Research › Search › Judgment

Kerala High Court · body

2024 DIGILAW 232 (KER)

Thomas Philip v. Interim Board For Settlement-II

2024-02-21

DINESH KUMAR SINGH

body2024
JUDGMENT : DINESH KUMAR SINGH, J. 1. The present writ petition has been filed by the petitioner, who is the Managing Director of M/s Delta Aggregators and Sand Pvt. Ltd. with 70% shareholding and M/s Delta Msand Pvt. Ltd. with 70% shareholding impugning the Order passed by the Settlement Commission dated 22.12.2023 in Ext.P8 in respect of the Assessment Years 2012-13 to 2018-19. 2. A search and seizure action under Section 132 of the Income Tax Act 1961 (for short, ‘the Act’) was carried out on 13.10.2017 at several premises of the Delta Group and the petitioner’s residence. Consequent to the search, notices under Section 153A were issued on 07.06.2018 to the aforesaid two companies as well as to the petitioner for the Assessment Years 2012-13 to 2017-18. Notice under Section 143(2) was issued on 23.09.2019 for the Assessment Year 2018-19. 2.1 The petitioner had filed Settlement Applications twice, i.e. on 26.12.2019 and 02.03.2020, respectively, before the Settlement Commission. However, the same was rejected on account of the failure of the petitioner to satisfy the criteria prescribed under Section 245(1) of the Act. Thereafter, the petitioner filed another application for the third time on 26.02.2021. Consequent to the abolition of the Settlement Commission with effect from 01.02.2021, the petitioner's application was dealt with by the Interim Board for Settlement. The petitioner, in his application dated 26.02.2021 in SA No. KL/KO51/2020-21/40-IT, admitted an undisclosed income of Rs.44,00,000/- towards remuneration earned outside the banking channels for the Assessment Years 2013- 14 to 2018-19. 3. The Principal Commissioner of Income Tax (Central), Kochi, submitted a report under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules on the Settlement Application of the petitioner. In the report, it was opined that the petitioner had not disclosed the additional income before the Income Tax Settlement Commission to the extent of Rs.10,52,32,443/- from the Assessment Years 2012-13 to 2018-19. 3.1 The petitioner filed a detailed objection to the said Report under Rule 9A in Ext.P6. After hearing the petitioner, the Interim Board for Settlement-II, New Delhi, has passed the impugned order. As there was no search operation in respect of the Assessment Year 2012-13, the undisclosed income for the said year was not considered. 3.1 The petitioner filed a detailed objection to the said Report under Rule 9A in Ext.P6. After hearing the petitioner, the Interim Board for Settlement-II, New Delhi, has passed the impugned order. As there was no search operation in respect of the Assessment Year 2012-13, the undisclosed income for the said year was not considered. In respect of the undisclosed income offered during the course of survey proceedings for the Assessment Years 2013-14 to 2018-19, as in respect of unaccounted remuneration, it was opinioned that in all the aforesaid Assessment Years, the petitioner had offered the unaccounted remuneration as additional income and therefore, no adverse view was warranted. In respect of the undisclosed income offered during the course of survey proceedings in Assessment Years 2013-14, 2015-16 and 2016- 17, the Interim Board for Settlement held that Rs.25,00,000/- remuneration received by the petitioner in the Assessment Year 2013-14 is included in the total income of Rs.44,00,000/-. Therefore, no adverse view on the same can be taken. 3.2 The petitioner had offered a sum of Rs.1,25,00,000/- , and for that sum, the Assessing Officer, in his factual report dated 18.11.2023, has merely objected that no evidence like sales ledger/cash book has been produced to show that the same is earned by way of unaccounted sales. The fact that the petitioner has offered this sum of Rs.1,25,00,000/- as unaccounted sales is not in dispute. As the petitioner had duly offered the sum of Rs.1.25 crores, the same is not required to be added again. As the petitioner has added a sum of Rs.1,75,00,000/- during the course of the survey, which has been paid from the admitted remuneration of Rs.5.6 crores, the same cannot be added again in the hands of the Company. 3.3 The petitioner is a majority shareholder in M/s Delta M Sand Pvt. Ltd. with a 99.65% stake and M/s Delta Aggregates and Sand Pvt. Ltd. with a 70% stake. He is also the Managing Director of M/s Metro Aggregates and Sand India Pvt. Ltd, holding 23% of the share. The petitioner, while holding stakes in the aforesaid three companies, had availed a loan of Rs.1,62,88,442/- for the Financial Year relevant to the Assessment Year 2014-15 from M/s Delta Aggregates and Sand Pvt. Ltd. in which he had 70% share and 10% voting rights. The petitioner, while holding stakes in the aforesaid three companies, had availed a loan of Rs.1,62,88,442/- for the Financial Year relevant to the Assessment Year 2014-15 from M/s Delta Aggregates and Sand Pvt. Ltd. in which he had 70% share and 10% voting rights. In the same Financial Year, the petitioner received Rs.1,20,00,000/- as a loan from M/s Metro Aggregates and Sand India Pvt. Ltd, in which he is a 23% shareholder and held more than 10% of the voting right. During the Financial Year relevant to the Assessment Year 2018-19, the petitioner availed a loan of Rs.11,54,10,055/- from M/s Delta M Sand Pvt. Ltd. in which he was a 70% shareholder and held more than 10% of the voting right. The Interim Board for Settlement, after considering the reply and submissions of the petitioner, had made an addition of Rs.4,86,77,012/- as deemed dividend under Section 2(22)(e) for the Assessment Year 2014-15 and 2018-19. 4. The learned Counsel for the petitioner has submitted that no material/documents which were not seized during the search operation could have been relied on by the Settlement Commission. The Settlement Commission ought to have considered only those documents and materials which were seized during the search operation, and therefore, making additions under Section 2(22)(e) of the Act for the Assessment Year 2014-15 and 2018-19 are only without jurisdiction and the impugned order passed by the Settlement Commission is void to that extent. 4.1 Learned Counsel for the petitioner further submits that the assessment under Section 143(3) was completed for the Assessment Year 2013-14 and 2014-15 on 24.03.2016 and 29.12.2016 respectively, wherein no additions were made in respect of the issue/facts in the report under Rule 9 submitted by the Principal Commissioner of Income Tax. It is, therefore, submitted that no additions with respect to the aforesaid Assessment Years could have been made in the hands of the petitioner while deciding the Settlement Application of the petitioner. 4.2 It is further submitted that additions made under Section 2(22)(e) of the Act for the Assessment Years 2014-15 and 2018-19 are not borne out of the incriminating materials found during the search. They are neither arising out of the undisclosed income disclosed voluntarily by the petitioner in his Settlement Application. 4.2 It is further submitted that additions made under Section 2(22)(e) of the Act for the Assessment Years 2014-15 and 2018-19 are not borne out of the incriminating materials found during the search. They are neither arising out of the undisclosed income disclosed voluntarily by the petitioner in his Settlement Application. It is further submitted that the petitioner had obtained loans towards the business exigencies, and the same ought not to have been added as deemed dividend, inasmuch as the assessment was already completed under Section 143(3) based on the entries in the books of accounts. Therefore, it is submitted that the additions are wholly unjustified, and, to that extent, this Court should delete the additions. 4.3 Learned Counsel for the petitioner also submits that the Interim Board had not dealt with the petitioner's objections for Settlement regarding the additions made under Section 2(22)(e). It was incumbent upon the Settlement Commission to have considered the objection, given the findings, which are not reflected in the impugned order. Therefore, the impugned order is bad in law and liable to be set aside. 5. Learned Counsel for the petitioner has placed reliance on the judgment of the Supreme Court in Principal Commissioner of Income Tax vs. Abhisar Buildwell (P) Ltd. (2023) 149 Taxmann.com 399 (SC) in support of his submission that no addition can be made in respect of the completed assessment in the absence of any incriminating material found during the course of the search under Section 132 or requisition under Section 132A. 5.1 The said judgment has been rendered in respect of block assessment under Section 153A and not in respect of the settlement proceedings before the Settlement Commission/Interim Settlement Board. In paragraph 14 of the said judgment, the Supreme Court has concluded as under: “14. In view of the above and for the reasons stated above, it is concluded as under: (i) that in case of search under Section 132 or requisition under Section 132A, the AO assumes the jurisdiction for block assessment under section 153A. (ii) all pending assessments/reassessments shall stand abated. (iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns. (ii) all pending assessments/reassessments shall stand abated. (iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns. (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under Sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved. The question involved in the present set of appeals and review petition is answered accordingly in terms of the above and the appeals and review petition preferred by the Revenue are hereby dismissed. No costs.” Therefore, I am of the considered view that the said judgment has no applicability to the facts of the present case. 5.2 Learned Counsel for the petitioner has also placed reliance on the judgment of the Delhi High Court in Commissioner of Income Tax vs. Creative Dyeing and Printing (P) Ltd. (2009) 184 Taxman 483 (Delhi) in support of his contention that the loan advances taken for business transactions between the parties would not fall within the definition of ‘deemed dividend’ under Section 2(22)(e) and therefore, the additions of the loan advances as business income is against the law. 5.3 Learned Counsel for the petitioner also submits that the Settlement Commission/Interim Board for Settlement would be required to pass orders in accordance with the provisions of the Act, and no other material which was not found during the search and seizure operation could have been considered by the Settlement Commission/Interim Board for Settlement. As the order is not as per the provisions of the Act, the same is liable to the set-aside. As the order is not as per the provisions of the Act, the same is liable to the set-aside. Learned Counsel for the petitioner in support of this submission has placed reliance on the judgment in the case of R. Chitra vs. Vice Chairman, Income Tax Settlement Commission, (2020) 120 Taxmann.com 49 (Madras). 6. On the other hand, Ms Susie Varghese, learned Senior Standing Counsel for the Income Tax Department submitted that the Order of the Interim Board for Settlement passed under sub-section (4) of Section 245D of the Act is conclusive as to the matters stated therein, and no matter covered by such order shall, save as otherwise provided, be re- opened in any proceedings. When the order is conclusive and final, there is no scope for interference by this Court in exercising its jurisdiction under Article 226 or 227 of the Constitution of India. 6.1 Furthermore, Ms Susie Varghese, learned Senior Standing Counsel, has submitted that the petitioner is a majority shareholder in two companies, i.e. M/s Delta M Sand Pvt. Ltd. with a 99.65% stake and M/s Delta Aggregates and Sand Pvt. Ltd. with 70% stake. He also holds 23% of the shares in M/s Metro Aggregates and Sand India Pvt. Ltd. with 10% voting rights. The petitioner has drawn loans from these companies for the Financial Year relevant to the Assessment Years 2014-15 and 2018-19. The petitioner did not produce any evidence/books of accounts regarding these loans obtained from the Companies except for the Board Resolution. In respect of the Assessment Year 2013-14, where the petitioner produced the relevant documents, the loan amount has not been treated as a ‘deemed dividend’ under Section 2(22)(e) of the Act. However, in respect of the Assessment Year 2014-15 and 2018-19, no evidence of the loan having been utilized for any business purposes was produced, and therefore, the same was considered as a ‘deemed dividend’ under the purview of the conditions stipulated in Section 2(22)(e) of the Act. It is further submitted that the impugned order is strictly in accordance with the provisions of the Act. The Settlement Commission can consider any other material and evidence that may be brought before it for deciding the Settlement Application and not bound by the materials discovered during the search operation. It is further submitted that the impugned order is strictly in accordance with the provisions of the Act. The Settlement Commission can consider any other material and evidence that may be brought before it for deciding the Settlement Application and not bound by the materials discovered during the search operation. 6.2 It is also submitted that incriminating materials were unearthed during the search for the relevant assessment years for which the additions have been made. It is submitted that under the special provisions of the settlement, once an application is made before the Settlement Commission, the undisclosed income for the concerned years is to be settled. The settlement scheme puts a quietus to all issues to avoid prolonged litigation. It is also submitted that there is no legal provision that specifically bars the Commission/Board while passing an order under Section 245D(4) of the Act not to consider any material in addition to the incriminating material found during the search operation. 6.3 The Settlement Commission is required to ensure that fair and true disclosure of income for all the years covered under the application has been made, irrespective of whether there is any incriminating material or not for all the years covered under the application. The Settlement Commission is also empowered to revisit completed assessments even in the absence of incriminating materials. It is for the applicant to make full and true disclosure of income in the application which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, and the additional income on which tax would be payable. It is, therefore, submitted that the writ petition may be dismissed. 7. I have heard the submissions on both sides. 8. Under the scheme of Chapter XIX A of the Act the proceedings before the Settlement Commission commence by an application made by the assessee as contemplated by Section 245C. Section 245D prescribes the procedure to be followed by the Commission on receipt of an application under Section 245C. The particulars which need to be disclosed in the application under Section 245C are provided. Section 245D prescribes the procedure to be followed by the Commission on receipt of an application under Section 245C. The particulars which need to be disclosed in the application under Section 245C are provided. Sub-Section (4) of Section 245D provides: “after examination of the records and the report of the Principal Commissioner or Commissioner, if any, received under – (i) sub-section (2B) or sub-section 3, or (ii) the provisions of sub-section (1) as they stood immediately before their amendment by the Finance Act, 2007, and after giving an opportunity to the applicant and to the Principal Commissioner or Commissioner to be heard, either in person or through a representative duly authorized in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of Principal Commissioner or Commissioner.” (Emphasis supplied) 8.1 Section 245E empowers the Commission to re-open the completed proceedings in appropriate cases, while 245F confers all the powers of an Income Tax authority upon the Commission. Section 245H empowers the Commission to grant immunity from penalty and prosecution, with or without conditions, in cases where it is satisfied that the assessee has fully disclosed his income and its sources. 8.2 Where a proceeding before the Settlement Commission abates, the Assessing Officer or any other Income Tax Authority before whom the proceedings at the time of making the application were pending are required to dispose of the case in accordance with the provisions of the Act as if no application under Section 245C has been made. Section 245-I declares that every order of settlement passed under Sub-Section (4) of Section 245D shall be conclusive as to the matter stated therein and no matter covered by such order shall, save as otherwise provided in Chapter XIXA be reopened in any proceedings under the Act or under any other law for the time being in force. Section 245L declares that any proceedings under Chapter XIXA before the Settlement Commission shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purposes of Section 196 of the Indian Penal Code. Section 245L declares that any proceedings under Chapter XIXA before the Settlement Commission shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for the purposes of Section 196 of the Indian Penal Code. 8.3 Under the scheme of Chapter XIXA the Settlement Commission is not a regular Tribunal. Its function is different from quasi-judicial authorities created by the Income Tax Act. Where an assessee makes an offer of settlement, the Commission either accepts it or rejects it subject to such conditions and terms as it deems appropriate to impose in that behalf. Settlement means a sort of composition. The Commission is not required to give detailed reasoning in its order. It is also well settled that even if the Commission decides any principles, they do not bind the Income Tax authorities in relating to the subsequent years. The Order of the Commission is relevant and confined only to the assessment years to which it relates. 9. Whether the jurisdiction of the High Court under Article 226 of the Constitution of India or the jurisdiction of the Supreme Court under Article 32 or Article 136 is barred in view of the finality clause contained in Section 245-I of the Act in respect of the Orders passed under sub-clause (4) of Section 245D of the Act by the Settlement Commission, was for consideration before the Supreme Court in the case of Jyotendrasinhji vs. S.I. Tripathi, AIR 1993 SC 1991 . In the aforesaid judgment, it has been held that the finality clause contained in Section 245-I does not and cannot bar the jurisdiction of the High Court or the Supreme Court under Articles 226, 32 and 136, as the case may be. Therefore, the submission of Ms Sussie Varghese learned Senior Standing Counsel that in view of the language employed in Section 245-I the writ petition is not maintainable, is liable to be rejected. 10. The Order of the Commission is in the nature of a package deal. An assessee cannot be permitted to accept what is favourable to him and reject what is not. The scope of enquiry by the High Court or Supreme Court is limited, i.e. whether the Order of the Commission is contrary to any of the provisions of the Act and, if so, has it prejudiced the applicant apart from the grounds of bias, fraud, or malice? The scope of enquiry by the High Court or Supreme Court is limited, i.e. whether the Order of the Commission is contrary to any of the provisions of the Act and, if so, has it prejudiced the applicant apart from the grounds of bias, fraud, or malice? 10.1 From the provisions of Chapter XIXA, it is clear that once the Settlement Commission admits a case for consideration, it shall have exclusive jurisdiction to exercise all powers of regular authorities under the Act to effect a settlement and recover tax penalty and interest. Once the Settlement Commission formally allows the application to be considered for “settlement” the regular assessment proceedings and recoveries initiated for tax penalty or interest pursuant thereto shall become subject to the powers of the Commission and not prior to the same. The Commission’s power of settlement has to be exercised in accordance with the provisions of the Act. However, the Commission has sufficient elbow room to assess the applicant's income. The Settlement Commission cannot make an order which would conflict with the mandatory provisions of the Act like in the quantum and payment of tax and interest, as is held in Commissioner of Income Tax vs. Hindustan Bulk Carriers, (2003) 3 SCC 57. 10.2 Therefore, what is contemplated under clause (4) of Section 245D is that the Commission has to pass the order in accordance with the provisions of the Act, but the Commission is not precluded from considering the other evidence and material which was not before the Assessing Officer if same is brought before the Commissioner to determine the true and correct undisclosed income of the applicant and this is amply clear from the language employed in sub-section (4) of Section 245D of the Act. Therefore, I find no substance in the submission of the learned Counsel for the petitioner that the Commission was barred from considering the material evidence which was not discovered during the search and seizure operation. 11. The settlement procedure commenced by filing the application by the assessee under Section 245C. The statutory mandate to the assessee is that the application shall contain “full and true disclosure” of the income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the source of income, etc. 11. The settlement procedure commenced by filing the application by the assessee under Section 245C. The statutory mandate to the assessee is that the application shall contain “full and true disclosure” of the income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the source of income, etc. 11.1 The jurisdiction of the Settlement Commission commences after it passes an order under Section 245D(1) admitting the case. The Order under Section 245D(4) is not an order of regular assessment. It is neither an order under Section 143(1) or Section 143(3) or Section 144. Under Sections 139 to 158, the process of assessment involves the filing of the return under Section 139 or under Section 142; inquiry by the Assessing Officer under Sections 142 and 143 and making of the order of assessment by the Assessing Officer under Section 143(3) or Section 144 and issuing of a notice of demand under Section 156 on the basis of the assessment order. No such steps are required to be followed in the case of the proceedings under Chapter XIXA. The said Chapter is a complete code in itself. Under this Chapter, taxability is determined by the Commission with respect to the undisclosed income only through the process of settlement/arbitration. [Brij Lal vs. Commissioner of Income Tax] 11.1.1 Paragraph 23 of the said judgment is extracted hereunder: “23. Descriptively, it can be stated that assessment in law is different from assessment by way of settlement. If one reads Section 245-D(6) with Section 245-I, it becomes clear that every order of settlement passed under Section 245-D(4) shall be final and conclusive as to the matters contained therein and that the same shall not be reopened except in the case of fraud and misrepresentation. Under Section 245-F(1), in addition to the powers conferred on the Settlement Commission under Chapter XIX-A, it shall also have all the powers which are vested in the Income Tax Authority under the Act. In this connection, however, we need to keep in mind the difference between “procedure for assessment” under Chapter XIV and “procedure for settlement” under Chapter XIX-A (see Section 245-D). In this connection, however, we need to keep in mind the difference between “procedure for assessment” under Chapter XIV and “procedure for settlement” under Chapter XIX-A (see Section 245-D). Under Section 245-F(4), it is clarified that nothing in Chapter XIX-A shall affect the operation of any other provision of the Act requiring the applicant to pay tax on the basis of self-assessment in relation to matters before the Settlement Commission.” 11.2 As mentioned above, the full and true particulars and disclosure of undisclosed income and the manner in which such income had been derived are the prerequisites for valid application under Section 245C(1) of the Act. From the plain reading of section 245D(4) of the Act, the jurisdiction of the Settlement Commission to pass such orders as it may think fit is confined to the matters covered by the application. It can extend to such matters which are referred to in the report of the Commissioner of Income Tax under Section 245D(1) or Section 245D(3). A full and true disclosure of the income which has not been previously disclosed by the assessee, being a precondition for a valid application under Section 245C(1) of the Act, the scheme of Chapter XIXA does not contemplate non-revision of the income so disclosed in the application against item no. 11 of the Form. It is well settled that under the power of judicial review of the High Court, the High Court cannot interfere with the finding of facts recorded by the Settlement Commission. 12. Section 2(22)(e) provides that where any payment by a company, not being a company in which the public is substantially interested, of any sum made after the 31st day of May 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not less than ten per cent of the voting rights would be the dividend for the purposes of taxing the loan under the Act. Section 2(22)(e) reads as under: “(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.” 13. The conditions as contemplated in Section 2(22)(e) are fully satisfied in the present case. The petitioner has allegedly obtained loans from Companies where he has majority shares and more than 10% voting rights. The petitioner has a substantial interest as the beneficial owner of majority shares in the Companies. Therefore, unless the petitioner could prove by leading cogent and credible evidence before the Commission that the loan he obtained was for business purposes, the said loan amount is to be treated as a deemed dividend in the hands of the petitioner. Except for one year, the petitioner has not been able to prove that the said advances/loan were given in the ordinary course of business. The Commission, after examining the record, has disallowed the claim of the petitioner in respect of two years, and this Court finds no ground to interfere with such a finding. 14. In view thereof, I do not find much substance in the writ petition, which is hereby dismissed.