No Infirmity In Immunity Granted By IT Settlement Commission From Prosecution & Penalty U/s. 245H When Additional Income Was Offered To Tax By Appellant: SC

While setting aside the judgment of the Division Bench of Karnataka High Court in the case of ING Vysya Bank (later merged with Kotak Mahindra Bank) whereby the remand to Income-tax Settlement Commission (ITSC) on immunity from prosecution and penalty by the Single Judge Bench was upheld, the Supreme Court restored the ITSC order and remarked  that the High Courts should avoid frequent interference with the orders of ITSC.

The Apex Court also observed that the larger picture behind settlement should be kept in mind and the High Courts should not scrutinize the orders of ITSC as an appellate court because unsettling settlement orders would erode the confidence of bona fide taxpayers and lead to multiplicity of litigation.

Although the provisions of Chapter XIX-A of the Income Tax Act are not to be employed to provide a shelter for tax dodgers to obtain immunity from facing the consequences of tax evasion by simply approaching the Settlement Commission, the Apex Court found that in the present case, the Commission rightly exercised its discretion under Section 245H having regard to the bona fide conduct of the assessee of offering additional income for tax, apart from the income disclosed in the return of income.

The Two Judge Bench comprising of Justice B.V. Nagarathna and Justice Ujjal Bhuyan observed that “the appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act”.

The Bench therefore made it clear 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”.

Senior Advocate Shyam Divan appeared for the Assessee while the Revenue was represented by ASG Balbir Singh.

As per the brief facts of the case, the Single Judge Bench of Karnataka High Court allowed Revenue's writ petition against ITSC order in so far as it related to granting immunity from penalty and prosecution and remanded the matter to ITSC for limited purpose of reconsidering the question of penalty, prosecution, and the penalty order after hearing both the parties. Later, the Division Bench of Karnataka High Court observed that on receipt of an application for settlement, ITSC had to call for a report from Commissioner of Income Tax (CIT) based on which, ITSC was empowered to reject or proceed with the application and in this context the granting of immunity from prosecution ought to have been scrutinized by ITSC.

After considering the submission and noting that the Single Judge had remanded the matter for de novo adjudication, the Bench observed that the Single Judge's order did not suffer from any material irregularity or illegality so as call for interference by the Division Bench which has a limited jurisdiction.

The Bench noted that under Section 245H(1) if the Settlement Commission is satisfied that any assessee who makes the application for settlement under Section 245C, has co-operated with the Settlement Commission in the proceedings before it and has made a full and true disclosure of its income and the manner in which such income has been derived, may grant immunity from prosecution or from the imposition of penalty, either wholly or in part with respect to the case covered by the settlement.

The Bench observed that even if the pre-conditions prescribed under Section 245C are to be read into Section 245H, it cannot be said 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.

Thus, what is of relevance is that the assessee offered to tax, income, in addition to the income recorded in the return of income, added the Bench.

The Bench also noted that the power vested with the Settlement Commission under Section 245H is a discretionary power to be exercised if the Settlement Commission is satisfied that an applicant has complied with the preconditions specified therein.

“The Commission in its order dated 04.03.2008, noted that the appellant had realized while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the appellant offered additional income under various heads, which were not considered by the Assessing Officer. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to be proceeded with under Section 245D (1) of the Act and that prima-facie, a full and true disclosure of income not disclosed before the Assessing Officer had been made by the appellant”, added the Bench.

Accordingly, the Apex Court concluded that the Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles, and therefore, restored the order of the SETCOM.

Cause Title: Kotak Mahindra Bank v. CIT, Bangalore [Neutral Citation: 2023: INSC: 855]

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