In a landmark ruling on the interplay between Chapter XIX-A and the reassessment provisions of the Income Tax Act, the Supreme Court has reaffirmed that once the Income Tax Settlement Commission passes a final settlement order, the Assessing Officer is denuded of jurisdiction to reopen the concluded assessment by issuing a notice under Section 148 of the Income Tax Act. The Court held that the settlement procedure under Chapter XIX-A of the Income Tax Act is a self-contained code, and the finality attached to a settlement order passed under Section 245D(4) cannot be defeated by permitting the Assessing Officer to independently exercise reassessment jurisdiction under Section 148 of the Act.
The Apex Court clarified that the expression ‘full and true disclosure of income’ under Section 245C must be read with the expression ‘the manner in which such income has been derived’, and once the ITSC admits the application and passes a final order determining the total income after allowing deductions claimed in the original return, the entire assessment year stands concluded and is conclusive under Section 245-I.
The Court explained the scheme of Chapter XIX-A as a ‘crust and crumb’ mechanism, where the Revenue realises the crumb of tax on suppressed income through voluntary disclosure, and the assessee avoids the crust of penal interest and prosecution by paying the tax upfront; both parties must take the crust and the crumb together, and the Revenue cannot seek further crust by resorting to reassessment after the settlement order attains finality.
Accordingly, the Apex Court reiterated that the Revenue’s sole recourse to reopen a concluded settlement order is to move the ITSC itself under Section 245D(6) on the grounds of fraud or misrepresentation, and not by issuing an independent reassessment notice under Section 148, as making the AO’s jurisdiction independently available would defeat the very finality Parliament intended to attach to settlement orders.
A Two-Judge Bench comprising Justice S.V.N. Bhatti and Justice N.V. Anjaria observed that the scope of judicial review of Settlement Commission orders is strictly limited to examining whether the order is contrary to the provisions of the Act, or is vitiated by fraud, bias, or malice, and that an incorrect interpretation of law by the Commission is not a valid ground for interference.
The Court noted that under Section 245C, an application must contain a full and true disclosure of the assessee’s income which has not been disclosed before the AO, and the manner in which such income has been derived. Once the ITSC admits the case for settlement, the consideration is the return for the assessment year, including deductions, and the Revenue participates in the settlement by filing its report. The Court further observed that the Revenue is not without recourse, as it has the option to move under Section 245D(6) on the grounds of fraud and misrepresentation, which the Revenue did in this case, but the ITSC rejected that application, which has become final.
The Court observed that the settlement procedure under Chapter XIX-A is a self-contained code, akin to arbitration proceedings, and that the objective of this Chapter is the ‘settlement of liability’ rather than the ‘determination of liability’. The Court further noted that the AO’s jurisdiction is not automatically fettered the moment an assessee files a settlement application; the Settlement Commission assumes exclusive jurisdiction only after it passes an order under Section 245D(1) permitting the application to proceed. Once the matter is concluded under Section 245D(4), the decision attains finality, and the scope of judicial review is limited.
Briefly, Omaxe Limited, a public limited company engaged in real estate, filed its return for AY 2006-07 declaring taxable income of Rs. 89.20 crores after claiming a deduction of Rs. 78.99 crores under Section 80IB(10) of the Act. Subsequently, the assessee filed an application under Section 245C before the Income Tax Settlement Commission (ITSC) for AY 2000-01 to 2006-07. The ITSC by its final order under Section 245D(4), accepted an additional income surrender of Rs. 18 lakhs and determined the net taxable income for AY 2006-07 at Rs. 89.38 crores, thereby allowing the Section 80IB(10) deduction as claimed in the original return.
On Dec 18, 2009, the Investigation Wing conducted a fresh survey under Section 133A at the assessee’s premises and impounded documents containing minutes of meetings of senior executives, including the Director of Taxation, V.P. Finance, G.M. Legal, and the company’s auditors. These minutes allegedly showed that the assessee’s executives had mutually decided, before finalising the balance sheet for the period ending March 31, 2009, to transfer commercial portions of specific projects to 100% subsidiary companies at cost to strengthen the Section 80IB claim. The Revenue alleged that the commercial area in several projects, namely Omaxe City Lucknow, Omaxe City Sonepat, Omaxe Heights Sonepat, and Omaxe Heights Faridabad, far exceeded the 5% or 2,000 sq. ft. limit prescribed under Section 80IB(10)(vi), making those projects ineligible for the deduction. Consequently, a notice under Section 148 was issued proposing to disallow the deduction to the extent of Rs. 55.58 crores.
The assessee filed objections contending that the ITSC settlement order was conclusive under Section 245-I and that the AO had no jurisdiction to reopen the assessment. The AO rejected the objections and passed the reassessment order disallowing the deduction and adding Rs. 65.65 crores to the total taxable income. The assessee challenged the same before the Delhi High Court, which was allowed, quashing the reassessment notice and order. The Revenue’s separate application under Section 245D(6) before the ITSC, seeking to declare the settlement order void on the ground of misrepresentation, was also rejected by the ITSC, holding that the minutes only reflected a desire to strengthen the claim and comply with the law, and that the difference of opinion on what constitutes a ‘project’ was a legal dispute, not misrepresentation.
