Commissioner
of Income Tax, Calcutta Vs. M/S. Paharpur Cooling Towers
Private Limited [1996] INSC 369 (11 March 1996)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Mukherjee M.K. (J) B.P.Jeevan Reddy,J.
CITATION:
JT 1996 (3) 144 1996 SCALE (2)655
ACT:
HEAD NOTE:
The
Commissioner of Income Tax, Calcutta (Central) has preferred these appeals
against the judgment and order dated March 1, 1979 made by the Settlement
Commission under Section 245-D of the Income Tax Act [the Act]. The respondent-assessee,
Paharpur Cooling Towers Private Limited, is engaged in the manufacture of
cooling towers and their parts. For the Assessment Years 1970-71 to 1974-74
[five years], it had filed its returns. [The accounting year was the year
ending list October.] For Assessment Year 1975- 76, the assessee had filed its
return. It was pending. While so, on October 27, 1976 and on the following dates,
searches were conducted by the Director of Inspection and his officers in the
premises of the assessee at Calcutta, Bombay and Delhi. The assessee's factories and the residential premises of
the Managing Director, Sales Manager, Directors and their associates were also
searched simultaneously. A number of documents were seized.
On June 24, 1977, the assessee approached the
Settlement Commission [Commission] with an application under Section 245-C of
the Act. The application was made in the prescribed proforma. Against Column
No.5 "Assessment Years in connection with which the application for
settlement is made", the assessee stated, "Assessment Year 1975-76
and any other proceeding that may be decided by the Settlement Commission (now
pending before the ITO)". Against Column No.8, "Particulars of the
matters to be settled", the assessee stated, "assessment of total
income for Assessment Year 1975-76 and any other matter that may be decided by
the Settlement Commission".
The
application made by the assessee was forwarded to the Commissioner of Income
Tax for his report under Section 245-D(1). In his report dated July 6, 1977, the Commissioner stated that
"he has no objection to the application for settlement being processed
with in respect of the Asstt.
Year
1975-76". By order dated July 21, 1977,
the Commission admitted the application for settlement.
On November 15, 1977, the assessee filed "a brief
statement of facts" stating inter alia the following facts:
it had
filed the return of its income for the Assessment Year 1975-76 on February 10,
1976 showing a total income of Rs.64,75,860/-; the assessment for the said year
is not yet completed; while so, searches were conducted in its various
premises; the accounts department and the Managing Director were not aware of
many facts which have since been discovered; in view of the said fact and with
a view to cooperate with tax authorities and to avoid harassment and
unnecessary litigation, it has been advised to approach the Commission for
settlement; the value of the finished goods as mentioned in the return for the
Assessment Year 1975-76 is Rs.14,25,077,16p; It should in fact be Rs.31,55,000/-;
similarly
the value of the stocks and of finished goods at the end of accounting year
ending with 31st
October, 1975 ought to
be Rs.19,85,000/- as against disclosed figure of Rs.5,36,304/-. The assessee
requested that the aforesaid revised figures may be accepted in the place of
the figures disclosed in the return. It then stated, "8. Since the value
of the opening stock is required to be amended by Rs.14,48,696/-
(Rs.19,85,000/- minus Rs.5,36,304/-) as aforesaid, this will have effect on the
profits of the previous years as the increased stocks were not and could not be
built up in any one accounting year only. (9)...for a proper fixation of the
profits for the Asstt. Year 1975-76, due to increased value of the closing
stocks, the company submits that the Commission may consider reopening of the
earlier five years assessment years, i.e., Asstt. Years 1970-71 to 1974-75.
(10) The company hereby gives its consent for reopening all the earlier five
years assessments as required in Section 245E of the Act." Similar request
is said to have been made regarding the other item of disclosure, viz., certain
capital expenditure claimed in the return as revenue expenditure, but which the
assessee now conceded may be treated as a capital expenditure. The assessee
also requested that all further proceedings with respect to Assessment Year
1975-76 as well as those relating to the said earlier Assessment Years be
stayed.
The
Commission called upon the Commissioner to file his response to the aforesaid
"statement of facts" filed by the assessee. In his response/report
dated January 3, 1978, the Commissioner stated inter alia, "the
applicant...asked for settlement in respect of asstt, year 1975-76, but in the
Statement of Facts now submitted, it is stated that the amount now offered for
settlement will have effect on earlier 5 years' assessments.....all these
assessments have long been completed and in none of these years, the under-
valuation of stock, as now offered, was considered for
assessment/re-assessment.....There is absolutely no material in the file in
support of this contention of the applicant".
The
Commissioner further submitted that since the assessee's original application
was for settlement in connection with the Assessment Year 1975-76, the assessee's
prayer in Para- 13 of the statement of facts for issuing stay orders in respect
of penalty proceedings pertaining to earlier assessment years is unwarranted,
more particularly when the said penalty proceedings do not relate to
under-valuation of stock but to other matters some of which were not even
contested in appeal. To this response/report, the Commissioner enclosed the
report of the concerned Income Tax Officer stating in detail the facts relating
to the said earlier assessment years. It was stated therein that there was
substantial concealment on the part of the assessee, that in certain cases
assessments were reopened and that penalty proceedings were also pending for
concealment in respect of the said assessment years. Several irregularities in
the maintenance of accounts and records by the assessee were also pointed out.
The
Commission comprising the Chairman and two members heard the parties at length
and disposed of the application for settlement under the impugned order. The
Chairman and the two members differed on one issue - which is the only issue in
these appeals. The question is whether the Commission could drop the penalty
proceedings relating to Assessment Years 1970-71 to 1974-75 in an application
for settlement relating to Assessment Year 1975-76. We are not concerned with
the other directions made by the Commissioner. They were not argued before us
and we express no opinion thereon. The only question we are considering is the
power of the Commission to drop/waive penalty proceedings and penalties for the
Assessment Years 1970-71 to 1974-75 in an application for settlement relating
to the Assessment Year 1975-76. The majority opinion [of the Commission] mainly
relied upon Section 245-E for holding that Commission did have such power while
the Chairman held to the contrary. The Chairman opined that since the
application for settlement before the Commission was only in respect of
Assessment Year 1975-76, the penalty proceedings relating to earlier assessment
years "were in no way connected with the present settlement application or
statement of facts made by the assessee" and, therefore, the Commission
had no jurisdiction to waive or drop the said penalty proceedings. He pointed
out further that the said penalty proceedings were "in respect of some
other concealment already detected by the Income Tax Officer and not relating
to incomes considered in the settlement application". [Emphasis added]
CONTENTIONS
URGED BY THE PARTIES:
In
these appeals, the main submission of Sri J.Ramamurthy, learned counsel for the
Revenue, is with respect to the jurisdiction of the Commission to drop the
penalty proceedings relating to Assessment Years 1970-71 to 1974-75. Counsel
submitted that the application for settlement pertained only to Assessment Year
1975-76 and not to the said earlier assessment years. The assessee did disclose
certain additional income for the Assessment Year 1975-76 requesting at the
same time that the said additional income be spread over all the six Assessment
Years 1970-71 to 1975-76. The assessee had so requested and had given its
consent for re-opening the said earlier assessment years for the limited
purpose of the spreading over/distributing the said additional income over the
six years, which was a request made in his own self-interest. He did not want
the entire additional income to be added to his income in the Assessment Year
1975-76 which would have enhanced his tax liability. The request to re-open the
assessments of the said earlier assessment years was, said the learned counsel,
for the limited purpose of giving due and appropriate relief for the Assessment
Year 1975-76. The advantage he was asking for could not be granted except by
re-opening the assessments for the said earlier assessment years for the
limited purpose of adding certain amounts as a consequence of "spreading
over". There was no request or concurrence to re-open the earlier
assessments for all purposes. In short, the application filed by the assessee
did not pertain to the said earlier assessment years but only to 1975-76.
Whatever was asked for was being asked for only to reduce the tax liability for
the Assessment Year 1975-76. Learned counsel emphasized the admitted fact that
the penalty proceedings relating to the said earlier assessment years, pending
at the time of filing of the settlement application, pertained to some other concealments
and not to the items which were disclosed in the settlement application.
Counsel also submitted that a settlement application can be filed only in
respect of a pending matter whereas the assessments in respect of the said
earlier assessment years were already concluded. They were also not appealed
against by the assessee. Sri Ramamurthy commended the opinion of the Chairman
for our acceptance.
Sri N.K.Poddar,
learned counsel for the respondent- assessee supported the reasoning and
conclusion of the majority. His reasoning runs thus: the assessee had expressly
requested and had given his consent/concurrence for re-opening the assessments
for the earlier Assessment Years 1970-71 to 1974-75. It is true that this
request and concurrence was for giving the relief asked for by the assessee in
respect of the Assessment Year 1975-76. But for giving the relay so asked for
by the assessee, it was necessary to re-open the assessment for the said earlier
assessment years and add certain amounts on account of enhanced valuation of
the opening stocks in each of the relevant accounting years. The Commission did
have the undoubted power, in these circumstances, to re-open the assessments
relating to the said earlier assessment years for the aforesaid purpose. Once
the Commission re-opened the said assessments, it was entitled to pass
necessary and appropriate orders relating to those earlier assessment years;
there was no restriction or limitation upon the Commission's power. Even though
the penalty proceedings relating to the said earlier assessment years pertained
to certain other alleged concealments by the assessee [other than the two items
concerned in the settlement application] the Commission had the power, in law,
to direct the dropping of those penalty proceedings also, once it re-opened the
assessments relating to the said earlier assessment years.
The
majority opinion of the Commission is, therefore, the correct one both on facts
and in law. The scheme and the object underlying Chapter XIX-A supports the
said interpretation. The learned counsel submitted further that the penalty
proceedings are co-related to the amount of concealment. Once the amount
concealed undergoes a change by virtue of additions made in the said earlier
assessment years on account of spreading over [of the value of opening stock]
in each of the relevant accounting years, the penalty proceedings become
automatically unsustainable in law. They cannot proceed further. Fresh penalty
proceedings have to be initiated on the basis of the revised figure of
concealment - and that can be done only by the Commission and not by the Income
Tax Officer.
RELEVANT
PROVISIONS OF LAW:
For a
proper appreciation of the questions arising herein, it is necessary to notice
the relevant provisions in Chapter XIX-A as they were obtaining at the relevant
time.
The
definition of the expression "Case" in clause (a) of Section 245-A
reads:
"`Case'
means proceeding under the Indian Income-tax Act, 1922, or under this Act for
or in connection with the assessment or reassessment of any person in respect
of any year or years which may be pending before an income-tax authority on the
date on which an application under sub-section (1) of section 245C is made."
Section 245-C provides that the application for settlement shall be filed in
the form prescribed and containing prescribed particulars. Section 245-D
prescribes the procedure to be followed on receipt of an application for
settlement. The second proviso to sub-section (1) says "provided further
that an application shall not be proceeded with under this sub-section 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
impossible under the Indian Income-tax Act, 1922, or under this Act, has been
established or is likely to be established by any Income-tax authority, in
relation to the case." Sub-section (4) provides that after examining the
entire material including the report(s) of the Commission, the Commission may
pass final orders in accordance with the provisions of the Act. It is not
necessary to refer to other sub-sections in Section 245-D for the purposes of
these appeals.
Section
245-E is relevant for our purposes and may be set out in full:
"245E.
Power of Settlement Commission to reopen completed proceedings.-- If the
Settlement Commission is of the opinion (the reasons for such opinion to be
recorded by it in writing) that, for the proper disposal of the case pending
before it, it is necessary or expedient to reopen any proceeding connected with
the case but which has been completed under the Indian Income-tax Act, 1922, or
under this Act by any Income-tax section 245C was made, it may, with the
concurrence of the applicant, reopen such proceeding and pass such orders
thereon relation to which the application for settlement had been made by the
applicant under that section covered such proceeding also:
Provided
that no proceeding shall be reopened by the Settlement Commission under this
section after the expiry of a period of eight years from the end of the
assessment year to which such proceeding relates." Sub-section (1) of Section
245-F provides that "in addition to the powers conferred on the Settlement
Commission under this Chapter, it shall have all the powers which are vested in
an Income-tax authority under this Act". Sub-section (2) provides that
"where an application made under section 245C has been allowed to be
proceeded with under section 245D, the Settlement Commission shall, until an
order is passed under sub-section (4) of section 245D, have, subject to the
provisions of sub-section (3) of that section, exclusive jurisdiction to
exercise the powers and perform the functions of an Income-tax authority under
this Act in relation to the case." Section 245-H empowers the Commission
to grant immunity from prosecution under Indian Penal Code or any other Central
Act to an applicant if it is satisfied that he has made full disclosure of his
income and has fully cooperated with the Commission.
Section
245-I declares that "every order of settlement passed under sub-section
(4) of section 245D shall be conclusive as to the matters stated therein and no
matter covered by such order shall, save as otherwise provided in this Chapter,
be reopened in any proceeding under this Act or under any other law for the
time being in force."
CONSIDERATION
OF THE CONTENTIONS URGED:
Section
245-C(1) provides that an application for settlement shall be filed in the
prescribed form containing prescribed particulars; in this case, the
application filed by the assessee pertaining only to one assessment year, viz.,
1975-76 and to no other assessment year. According to the second proviso to
Section 245-D(1), as in force at the relevant time, no such application can be
proceeded with by the Commission 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 has been established or is likely to be established by
any income tax authority in relation to the case; in this case, the Commissioner
objected to the Commission passing any orders with respect to assessment years
other than the Assessment Year 1975-76;
so far
as Assessment Year 1975-76 is concerned, the Commissioner put forward no
objection. Sub-section (4) of Section 245-D says that after examining the
entire material, the Commission shall "pass such orders as it thinks fit
on the matters covered by the application and any other material relating to
the case not covered by the application", "in accordance with the provisions
of the Act"; in other words, the Commission has not only to act in
accordance with the provisions of the Act but that its jurisdiction is confined
to the matters covered by the application before it. The further words
"and any other material relating to the case not covered by the
application" show that the Commission can take into consideration any
other material not covered by the application but it must be one relating to
the case before it. It must be remembered that this chapter [XIX-A] prescribes
a procedure which is a departure from the normal procedure provided by the Act.
Once an application is admitted - an application can be made only in respect of
a pending case - the Commission takes over all the proceedings relating to that
case which may be pending before any authority under the Act. But this power is
confined to the case before the Commission, which means the case relating to
the assessment year for which the application for settlement is filed and
admitted for settlement - to wit, Assessment Year 1975-76 in this case. Section
245-E, which is the sheet anchor of the majority opinion, empowers the
Commission to re-open any completed proceedings connected with the case before
it but this power is circumscribed by the requirement expressly stated in the section
that such re-opening of completed proceedings should be necessary or expedient
for the proper disposal of the case pending before it. There are two other
limitations upon this power, viz., that this re- opening of the completed
proceedings can be done, even for the aforesaid limited purpose, only with the
concurrence of the assessee and secondly that this power cannot extend to a
period beyond eight years from the end of the assessment year to which such
proceeding relates. These two features make it abundantly clear that the
section contemplates re- opeining of the completed proceedings not for the
benefit of the assessee but in the interests of Revenue. It contemplates a
situation where the case before the Commission cannot be satisfactorily settled
unless some previously concluded proceedings are re-opened which would normally
be to the prejudice of the assessee. It is precisely for this reason that the
section says that it can be done only with the concurrence of the assessee and
that too for a period within eight years. This section cannot be read as
empowering the Commission to do indirectly what cannot be done directly. We may
explain. The Commission has jurisdiction to settle the case which is before it.
Take this very case: the application for settlement before it pertains to the
Assessment Year 1975-76. Its jurisdiction is limited to settling this case
alone. In this case, it cannot settle the matters relating to other assessment
years, which are not before it. The Commissioner cannot touch the proceedings
relating to the earlier or other years. This rule is, however, relaxed by
Section 245-E to a limited extent and for a limited purpose. The concluded
proceedings can be re-opened by the Commission provided (a) such re- opening is
necessary or expedient for the proper disposal of the case before it, (b) the
reasons for such opinion are recorded in writing by the Commission, (c) the
applicant- assessee must give his concurrence therefore and (d) the proceeding
which is being re-opened must relate to an assessment year which is within
eight years from the end of the assessment year to which the case before the
Commission relates. The power conferred by Section 245-E is thus a
circumscribed and a conditional power. It can be exercised only in accordance
with and subject to the conditions aforementioned and in no other manner. Now,
let us see whether Section 245-E availed the Commission to direct the dropping
of penalty proceedings relating to Assessment Years 1970-71 to 1974-75 while
settling the case relating to Assessment Year 1975-76.
In the
present case, the application filed by the assessee was in respect of only one
assessment year, viz., 1975-76. This is clear from the particulars mentioned in
his application for settlement dated June 24, 1977 referred to hereinbefore. In his
response/report to the said application, the Commissioner had stated that he
had no objection to the application for settlement being processed with in
respect of Assessment Year 1975-76 vide Commissioner's report dated July 6, 1977. Thereafter, the assessee filed,
what he called, "a brief statement of facts". In this statement, he
requested that the enhanced value of the opening stock disclosed by him should
not be added in the assessment of the Assessment Year 1975-76 alone but should
be appropriately spread over all the six assessment years, viz., Assessment
Years 1970-71 to 1975-76.
This
he requested because, doing so would have reduced his overall tax liability. It
is for this purpose that he gave his consent/concurrence for re-opening the
assessments of the earlier assessment years.* It was, therefore, not a
situation contemplated by Section 245-E. This was not a case where the
Commission wanted to re-open the concluded assessments because it was found
necessary or expedient to do so for the proper disposal of the case pending
before it;
it was
a case where the assessee was requesting for a benefit and for the purpose of
obtaining that benefit, he was requesting the
------------------------------------------------------------ *This request was
promptly opposed by the Commissioner of Income Tax. He stated that while in the
original application, settlement was sought in respect of Assessment Year
1975-76 alone, the assessee was now saying that the settlement of Assessment Year
1975-76 will have effect upon earlier years as well. The Commissioner of Income
Tax stated that the assessments for the said earlier assessment years
"have long been completed" and that the valuation of stock was never
under consideration in those assessment years.
This
objection of the Commissioner is also a limiting factor on the power and
jurisdiction of the Commission in the light of the second proviso to Section
245-D(1). re-opening of the earlier assessments. Even this request of the assessee
was for a limited purpose, viz., for spreading over the enhanced value of
opening stock disclosed by him over the said six assessment years. It was not a
request or concurrence to re- open the entire assessment and penalty
proceedings relating to the said earlier assessment years. [As a matter of
fact, penalty proceedings for the said earlier assessment years were pending on
the date of filing of the application for settlement and its admission. As
pointed out by the Chairman in his opinion, the said proceedings were in
respect of certain concealments already discovered by the Income Tax Officer,
i.e., concealments established or likely to be established by the Income Tax
Officer within the meaning of the second proviso to Section 245-D(1) - another
limiting factor on the power of the Commission.] It, therefore, follows that
the Commission could re-open the assessment proceedings for the said earlier
assessment years only for the aforesaid limited purpose, i.e., for spreading
over the said enhanced value. Under the guise of re-opening the said
assessments for the aforementioned limited purpose, the Commission could not
have re-opened or for that matter, settled the matters relating to the said
earlier assessment years. It is not permissible for the Commission to say that
since it has re-opened the assessments of earlier assessment year for the
limited purpose of giving relief for the assessment year before it, it gets
full command and total jurisdiction over all the said earlier assessment years
and that it can pass such orders as it thinks fit in respect of all the matters
relating to the said assessment years including the penalty proceedings. This
would amount to doing indirectly what cannot be done directly. The ultimate
orders passed by the Commission should relate to the case before it; it is only
for the purpose of effectively settling the case before it that the Commission
can re-open concluded proceedings subject to the four conditions set out
hereinabove. We fail to see how the penalty proceedings (which have now been
dropped) fall within the ambit of the power conferred by Section 245-E. The
penalty proceedings not only relate to assessment years not before the
Commission but they relate to alleged concealments during those earlier
assessment years which concealments were not before the Commission. The
disclosures before the Commission related to two other concealments [disclosed
for the Assessment Year 1975-76 but which amounts the assessee wanted to be
spread over all the six Assessment Years 1970- 71 to 1975-76] wholly different
and distinct from the concealments on account of which the said penalty
proceedings were initiated. We are, therefore, of the opinion that the
Commission exceeded its jurisdiction in directing that the said penalty
proceedings [relating to Assessment Years 1970-71 to 1974-75] should be dropped
or that penalties be waived in respect of the said assessment years. The
interpretation placed by the Chairman upon Section 245-E is the correct one and
not the interpretation placed by the majority.
We are
also not impressed by the argument of Sri Poddar, learned counsel for the assessee,
that inasmuch as the quantum of penalty depends upon the quantum of the income
assessed and because the income assessed for the said earlier assessment years was
bound to undergo a change on account of the "spreading over"
aforesaid, the earlier penalty proceedings fall to the ground automatically and
that, thereafter penalties, if any, can be levied only by the Settlement
Commission. There is a clear fallacy in the said submission. The penalty
proceedings related to certain other concealments, i.e., other than the two
concealments disclosed in the assessee's application for settlement and which
were sought to be spread over backwards. The said penalty proceedings could
not, therefore, have been affected or rendered nugatory by the addition to the
total income resulting from the aforesaid "spreading over". It is
difficult to see any connection, much less an intimate connection, between the
said "spreading over" and the consequent enhancement of the income
assessed for the said assessment years and the penalty proceedings.
Lastly,
we may refer to Sri Poddar's submission based upon Section 245-F(1). According
to him, sub-section (1) confers the powers of an income tax authority upon the
Settlement Commission including the power to re-open the assessments as
contemplated by Section 147. We do not know whether the power under Section 147
can also be claimed by the Commission. But assuming it can, the said power has
to be exercised in accordance with the provisions contained in Sections 147 to
and 150 including Sections 148 and 149.
Admittedly,
they were not complied with in this case.
The
appeals are accordingly allowed and the order of the Settlement Commission is
set aside to the extent it has dropped the penalty proceedings relating to
Assessment Years 1970-71 to 1974-75 and to the extent it has waived the
penalties for the said assessment years. The orders and directions made by it
shall not affect the said penalty proceedings which can now proceed according
to law. The Settlement Commission shall modify its judgment and order in terms
of and in accordance with this judgment.
The
appeals are accordingly allowed with costs. The appellants' costs are
quantified at a consolidated sum of Rupees twenty thousand.
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