Supreme Court: Income Tax Settlement Commission’s Purpose Is to Give Assesse Chance to Disclose Undisclosed Income to Seek Immunity

In a recent appeal before the Supreme Court, a division bench comprising Justices B.V. Nagarathna and Ujjal Bhuyan deliberated on the objective and purpose behind the establishment of the Settlement Commission under the Income Tax Act of 1961. The court emphasized that the Settlement Commission provides an opportunity for taxpayers to disclose undisclosed income and seek immunity from penalties and prosecution.

The case in question involved a partnership firm that underwent a survey conducted by the Income Tax Department under Section 133A (Power of survey) of the Income Tax Act. During the survey, the department discovered incriminating evidence. Subsequently, the firm approached the Settlement Commission to seek a settlement of its case. The Settlement Commission, under Section 245(D)(1) (Procedure on receipt of an application for settlement of cases) of the Act, allowed the case to proceed further.

However, the Income Tax Department objected to the settlement offer of Rs. 34 lakhs, contending that the firm had not fully disclosed all material particulars. Eventually, the appellant’s representative increased the settlement offer to Rs. 56 lakhs as additional income. The Settlement Commission accepted this amount and passed an order accordingly.

Unsatisfied with the settlement, the Income Tax Department approached the High Court through a writ petition, arguing that the Settlement Commission had not rendered a just and proper order. The High Court agreed with the department’s contention and set aside the Settlement Commission’s order. As a result, the appellant appealed to the Supreme Court.

During the proceedings, Senior Advocate Ramesh P. Bhatt, representing the appellant, argued that the settlement offers of Rs. 56 lakhs had been made for taxation purposes, and the High Court’s decision deprived the appellant of the benefits of the settlement.

On the other hand, Additional Solicitor General Aishwarya Bhati, appearing for the respondent (Income Tax Department), contended that the undisclosed income had not been accurately determined despite accepting the additional amount of Rs. 56 lakhs.

The Supreme Court noted that the High Court’s decision to set aside the Settlement Commission’s order had denied the appellant the benefits of settlement. The Court observed that initially, only Rs. 34 lakhs had been offered as disclosed income spread over three assessment years. However, after the survey and the recovery of incriminating documents, the offer was increased to Rs. 56 lakhs as additional income for taxation.

Based on these circumstances, the Court agreed with the respondent’s argument that there had been no actual determination of the undisclosed income. Instead of setting aside the Settlement Commission’s order, the Court opined that the matter could have been remanded back to the Commission for a revaluation and redetermination of the undisclosed income. This would have provided the appellant an opportunity to benefit from the settlement.

In light of this, the Supreme Court set aside both the High Court’s order and the Settlement Commission’s order. The Court remanded the matter to either Interim Board for Settlement-V (IBS-V), Mumbai or Interim Board for Settlement-VI (IBS-VI), Mumbai, which would serve as a substitute for the Settlement Commission. The remand aims to facilitate the revaluation and redetermination of the undisclosed income, ensuring that both parties have an opportunity to present their cases.

Case Title: SHREE NILKANTH DEVELOPERS v. PRINCIPAL COMMISSIONER OF INCOME TAX

Citation: 2023 LiveLaw (SC) 648

Reference: https://www.livelaw.in/supreme-court/income-tax-settlement-commissions-purpose-is-to-give-assessee-chance-to-disclose-undisclosed-income-to-seek-immunity-supreme-court-235287 

Written By Shriya Ayalasomayajula, College Name: Nyaya Vidya Parishad, Intern At Legal Vidhiya

Admin