Industrial Corporation Vs. Income Tax Officer & Ors  INSC 1587 (10 December 1996)
Jeevan Reddy, K.S. Paripoornan B.P. Jeevan Reddy, J.
order of the Settlement Commission dated October 15, 1980 has given rise to these appeals. Kuldeep
Industrial Corporation had filed an application under Section 245-C of the
Income Tax Act in respect of three assessment years 1977-78, 1978-79 and
1979-80. The Settlement Commission refused to admit the case relating to
assessment year 1977- 78 for settlement, against which the assessee has filed
Civil Appeals 233-35 of 1982 (Civil Appeals 236-237 of 1982). The Settlement
Commission has, however, admitted the case relating to the other two assessment
years for settlement, against which the Revenue has preferred Civil Appeals
238-239 of 1982.
the previous years relevant to the said three assessment years, the assessee
received substantial quantities of stainless steel sheets from M.M.T.C.
claiming to be a manufacturer of sterilizers. It filed returns for the said
three assessment years disclosing losses in a sum of Rs.1,31,143/- (for A.Y.
1977-78), Rs.39,939/- (for A.Y.1978-79) and a profit Rs.7,340/- (for the A.Y.
inquiries were made by the Income Tax Officer in the Month of December 1979.
She also impounded the account books of the assessee. On February 13, 1980 the Income Tax Officer visited the
premises of the appellant where the assessee was said to be carrying on the
manufacturing activity. She found no such activity being carried on there. On February 14, 1980 the Income Tax Officer issued a
notice proposing addition of three items of income. At this stage i.e., on February 29, 1980, the assessee filed an application
before the Settlement Commission seeking settlement of his case relating to all
the said three assessment years. By its letter dated March 1, 1980 the assessee
informed the income Tax Officer that it has filed an application before the
Settlement Commission in respect of the said three assessment years and, on
that basis, called upon the Income Tax Officer to stop all further proceedings.
To this letter, the assessee enclosed a photocopy of the acknowledgement from
the office of the Settlement Commission. By her letter dated March 3, 1980, the Income Tax Officer requested
the assessee to furnish copies of the application filed by it before the
Commission. The assessee declined to do so on the ground that his application
was a secret document. The Income Tax Officer refused to stay the assessment proceedings
and called upon the assessee to submit his replies/explanation to the notices
already issued by her.
Income Tax Officer once again requested for copies of the application filed by
the assessee before the Commission.
complained to the Commission about the refusal of the Income Tax Officer to
stay the assessment proceeding but at the same time refused to furnish copies
of its application to the Income Tax Officer. By letter dated March 11/12,
1980, the Income Tax Officer again requested for the copies of the application.
She also called upon the assessee once again to furnish replies to the notices
still refused. In these circumstances the Income Tax Officer made a draft
assessment order on 19th March, 1980 and communicated the same to the assessee,
as required by Section 144-B, which was then in force. This assessment order
pertains to the assessment year 1977-78 only. Under this order the Income Tax
Officer determined the income of the assessee at Rs.44,40,500/- as against the
loss of Rs.1,28.691/- returned by the assessee. It was received by the assessee
on 31st March, 1980.
letter dated March 14, 1980, the Settlement Commission forwarded a copy of the assessee's
application filed under Section 245-C to the Commissioner of Income Tax for his
objections. This communication was received by the Commissioner on 3rd April,
1980. On 5th June, 1980 the Commissioner filed his objections enclosing
therewith a copy of the draft assessment order dated March 19, 1980 pertaining
to the assessment year 1977-78. After hearing the parties, the Commission
unanimously refused to admit the assessee's application for settlement with
respect to the assessment year 1977-78. So far as the other two assessment
years are concerned, the majority (two out of three members) admitted the case
for settlement while one member dissented.
dissenting member was of the opinion that the application for settlement should
be rejected for the other two assessment years also.
application under Section 245-C, the assessee stated the following facts: the assessee,
a partnership firm, is engaged in manufacture and sale of stainless steel
utensils, sterilizers and other items in its factory located at Chandigarh. For
the two assessment years 1977-78 and 1978-79 it had filed returns disclosing
loss in a sum of Rs.1,31,113.06 and Rs.39,939/- respectively. For the
assessment year 1979-80 it returned a profit of Rs.7,340/-.
holding a quota for the purchase of stainless steel sheets from M.M.T.C During
the accounting years relevant to the said three assessment years, the assessee
could not carry one the manufacturing activity on account of acute shortage of
funds. With a view to ensure that its quota does not lapse, it obtained the
quota and sold it to various brokers in Bombay, Delhi and Madras. The assessee set out the arrangement with those brokers.
From these sales, the assessee said it derived a profit of Rs.1,28,691/- in all
the three assessment years put together. It offered the said amount to tax.
objections filed to the assessee's application, the Commissioner stated the
following facts. The investigations made for the assessment year 1977-78
revealed that the assessee has tried to evade tax on a massive scale.
fabricated its account books to defraud the Revenue and had filed a return
showing a loss of Rs.1,31,113/-. On the basis of investigations, the Income Tax
Officer has proposed an addition of Rs.45,71,703/- in her draft assessment
order sent to the assessee for objections under Section 144-B. The story of
manufacturing and the sale of manufactured products to certain named concerns is
all fictitious. The parties, to whom the manufactured products were allegedly
sold, denied having made such purchases.
account books also did not disclose any such transactions. The verification of
the sales tax record shows that no trucks carrying stainless steel sheet ever
crossed the sales tax barriers enroute to Chandigarh. The goods receipts produced by the assessee did not contain the stamp
of sales tax barriers. The spot inspection of the factory disclosed that no
manufacturing activity was being carried on there. The books of account for the
assessment years 1978-79 and 1979-80 were not produced inspite of summons
issued under Section 131. The inquiries revealed that the stainless steel
sheets were never brought to Chandigarh but
were sold at premium at Bombay, Madras and Delhi. The various entries in the account
books which were produced latter were found to be fictitious. Indeed, the assessee
was in the habit of manipulating its account-books to defraud the Revenue. In
1974 a search and seizure operation was conducted in the assessee's premises
which disclosed mis- utilisation of the stainless steel sheets. On the above
facts the Commissioner stated that he strongly objects to the application under
Section 245-C being proceeded with. He submitted that in view of the fraud
perpetrated by the assessee having already been established, the assessee's
application may be rejected.
as the assessment year 1977-78 is concerned, all the three members of the
Commission unanimously rejected the application on the following reasoning:
Viewing the facts of this case against the observations made by us above, it
appears to us that for the A.Y. 1977-78, the Department has a very strong case
to raise objection on the ground that concealment of particulars of income or
perpetration of fraud by the applicant has been or is likely to be established
- particularly so in regard to the perpetration of fraud. In so far as this
year is concerned, there is clear fabrication of accounts, the balances in the
account have been fudged; the sale vouchers and goods receipts have been cooked
up, and a false facade is created to mislead the Department and cover up the
real state of the assessee's business transactions. It strains our sense of
credulity too far to accept the applicant's claim that all this was being done
only to save its skin from some other departments and its intentions vis- a-vis
the Revenue were nothing but honourable. If that be so, how does the assessee
in any case explain the inflation by Rs.10 lacs of the carried forward balance
in "Kuldip Parkash Imprest Account". To our minds, the Department has
also succeeded in substance in rebutting the assessee's claim of so-called
inaccuracies in the Commissioner's report. We do not find any distortion or
misconception of facts in the Commissioner's report, nor can we subscribe to
the view that it involves any colourable exercise of his powers. In fact, the
Commissioner would have failed in his duty enjoined upon him by law, if he had
not raised objection for the year 1977-78." The findings recorded by the
Commission are too eloquent to call for any emphasis. They could not have been
expressed in more stronger language.
as the other two assessment years (1978-79 and 1979-80) are concerned, there
was a difference of opinion between the three members. The majority held that
the case with respect to thee two assessment years stands on a different
footing, inasmuch as no inquiries appear to have been made by the Income Tax
Officer in respect of these two assessment years. No bogus sales have also been
conclusively established by the Income Tax Officer by the date of filing of the
application under Section 245-C, said the majority, except the entries
regarding sale of scrap in the account books of the assessee. The were of the
view that there is no adequate material on the basis of which it can be said
that the concealment of income has been established or is likely to be
established. The inspection of the factory premises by the Income Tax Officer
on February 8, 1980 too is not of much relevance, they
said, since the inspection is long after the expiry of the relevant previous
years. The non- production of the account books for these years was also said
to be not of much relevance because the department itself has been giving
repeated adjournments for their production.
dissenting member, however, based his opinion on the following reasoning. The
facts placed before the Commission conclusively establish that no manufacturing
activity was being carried on by the assessee during the relevant years. The
account books for all the three years were fabricated with a view to conceal
the assessee's true activity. It is not even the assessee's case that it
carried on any manufacturing activity during the previous years relevant to
assessment years 1978-79 and 1979-80. In the course of hearing before the
Commission it was categorically admitted by the counsel for the assessee that
the losses claimed by it in its returns were not true and that no manufacturing
activity was carried on during the relevant years. The assessee has also
admitted that it has sold the stainless steel quota at Bombay, Delhi and Madras and that it never transported the
same to Chandigarh. It is also admitted that the books
of account, showing the sale of manufactured goods to various parties are
itself has made no distinction as between these three assessment years. Its
case is common to all the there assessment years. No distinction is, therefore,
permissible as between these three assessment years. The facts and record
clearly prove that the assessee refused to produce its account books for the
two subsequent assessment years inspite of notices and summons; they were
produced later and were found to be fabricated. The inspection by the Income
Tax Officer on February
8, 1980 disclosed no
manufacturing activity at the alleged factory premises except some small scale
electro-plating work being done there. The dissenting member further observed:
"I do not see any reason why the admission made on behalf of the applicant
that there was no manufacturing activity carried on and that the losses claimed
as per return are not genuine can be or should be ignored. These admissions
have been made in the papers filed along with the application and also in the
course of the hearing before us........... I also feel that the applicant
should not be allowed to take advantage of his own deliberate default before
the Income Tax Officer and he should not be heard to plead before us that the
Income Tax Officer has not examined the books or pointed any defects or
deficiencies therein so as to be able to establish any concealment for these
years. The applicant should not be allowed to take advantage of his own
deliberate default to find a short-cut to approach the Commission and to
circumvent the normal processes of law prescribed in the Income-tax Act."
The dissenting member emphasised that making a distinction between assessment
year 1977-78 on one hand and 1978-79 and 1979-80 on the other would lay the
Commission open to charge of inconsistency, particularly when it is not even
the case of the assessee itself.
proposition stated in the impugned order is that the Commissioner cannot refer
in his objections to any material collected after the filing of the application
under Section 245-C and that any material collected after the filing of such application
cannot be lolled into while deciding the question whether to admit the
application or not.
Salve, learned counsel for the assessee submitted that this is a case where the
assessee has genuinely repented for his lapses and has made a clean breast of
all its wrong-doing. It has admitted that it had not carried on any
manufacturing activity during the relevant years, that it had sold the entire
stainless steel quota at Bombay, Delhi and Madras, that the returns filed by it
were untrue, that the books of account maintained by it were untrue and
fabricated and that it had disclosed its true income for the said assessment
years before the Commission. Indeed the assessee has disclosed many other items
of income apart from the three items mentioned in the notice dated February 14, 1980 issued by the Income Tax Officer.
Mr. Salve complained that the Income Tax Officer has drawn several facts
mentioned in the assessee's application under Section 245-C and made them the
basis of her draft assessment order. This was wholly unfair, said Mr. Salve.
Having regard to the candour with which the assessee approached the Commission,
the Commission should have admitted the case relating to assessment year
1977-78 also for settlement. Counsel further submitted that the very statements
made and facts stated by the assessee in its application cannot be made a basis
for rejecting it. Mr. J. Ramamurthy, learned counsel for the Revenue on the
other hand assailed the order of the majority insofar as they admitted the assessee's
case for the two latter assessment years for settlement. He submitted that in
view of the facts and circumstances of the case which have been fully and
clearly pointed out by the dissenting member on his opinion, the application of
the assessee should have been rejected outright and should not have been
admitted for any assessment year. The distinction made between the three
assessment years, the counsel submitted, is equally untenable.
scheme of chapter XIX-A has been set out in the earlier decisions of this Court
including Commissioner of Income-Tax, (Central;), Calcutta v. B. N. Bhattacharjee and Another
[1979 (118) I.T.R. 461] and Commissioner of Income Tax v. Express Newspapers
Limited [1994 (206) I.T.R. 443] and need not be reiterated here. For the
purpose of this case it is sufficient to notice subsections (1) and (1-A) of
Section 245-D. They read:
(1) On receipt of an application under section 254C, the Settlement Commission
shall call for a report from the Commissioner and on the basis of the material
contained in such report and having regard to the nature and circumstances of
the case or the complexity of the investigation involved therein, the
Settlement Commission may, by order, allow the application to the proceeded with
or reject the application:
that an application shall not be rejected under this sub- section unless an
opportunity has been given to the applicant of being heard.
proviso omitted by the Finance Act, 1979, w.e.f. 1.4.1979.] [(1A) Notwithstanding
anything contained in sub-section (1), an application shall not be proceeded
with under that subsection if the Commissioner objects to the application being
proceeded with on the ground that concealment of particulars of income on the
part of the applicant or perpetration of fraud by him for evading any tax or
other sum chargeable or imposable under the Indian Income-tax Act, 1922 (11 of
1922) or under this Act, has been established or is likely to be established by
any income-tax authority, in relation to the case:
that where the Settlement Commission is not satisfied with the correctness of
the objection raised by the Commissioner, the Settlement Commission may, after
giving the Commissioner an opportunity of being heard, by order, allow the
application to be proceeded with under sub-section (1) and send a copy of its
order to the Commissioner.]" The meaning and purport of these Sections has
also been dealt with and set out in Express Newspapers. The said decision
rejects the argument that once an application is filed by an assessee under
Section 245-C, no further investigations or inquiries can be carried on by the
Income Tax Officer and that he is obliged to stop all further proceedings with
effect from the said date. It has been held that the Income Tax Officer is not
bound to do so and that he can continue with the proceedings before him till
the date of submitting the report by the Commissioner under sub- section (1-A)
of Section 245-D - and may be, even beyond.
Commission was, therefore, in error in holding to the contrary.
contention of Mr. Salve that the assessee sent a copy of his application filed
under Section 245-C to the Income Tax Officer immediately and that the Income
Tax Officer acted unfairly in drawing upon the facts in said application to
make the draft assessment order (relating to the assessment year 1977-78) is
factually incorrect as pointed out hereinabove. The truth is that not only did
the assessee not send a copy of it's application to the Income Tax Officer but
it refused to supply copies thereof inspite of repeated requests by the Income
Tax Officer. A copy of the application was communicated by the Commission to
the Commissioner only on 14th
March, 1980 and was
received by the Commissioner on April 3, 1980, as would be evident from the statement in the preamble to
the objections filed by the Commissioner. The draft assessment order was made
on March 19, 1980 and communicated to the assessment alongwith
a covering letter on March
20, 1980. Even by the
date of the making of the draft assessment order the Income Tax Officer had
made elaborate inquiries and had discovered that there was no manufacturing
activity, that there was no transport of stainless steel sheets to Chandigarh,
that they were sold in Delhi, Bombay and Madras, that the alleged sale of
manufactured goods to various parties is false and that the account books were
totally fabricated. The draft assessment order states all these facts. Mr.
Salve could not point out any particular fact or facts which have been taken
from the assessee's application and used as a basis for making the draft
assessment order. It is significant to notice that according to the application
filed by the assessee its total income for all the three years put together is
Rs.1,28,691/- , whereas according to the draft assessment order the income of
the assessee is in the region of Rs. 45 lacs during the first assessment year
alone. The allegation of unfairness levelled against the Income Tax Officer is,
therefore, factually incorrect and is unwarranted.
dissenting member is right in emphasizing the fact that the assessee itself did
not make a distinction between the assessment year 1977-78 on one hand and the
assessment years 1978-79 and 1979-80 o the other. A Perusal of the application
filed by the assessee before the Commissioner shows that it has set out facts
and figures relating to stock received from M.M.T.C., their sale to different
parties, the expenses and brokerage paid in that connection, the profits made
from such sales and all other relevant particulars. Neither the application nor
the particulars stated therein are confined to one assessment year (1977-78)
but extend to all the three assessment years. In short, whatever was stated or
disclosed in the said application related to all the three years; no
distinction was made or suggested as between assessment year 1977-78 and other
two assessment years. As a matter of fact, the "computation of
Income" (Annexure C) at the end of the application gave the figures of
"Total sale of stainless steel sheets", "gross sale value",
"cost of purchase", "transport charges" and
"brokerage" for all the three years combined. The total profit from
the sale of stainless steel sheets for all the three years was worked out at Rs.
1,28,698.10 p. It was one package and indivisible. We are, therefore, inclined
to agree with the opinion of the dissenting member that by making such a
distinction, the Commission laid itself open to the charge of inconsistency.
Indeed it must be said that the majority of the members of the Commissioner
have tried to make out a new case for the assessee not put forward by it in its
application. We are also of the opinion that the facts found proved and stated
in the draft assessment order aforesaid and the facts admitted by the assessee
in its application before the Commission and during the course of hearing
before the Commission do clearly show that the "concealment of particulars
of income on the part of the applicant or perpetration of fraud by him for
evading any tax or other sum chargeable or impossible ........... under this
Act has been established." Now, so far as the assessment year 1977-78 is
concerned, the draft order does bear out the aforesaid facts and since the assessee's
case and all the material facts are one and the same for all the three
assessment years (as set out in its own application filed under Section 245-C)
it must be said that the very same facts also established the said factors even
with respect to the two latter assessment years. In the circumstances it must
be said that the main limb of subsection (1-A) was fully satisfied in this
case. No valid or relevant reasons have been assigned by the Commission, within
the meaning of the proviso to subsection (1-A) to admit the application for the
two latter assessment years.
a gross case where the assessee brazenly and deliberately perpetrated fraud
upon the Revenue with a view to evade the taxes legitimately and lawfully
payable by him.
fraud played by him, which was discovered by the Income Tax Officer even by the
date of submission of report by the Commissioner, disentitles the assessee from
claiming that his case should be admitted for settlement by the Commissioner.
There is neither law in its favour nor equity.
fact that it has admitted its fraud in its application is of no consequence
since its fraud was already discovered by the Income Tax Officer by her own
extensive and elaborate inquiries.
been held by this Court that the nature of jurisdiction exercised by this Court
over the orders of the Settlement Commission is in the nature of judicial
Durga Prasad v. Settlement Commissioner (176 I.T.R. 169) and Jyotendra Singhji
v. S.I.Tripathi (A.I.R. 1993 S.C. 1991)]. In these cases, we find that the
impugned orders of the Commission are vitiated by more than one misdirection in
law. Firstly, the Commission held, wrongly, that the Income Tax Officer had no
power to proceed with or collect any material after the date of submission of
the application under Section 245-C. Secondly, having rightly rejected to admit
the case relating to assessment year 1977- 78 for settlement, it (the majority)
made out a new case for the assessed by creating a distinction between 1977-78
and 1978-79 and 1979-80, when no such distinction was suggested even by the assessee;
indeed such a distinction is contrary to the case put forward by the assessee
in its application under Section 245-C. The Commission (the majority) also
ignored the several statements, admissions and averments made by the assessee
before the Commission while admitting the case relating to assessment year
1978-79 and 1979-80 for settlement.
the above reasons the Civil Appeals 238 and 239 of 1982 filed by the Revenue
are allowed with costs and the Civil Appeals 233-235 of 1982 (and Civil Appeals
236- 237/1982) filed by the assessee are dismissed with costs.
cost payable by the assessee in all the appeals put together are assessed at Rs.