Wp(C)/24042/2022 Of M/S. Muthoot Fincorp Ltd v. Income Tax Settlement Commission

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR. JUSTICE GOPINATH P. MONDAY, THE 3RD DAY OF APRIL 2023 / 13TH CHAITHRA, 1945 PETITIONER: WP(C) NO. 24042 OF 2022 M/S. MUTHOOT FINCORP LTD.MUTHOOT CENTER, PUNNEN ROAD,TRIVANDRUMREPRESENTED BY ITS AUTHORIZED SIGNATORY SHRI. BINU RAMACHANDRAN, PIN - 695039BY ADVS.G.HARIKUMAR (GOPINATHAN NAIR)AKHIL SURESHANU BALAKRISHNAN NAMBIAR RESPONDENTS: 1INCOME TAX SETTLEMENT COMMISSIONADDITIONAL BENCH, SATGURU COMPLEX,640, ARMASALAI, NANDANAM, CHENNAI - 600034,PRESENTLY REPLACED BY THE INTERIM BOARD FOR SETTLEMENT,SATGURU COMPLEX,640 ANNA SALAI,NANDANAM CHENNAIREPRESENTED BY ITS SECRETARY, PIN - 6000352THE PRINCIPAL COMMISSIONER OF INCOME TAX(CENTRAL)5TH FLOOR, KANDAMKULATHY TOWERS,MG ROAD, COCHIN, PIN - 6820113THE DEPUTY COMMISSIONER OF INCOME TAXCENTRAL CIRELE, TRIVANDUM, PIN - 695003BY ADVS.JOSE JOSEPHP.K.RAVINDRANATHA MENON (SR.)(R-348)P.S. RAMAN (SR.ADV.)FOR PETITIONER. THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON03.04.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: JUDGMENT The petitioner has approached this Court being aggrieved by Ext.P12order of the Income Tax Settlement Commission (1[st] respondent) throughwhich the application filed by the petitioner for settlement has been rejected. 2.The brief facts are that, on 05.08.2016, there was a search andseizure under Section 132 of the Income Tax Act (In short 'the Act') in variousbusiness premises of the petitioner. The petitioner opted to settle the issuesby adopting the procedure under Chapter XIX A of the Income Tax Act, 1961[‘the Act’ - as it stood at the relevant time]. The period for which theapplication was filed relate to the Assessment Years 2010-11 to 2017-18. Inthe application before the Settlement Commission, the petitioner madedisclosures under the following three heads:- “(i) 'E xcess realisation of gold':- This is stated to be the differencebetween the gold which was shown in the records of the petitioner as soldfor the realisation of amounts due under gold loans availed by its customersand the actual quantity of gold sold during the relevant period. In otherwords, the disclosure referred to the excess of gold sold over and above theaccounted figures. The petitioner disclosed Rs.85.37 Crores as income underthis head; (ii) An ad-hoc voluntary disclosure of Rs.2 Crores; and (iii) ‘Dis-allowance of interest on debentures amounting toRs.109.92 Crores’:- This represents the income received by the petitioneron account of late disbursement of interest on debentures issued by thepetitioner from time to time.” 3.The petitioner's application before the Settlement Commission (ii) An ad-hoc voluntary disclosure of Rs.2 Crores; and (iii) ‘Dis-allowance of interest on debentures amounting toRs.109.92 Crores’:- This represents the income received by the petitioneron account of late disbursement of interest on debentures issued by thepetitioner from time to time.” 3.The petitioner's application before the Settlement Commission passed through the 1[st] stage under Section 245D(1) of the Act, after thecommission was satisfied that proceedings were pending for the years inquestion, there was a full and true disclosure (prima facie) and on a findingthat the tax liability arising out of the disclosures (mentioned above) hadbeen remitted in full by the petitioner. The Settlement Commissionthereafter directed the 2[nd] respondent to file a report as contemplated underSection 245D(2B) of the Act. However, the 2[nd] respondent chose not to fileany report under Section 245D(2B) of the Act. The application, therefore,proceeded to the final stage of adjudication. At that stage, the 2[nd] respondentfiled a report as contemplated by Section 245-D(3) of the Act, where fourobjections were raised to the application for settlement. One objection wasthat the petitioner had not provided for interest on non-performing assets. Itwas pointed out that since the petitioner was following the mercantile systemof accounting as opposed to the cash system, the petitioner was required todisclose, as income, the interest accruing on Non-Performing Assets. It waspointed out that during search and seizure, the Managing Director of thepetitioner had agreed that such disclosure would be made. Another objectionwas regarding the disclosure on account of excess realisation of gold, asexplained above. According to the 2[nd] respondent, the purity of gold sold inauction, which has a huge impact on the income realised by the petitionerunder this head, was shown as 80%. It was pointed out that in respect of a W.P.(C)No.24042/2022 transaction relating to one P.M.Reji, the Branch Manager of the petitionerhad accepted that the purity of gold pledged by the aforesaid P.M.Reji wasabout 85%. This document was, according to the 2[nd] respondent, sufficient toestablish that the petitioner had not made a full and true disclosure whichalone would entitle it to have the case settled at the hands of the SettlementCommission. Based on the findings of the aforesaid two issues theSettlement Commission has rejected the application filed by the petitioner forsettlement, on the finding that there was no ‘full and true disclosure’. Theother objections raised by the 2[nd] respondent need not be discussed herebecause those objections do not form part of the reasons for rejecting theapplication for settlement. 4.The petitioner initially challenged the order of the SettlementCommission before the Madras High Court. However, by Ex.P14 judgment, alearned Judge of the Madras High Court disposed of the writ petition filed bythe petitioner [W.P(C)No.22792/2019], holding that the writ petition was notmaintainable before the Madras High Court and the petitioner ought tochallenge the order of the Settlement Commission before this Court. It isaccordingly that this writ petition was filed before this Court. 5.Sri. P.S. Raman, learned Senior counsel appearing for thepetitioner on the instructions of Adv. G.Harikumar, would contend that the W.P.(C)No.24042/2022 order passed by the Settlement Commission is clearly irrational andunsustainable in law. 4.The petitioner initially challenged the order of the SettlementCommission before the Madras High Court. However, by Ex.P14 judgment, alearned Judge of the Madras High Court disposed of the writ petition filed bythe petitioner [W.P(C)No.22792/2019], holding that the writ petition was notmaintainable before the Madras High Court and the petitioner ought tochallenge the order of the Settlement Commission before this Court. It isaccordingly that this writ petition was filed before this Court. 5.Sri. P.S. Raman, learned Senior counsel appearing for thepetitioner on the instructions of Adv. G.Harikumar, would contend that the W.P.(C)No.24042/2022 order passed by the Settlement Commission is clearly irrational andunsustainable in law. 6.Regarding the issue of non-accounting of interest on non-performing assets, it is a specific case of the learned Senior Counsel that thereis a specific bar under Section 45Q of the Reserve Bank of India Act whichprohibits non-banking financial companies like the petitioner fromrecognising as income, the interest on non-performing assets. It is submittedthat despite pointing out before the Settlement Commission that the issue hasbeen settled by the judgment of the Supreme Court in CIT v. Vasisth ChayVyapar Ltd; [2018] 90 taxmann.com 365, [where the Supreme Courtcategorically found that the provisions of the Reserve Bank of India Act willtake precedence over the provisions of the Income Tax Act] the commissionproceeded to hold that the petitioner had failed to make full and truedisclosure. It is submitted that the Settlement Commission strangely foundthat the Managing Director of the petitioner had undertaken to declare thisincome at the time of the search. It is submitted that the SettlementCommission also did not advert to the contention taken on the basis of thejudgment of the Supreme Court in Vasisth Chay Vyapar Ltd., (supra)asalso the relevant provisions of the Reserve Bank of India Act and wronglyheld that the failure to disclose income relatable to interest on non-performing assets was actually a failure on the part of the petitioner to make W.P.(C)No.24042/2022 full and true disclosure for the purposes of proceedings before the SettlementCommission. 7.It is submitted that the Settlement Commission has givenextremely strange reasons for not accepting the purity of gold sold by thepetitioner as 80%. It was submitted that the only reason found by theSettlement Commission is the case of the aforesaid P.M.Reji. It is submittedthat according to the Settlement Commission this solitary instance of thepurity of gold pledged by the aforesaid P.M.Reji (being recorded as 85%) wassufficient to discredit the disclosure made by the petitioner that the purity ofgold sold should be determined at 80%. It is submitted that the SettlementCommission irrationally found that the petitioner did not produce anydocument which substantiated that when the gold ornaments pledged by theaforesaid P.M.Reji were subsequently sold, the purity of gold was found to be79.24% as opposed to the recording made by the Branch Manager at the timewhen the gold was pledged that the purity of gold was 85%. It is submittedthat the finding of the Settlement Commission that the petitioner did notproduce these documents at any earlier stage is itself unreasonable, as thefirst opportunity that the petitioner got to produce the documents in questionwas when the objection was raised by the 2[nd] respondent in the report filed ascontemplated by Section 245 D (3). It is pointed by the learned SeniorCounsel that the amount of gold actually pledged by the aforesaid P.M.Reji was 172.5 grams which are about 0.00058% of the gold actually sold by thepetitioner in auction during the relevant period. It is submitted that therecord shows that the petitioner had actually sold 29.6 Tons of gold duringthe relevant period. In other words, it is the submission of the learned SeniorCounsel that the solitary case of the gold pledged by P.M.Reji could not havebeen seen as representing the purity of the entire quantity of gold actuallysold in auction by the petitioner during the relevant period. 8.Sri. Jose Joseph, the learned Standing Counsel for the Income TaxDepartment, would contend that the Settlement Commission had rightlyrejected the application filed by the petitioner. It is submitted that onecondition that is fundamental to an application for settlement of cases underthe provisions of the Income Tax Act, 1961, is full and true disclosure, asevident from a reading of Section 245-C of the Act. It is submitted that thefact that purity of gold which had been sold in various auctions, wasestimated at 80% for working out the income of the petitioner under thishead. It is submitted that if the claim of 80% purity is accepted, the quality ofgold is only 19.20 Carat which is substantially less than the 22 Carat, which isthe usual standard for the manufacture of gold ornaments. It is submittedthat the contention that the petitioner started checking the purity of gold onlyafter RBI made it mandatory to give a certificate of purity is neither reliablenor convincing. It is submitted that no prudent businessman would sanction loans by accepting gold having 80% purity as security. It is submitted thatthe assessment of purity at 80% across all the Assessment Years in questionmakes it clear that the disclosure of income under this head was not correct,and there was no full and true disclosure. It is submitted that during thesearch, Excel worksheets were found, which revealed a vast differencebetween interest income offered to tax and interest income as recorded in theExcel Sheets. It is submitted that the Managing Director of the petitionerCompany had given a statement which clearly indicated that the actualinterest income was not offered for taxation. It is submitted that subsequentretraction from the statement cannot be accepted, and the failure to offer anyadditional income under this head also amounts to a failure to make full andtrue disclosure. It is submitted that the petitioner is offering interest on loanson an accrual basis while it is calculating interest on NPA accounts on a cashbasis. It is also submitted that in the statement given by the ManagingDirector of the petitioner Company, an amount of Rs.75 crores was stated tobe undisclosed income for the Financial Year 2016-17 on account of un-recognized interest income. This income was not offered in the application forsettlement, and only an ad-hoc amount of Rs.2 crores was offered asadditional income. It is, therefore, submitted that the failure of the petitionerto make full and true disclosure resulted in the rejection of the application forsettlement, and the order of the Settlement Commission is not liable to be interfered with in the exercise of jurisdiction vested in this Court underArticle 226 of the Constitution of India. interfered with in the exercise of jurisdiction vested in this Court underArticle 226 of the Constitution of India. 9.The learned Senior Counsel, for the petitioner, in reply, reiteratesthe contentions taken and submits that the formula for ascertaining thepurity of gold and analysing the actual income is one suggested by thepetitioner. It is submitted that while the Department has accepted themethodology, the Department only disputes the percentage of purity of goldfor the purposes of ascertaining the income to be offered for settlement. It issubmitted that this difference in percentage is a matter for ascertainmentand cannot be a ground to hold that there was no full and true disclosure bythe petitioner. It is submitted with reference to internal page 8 of Ext.P12order that in the case of gold pledged by the aforesaid P.M.Reji, the purity ofthe gold that was sold in the auction as per the auction conducted in terms ofthe guidelines issued by the RBI shows that the purity of gold pledged by P.M.Reji was only 79.24 %, which is even less than the value adopted by thepetitioner while offering amounts for settlement. It is submitted that this isa clear indication of the fact that the report filed by the Department before theCommission is wrong. It is submitted that after the Fair Practices Code ofthe RBI came into force, the purity of the gold was verifiable. It is reiteratedthat the statement given by the Managing Director cannot be the basis to holdthat the petitioner had to offer interest on NPA accounts for reasons already stated. 10.Having heard the learned Senior Counsel appearing for thepetitioner and the learned Standing Counsel appearing for the respondents, Iam of the view that the writ petition is liable to be allowed. The procedure forsettlement, as contemplated by Chapter XIX-A of the Income Tax Act, 1961 asit then stood, was a procedure enabling assessees to declare their previouslyundisclosed income and arrive at a settlement of their case. The Scheme, asis evident from a reading of the relevant provisions, is that the assessee is tomake an application disclosing the income under various heads which werenot earlier offered for assessment and must pay the admitted tax on suchincome. After considering the reports of the Department, the SettlementCommission would proceed to adjudication to arrive at a conclusion as towhether any further tax is to be paid by the assessee under any head. Whilethe assessee is required to make a full and true disclosure, the SettlementCommission is also authorised to render findings on any additional incomethat must be brought to tax and, consequently, the amount of tax, penalty orinterest payable by the assessee that should be paid in addition to the tax,penalty or interest already paid on the income offered in the application forsettlement. This is clear from a reading of Sub-Sections (4) and (6) of Section245-D of the Act. The provisions of Section 245-J make it clear that anyamount found due and payable by an assessee in terms of an order issued W.P.(C)No.24042/2022 W.P.(C)No.24042/2022 under Section Sub-Section (4) of Section 245-D can be recovered inaccordance with the provisions contained in Chapter XXVII of the Act. Theprovisions of Section 245-K make it clear that an application for settlement isa one-time measure, and further applications for settlement will not beentertained at the instance of the assessee in question. An overall reading ofthe provisions of Chapter XIX of the act and the procedure to be adopted bythe Settlement Commission clearly indicate that while the assessee isexpected to make a full and true disclosure, a further process of adjudicationat the hands of the Settlement Commission is involved, and the SettlementCommission can determine any further amounts payable by the assesseetowards the tax, interest or penalty and such amount is also liable to be paidby the assessee in question. In other words, it is clear that the SettlementCommission does not proceed merely on the basis of the statementscontained in the application for settlement or any further pleadings before itand can, for reasons to be recorded, come to a conclusion that some higher-income had to be offered by the assessee for arriving at a settlement.Therefore, taking into consideration the spirit and mandate of the provisionscontained in Chapter XIX and merely for the reason that further amounts hadto be offered by the assessee, the Settlement Commission cannot reject theapplication for settlement. This is not to say that the assessee is not requiredto make full and true disclosure. 11.In the facts of this case, one of the main reasons which weighedwith the Settlement Commission is the alleged non-disclosure owing to thefact that the purity of gold which was sold in the auction was determined at80% (on average) to arrive at the previously undisclosed income under thishead. There appears to be some material on record to suggest that theyardstick adopted by the assessee was correct. Similarly, the documentsproduced by the Department could also be scrutinised by the Commission todetermine whether the purity of gold sold in auction should be taken at somehigher value than 80% for the purpose of determining whether the assessee isrequired to disclose further income and to pay tax, interest and penalty on thesame. However, it was wrong on the part of the Settlement Commission tocome to the conclusion that merely because the purity of gold recorded at thetime of issuing the loan in favour of one P.M. Reji was higher than the averagerecorded or disclosed in the settlement application, there was failure to makea full and true disclosure. 12.The second aspect made with the Settlement Commission is thefailure to offer the interest accruing on Non-Performing Assets as part of theincome. It is not disputed before me that the regulations/instructions issuedby the Reserve Bank of India regarding income recognition do not permit anon-banking financial institution like the petitioner to recognise interest onincome on non-performing assets. The decision of the Supreme Court in Vasisth Chay Vyapar Ltd. (supra) is the authority for the propositionthat the instructions issued by the Reserve Bank of India on incomerecognition will take precedence over any contrary provision in the IncomeTax Act, 1961. Therefore, I am of the view that the finding of the SettlementCommission that the failure to offer interest income on non-performingassets constitutes a failure to make a full and true disclosure for the purposeof Section 245-C of the Act, is unsustainable. Vasisth Chay Vyapar Ltd. (supra) is the authority for the propositionthat the instructions issued by the Reserve Bank of India on incomerecognition will take precedence over any contrary provision in the IncomeTax Act, 1961. Therefore, I am of the view that the finding of the SettlementCommission that the failure to offer interest income on non-performingassets constitutes a failure to make a full and true disclosure for the purposeof Section 245-C of the Act, is unsustainable. 13.By virtue of provisions contained in Finance Act, 2021, Sections245-A and 245-B of the Act have been amended, and the SettlementCommission has ceased to exist. In the place of the Settlement Commission,an Interim Board has been constituted to consider and entertain applicationsfor settlement which were pending. The question as to whether, in a case likethis (where the order of the Settlement Commission is required to bequashed), the matter can be reconsidered by the Interim Board, came up forconsideration of a Division Bench of the Madras High Court in K.S.Thirumalaivasan v. The Chairman, Income Tax SettlementCommission and others;(judgment dated 27.6.2022 in W.A.No.1851/2021) where in paragraph 31 it was held as follows:- “31. …............................... Upon the matter being remanded, theapplication filed by the Appellant would have to be treated as apending application and appropriate orders are to be passed aftergiving the appellant sufficient opportunity and by considering allthe materials placed by him. ..........” I am in respectful agreement with the view taken by the Division Bench of the W.P.(C)No.24042/2022 Madras High Court in the aforesaid judgment. The effect of an order quashingthe order passed by the Settlement Commission would result in theapplication for settlement filed by the petitioner being treated as a ‘pendingapplication’ which has to be disposed of by the interim board. The Writ Petition is allowed. Ext.P12 order is quashed. It is directedthat the application for settlement of the petitioner, which stands restored onaccount of the fact that Ext.P12 order of the Settlement Commission has beenquashed, will be considered afresh by the Interim Board after affording anopportunity to the petitioner and to the respondent Department. The writpetition will stand allowed in the manner indicated above. I make it clear thatno observation in this Judgment will prevent the Interim Board fromconsidering and disposing of the application for settlement in accordancewith law or from determining the actual income to be offered to tax, by thepetitioner, for the purposes of settlement. sd/- acd GOPINATH P.JUDGE PETITIONER EXHIBITS Exhibit P1(a)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2011-12SECTION 153A DATED 22.02.2017 FOR THE A.Y 2011-12 Exhibit P1(b)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2012-13SECTION 153A DATED 22.02.2017 FOR THE A.Y 2012-13 Exhibit P1(c)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2013-14SECTION 153A DATED 22.02.2017 FOR THE A.Y 2013-14 Exhibit P1(d)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2014-15SECTION 153A DATED 22.02.2017 FOR THE A.Y 2014-15 Exhibit P1(e)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2015-16SECTION 153A DATED 22.02.2017 FOR THE A.Y 2015-16 Exhibit P1(f)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2016-17SECTION 153A DATED 22.02.2017 FOR THE A.Y 2016-17 Exhibit P2A TRUE COPY OF THE NOTICE ISSUED UUNDER SECTION 148 DATED 28.03.2017 FOR THE A.Y 2010-11UUNDER SECTION 148 DATED 28.03.2017 FOR THE A.Y 2010-11 Exhibit P3A TRUE COPY OF THE APPLICATION FOR SETTLEMENT DATED 26.12.2017 FILED BYTHE PETITIONER BEFORE THE LST RESPONDENTSETTLEMENT DATED 26.12.2017 FILED BYTHE PETITIONER BEFORE THE LST RESPONDENT Exhibit P1(d)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2014-15SECTION 153A DATED 22.02.2017 FOR THE A.Y 2014-15 Exhibit P1(e)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2015-16SECTION 153A DATED 22.02.2017 FOR THE A.Y 2015-16 Exhibit P1(f)A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2016-17SECTION 153A DATED 22.02.2017 FOR THE A.Y 2016-17 Exhibit P2A TRUE COPY OF THE NOTICE ISSUED UUNDER SECTION 148 DATED 28.03.2017 FOR THE A.Y 2010-11UUNDER SECTION 148 DATED 28.03.2017 FOR THE A.Y 2010-11 Exhibit P3A TRUE COPY OF THE APPLICATION FOR SETTLEMENT DATED 26.12.2017 FILED BYTHE PETITIONER BEFORE THE LST RESPONDENTSETTLEMENT DATED 26.12.2017 FILED BYTHE PETITIONER BEFORE THE LST RESPONDENT Exhibit P4A TRUE COPY OF THE ORDER U/S 245(D1)DATED 05.01.2018DATED 05.01.2018Exhibit P5A TRUE COPY OF THE LETTER NO. F NO. KL/TV51/2017-18/63IT DATED 15.02.2018KL/TV51/2017-18/63IT DATED 15.02.2018 Exhibit P6A TRUE COPY OF THE RULE 9 REPORT DATED 09.04.2018 Exhibit P7A TRUE COPY OF REPLY TO EXT P-6 (RULE 9) REPORT ON 28.05.2018(RULE 9) REPORT ON 28.05.2018 Exhibit P8A TRUE COPY OF THE ORDER DATED 11.04.201911.04.2019 Exhibit P9A TRUE COPY OF THE VERIFICATION RIPORT DATED 13.05.2019RIPORT DATED 13.05.2019 Exhibit P10A TRUE COPY OF REPLY TO THE VERIFICATION REPORT DATED 04.06.2019VERIFICATION REPORT DATED 04.06.2019Exhibit P10(a)A TRUE COPY OF WRITTEN SUBMISSION OFTHE PETITIONER AT THE FINAL HEARING DATED 12.06.2019THE PETITIONER AT THE FINAL HEARING DATED 12.06.2019 Exhibit P11A TRUE COPY OF LETTER DATED 12.06.2019 ALONG WITH ITS ANNEXURES12.06.2019 ALONG WITH ITS ANNEXURES Exhibit P12A TRUE COPY OF IMPUGNED ORDER DATED 19.06.2019 PASSED BY THE 1ST RESPONDENT19.06.2019 PASSED BY THE 1ST RESPONDENT Exhibit P13A TRUE COPY OF THE ORDER DATED 17.09.2019 IN WP NO.22792 OF 2019 AND WMP NOS. 22354 AND 22359 OF 2019PASSED BY THE HIGH COURT OF MADRAS17.09.2019 IN WP NO.22792 OF 2019 AND WMP NOS. 22354 AND 22359 OF 2019PASSED BY THE HIGH COURT OF MADRAS Exhibit P14A TRUE COPY OF THE JUDGMENT DATED 29.06.2022 IN WP NO.22792 OF 2019 AND WMP NOS. 22354 AND 22359 OF 2019PASSED BY THE HIGH COURT OF MADRAS