Supreme Court: In Respect of Undisclosed Income Settlement Commission Must Follow Due Procedure under Section 245 of Income Tax Act

Supreme Court: In Respect of Undisclosed Income Settlement Commission Must Follow Due Procedure under Section 245 of Income Tax Act

The Supreme Court by its division judges bench comprising of Justices M.R. Shah and C.T. Ravikumar while setting aside the order passed by the High Court, observed that Settlement Commission with respect to cases concerning undisclosed income must adjudicate in accordance with law and on merits after following due procedure as required under Section 245D(4) of the Income Tax Act, 1961.

The brief background of the case is that a search was conducted under Section 132 on the business premises as well as the residence of the partners and notices under Section 153A were issued to all the taxpayers.

The return of income was filed by the appellants under Section 153A of the Act for the aforesaid Assessment Years. An application under Section 245C(1) of the Income Tax Act, 1961 (for short- the Act) was filed by the appellants before the Income Tax Settlement Commission (for short “the Settlement Commission”).

It was submitted that as per Section 245HA, inserted by the Finance Act, 2007, the application was to be decided by the Settlement Commission on or before 31 March, 2008, failing which the proceedings before the Settlement Commission shall stand abated.

The High Court, by way of an interim order, directed the Settlement Commission to dispose of the application under Section 245D of the Act by 31 March, 2008.

By an order dated 31 March, 2008, the Settlement Commission disposed of the proceedings and settled the undisclosed income at Rs. 59,00,000. The Settlement Commission also passed an order that the Commissioner of Income Tax (CIT)/Assessing Officer (AO) may take such action as appropriate in respect of the matters, not placed before the Commission by the applicant, as per the provisions of Section 245F(4) of the Act.

Thereafter, in the light of observations made by the Settlement Commission, the AO issued the show cause notice for re-assessment on various transactions which are detected but were not disclosed by the appellants before the Settlement Commission. However, when the said show cause notice was subject-matter of writ before the High Court, the AO passed assessment order. When this was challenged before the High Court by way of an amendment, the Division Bench of the High Court dismissed the petition on the ground that the order passed by Settlement Commission was a nullity as the Settlement Commission itself observed that it was not practicable for the Commission to examine the records and investigate the case for proper Settlement and even giving adequate opportunity to the applicant and the Department, as laid down in Section 245D(4) was not practicable.

The Supreme court noted that, as such, the Settlement Commission specifically observed that it is not practicable for the Commission to examine the records and investigate the case for proper Settlement and that even giving adequate opportunity to the applicant and the Department, as laid down in section 245D(4) is not practicable.

However, the Apex Court noted that, the Settlement Commission passed an order to comply with the directions of the High Court to dispose of the application on or before 31 March, 2008. The Apex Court remarked that the High Court in fact ought to have remitted the matter back to the Settlement Commission to pass a fresh order in accordance with law and on merits after following due procedure as required under Section 245D(4) of the Act.

Accordingly, the Bench aside both the impugned judgment and order passed by the High Court and the subsequent assessment/re-assessment order passed by the AO, which was the subject-matter of writ petition before the High Court.

It also set aside the order passed by the Settlement Commission dated 31 March, 2008 and remanded the matter to the Settlement Commission for a fresh decision.

The Court was further informed that the Settlement Commission has been wound up and the matters pending before the Settlement Commission are being adjudicated and decided by the interim Board constituted under Section 245AA of the Act.

In this regard the bench observed that, “the matter is remitted to the Settlement Commission/interim Board for a fresh decision in accordance with law and on its own merits and after following due procedure as required under Section 245 of the Act. It will be open for the interim Board to call for a fresh report under Rule 9 and thereafter to pass the final order on the application, after following due procedure as required under Section 245D(4) of the Act.”

AOR Pawanshree Agrawal appeared for the Appellant and ASG Balbir Singh along with Senior Advocate Arijit Prasad and AOR Raj Bahadur Yadav appeared for the Respondent.