceedings of the Settlement Commission should be avoided, holding that the High Court should not scrutinize an order or proceeding of a Settlement Commission as an appellate court.

“Unsettling reasoned orders of the Settlement Commission may erode the confidence of the bonafide assessees, thereby leading to multiplicity of litigation where settlement is possible. This larger picture has to be borne in mind,” the court said.

The bench remarked that the Supreme Court has carved out a very narrow scope for judicial review of the Commission’s orders passed in exercise of its discretionary powers. The court said that except on the ground that the order of the Settlement Commission contravenes provisions of the Income Tax Act or has caused prejudice to the opposite party, or on the ground that the order is vitiated by fraud, bias or malice, the court-while exercising powers under Articles 32, 226 or 136 of the Constitution of India- cannot interfere with an order of the Commission which is passed in exercise of its discretionary powers.

Brief Facts:

A notice under Section 148 of the Income Tax Act was issued against Kotak Mahindra Bank in 2000, for reassessment of income for the relevant assessment years. The Assessing Officer also passed a penalty order levying a penalty under Section 271 (1)(c) after being satisfied that the bank had concealed its income.

During the pendency of the appeal against the assessment order and the re-assessment proceedings, Kotak Mahindra approached the Settlement Commission to settle its income tax liabilities under Section 245C (1) of the Act.

The Settlement Commission, while upholding the maintainability of the application filed by the assessee-bank, passed an order dated 04.03.2008 under Sections 245D(1) and 245D(4), determining the additional income of the bank. The Commission also granted immunity under Section 245H(1) from imposition of penalty and prosecution under the Income Tax Act and the relevant sections of the Indian Penal Code. The Settlement Commission further annulled the penalty levied by the Assessing Officer under Section 271(1)(c) for the relevant assessment year in respect of non-disclosure of lease rental income by the assesee-bank.

The Revenue Department challenged the order dated 04.03.2008 by filing a writ petition before the Karnataka High Court. While the Single Judge upheld the order of the Settlement Commission with respect to its jurisdiction to entertain the application as well as the tax liability determined by it, the court set aside the order granting immunity to the assessee-bank from levy of penalty and initiation of prosecution. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles.

The Single Judge ruled that the burden was on the assessee-bank to prove that there was no concealment of income or wilful neglect on its part, and in the absence of such evidence before the Settlement Commission, the order granting immunity from penalty and prosecution was an illegal order. The Single Judge, thus, remanded the matter to the Settlement Commission for reconsidering the issue of immunity from levy of penalty and prosecution, as well as the question of grant of immunity from the penalty levied by the order of the Assessing Officer.

Kotak Mahindra challenged the remand order before the Division Bench of the High Court, who upheld the order passed by the Single Judge. Against this, the assessee-bank filed an appeal before the Supreme Court.

Supreme Court’s Analysis:

The top court observed that under Section 245H(1) of the Act, if the Settlement Commission is satisfied that any assessee who makes the application for settlement under Section 245C, has co-operated with the Settlement Commission in the proceedings before it and has made a full and true disclosure of its income and the manner in which such income has been derived, the Commission may grant immunity from prosecution or from the imposition of penalty- either wholly or in part.

The court further noted, “While Section 245C provides that the disclosures as to income “not disclosed before the Assessing Officer” must accompany the application filed before the Settlement Commission, Section 245H provides that if the assessee has co-operated with the Settlement Commission and has made “full and true disclosure of his income”, the Settlement Commission may grant immunity from prosecution and penalty.”

It was the case of the Revenue Department that in the present case, what had been "disclosed" in the application by the assessee-bank was the same as what was "discovered" by the Assessing Officer and therefore, the application of the assessee ought not to have been entertained by the Commission. Further, immunity under Section 245H ought not to have been granted to the assessee, the department claimed.

In this regard, the court said that even if the pre-conditions prescribed under Section 245C are to be read into Section 245H, it cannot be said that in every case, the material “disclosed” by the assessee before the Commission must be something apart from what was discovered by the Assessing Officer. The bench added that what is relevant is that the assessee has offered to tax, income, in addition to the income recorded in the return of income.

“Section 245C read with Section 245H only contemplates full and true disclosure of income to be made before the Settlement Commission, regardless of the disclosures or discoveries made before/by the Assessing Officer,” the court said.

The bench added: “To say that in every case, the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer, in our view, seems to be an artificial requirement. In every case, there may not even be additional income to offer, apart from what has been discovered by the Assessing Officer.”

The court remarked that the object of Chapter-XIXA of the Act is to settle cases and to reduce the disputes, and not to prolong litigation. Therefore, instead of preferring an appeal against the assessment order, the assessee may, by making a ‘full and true disclosure’ of income, approach the Settlement Commission and offer to tax income other than that disclosed in the return of income.

The court observed that the Settlement Commission- after noting that the non-disclosure was on account of RBI guidelines which required a different standard of disclosure- had decided to grant immunity to the assessee from prosecution and penalty. The court concluded that the Settlement Commission had rightly considered the relevant facts and material while deciding to grant immunity to the assessee, adding that the findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the assessee or not.

Thus, the bench remarked that the Single Judge was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such view of the Single Judge, the court said.

The court thus set aside the order of the High Court, restoring the order of the Settlement Commission.

Case Title: KOTAK MAHINDRA BANK LIMITED vs COMMISSIONER OF INCOME TAX BANGALORE AND ANR

Citation : 2023 LiveLaw (SC) 822

Counsel for the Appellant: Mr. Shyam Divan, Sr. Adv. Mr. Rohan Shah, Adv. Mr. D. Bharat Kumar, Adv. Mr. Siddhartha Sinha, Adv. Mr. Aman Shukla, Adv. Mr. M. Chandrakanth Reddy, Adv. Ms. Anu Priya Nisha Minz, Adv. Mr. Abhijit Sengupta, AOR

Counsel for the Respondent: Mr. Balbir Singh, A.S.G. Mr. Raj Bahadur Yadav, AOR Mr. Shashank Bajpai, Adv. Mr. Samarvir Singh, Adv. Mr. Prashant Singh Ii, Adv. Mr. Shyam Gopal, Adv. Mr. Prahlad Singh, Adv.

Income Tax Act, 1961: Sections 245C, 245D, 245H, 271 (1)(c)

The Supreme Court has ruled that Section 245H of the Income Tax Act, 1961, which empowers the Settlement Commission to grant immunity from prosecution and penalty to the assessee if he has co-operated with the Settlement Commission and has made “full and true disclosure of his income”, cannot be saddled with an artificial requirement that the material “disclosed” by the assessee before the Commission must be something apart from what was “discovered” by the Assessing Officer.

Click Here To Read/Download Judgment