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ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 1830 OF 2019
Principal Commissioner of Income Tax )
(Central) – 3, Mumbai, 19th floor, Air India )
Building, Nariman Point, Mumbai 400 021 ) ...Petitioner
(ITSC), Additional Bench-II, Mahalaxmi )
Chambers, Mumbai 400 034 )
2. M/s Wadhwa Group Holding Pvt Ltd. )
301, Plantina Plot No.C-59, G-Block BKC )
Bandra East Mumbai 400098 )
3. M/s Wadhwa Residency Pvt Ltd. )
4. M/s Vijay Associate (Wadhwa) )
5. M/s Wadhwa Estate & Developer Pvt Ltd.)
Bandra East Mumbai 400098 ) ...Respondents
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Mr. Suresh Kumar for Petitioner.
Mr. R. V. Easwar, Senior Advocate a/w Mr. K. Gopal, Mr. Om Kandalkar and
Mr. Akhilesh Deshmukh for Respondent Nos.2 to 5.
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DATED : 18th APRIL 2024
ORAL JUDGMENT
1 By consent, Rule. Rule made returnable forthwith and heard.
2 Petitioner, who is the Principal commissioner of Income Tax Meera Jadhav (Central)-3, Mumbai (PCIT), is impugning by this writ petition an order dated 27th September 2018 passed under Section 245D(4) of the Income Tax Act 1961 (the Act) by respondent no.1, the Income Tax Settlement Commission (ITSC).
3 There was a search and seizure action under Section 132 of the Act on 16th December 2015 at the business premises of applicants, respondent nos.[2] to 5 (the assesses) and residential premises of key personnel of assessees. The search was concluded on 21st December 2015. No seizure of cash or jewellery was effected from the premises of applicants or its promoters. Certain cash and jewellery were seized from the residence of certain key personnel. Admittedly, the assets found were explained.
4 Respondent Nos. 2 to 5 filed application under Section 245C(1) of the Act before ITSC-respondent no.1, for settlement of its income for Assessment Years 2010-11 to 2016-17. Order under Section 245D(1) of the Act was passed on 5th April 2017. Order under Section 245D(2C) of the Act was passed on 12th May 2017 holding the application as not invalid. On 4th September 2017, the PCIT submitted his report under Rule 9 of ITSC (Procedure) Rules, 1997. Admittedly, after taking into consideration the Rule-9 reports and subsequent reports of the PCIT, the replies of applicants to the Rule-9 reports as well as the oral arguments from both the sides, the documents submitted along with the statement of facts, the ITSC settled all four cases as per the order dated 27th September 2018 which is impugned in this petition. Mr. Easwar submitted that on this admitted position itself the petition should be dismissed since the Apex Court in R. B. Shreeram Durga Prasad & Fatechand Nursing Das Vs. Settlement Commission[1] has held that court should be concerned with the legality of the procedure followed and not with the validity of the order and the judicial review is concerned not with the decision but with the decision making process. Since admittedly the procedure has been followed in as much as, all reports have been considered, arguments have been heard and in view of there being no ground in the petition challenging the decision making process, this petition should be dismissed. We would agree with him.
5 Revenue, notwithstanding, what is noted above, is unhappy with the findings of the ITSC on 8 points, viz., a) income-Revised percentage of profit; b) cash loans; c) bogus purchase from Dwish Enterprise; d) disallowance under Section 14A of the Act; e) NCDs / shares issued to Cyprus and Mauritius based entities; f) NCDs issued to Kolkata based entities; g) claim of marketing expenses; and h) penalty and prosecution.
(i) Income revised percentage of profit:- Applicants applied profit rate of
15% to the total estimated on- money and offered the corresponding amount for tax arguing that seized data itself contains the record of unaccounted expenditure. It was revenue’s case that 100% of on- money should be taxed. The ITSC, however, restricted the additional income on account of on money @20% of total on money receipts and allowed 1 (1989) 176 ITR 169 claimed expenditure to the extent of 80%. It is revenue’s case that this was done without examining the details, nature and purpose of such expenses and legality of the said expenses under the provisions of the Act without any cogent reason.
(ii) Cash loans:- Admittedly, the seized data revealed that applicants had received cash loan amounting to Rs.234.05 Crores during the period 1st July 2014 to 16th December 2015. According to revenue, this amount should have been added under Section 68 of the Act as unexplained income. The ITSC, however, accepted the genuineness of the loan. It is revenue’s case that applicants have failed to produce a single confirmation and mere production of names, addresses and PAN of the lenders is not sufficient. Mr. Suresh Kumar submitted that the onus was upon assessee to establish the identity of the lenders, their credit worthiness and fact that it was a loan transaction or else, applicants will not be able to escape the provisions of Section 68 of the Act. The ITSC accepted the cash loans as genuine loans without directing any inquiry or identity or creditworthiness of the lenders.
(iii) Bogus purchase from Dwish Enterprise:- It was revenue’s case before the ITSC to bring 100% of bogus purchases made from Dwish Enterprise to tax as against 15% offered by applicants. The ITSC has brought 20% of such bogus purchases to tax. The revenue has relied upon judgment of the Apex Court in N K Proteins Ltd. Vs. Deputy Commissioner of Income Tax[2]. 2 (2017) 250 Taxman 22 (SC) Apart from the reasons, which we would give later, court’s have time and again held that only the profit element in the bogus purchases requires to be taxed and whether it is 12.5% or 15% or 20%, is a question of fact.
(iv) Disallowance under Section 14A of the Act:- The ITSC brought to tax the additional income of Rs.2.19 crores towards disallowance under Section 14A of the Act, following the decision of the ITSC in assessee’s own case for A.Y.2012-13. It is revenue’s case that the ITSC should not have restricted the disallowance under Section 14A read with Rule 8D to the extent of exempt income. Mr. Suresh Kumar in fairness submitted that the law as on date is that the disallowance has to be restricted to the extent of exempt income.
(v) NCDs /shares issued to Cyprus and Mauritius based entities:-
Applicant no.2-(respondent no.3) Wadhwa Residency Pvt Ltd. had issued NCDs/shares totaling to Rs.300 crores to Precilion Holdings Ltd. Cyprus and IIRF India Realty XXII Ltd, Mauritius. According to revenue the genuineness of the above funding was doubtful and it was applicants’ case that funding transaction was genuine. Revenue has raised grievance that it was not given time to verify thoroughly creditworthiness of the investors. The ITSC has not discussed this issue in the impugned order because the revenue submitted the report to the ITSC that they were unable to establish that the genuineness of the funding was doubtful. Therefore, in our view, this is a non issue in any case.
(vi) NCDs issued to Kolkata based entities:- Applicant no.1, i.e.
respondent no.2 had issued non convertible debentures (NCD) totaling to Rs.23.67 crores to various Kolkata based entities. According to revenue these entities were paper/shell companies and the entire issue of NCDs has been managed by the portfolio managers-ICICI Prudential Asset Management Company Limited and IIFL Realty Private Limited. Applicants took a stand that it was nowhere directly connected to the subscribers and the money has been invested through portfolio managers who confirmed the stand taken by applicants. Therefore, the ITSC did not find it necessary to even discuss this in the impugned order.
(vii) Claim of marketing expenses:- It was applicants’ case that administration, selling and marketing cost, brokerage expenses for AY-2013- 14 to AY-2016-17 should be allowed as deduction because it has been capitalised to work in progress in its books of accounts. The revenue had objected because according to revenue the claim was in violation of principle of consistency and matching principles as per Accounting Stand (AS)-1 and also in violation of Section 145A of the Act. In the grounds, the revenue has not even bothered to explain as to why the same was in violation of principle of consistency and matching principle as per AS-1 or in violation of Section 145A of the Act.
(viii) Penalty and prosecution:- The ITSC has granted immunity from prosecution under Section 245H(1) of the Act and levy of penalty under Section 271(1)(c) of the Act. At the same time, the ITSC levied penalty of Rs.[8] crores and Rs.[2] crores under Section 271D and 271E, respectively, of the Act, in relation to cash loan taken and repaid, respectively. If one considers the entire petition, no case is even made out as to how the order passed by the ITSC is contrary to any of the provisions of the Act, except in the case of claim of marketing expenses, where Section 145A of the Act is referred to. As regards the other heads, it is not even stated as to which are the provisions to which the findings are contrary to.
6 In the case of income revised percentage of profit, data considered are documents / materials that were seized by the department. Considering the evidence and material before them and the submissions made, the ITSC restricted the additional account of on money at 20% of total money receipts and allowed claimed expenditure to the extent of 80%. It is a discretion that the ITSC exercised and there was nothing wrong in that. Whether to examine and how much to examine should be left to the discretion of the ITSC. Similarly for item (ii) cash loans, (iii) Bogus Purchase from Dwish Enterprises and (iv) Penalty and prosecution.
7 The Apex Court in Jyotendrasinhji Vs. S. I. Tripathi[3] has discussed the scope of challenge to orders passed by the ITSC. The Apex Court has held that after examining such further evidence as it may be placed before it, the ITSC may, in accordance with the provisions of this Act, pass such 3 (1993) 68 Taxman 59(SC) order as it thinks fit. The Apex Court also held that the scope of enquiry is restricted to whether the order passed by the ITSC is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category, has it prejudiced the assessee. The Apex Court has held that the order of the ITSC is in the nature of a package deal and that it may not be ordinarily possible to dissect its order and accept what is favourable and reject what is not. Moreover, it is open to the ITSC to accept an amount of tax by way of settlement and to prescribe the manner in which it is to be paid. The Apex Court further held that the ITSC has the discretion to condone the defaults, penalties or prosecution, where it thinks appropriate. Thus, the sole limitation upon the ITSC is to act in accordance with the provisions of the Act. The ITSC, as held in Jyotendrasinhji (supra), need not even give reasons. The Apex Court further held that even if the interpretation placed by the ITSC on documents is not correct, it would not be a ground for interference since a wrong interpretation of documents cannot be said to be a violation of the provisions of the Act. The Apex Court has held that the scope of enquiry by the High Court under Article 226 should be restricted to i) whether the ITSC has acted in accordance to the provisions of the Act and ii) whether the order passed by it has prejudiced assessee apart from the ground of bias, fraud and malice which constitute a separate and independent category. For ease of reference, paragraphs no. 14 and 15 of Jyotendrasinhji (supra) reads as under: “14. The first question we have to answer is the scope of these appeals preferred under Article 136 against the orders of the Settlement Commission. The question is whether all the questions of fact and law as may have been decided by the Commission are open to review in this appeal. For answering this question one has to have regard to the scheme of Chapter XIX-A. The said chapter was inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 1-4-1976. A somewhat similar provision was contained sub-sections (1A) to (1D) of Section 34 of the Income Tax Act, 1922 introduced in the year 1954. The provisions of Chapter XIX-A are, however, qualitatively different and more elaborate than the said provisions in the 1922 Act. The proceedings under this chapter commence by an application made by the assessee as contemplated by Section 245C. Section 245D prescribes the procedure to be followed by the commission on receipt of an application under Section 245C. Sub-section (4) says: 'after examination of the records and the report of the commissioner received under sub-section (1), and the report, if any, of the commissioner received under sub-section (3), and after giving an opportunity to the applicant and to the commissioner to be heard, either in person or through a representative duly authorised in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the settlement commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the commissioner under sub-section (1) or sub-section (3)." Section 245E empowers the Commission to reopen the completed proceedings in appropriate cases, while Section 245F confers all the powers of an Income Tax authority upon the Commission. Section 245H empowers the Commission to grant immunity from penalty and prosecution, with or without conditions, in cases where it is satisfied that the assessee has made a full disclosure of his income and its sources. Under Section 245HA the Commission can send back, the matter to assessing. officer, where it finds that the applicant is not cooperating with it. 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, Chapter XIX-A, be re- opened in any proceeding under the Act or under any other law for the time being in force. Section 245L declares that any proceedings under chapter XIX-A before the settlement commission shall be deemed to be a judicial proceeding within the meaning of Section 193 and 228 and for the purposes of Section 196 of the Indian Penal Code.
15. It is true that the finality clause contained in Section 245I does not and cannot bar the jurisdiction of the High Court under Article 226 or the jurisdiction of this court under Article 32 or under Article 136, as the case may be. But that does not mean that the jurisdiction of this Court in the appeal preferred directly in this court is any different than what it would be if the assessee had first approached the High Court under Article 226 and then come up in appeal to this court under Article 136. A party does not and cannot gain any advantage by approaching this Court directly under Article 136, instead of approaching the High Court under Article 226. This is not a limitation inherent in Article 136; it is a limitation which this court imposes on itself having regard to the nature of the function performed by the Commission and keeping in view the principles of judicial review. May be, there is also some force in what Dr. Gauri Shankar says viz., that the order of commission is in the nature of a package deal and that it may not be possible, ordinarily speaking, to dissect its order and that the assessee should not be permitted to accept what is favourable to him and reject what is not. According to learned counsel, the Commission is not even required or obligated to pass a reasoned order. Be that as it may, the fact remains that it is open to the Commission to accept an amount of tax by way of settlement and to prescribe the manner in which the said amount shall be paid. It may condone the defaults and lapses on the part of the assessee and may waive interest, penalties or prosecution, where it thinks appropriate. Indeed, it would be difficult to predicate the reasons and considerations which induce the commission to make a particular order, unless of course the commission itself chooses to, give reasons for its order. Even if it gives reasons in a given case, the scope of enquiry in the appeal remains the same as indicated above viz., whether it is,contrary to any of the provisions of the Act. In this context, it is relevant to note that the principle of natural justice (and alteram partem) has been incorporated in Section 245D itself. The sole overall limitation upon the Commission, thus, appears, to be that it should act in accordance with the provisions of the Act. The scope of enquiry, whether by High Court under Article 226 or by this Court under Article 136 is also the same whether the order of the Commission is contrary to any of the provisions of the Act and if so, has it prejudiced the petitioner/appellant apart from ground of bias, fraud & malice which, of course, constitute a separate and independent category. Reference in this behalf may be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement Commission 176 I.T.R. 169, which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S.R. Pandian, J. observed that in such a case this Court is "concerned with the legality of procedure followed and not with the validity of the order.' The learned Judge added 'judicial review is concerned not with the decision but with the decision-making process." Reliance was placed upon the decision of the House of Lords in Chief Constable of the N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, the appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders' of the Settlement Commission. For all the above reasons, we are of the opinion that the only ground upon which this Court can interfere in these appeals is that order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant. The main controversy in these appeals relates to the interpretation of the settlement deeds though it is true, some contentions of law are also raised. The commission has interpreted the trust deeds in a particular manner. Even if the interpretation placed by the commission the said deeds is not correct, it would not be a ground for interference in these appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. It is equally clear that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other assessment years. In view of the above, though it is not necessary, strictly speaking, to go into the correctness of the interpretation placed upon the said deeds by the commission, and it is enough if we confine ourselves to the question whether the order of the Commission is contrary to the provisions of the Act, we propose to, for the sake of completeness, examine also whether the order of Commission is vitiated by any such wrong interpretation?” (emphasis supplied)
8 In N. Krishnan vs. Settlement Commission And Others[4], it is held that the ITSC is the forum for self surrender and seeking relief and not a forum for challenging the legality of assessment order or orders passed in any other proceedings. The Karnataka High Court held that the power conferred on the settlement commission is so wide that it can take any view on any questions of law, which it considers appropriate having regard to the facts and circumstances of a case including giving immunity against prosecution or imposition of penalty. The Karnataka High Court further held that it is in the nature of statutory arbitration to which a person may submit himself voluntarily and the scope of interference is much more restricted than the power of the court to interfere with an arbitration award.
9 A similar matter came to be considered by this court in the 4 (1989) 180 ITR 585 Commissioner of Income Tax,Central-II Vs. Kanakia Spaces Pvt Ltd.5. This court after considering all the judgments cited, noted that in R. B. Shreeram Durga Prasad & Fatechand Nursing Das (Supra) the court held that any challenge to the orders of the Settlement Commission, the High Court should be concerned with the legality of the procedure followed and not with the validity of the order. The judicial review should be concerned not with the decision but with the decision making process. Thus, the Court could not interfere with the order if otherwise proper on the ground that the decision appeared erroneous. The decision wrong or right was binding, if it is reached fairly after giving adequate opportunity to the parties to place their case in the manner provided by the Act. Unless grave procedural defect such as violation of the mandatory procedural requirements of the provisions of Chapter XIX-A and/or violation of rules of natural justice is made out or if it is found that there is no nexus between the reasons given and the decision taken only then the court may interfere. Thus, it is clear that the powers conferred on the ITSC is so wide that it has the discretion to take any view on any question of law, which it considers appropriate, having regard to the facts and circumstances of the case. The High Court ought not to sit in appeal as to the sufficiency of the material and particulars placed before the ITSC.
(ii) and Section 132(4A) of the Act mandates that the contents of seized documents are true. Where any books of accounts or other documents are or is found in possession or control of any person in the course of a search it may be presumed that the contents of such books of account and other documents are true. The issue of income revised percentage of profit, cash loans, bogus purchases from Dwish Enterprise, etc., came up for consideration before the ITSC on the basis of documents found during the search under Section 132 of the Act. The revenue cannot raise any grievance on the acceptance of entries in the documents by the ITSC because once the contents of documents are accepted as correct, then no further inquiry was required to be carried out. Moreover, inquiry under Section 245D(3) of the Act was subject to discretion of the ITSC as it relates to question of fact and is not amenable to the jurisdiction of this court. Moreover, as held in Jyotendrasinhji (supra), even if the interpretation placed by the ITSC on the documents seized is not correct, it would not be a ground for interference since a wrong interpretation of documents cannot be said to be a violation of the provisions of the Act. Further, as held in Kotak Mahindra Bank Ltd. vs. Commissioner of Income Tax & Anr.[6] sufficiency of the material and particulars placed before the Commission based on which the Commission proceeded to pass its orders are beyond the scope of judicial review. As held by the Apex Court in Brij Lal And Others vs. Commissioner of Income Tax[7] the High Court should not 6 (2023) 7 NYPCTR 1353 (SC) 7 (2010) 328 ITR 477 (SC) scrutinize an order or proceeding of the ITSC as an appellate court.
11 Therefore, in our view, ITSC was entitled to exercise discretion while passing the impugned order and has exercised its discretion. In our view, there is neither violation of any mandatory procedure prescribed under any of the sections of Chapter XIX-A of the Act nor any violation of any of the Rules of natural justice. Further, it cannot be said that the reasons assigned by the ITSC for granting relief sought for by assessee have no nexus to the decision taken.
12 As held by the Apex Court in Kotak Mahindra Bank Ltd. (supra), unsettling reasoned orders of the ITSC, and in the present case order runs into almost 170 pages, may erode the confidence of bonafide assessee thereby leading to multiple litigation where settlement is possible and this larger picture has to be borne in mind. Moreover, the members of the ITSC have been appointed by Central Government in accordance with Section 245B(3) of the Act for their integrity and outstanding ability and for special knowledge and experience in, problems relating to direct taxes and business accounts. The members of the ITSC, therefore, cannot be questioned for their decision or for exercising their discretion.
13 It will be useful to reproduce, at this stage, paragraphs 28, 29, 30 and 31 of Kanakia Spaces (Supra), which read as under:
15 In the circumstances, as it is evident from Section 245 of the Act that 8 (1979) 4 Supreme Court Cases 121 the Central Government has appointed the members as their representatives to settle the disputes with assesee, which reflects the confidence they had in the members because the persons appointed are of integrity and known for their outstanding ability and expertise and for the special knowledge and experience in problems relating to direct taxes and business accounts. Therefore, these members have been authorised to settle the disputes on behalf of the Government and it does not lie in the mouth of the Government to challenge the decision taken by their own representatives without making allegations of bias or fraud or malice.
NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)