SC stays operation of re-assessment & demand notices issued after rejection of settlement application

While fielding an appeal against an order passed by the High Court of Gujarat, the Supreme Court of India clarified that the real object and purpose of behind the Settlement Commission was to give an opportunity to an assessee, to disclose any hitherto undisclosed income in order to seek benefit in the form of immunity from penalty and prosecution. 

With these observations, the Court stayed the operation of re-assessment orders and demand notices which had been issued to the Assessee after the High Court of Gujarat rejected the Assessee’s application for settlement.

A Division Bench comprising of Justice BV Nagarathna and Justice Ujjal Bhuyan noted that the Assessee initially declared a sum of about Rs 34 Lakhs as income, over a period of three Assessment Years, and pursuant to Survey operations under Section 133A of the Income Tax Act 1961, the Assessee declared an additional income of about Rs 56 Lakhs, over and above the amount already declared.

Thus, the Bench agreed with the Respondent-Revenue’s argument of their having been no real determination of undisclosed income.

However, the Bench also observed that the High Court could also have remanded the matter to the Settlement Commission for re-determination of undisclosed income, rather than remanding the matter to the Revenue. The Bench also noted a lapse in the High Court’s order, in the sense that did not pass any further order after setting aside the order passed by the Settlement Commission.

The Appellant in this matter was represented by Mr. Ramesh P Bhatt, Senior Advocate, whereas the Respondent-Revenue was represented by Ms. Aishwarya Bhati, Additional Solicitor General.

The Assessee is a partnership firm. The facts of this matter have their genesis in Survey operations conducted under Section 133A of the Act, in respect of the Assessee, during the relevant Assessment Year. In course of Survey, statements of the manager and one of the partners in the firm, were recorded, along with documents being impounded. Subsequently, the Assessee filed an application before the Settlement Commission for the Assessment Years 2011-12, 2012-13 and 2013-14. Vide order passed under Section 245D of the Act, the Commission rejected the Revenue’s plea that the Assessee had not made full & true disclosure of its income. The Commission accepted the Assessee’s declaration of additional income of Rs 56 Lakhs & permitted the assessee to pay the tax amount in two installments. The Commission also granted immunity from penalty and prosecution.

Thereafter, the Revenue approached the High Court, and before the Court, the Revenue canvassed that the revised disclosures of about Rs 56 Lakhs were far greater than the initial disclosures of about Rs 34 Lakhs and that the Settlement Commission had ignored the Revenue’s plea that it was difficult to accurately ascertain the actual amount of undisclosed income, based on the documents impounded during Survey operations.

Based on this ground alone, the High Court of Gujarat set aside the order passed by the Settlement Commission and remanded the matter. Thereafter, the Revenue passed an order of re-assessment and a demand notice was issued subsequently.

On hearing both sides, the Division Bench held that – “…We find that there is a real object and purpose of setting up of the Settlement Commission as an Assessee, who is given an opportunity to disclose the undisclosed income in order to seek benefit in the form of immunity from penalty and prosecution. Therefore, when the High Court set aside the order of the Settlement Commission, the matter had to be remanded to the Settlement Commission for re-consideration and re-determination of the undisclosed income, after giving an opportunity to both sides…”.

With these observations, the Bench quashed the order passed by the High Court and remanded the matter to the Settlement Commission to dispose of the Assessee’s application for settlement. As the High Court’s order stood quashed, the re-assessment order and demand notice issued by the Respondent-Revenue were set aside as well.

Cause Title: Shree Nilkanth Developers Vs Principal Commissioner of Income Tax [CIVIL APPEAL NO. 434 OF 2017 / 2023-Entersclice-2-SC-IT]

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Shree-Nilkanth-Developers-Vs-Principal-Commissioner-of-Income-Tax