2017 (9) TMI 1107 - HC - Income Tax

Court overturns Settlement Commission order for lack of reasoning on income addition, stresses need for clear justification.

The court set aside the Settlement Commission's order due to lack of reasoning for the specific quantum of expenditure added to the respondent's income, ... Settlement Commission order - Settlement Commission has applied the principles of best judgment - claim of bogus expenditure - Held that:- An order under Section 245(D) is not an order of regular assessment. Chapter XIXA contemplates the taxability determined with respect to undisclosed income only by the process of settlement/arbitration. The process of arrival of the liability of the assessee to pay tax under Chapter XIXA of the Act of 1961 being different to that of a regular assessment, the Settlement Commission should factor the same while considering an application for settlement. It is obliged to give reasons for arriving at a particular figure. It is open to the Settlement Commission to use best judgment in arrival of the figure. Nonetheless it has to explain the manner in which the best judgment figure has been arrived at by the Settlement Commission. In the facts of the present case, the Settlement Commission not having disclosed the reasons for arriving at the figures which to its best judgment are the figures to be added to the income of the private respondent, the impugned order is set aside. The settlement application is remanded to the Settlement Commission for fresh consideration. The issue is answered accordingly. Issues:Challenge to Settlement Commission's order; Best judgment assessment; Remand for fresh consideration.Analysis:The Income Tax Department challenged an Order by the Settlement Commission, arguing that the order was perverse as it lacked reasoning for adding a specific quantum of expenditure. The Department contended that the Settlement Commission did not consider the Department's report and failed to exercise best judgment. The Department sought remand based on precedents supporting such action.The private respondent, engaged in coal mining, defended the Settlement Commission's decision, claiming a realistic view was taken on expenditures. The respondent argued that the Department failed to point out reopened assessment orders, and relied on legal precedents to support the Settlement Commission's approach.The Settlement Commission considered the dispute involving alleged shell companies used for tax evasion. It estimated the income diverted through these companies but refrained from adding the entire sum to the respondent's income due to lack of evidence. However, the Commission added a specific amount for each assessment year without clear reasoning, leading to a challenge on the application of best judgment principles.Legal precedents highlighted the distinction between best judgment assessment and assessment based on submitted accounts. The court found the Settlement Commission's order lacking in reasoning for the specific quantum added to the respondent's income, deeming it arbitrary and capricious. The court emphasized the need for the Commission to provide reasons for its best judgment figures.The court held that the Settlement Commission's failure to disclose reasons for arriving at the figures required remand for fresh consideration. The order was set aside, and the settlement application was remanded to the Commission. The judgment addressed the issues raised by both parties and disposed of the writ petitions without costs.