Case: Major Metals Limited Vs. Union of India &amp; Others

2. On 16 December 2009 the petitioner filed an application before the Settlement Commission under Section 245C(1) seeking a settlement of a case as defined in Section 245A(b) for Assessment Years10 which was pending before the Assessing Officer, no assessment having been made under Section 143(3). The petitioner made a disclosure of income to the extent of Rs.10 lacs each for the two Assessment Years in question, being income which had not been disclosed before the Assessing Officer. The basis on which the Settlement Commission was moved was that during the course of Assessment Years10 the petitioner was engaged in transactions in which the petitioner would locate sellers in the grey market who would sell goods to prospective buyers. According to the petitioner, the goods would be delivered directly by the seller to the buyer; and payment would be routed through the petitioner who in turn would effect payment to the seller after deducting its share. This activity, it was stated, was undertaken in respect of items which did not form part of the inventory of the petitioner. The difference, it is stated, was earned in cash and was not accounted in the regular books of account. The petitioner stated that the activity was since discontinued, but in order to buy peace of mind the petitioner was willing to offer the income earned from the activity during Assessment Years0, each in the amount of Rs.10 lacs to tax. The terms of settlement which the petitioner proposed were that (i) the total income of the petitioner be determined at the amount disclosed in the petition; (ii) a waiver of interest be granted under the provisions of the Income Tax Act, 1961 as may be permissible; (iii) Immunity be granted to the petitioner from the levy of penalty and prosecution under the Act; and (iv) such other relief as the Settlement Commission may deem fit in the circumstances of the case be granted.3. On 24 December 2009 the Settlement commission passed an order under the provisions of Section 245D(1) directing that the application be proceeded with. On 30 December 2009 the Settlement Commission sought a report from the Commissioner of Income Tax under Section 245D(2B). In terms of the provisions of Section 245D(2B) the report of the Commissioner was required to be submitted within a period of thirty days from the order of the Settlement commission. The period stipulated in the provision expired on 29 January 2010 in spite of which no report was received. By an order dated 23 February 2010 the Commission directed that further proceedings shall take place in the matter and that the application could not be regarded as invalid. On 21 September 2010 a report was submitted by the CIT under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997. Under Section 245D(1), as it stood prior to amendment, the Settlement Commission was under a mandate to call for a report from the Commissioner on receipt of an application under Section 245C. This procedure was modified when Parliament substituted the provisions of(1) as they now stand by the Finance Act, 2007 with effect from 1 June 2007. As it now stands, the earlier requirement of a report from the Commissioner on the receipt of an application under Section 245C and before the Commission decides whether to proceed with the matter, has been dispensed with. Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997 required, under the provisions of the earlier version of Section 245D(1) that the report of the Commissioner had to be furnished within a period of ninety days.4. The Settlement Commission by an order dated 18 October 2010 directed the Commissioner of Income Tax to conduct a further inquiry and investigation and to submit his report under Section 245D(3) on or before 22 November 2010. The time limit for the disposal of the proceedings before the Settlement Commission was to end on 31 December 2010 and after that the proceedings would abate. In its order dated 18 October 2010 the Settlement Commission noted that during the course of Assessment Yearthe petitioner had unsecured loans of Rs.3.73 Crores, the genuineness of which needed to be verified, bearing in mind the modus operandi adopted by the group. During A.Y.the petitioner claimed to have received two loans of Rs.2.0 crores from two companies by the name of Oleander Manufacturing Credit Pvt. Ltd. and Tristar Agency Pvt. Ltd. During the course of AYfurther amounts of each of Rs.90 lacs were received from the two companies. During AYthe petitioner allotted 30,000 shares each to the two companies on 13 March 2009 of a face value of Rs.10 at a premium of Rs.990 per share. This resulted in share capital of Rs.3 lacs and share premium of Rs.2.97 crores being realized from each of the two companies. The Settlement Commission noted from the sketchy details that were available on record, it was difficult to understand the loan transactions which resulted in the conversion of loans into share capital and share premium particularly since the petitioner is not a listed company. The CIT was accordingly directed to submit a factual report under Section 245D(3) on several aspects including, inter alia, the following:(b) To verify the genuineness of loans and credit worthiness of the entities who are said to have given loans of Rs.3 crores each i.e. M/s. Tristar Agencies Pvt. Ltd. and M/s. Oleander Mfg.Credit Pvt. Ltd. during FY09, and also to inquire into the genuineness of conversion of the loans to share capital and share premium by issue of shares.5. The Commissioner of Income Tax by his letter dated 22 November 2010 adverted to the order of the Settlement Commission and stated that the Assessing Officer (DCIT,Mumbai) had carried out an investigation but that due to a shortage of time a complete inquiry could not be made. The report stated that the Assessing Officer was prevented by shortage of time from inquiring into the creditworthiness of the persons who had advanced moneys to the petitioner in the form of loans and share applications. However, he noted that all the parties had confirmed having advanced the loans; that all persons were income tax assessees whose identity was established. The Commissioner also noted in his report that the petitioner had disclosed an income each of Rs.10 lacs for the two Assessment Years which was stated to be commission income earned out of the transactions involving purchase and sale of non ferrous metals. It was stated that the petitioner had not furnished any details of this income and the names of the parties from whom it had earned Commission, rate of commission and the mode of receipt had not been disclosed. Reference was made to the fact that if the history of the assessee was to be taken into account, the income disclosed was rather meager; for AYthe petitioner had introduced its own money of Rs. 2 crores in the form of share application money. This, it was stated, was evident from the statement of one Giriraj Vijayavargiya who was supposed to have given the share application money but who had stated subsequently that he had only given an accommodation entry. The Commissioner, therefore, stated that the extent of the undisclosed income of the petitioner could be much more than the income which was disclosed.6. The Settlement Commission heard the parties and passed its order dated 30 December 2010. The Commission has come to the conclusion that a total amount of Rs.6.18 Crores represents the additional income which is to be taxed in hands of the petitioner of which an amount of Rs.4.26 crores relates to Assessment Yearand Rs.1.92 Crores for Assessment YearThe Commission has, in the course of its order, noted that the adequacy of the income from the commodity trading is like an inconsequential sub plot in the bigger saga of the genuineness of funds credited as loans, share application and share premium moneys. The Settlement Commission has adverted to the fact that the Department failed to carry out any meaningful investigation on the specious ground of a paucity of time. However, during the course of the proceedings the petitioner was called upon to produce relevant documentary evidence in order to enable the Commission to examine the genuineness of the transactions alleged to have been entered into by the petitioner. After duly considering the material which has been produced by the petitioner, the Settlement Commission has, on the basis of nearly fourteen grounds and after considering the evidence in its totality, come to the conclusion that the purported transactions were not genuine. The Settlement commission held that the claim of having received such high premium on shares is fictitious and an attempt by the petitioner to launder its own unaccounted funds in the guise of such receipts. The Commission has, therefore, come to the conclusion that the amount shown in the books of account of the petitioner as share capital / premium has to be brought to tax in accordance with the provision of Section 68. In certain areas the Commission has accepted the contention of the petitioner. As a consequence a total amount of Rs. 6.18 crores has been added to the income of the petitioner for Assessment Years0. On the aspect of the imposition of penalty the Commission has furnished reasons for rejecting the contention of the petitioner and has come to the conclusion that the offer of the petitioner of Rs.10 lacs for each of the Assessment Years, based on a story of having earned income for which no records are available and without touching upon the real issues for which the petitioner was being pursued by the Department, is merely an attempt to create a smoke screen to shut out further investigation. Consequently the Commission has come to the conclusion that the petitioner would not be entitled to a waiver of penalty under Section 271(1)(c) and a penalty of Rs.2.75 crores has been imposed on the petitioner. The petitioner has, however, been granted an immunity under Section 245H from prosecution for offences punishable under the Income Tax Act, 1961. The taxes due and consequent upon the order have been directed to be paid within a period of thirty five days.

Court's reasoning:
It is impossible to accept the submission. The jurisdiction of the Settlement Commission having been invoked under Section 245C, the Commission, when it passed its order dated 18 October 2010 under Section 245D(3), specifically called upon the Commissioner to verify the genuineness of the loans and the credit worthiness of the entities who had allegedly given loans of Rs.3 lacs each (M/s. Oleander Manufacturing Credit Pvt. Ltd. and M/s. Tristar Agency Pvt. Ltd.) during FY09 and to enquire into the genuineness of the conversion of loans to share capital and share premium by the issue of shares. The Commissioner in his report dated 22 November 2010 adverted to the directions of the Commission and stated that a shortage of time had prevented the Assessing Officer from enquiring into the creditworthiness of the persons who had advanced moneys to the petitioner in the form of loans and share applications. The Commissioner, however, stated that all the parties concerned had confirmed having advanced loans to the petitioner; that all persons were income tax assessees and, therefore, the identity of the persons who had advanced the loans was established. The genuineness of the loan transactions, the credit worthiness of the entities who had allegedly advanced the loans and the genuineness of the conversion of the loans into share capital and share premium against the issuance of shares specifically formed a subject matter of the reference made to the Commissioner under Section 245D(3). The Commissioner dealt with a part of his mandate leaving the rest not analyzed, for reasons of time. These were all matters relating to the casenot covered by the applicationbut nonetheless referred to in the report of the Commissioner. The Commissioner, by the terms of reference, had to verify the genuineness of the transactions and credit worthiness of the parties. If the Commissioner were to hold that the transactions were genuine and parties were credit worthy, that would be an input before the Commission, but would not conclude the issue. Contrariwise, if the Commissioner were to hold that the transactions were sham and fictitious, it would still be for the Settlement Commission to arrive at its determination when it settled the case. The nature of the determination by the Commissioner does not determine the jurisdiction of the Commission. The expression relating to the case is an expression of width and amplitude. The report of the Commissioner furnished in pursuance of the directions of the Settlement Commission under Section 245D(3) cannot be read in a sense disjointed from the terms of reference made by the Commission to him. The report refers to the matters upon which he was called upon to investigate. All those matters would fall within the jurisdiction of the Commission as matters relating to the case and referred to in the report of the Commissioner. Consequently even on a literal and textual construction of Section 245D(4), we are satisfied that the Settlement Commission acted within the parameters of its jurisdiction in the present case. The position which emerges on a plain and literal construction of the language of the statute is supported by even a contextual construction. Parliament intended that the entire assessment is before the Settlement Commission. The Commission completes the process of assessmentas the decision in BrijLal holdsas part of the settlement of the case. Until the Settlement Commission is seized of the proceedings, there is no parallel assessment contemplated in law. Comprehensiveness, finality and conclusiveness are the three attributes of the function assigned to the Commission. That object is achieved when the entire assessment is completed, as part of the jurisdiction to settle a case. To dilute this position would defeat the object which Parliament intended to achieve. Once an assessee moves the Settlement Commission, the statute expressly mandates that the application cannot be withdrawn. Unless the Commission in a given case decides to reject the application, it is entitled to resolve the case by settlement. An assessee who moves the Settlement Commission cannot be allowed to be anything other than fair and candid. Nor can he assert an unqualified right that the Settlement Commission should either accept what he discloses or leave him to another round of assessment before the Assessing Officer.In the present case it needs to be emphasised that the Settlement Commission has considered all the material on record including the material which had a bearing on the credit worthiness and financial standing of the alleged subscribing companies to the share capital of the petitioner. None of the companies was held to have a financial standing or credit worthiness which would justify making of such a large investment of Rs.6 crores at a premium of Rs.990/per share. The allotment of shares, it must be noted, has taken place in pursuance of a private placement. The principles which have been applied in relation particularly to the public subscription of shares of a public limited company can obviously have no application to the facts of a case such as the present. The view which has been taken by the Settlement Commission is consequently borne out on the basis of the material on record. This is not a case where the Commission has proceeded contrary to law or on the basis of no evidence. There is no perversity in the findings of the Settlement Commission.In the exercise of the power of judicial review particularly against the findings of the Settlement Commission this Court would not be justified inthe findings of fact which, in any event, are based on the material on record. The view taken is consistent with the law laid down by the Supreme Court.The first aspect of the matter which merits emphasis is that the petitioner moved the Settlement Commission specifically with a request for the settlement of the entire case including the grant of a waiver of penalty under the applicable provisions of the Income Tax Act, 1961. The Settlement Commission is vested with the power under Section 245H to grant an immunity wholly or in part from the imposition of any penalty under the Act where it is satisfied that any person who has made an application for settlement hascooperated with theCommission in the proceedings before it and has made a full and true disclosure of his income and of the manner in which the income has been derived. Under(6) of Section 245D, every order passed under(4) by the Settlement Commission is required to provide for the terms of settlement including any demand by way of tax, penalty or interest. It is in this perspective that the petitioner, when it sought settlement of the case which was pending before the Assessing Officer, expressly sought a direction in regard to the grant of a waiver of the penalty payable otherwise under the provisions of the Act. Section 274 stipulates that no order imposing a penalty under Chapter XXI shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. Evidently the assessee here was cognizant of the fact that the very object and purpose of the application was, inter alia, to seek a waiver of the imposition of a penalty and the assessee went before the Settlement Commission in the present case armed with such a request. Secondly, as the order passed by the Settlement Commission indicates, the assessee was heard specifically on the issue of penalty. The contention of the petitioner which has been recorded in para 28 of the decision of the Settlement Commission was that it had fullyin the proceedings of the Commission and that it had made a full and true disclosure of the particulars of its income. The Commission considered the submission and held that looked at from the perspective of the test of human probabilities laid down by the Supreme Court and on the totality of the evidence, the contention of the assessee that it had genuinely received such high share premiums must fail. The Commission held that the assessee had not come clean before it. The assessee had offered an amount of Rs.10 lacs in each of the Assessment Years in question based on a story of having earned income for which no records were available, without touching upon the real issues for which the applicant was being pursued by the Revenue. The Commission has, in our view, with justification come to the conclusion that the attempt on the part of the assessee was merely to create a smoke screen in order to shut out further investigation. In these circumstances, the view which has been taken by the Settlement Commission has been after complying with the principles of natural justice and after furnishing to the assessee an opportunity of being heard specifically on the issue of penalty. The Settlement Commission is bound by the mandate of the Act, which includes Section 274. The Settlement Commission has to hear the applicant on the question of penalty. The proceeding before the Settlement Commission cannot be disjointed into parts, particularly having regard to the time limit set for disposal. The Commission has furnished a reasonable opportunity of hearing to the assessee and has heard him. No prejudice is shown. The Settlement Commission has imposed a penalty of Rs.2.75 crores. Section 271(1)(c) provides for the imposition of a penalty where the assessee has concealed the particulars of his income or has furnished inaccurate particulars of such income. In such a situation the penalty shall not be less than the amount of tax sought to be evaded but shall not exceed three times the amount of tax sought to be evaded. The total income tax demand in the present case, according to the petitioner, which has been arrived at on behalf of the Revenue works out to Rs.1.96 crores for AYand Rs.82.40 lacs for AYThe total penalty of Rs.2.75 crores has been clarified by a corrigendum dated 30 December 2010 issued by the Settlement Commission to be on a pro rata basis as an amount of Rs.1.92 crores for AYand Rs.82.50 lacs for AYThe penalty which has been imposed is thus commensurate with the provisions of Section 271(1)(c). In that view of the matter, we do not find any merit in the challenge to the order of the Settlement Commission on the aspect of penalty.32. For these reasons, having heard the counsel, we are of the view that there is no merit in the petition.