M/S. Swamina International ... vs Income Tax Settlement Commission ...
2021 Latest Caselaw 1555 Cal/2

Form No.(J2)



                           IN THE HIGH COURT AT CALCUTTA
                            CIVIL APPELLATE JURISDICTION
                          IN APPEAL FROM AN ORDER PASSED
                     IN ITS CONSTITUTIONAL WRIT JURISDICTION
                                    ORIGINAL SIDE



Present :

THE HON'BLE JUSTICE T.S. SIVAGNANAM

               AND

THE HON'BLE JUSTICE HIRANMAY BHATTACHARYYA


                            APO NO. 421 of 2017
                            WP NO: 431 OF 2014
            M/s. SWAMINA INTERNATIONAL PRIVATE LIMITED & ANR.
                                    VS.
            INCOME TAX SETTLEMENT COMMISSION (IT&WT) & ORS.



                                                    Mr. J. P. Khaitan, Sr. Adv.
                                                    Ms. Anupa Banerjee, Adv.
                                                        Mr. Sagnik Basu, Adv.
                                                         Ms. Nidhi Bahal, Adv.
                                                     Mr. Shivam Pathak, Adv.
                                                          ...For the Appellants

                                                      Mr. P. K. Bhowmik, Adv.
                                                       Mr. A. Bhowmick, Adv.
                                                        ...For the respondents

Heard on : 09.12.2021

Judgment on : 09.12.2021

T.S. SIGAGNANAM, J. : This appeal is directed against the

order passed in a writ petition filed by the appellant in WP 431 of

2014 dated 17th August 2017. The said writ petition was filed

challenging the order passed by the Settlement Commission under the

provision of the Income Tax Act, 1961 (the Act in brevity). The writ

petition has been dismissed and the order passed by the Settlement

Commissioner has been affirmed. The appellant is aggrieved by the

said order and urged before us by way of this appeal.

The brief factual background would be necessary before we

proceed to deal with the contentions raised before us by either side.

The appellant is a company incorporated under the provisions

under the Indian Companies Act during 1976 and engaged in

business of electrical maintenance and contract jobs, erection of

power plants etc. The appellant company has undertaken job works

for several public sector undertakings throughout the country. The

assessee approached the Settlement Commission on account of

deficiencies in the final account which were filed and that return filed

by the company did not reflect the true state of affairs, and, therefore,

the application dated 31st May 2007 was filed under Section 243C of

the Act. This application was allowed to be proceeded in terms of

Section 245D(2A) as the appellant had filed the same on 31st May,

2007 and the additional tax and interest thereupon was paid before

31st July 2007. The Settlement Commission took up the matter for

consideration and a report in terms of Rule 9 of the Settlement

Commission Procedure Rules was filed on 7th February 2008 and

taking into consideration of the said report the Commission proceeded

to decide the matter. On going through the order passed by the

Commission we find that the commission has referred a

communication sent by the assessing officer to the Commissioner of

Income Tax dated 27/30th December 2013 and referred the same as a

report which have been filed before the Commission on 15th January

2014, the date on which the application was finally heard by the

Commission. The assessee appears to have filed their objection /

response to the said communication vide letters dated 14.2.2014 and

24.2.2014 contending that the said communication dated 27/30th

December, 2013 cannot be taken as a report, at best it can be only a

communication. Apart from that assessee had also raised certain

issues on the merits of the matter which had been pointed out in the

said communication. It may not be necessary for us at this juncture

to go into the other factual details since the primary ground on which

the writ petition came to be filed is on the ground that the order

passed by the Settlement Commission violates provisions of the Act

and causes prejudice to the appellant/assessee. The learned Single

Judge was of the view that the scope of the interference by a Court

exercising powers under Article 226 of the Constitution are clearly

circumscribed and disputed question of fact cannot be gone into and

the Settlement Commission had called for a report under Rule 9 of the

said rules and considered the additions and there cannot be any

illegality in the said order for the Writ Court to intervene. The

appellant is aggrieved by the dismissal of the writ petition.

Mr. J.P. Khaitan, learned Senior Counsel appearing for the

appellant submitted that gross procedural irregularity has been

committed by the Commission, and the provisions of the Act has been

violated thereby putting the assessee to a great prejudice. It is

submitted that the addition of Rs.6.97 crore to the income of the

assessee for the assessment year 2001-2002 was made contrary to the

provisions of the Act and without considering or dealing with any

submission made by the assessee on facts as well as on law. Further

the learned Single Bench committed an error in holding that the

appellant's case was a report under Rule 9 should have been called for

in respect of the said sum of Rs.6.97 crore when such was never the

case of the appellant. Further it is submitted that the sum of Rs.6.97

crore was not referred to any report of the Principal Commissioner or

Commissioner under Sub Section 2B or sub Section 3 of Section 245D

and as such could not be added as income in the order passed under

sub Section 4 of Section 245D. Further, it is submitted that if the

commission was desirous of passing an order by settling the case

under Section 245, it should have ordered for an investigation under

sub Section 3 and call for a report from the commissioner in respect of

the sum of Rs.6.97 crores, should afford an opportunity to the

assessee to deal with such report and make submissions and such

procedure was not followed by the Commission. Further, it is

submitted that the assessee's consistent case was that the said sum

of Rs.6.97 crores was a balance sheet item and was not a matter

covered by the Settlement Commission in respect of which assessee

had offered itself to be assessed and mere mentioning of the statement

of fact about the treatment of the said Act in the revised amount filed

by the assessee before the Commission did not make a matter covered

by the application for settlement.

Further it is submitted that the learned Writ Court ought not to

have seen that the assessee had stated before the Commission that

the said advances of Rs.6.97 crore has become time barred. It was

factually incorrect and has also made factual and legal submissions in

respect of such submission and to demonstrate that the said

advances unilaterally transferred to reserve and surplus on March 31,

2000 had no tax implication for the assessee. Further the

communication sent by the assessing officer dated 27/30th December,

2013 was an internal communication between the assessing officer

and the Commissioner of Income Tax with regard to the issues on

which investigation under Section 245(3) of the Act should have been

sought for by the revenue before the Commission and, therefore, the

said communication dated 27/30th December, 2013 is not a report

called for by the Commission. Further it is contended that the order

passed by the commission is a non speaking order, without having

due regard to the submissions made by the assessee more particularly

the objections which they have filed to the Rule 9 report itself apart

from not considering the response filed by the appellant/assessee to

the communication sent by the assessing officer dated 27/30th

December 2013. It is further submitted that the Settlement

Commission had not taken into account the relevant fact that the

assessed net profit rate in the assessee's case for the assessment year

2003-04 after examination of its books of accounts was 2.93% and as

such the company's offer on the basis of six years average rate was

3.69 per cent which should have been accepted rather than to fix an

ad hoc percentage of 8% which was adopted by the assessing officer

for the assessment year 2001-02 which assessment is a subject

matter of appeal before the Commissioner of Income Tax (Appeals).

Further it is submitted that the Commission has not given any

independent reasons as to why the rate offered by the assessee at

3.69% was not acceptable and this fact was also not considered by the

learned Single Bench. Further it is submitted that when the assessee

had pointed out serious illegality in the decision making process by

the Commission, the learned Writ Court ought not to have dismissed

the writ petition. With regard to the scope of interference of this

Court under Article 226 of the Constitution of India against an order

of Settlement Commission reliance was placed on the decsision in the

case of Major Metals Ltd. Versus Union of India & Ors. [2013] 359 ITR

450 (Bom). Mr. Bhowmick learned standing counsel appearing for the

respondent has drawn our attention to the statement of fact as

recorded in the Settlement application dated 31st May, 2007 filed

under Section 245(C) of the Act. Further for completion of fact the

learned standing Counsel had referred to the report submitted under

Rule 9 dated 7th February, 2008 and the findings recorded by the

Commission and contended that learned Writ Court after taking note

of the fact that the Commission had considered the materials as well

as the report and rendered a finding, rightly dismissing the writ

petition finding that there is nothing to be interfered by a Writ Court.

With the aforestated submission learned standing counsel sought to

sustain the order passed in the writ petition.

We have elaborately heard the learned Counsel for the parties,

carefully considered the materials perused and referred to. First, we

need to take note of the legal position of the scope of this Court under

Article 226 of the Constitution to interfere with the orders passed by

the Settlement Commission. This issue is no longer a res integra and

one of the decisions in the case of Jyotendrasinhji Vs. S.I. Tripathi

reported in [1993] Vol 201 ITR 611 (SC), wherein the Hon'ble Supreme

Court emphasized that the only ground upon which an order passed

by the Settlement Commission can be interfered with is that the order

of the Commission is contrary to the provisions of the Act and that

such contravention has prejudiced the assessee. That apart the other

ground should be that of bias, fraud or malice.

In the said decision the Hon'ble Supreme Court referred to the

decision in R.B. Shreeram Durga Prasad & Fatechand Nursingh Das

Vs. Settlement Commission (IT and WT) reported in [1989] 176 ITR 169

(SC) wherein it was observed that Court should be concerned with the

legality of procedure followed and not with the validity of the order

and that the judicial review is concerned not with the decision but the

decision making process. Thus it was held that the power exercised by

the Court while examining the correctness of the order of the

Settlement Commission cannot be equated to an appellate power. In

Union of India Vs. Ind-Swift Laboratories Ltd. [2011] 40 VST 1(SC) the

Hon'ble Court held that an order passed by the Settlement

Commission should be interfered with only if the said order is found

to be contrary to any provisions of the Act and so far as the findings of

fact recorded by the Commission or question of facts are concerned

the same is not open for examination either by the High Court or by

the Supreme Court. In N. Krishnan Vs. Settlement Commission

[1989] 180 (ITR) 585 (Karn) it was held that the Settlement

Commission may be interfered broadly under two circumstances

firstly if there is a gross procedural defect such as the violation of the

mandatory of procedural requirements of the provisions of Chapter

XIX and/or violation of the principles of natural justice and secondly

there is no nexus between the reasons given and the decision taken by

the Settlement Commission. It was pointed out that the Court under

Article 226 would not interfere with an error of fact alleged to have

been committed by the Settlement Commission. Those decisions

were noted in Major Metals Ltd.(supra). By keeping the above legal

principles in mind if we examine the order passed by the Settlement

Commission we have no hesitation to hold that the order violates the

provisions of the Act and causes grave prejudice to the

appellant/assessee. We support such conclusions with the following

reasons;

In terms of Section 245D(3) of the Act, the Settlement

Commission may call for the records from the Principal Commissioner

or Commissioner and after examination of such records, if the

Settlement Commission is of the opinion that any further enquiry or

investigation in the matter is necessary, it may direct the Principal

Commissioner or Commissioner to make or caused to be made such

further enquiry of or investigation and furnish a report on the matters

covered by the application and any other matter relating to the case

and the Principal Commissioner or the Commissioner shall furnish a

report within a period of 90 days of the receipt of the communication

from the Settlement Commissioner. In terms of the above provision

the Commission is empowered to not only consider the matter which

is covered by an application by directing further enquiry or

investigation but also any other matter relating to the case. Thus if

the commission is to venture into any other matter relating to the case

or in other words a matter not covered by the application then the pre

requisite is an enquiry or investigation is required to be done.

Thereafter on receipt of the report, the assessee/application is entitled

for an opportunity to be heard in terms of sub Section 4 of Section

245D of the Act. The three issues namely the addition of about

Rs.6.97 crores, the rate of profit adopted by the Commission at 8%

and the increase of the turnover are all matters which are not covered

in the application. Thus if the Commission had to venture into this

aspect merely because it was made as a statement of fact in the

application or it was part of Rule 9 report, unless and until the

procedure which is stipulated under the Act has been followed such a

conclusion or a finding could not have been rendered by the

Settlement Commission more particularly when those issues did not

form part of this application. In fact, we could very well elaborate on

the factual aspect in to the matter but we refrain from doing so as

what we have called upon to decide is to whether there was an error in

the decision making process and we are not concerned about the

decision. This procedural violation goes to the root of the matter

rendering the order of the Commission wholly unsustainable in

violation of the provisions of the Act and causing grave prejudice to

the assessee. The consequence would be that the order has to be

treated as an order in violation of principles of natural justice and to a

certain extent beyond jurisdiction. Those are all grounds which are

very much available to a Court exercising jurisdiction under Article

226 to interfere with the said order. One more aspect which we had

noted is the observation made by the Commission in paragraph 7of its

order dated 28th February, 2014. In the said paragraph the

Commission records that they have heard the rival submissions and

gone through the "latest report" of the CIT dated 27/30th December,

2013 filed before the Commission on 15th January, 2014. To be noted

that 15th January, 2014 was the date on which the Commission heard

the application finally before reserving orders. More importantly what

is required to be seen is whether the communication dated 27/30th

December, 2013 is a report which has to be construed as such in

terms of Section 245D(3). On a perusal of the said letter we find that

is not a report but is an internal communication sent by the assessing

officer to his Commissioner of Income Tax and on reading of the

communication it is clear that the assessing officer has requested his

commissioner to allow him to enquire and investigate the whole case

through principals/beneficiaries and obtain correct picture of the

business activities and interest income and factual position of assets

of transparency and find out the income accurately. Further the

assessing officer qualifies the communication by stating that the

submission furnished is in the form of a report based on records

without cross-checking or verification.

Furthermore, the assessing officer states that due to lack of

fairness on the part of the assessee in disclosing income, the

Settlement Commissioner may reject the application. Thus by

reading the said communication dated 27/30th December, 2013 it is

clear that is not a report in terms of sub Section 3 of Section 245D

which mandates that Commission should direct the Commissioner to

submit a report which has never been done by the Commissioner. All

those which we have pointed out above would go to show that the

order passed by the Commissioner flows from serious illegality and

irregularity calling for interference. That apart the alleged report dated

27th December, 2013 as admittedly been filed only on 15th January,

2014, the date on which the application was finally been heard by the

Commission and orders were reserved. The assesee had stated that on

14th February 2014 and 24th February, 2014 they have filed their

objection to the said letter which has not been dealt with by the

Commission not even referred to by the Commission. Thus we can

safely hold that there has been serious violation of principles of

natural justice. On all the above grounds we are fully satisfied that

the order passed by the Commission calls for interference and

consequently we are required to interfere with the order passed by the

learned Single Judge dismissing the writ petition.

In the result, the appeal is allowed. The order passed in the writ

petition is set aside and the order passed by the Settlement

Commission is quashed and the assessment is relegated back to the

assessing officer to get assessment in accordance with law after

effective opportunity to the assessee and not being influenced in any

of the these observations made in any of the letters and in any of the

reports and any observation made by the Settlement Commission

which order has been set aside by this Judgment.

(T.S. SIVAGNANAM, J.)

I agree.

(HIRANMAY BHATTACHARYYA,J.)

GH/A Dey