Case: Commissioner of Income Tax Vs. Paharpur Cooling Towers Private Limited

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 245D of the Income-tax Act, 1961 (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 1974-75 (five years), it had filed its returns. (The accounting year was the year ending 31st October). For the 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 assessees 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 245C 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 Income-tax Officer)". Against column No. 8, "particulars of the matters to be settled", the assessee stated, "assessment of total income for the 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 245D(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 assessment year 1975-76". By order dated July 21, 1977, the commission admitted the application for settlementOn 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 co-operate 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, 077.16 ; it should in fact be Rs. 31, 55, 000 ; similarly, the value of the stocks and of finished goods at the end of the accounting year ending with October 31, 1975, ought to be Rs. 19, 85, 000 as against the 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 assessment year 1975-76, due to increased value of the closing stocks, the company submits that the commission may consider reopening of the earlier five assessment years, i.e., assessment year 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 the assessment year 1975-76 as well as those relating to the said earlier assessment years be stayedThe commission called upon the Commissioner to file his response to the aforesaid "statement of facts" filed by the assessee. In hit response/report dated January 3, 1978, the Commissioner stated, inter alia, "the applicant .. asked for settlement in respect of the assessment 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 five years assessments ... all these assessments have long been completed and in none of these years, the undervaluation of stock, as now offered, was considered for assessment/reassessment . . . There is absolutely no material in the file in support of this contention of the applicant". The Commissioner further submitted that since the assessees original application was for settlement in connection with the assessment year 1975-76, the assessees prayer in para 13 of the statement of facts for issuing stay orders in respect of penalty proceedings pertaining to the earlier assessment years is unwarranted, more particularly when the said penalty proceedings do not relate to undervaluation 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 outThe 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.

Reasoning: We are not concerned with the other directions made by the Commissioner. They were not argued before us and we express no opinion thereonSection 245C(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 pertained only to one assessment year, viz., 1975-76, and to no other assessment year. According to the second proviso to section 245D(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 the assessment years other than the assessment year 1975-76 ; so far as the assessment year 1975-76 is concerned, the Commissioner put forward no objection. Sub-section (4) of section 245D says that after examining the entire material, the commission shall "pass such order 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 hot 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 authori ty 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 245E, which is the sheet anchor of the majority opinion, empowers the commission to reopen any completed proceedings connected with the case before it but this power is circumscribed by the requirement expressly stated in the section that such reopening 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 reopening 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 reopening of the completed proceedings not for the benefit of the assessee but in the interests of the Revenue. It contemplates a situation where the case before the commission cannot be satisfactorily settled unless some previously concluded proceedings are reopened 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 yearsThis rule is, however, relaxed by section 245E to a limited extent and for a limited purpose. The concluded proceedings can be reopened by the commission provided (a) such reopening 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 therefor, and (d) the proceeding which is being reopened 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 245E 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 245E availed the commission to direct the dropping of penalty proceedings relating to the assessment years 1970-71 to 1974-75 while settling the case relating to the assessment year 1975-76n 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 the assessment year 1975-76 vide Commissioners 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 reopening the assessments of the earlier assessment years. It was, therefore, not a situation contemplated by section 245E. This was not a case where the commission wanted to reopen 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 reopening 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 reopen the entire assessment and penalty proceedings relating to the said earlier assessment yearsIt is not permissible for the commission to say that since it has reopened 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 reopen 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 245E. 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 the 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 245E is the correct one and not the interpretation placed by the majoritye 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 assessees 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 proceedingsLastly, we may refer to Sri Poddars submission based upon section 245F(1). According to him, sub-section (1) confers the powers of an income-tax authority upon the Settlement Commission including the power to reopen 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 150 including sections 148 and 149. Admittedly, they were not complied with in this case