Apo v. Income Tax Settlement Commission (It&Wt) & Ors

Form No.(J2) IN THE HIGH COURT AT CALCUTTACIVIL APPELLATE JURISDICTIONIN APPEAL FROM AN ORDER PASSEDIN ITS CONSTITUTIONAL WRIT JURISDICTIONORIGINAL SIDE Present : A N D THE HON’BLE JUSTICE T.S. SIVAGNANAM THE HON’BLE JUSTICE HIRANMAY BHATTACHARYYA APO NO. 421 of 2017WP NO: 431 OF 2014M/s. SWAMINA INTERNATIONAL PRIVATE LIMITED & ANR.VS.INCOME TAX SETTLEMENT COMMISSION (IT&WT) & ORS. Mr. J. P. Khaitan, Sr. Adv.Ms. Anupa Banerjee, Adv.Mr. Sagnik Basu, Adv.Ms. Nidhi Bahal, Adv.Mr. Shivam Pathak, Adv.…For the Appellants Mr. P. K. Bhowmik, Adv.Mr. A. Bhowmick, Adv.…For the respondents Heard on : 09.12.2021 Judgment on : 09.12.2021 T.S. SIGAGNANAM, J. :This appeal is directed against theorder passed in a writ petition filed by the appellant in WP 431 of2014 dated 17[th] August 2017. The said writ petition was filedchallenging the order passed by the Settlement Commission under the provision of the Income Tax Act, 1961 (the Act in brevity). The writpetition has been dismissed and the order passed by the SettlementCommissioner has been affirmed. The appellant is aggrieved by thesaid order and urged before us by way of this appeal. The brief factual background would be necessary before weproceed to deal with the contentions raised before us by either side. The appellant is a company incorporated under the provisionsunder the Indian Companies Act during 1976 and engaged inbusiness of electrical maintenance and contract jobs, erection ofpower plants etc. The appellant company has undertaken job worksfor several public sector undertakings throughout the country. Theassessee approached the Settlement Commission on account ofdeficiencies in the final account which were filed and that return filedby the company did not reflect the true state of affairs, and, therefore,the application dated 31[st] May 2007 was filed under Section 243C ofthe Act. This application was allowed to be proceeded in terms ofSection 245D(2A) as the appellant had filed the same on 31[st] May,2007 and the additional tax and interest thereupon was paid before31[st] July 2007. The Settlement Commission took up the matter forconsideration and a report in terms of Rule 9 of the SettlementCommission Procedure Rules was filed on 7[th] February 2008 andtaking into consideration of the said report the Commission proceededto decide the matter. On going through the order passed by theCommission we find that the commission has referred acommunication sent by the assessing officer to the Commissioner of Income Tax dated 27/30[th] December 2013 and referred the same as areport which have been filed before the Commission on 15[th] January2014, the date on which the application was finally heard by theCommission. The assessee appears to have filed their objection /response to the said communication vide letters dated 14.2.2014 and24.2.2014 contending that the said communication dated 27/30[th]December, 2013 cannot be taken as a report, at best it can be only acommunication. Apart from that assessee had also raised certainissues on the merits of the matter which had been pointed out in thesaid communication. It may not be necessary for us at this junctureto go into the other factual details since the primary ground on whichthe writ petition came to be filed is on the ground that the orderpassed by the Settlement Commission violates provisions of the Actand causes prejudice to the appellant/assessee. The learned SingleJudge was of the view that the scope of the interference by a Courtexercising powers under Article 226 of the Constitution are clearlycircumscribed and disputed question of fact cannot be gone into andthe Settlement Commission had called for a report under Rule 9 of thesaid rules and considered the additions and there cannot be anyillegality in the said order for the Writ Court to intervene. Theappellant is aggrieved by the dismissal of the writ petition. Mr. J.P. Khaitan, learned Senior Counsel appearing for theappellant submitted that gross procedural irregularity has beencommitted by the Commission, and the provisions of the Act has beenviolated thereby putting the assessee to a great prejudice. It is submitted that the addition of Rs.6.97 crore to the income of theassessee for the assessment year 2001-2002 was made contrary to theprovisions of the Act and without considering or dealing with anysubmission made by the assessee on facts as well as on law. Furtherthe learned Single Bench committed an error in holding that theappellant’s case was a report under Rule 9 should have been called forin respect of the said sum of Rs.6.97 crore when such was never thecase of the appellant. Further it is submitted that the sum of Rs.6.97crore was not referred to any report of the Principal Commissioner orCommissioner under Sub Section 2B or sub Section 3 of Section 245Dand as such could not be added as income in the order passed undersub Section 4 of Section 245D. Further, it is submitted that if thecommission was desirous of passing an order by settling the caseunder Section 245, it should have ordered for an investigation undersub Section 3 and call for a report from the commissioner in respect ofthe sum of Rs.6.97 crores, should afford an opportunity to theassessee to deal with such report and make submissions and suchprocedure was not followed by the Commission. Further, it issubmitted that the assessee’s consistent case was that the said sumof Rs.6.97 crores was a balance sheet item and was not a mattercovered by the Settlement Commission in respect of which assesseehad offered itself to be assessed and mere mentioning of the statementof fact about the treatment of the said Act in the revised amount filedby the assessee before the Commission did not make a matter coveredby the application for settlement. Further it is submitted that the learned Writ Court ought not tohave seen that the assessee had stated before the Commission thatthe said advances of Rs.6.97 crore has become time barred. It wasfactually incorrect and has also made factual and legal submissions inrespect of such submission and to demonstrate that the saidadvances unilaterally transferred to reserve and surplus on March 31,2000 had no tax implication for the assessee. Further thecommunication sent by the assessing officer dated 27/30[th] December,2013 was an internal communication between the assessing officerand the Commissioner of Income Tax with regard to the issues onwhich investigation under Section 245(3) of the Act should have beensought for by the revenue before the Commission and, therefore, thesaid communication dated 27/30[th] December, 2013 is not a reportcalled for by the Commission. Further it is contended that the orderpassed by the commission is a non speaking order, without havingdue regard to the submissions made by the assessee more particularlythe objections which they have filed to the Rule 9 report itself apartfrom not considering the response filed by the appellant/assessee tothe communication sent by the assessing officer dated 27/30[th]December 2013. It is further submitted that the SettlementCommission had not taken into account the relevant fact that theassessed net profit rate in the assessee’s case for the assessment year2003-04 after examination of its books of accounts was 2.93% and assuch the company’s offer on the basis of six years average rate was3.69 per cent which should have been accepted rather than to fix an ad hoc percentage of 8% which was adopted by the assessing officerfor the assessment year 2001-02 which assessment is a subjectmatter of appeal before the Commissioner of Income Tax (Appeals).Further it is submitted that the Commission has not given anyindependent reasons as to why the rate offered by the assessee at3.69% was not acceptable and this fact was also not considered by thelearned Single Bench. Further it is submitted that when the assesseehad pointed out serious illegality in the decision making process bythe Commission, the learned Writ Court ought not to have dismissedthe writ petition. With regard to the scope of interference of thisCourt under Article 226 of the Constitution of India against an orderof Settlement Commission reliance was placed on the decsision in thecase of Major Metals Ltd. Versus Union of India & Ors. [2013] 359 ITR450 (Bom). Mr. Bhowmick learned standing counsel appearing for therespondent has drawn our attention to the statement of fact asrecorded in the Settlement application dated 31[st] May, 2007 filedunder Section 245(C) of the Act. Further for completion of fact thelearned standing Counsel had referred to the report submitted underRule 9 dated 7[th] February, 2008 and the findings recorded by theCommission and contended that learned Writ Court after taking noteof the fact that the Commission had considered the materials as wellas the report and rendered a finding, rightly dismissing the writpetition finding that there is nothing to be interfered by a Writ Court.With the aforestated submission learned standing counsel sought tosustain the order passed in the writ petition. We have elaborately heard the learned Counsel for the parties,carefully considered the materials perused and referred to. First, weneed to take note of the legal position of the scope of this Court underArticle 226 of the Constitution to interfere with the orders passed bythe Settlement Commission. This issue is no longer a res integra andone of the decisions in the case of Jyotendrasinhji Vs. S.I. Tripathireported in [1993] Vol 201 ITR 611 (SC), wherein the Hon’ble SupremeCourt emphasized that the only ground upon which an order passedby the Settlement Commission can be interfered with is that the orderof the Commission is contrary to the provisions of the Act and thatsuch contravention has prejudiced the assessee. That apart the otherground should be that of bias, fraud or malice. In the said decision the Hon’ble Supreme Court referred to thedecision in R.B. Shreeram Durga Prasad & Fatechand Nursingh DasVs. Settlement Commission (IT and WT) reported in [1989] 176 ITR 169(SC) wherein it was observed that Court should be concerned with thelegality of procedure followed and not with the validity of the orderand that the judicial review is concerned not with the decision but thedecision making process. Thus it was held that the power exercised bythe Court while examining the correctness of the order of theSettlement Commission cannot be equated to an appellate power. In-Union of India Vs. IndSwift Laboratories Ltd. [2011] 40 VST 1(SC) theHon’ble Court held that an order passed by the SettlementCommission should be interfered with only if the said order is foundto be contrary to any provisions of the Act and so far as the findings of fact recorded by the Commission or question of facts are concernedthe same is not open for examination either by the High Court or bythe Supreme Court. In N. Krishnan Vs. Settlement Commission[1989] 180 (ITR) 585 (Karn) it was held that the SettlementCommission may be interfered broadly under two circumstancesfirstly if there is a gross procedural defect such as the violation of themandatory of procedural requirements of the provisions of ChapterXIX and/or violation of the principles of natural justice and secondlythere is no nexus between the reasons given and the decision taken bythe Settlement Commission. It was pointed out that the Court underArticle 226 would not interfere with an error of fact alleged to havebeen committed by the Settlement Commission. Those decisionswere noted in Major Metals Ltd.(supra). By keeping the above legalprinciples in mind if we examine the order passed by the SettlementCommission we have no hesitation to hold that the order violates theprovisions of the Act and causes grave prejudice to theappellant/assessee. We support such conclusions with the followingreasons; In terms of Section 245D(3) of the Act, the SettlementCommission may call for the records from the Principal Commissioneror Commissioner and after examination of such records, if theSettlement Commission is of the opinion that any further enquiry orinvestigation in the matter is necessary, it may direct the PrincipalCommissioner or Commissioner to make or caused to be made suchfurther enquiry of or investigation and furnish a report on the matters covered by the application and any other matter relating to the caseand the Principal Commissioner or the Commissioner shall furnish areport within a period of 90 days of the receipt of the communicationfrom the Settlement Commissioner. In terms of the above provisionthe Commission is empowered to not only consider the matter whichis covered by an application by directing further enquiry orinvestigation but also any other matter relating to the case. Thus ifthe commission is to venture into any other matter relating to the caseor in other words a matter not covered by the application then the prerequisite is an enquiry or investigation is required to be done.Thereafter on receipt of the report, the assessee/application is entitledfor an opportunity to be heard in terms of sub Section 4 of Section245D of the Act. The three issues namely the addition of aboutRs.6.97 crores, the rate of profit adopted by the Commission at 8%and the increase of the turnover are all matters which are not coveredin the application. Thus if the Commission had to venture into thisaspect merely because it was made as a statement of fact in theapplication or it was part of Rule 9 report, unless and until theprocedure which is stipulated under the Act has been followed such aconclusion or a finding could not have been rendered by theSettlement Commission more particularly when those issues did notform part of this application. In fact, we could very well elaborate onthe factual aspect in to the matter but we refrain from doing so aswhat we have called upon to decide is to whether there was an error inthe decision making process and we are not concerned about the decision. This procedural violation goes to the root of the matterrendering the order of the Commission wholly unsustainable inviolation of the provisions of the Act and causing grave prejudice tothe assessee. The consequence would be that the order has to betreated as an order in violation of principles of natural justice and to acertain extent beyond jurisdiction. Those are all grounds which arevery much available to a Court exercising jurisdiction under Article226 to interfere with the said order. One more aspect which we hadnoted is the observation made by the Commission in paragraph 7of itsorder dated 28[th] February, 2014. In the said paragraph theCommission records that they have heard the rival submissions andgone through the “latest report” of the CIT dated 27/30[th] December,2013 filed before the Commission on 15[th] January, 2014. To be notedthat 15[th] January, 2014 was the date on which the Commission heardthe application finally before reserving orders. More importantly whatis required to be seen is whether the communication dated 27/30[th]December, 2013 is a report which has to be construed as such interms of Section 245D(3). On a perusal of the said letter we find thatis not a report but is an internal communication sent by the assessingofficer to his Commissioner of Income Tax and on reading of thecommunication it is clear that the assessing officer has requested hiscommissioner to allow him to enquire and investigate the whole casethrough principals/beneficiaries and obtain correct picture of thebusiness activities and interest income and factual position of assetsof transparency and find out the income accurately. Further the assessing officer qualifies the communication by stating that thesubmission furnished is in the form of a report based on recordswithout cross-checking or verification. Furthermore, the assessing officer states that due to lack offairness on the part of the assessee in disclosing income, theSettlement Commissioner may reject the application. Thus byreading the said communication dated 27/30[th] December, 2013 it isclear that is not a report in terms of sub Section 3 of Section 245Dwhich mandates that Commission should direct the Commissioner tosubmit a report which has never been done by the Commissioner. Allthose which we have pointed out above would go to show that theorder passed by the Commissioner flows from serious illegality andirregularity calling for interference. That apart the alleged report dated27[th] December, 2013 as admittedly been filed only on 15th January,2014, the date on which the application was finally been heard by theCommission and orders were reserved. The assesee had stated that on14[th] February 2014 and 24[th] February, 2014 they have filed theirobjection to the said letter which has not been dealt with by theCommission not even referred to by the Commission. Thus we cansafely hold that there has been serious violation of principles ofnatural justice. On all the above grounds we are fully satisfied thatthe order passed by the Commission calls for interference andconsequently we are required to interfere with the order passed by thelearned Single Judge dismissing the writ petition. In the result, the appeal is allowed. The order passed in the writpetition is set aside and the order passed by the SettlementCommission is quashed and the assessment is relegated back to theassessing officer to get assessment in accordance with law aftereffective opportunity to the assessee and not being influenced in anyof the these observations made in any of the letters and in any of thereports and any observation made by the Settlement Commissionwhich order has been set aside by this Judgment. (T.S. SIVAGNANAM, J.) I agree. (HIRANMAY BHATTACHARYYA,J.) GH/A Dey