Supreme Court in a recent judgment[1] has interpreted two provisions of IT Act, 1961 – Section 245C and section 245H – to reiterate the scope of jurisdiction and power of Settlement Commission and the necessary conditions that a taxpayer needs to satisfy to invoke its jurisdiction. The Supreme Court also underlined that the power of Settlement Commission to grant immunity to taxpayers should not be ordinarily interfered with by the High Courts.
Facts and Relevant Issues
The relevant facts of the case are that the appellant approached Settlement Commission under Section 245C, IT Act, 1961 for determination of its taxable income for assessment years 1994-95 to 1999-2000. The Revenue’s preliminary objection before the Settlement Commission was that the applicant did not fulfil the qualifying criteria under Section 245C since it did not make a full and true disclosure of income before the assessing officer. The Settlement Commission nonetheless assumed jurisdiction and passed an order which the Revenue challenged before the Karnataka High Court. A Single Judge of the High Court allowed the Settlement Commission to decide on all matters relating to maintainability of the application and its merits.
The Settlement Commission thereafter found the appellant’s application maintainable and granted immunity to the appellant in exercise of its powers under Section 245H, IT Act, 1961. Aggrieved by the Settlement Commission’s order the Revenue approached the Karnataka High Court again and a Single Judge Bench upheld the jurisdiction but found fault with the Settlement Commission’s order granting immunity and remanded the matter back. Against the said order, the appellant approached the Division Bench of the High Court which approved the order of the Single Judge. The two provisions in question: Section 245C and Section 245H were interpreted by the Division Bench of the High Court in the Revenue’s favor.
As per the Division Bench of the Karnataka High Court, Section 245C, IT Act, 1961 which governs filing of application before the Settlement Commission, the applicant’s application must contain full and true disclosure of his income. While the Settlement Commission under Section 245H, IT Act, 1961 can grant immunity from penalty if two conditions are satisfied: the applicant has co-operated with the Settlement Commission in the proceedings before it and the applicant had made a full and true disclosure of income and the way such income had been derived. The High Court reasoned that the two provisions need to be read harmoniously and not independent of each other and that Section 245C was ‘embedded’ in Section 245H.
The Revenue supported the Division Bench’s reasoning and judgment before the Supreme Court while the appellant assailed the said judgment inter alia on the ground that the assessing officer’s opinion is not final, Section 245C does not contemplate true and full disclosure before the assessing officer but before the Settlement Commission and that non-disclosure of income before the assessing officer cannot be a ground to prevent the Settlement Commission from exercising its jurisdiction and exercising its immunity granting powers under Section 245C and Section 245H of the IT Act, 1961 respectively.
Supreme Court Decides
The Supreme Court engaged with another argument made by the Revenue, i.e., the disclosure made by the appellant before the Settlement Commission must be ‘something apart’ from that discovered by the assessing officer. (para 7.1) As per the Revenue, the assessing officer ‘discovered’ additional income of the appellant through documents and other materials and not on the basis of income tax returns. And that the appellant’s disclosure of income while filing an application under Section 245C must be beyond the discovery of income already made by the assessing officer. The Supreme Court correctly rejected this laboured distinction between disclosure and discovery made by the Revenue and concluded that:
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. (para 7.2)
In stating so, the Supreme Court also noted that the appellant’s intent for approaching the Settlement Commission is to settle the dispute and not prolong litigation. And by making a full and complete disclosure of income not disclosed in the return of income, the appellant was trying to settle the case. In other words, the Revenue’s attempt to treat the application ineligible on the basis that income beyond discovery should be disclosed was not in serving the intent to resolve the dispute.
Conclusion
The Supreme Court’s conclusion was also influenced by the complexity of facts wherein the appellant in question – Kotak Mahindra Bank – had to make different disclosures to the Reserve Bank of India as per its guidelines, and it cited the Settlement Commission’s order to state that the latter had applied its mind to the facts of the case and thereafter decided to grant immunity under Section 245H, IT Act, 1961. It underlined the power of the Commission under Section 245H and stated 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 as contemplated under Section 245H of the Act. (para 9)
In stating the above, the Supreme Court reiterated that the power of Settlement Commission to grant immunity under Section 245H is determined as per facts and circumstances of each case and there is no universal formula for exercise of such power.
[1] Kotak Mahindra Bank Ltd v Commissioner of Income Tax, Bangalore and Anr TS-556-SC-223.