PETITIONER: COMMISSIONER OF INCOME TAX, CALCUTTA [CENTRAL] Vs. RESPONDENT: M/S.PAHARPUR COOLING TOWERS PRIVATE LIMITED DATE OF JUDGMENT: 11/03/1996 BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) MUKHERJEE M.K. (J) CITATION: JT 1996 (3) 144 1996 SCALE (2)655 ACT: HEADNOTE: JUDGMENT:
J U D G M E N T
B.P.JEEVAN REDDY,J.
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.