2025 (6) TMI 1330 - HC - Income Tax

Income Tax Settlement Commission orders have limited judicial review scope, wrong document interpretation insufficient for interference

Dr. Kamala Selvaraj Versus The Income Tax Settlement Commission, Commissioner of Income Tax, Chennai.

Dr. Kamala Selvaraj Versus The Income Tax Settlement Commission, Commissioner of Income Tax, Chennai. - TMI 1. ISSUES PRESENTED and CONSIDERED- Whether the Revenue can challenge the order of the Income Tax Settlement Commission (ITSC) under Article 226 of the Constitution of India, in absence of allegations of fraud, bias, or malice against the members of the ITSC.- Whether the ITSC was justified in passing the settlement order under Section 245D(4) of the Income Tax Act, 1961, given the facts of the case including the disclosures made by the assessee and the seized materials.- The scope and extent of judicial review of the ITSC's orders by the High Court under Article 226 of the Constitution, particularly in light of precedents limiting interference to procedural irregularities or violations of natural justice.- Whether the Revenue's submissions regarding alleged miscalculations or non-consideration of certain admissions and seized documents by the ITSC justify interference with the settlement order.- The applicability of retrospective effect of subsequent judicial decisions on the Revenue's challenge to the ITSC order.- The role and powers of the ITSC as a forum for self-surrender and settlement, and the extent to which its decisions can be questioned or set aside by courts.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Challenge to ITSC order by Revenue in absence of fraud, bias, or maliceThe legal framework governing the Income Tax Settlement Commission is set out in Chapter XIX-A of the Income Tax Act, 1961, particularly Sections 245B to 245D. Section 245B(3) provides for appointment of members of the ITSC by the Central Government, selecting persons of integrity, outstanding ability, and special knowledge in direct taxes and business accounts.The Court referred to the judgment of the Bombay High Court which held that unless there is an allegation of fraud, bias, or malice against the members of the ITSC, the Revenue cannot challenge the settlement order. This principle was further reinforced by the Apex Court in Jyotendrasinhji vs. S.L. Tripathi, which held that judicial interference under Article 226 is permissible only when there is a fault in the decision-making process and not with the decision itself.In the present case, the Revenue did not allege any fraud, bias, or malice against the ITSC members. The Court emphasized that the Commissioner of Income Tax cannot sit in appeal over the findings of the ITSC, especially in absence of such allegations. The ITSC's satisfaction regarding true and full disclosure, as required under Section 245D(2C), was a decisive factor that precluded interference.The Court underscored the importance of respecting the integrity and expertise of the ITSC members appointed by the Central Government, cautioning against unwarranted challenges to their orders without substantial grounds.Issue 2: Justification of the ITSC's settlement order under Section 245D(4)The ITSC's role is to consider applications for settlement where the assessee makes a full and true disclosure of income not previously disclosed. The Commission has wide powers to take any view on questions of law and facts, including granting immunity against prosecution or penalty.In this case, the ITSC conducted a thorough process: it allowed the settlement application to proceed, called for reports from the Department, considered the Rule 9 report, heard submissions from both parties, and finally passed the settlement order. The Commission did not find the application invalid under Section 245D(2C), indicating satisfaction with the disclosure made.The Revenue contended that the ITSC failed to consider the admission made by the assessee under Section 132(4) and that the Commission erred in fixing unaccounted expenditure at 7% instead of 55% of suppressed receipts. The Court noted that if such an error existed, the Revenue could have approached the ITSC to rectify it, but no such action was taken.The Court held that the ITSC's discretion in accepting the assessee's submissions and passing the order was rightly exercised. The Commission's acceptance of the seized records and the related expenditure entries was consistent with precedents such as Commissioner of Income Tax vs. P.D. Abraham, which upheld acceptance of expenditure entries found in seized records when income recorded therein is accepted.Issue 3: Scope of judicial review over ITSC orders under Article 226The Court extensively relied on the Apex Court's decisions in Jyotendrasinhji and Kotak Mahindra Bank Ltd., which clarify that the High Court's power of judicial review over ITSC orders is very narrow. Interference is limited to procedural irregularities, violation of natural justice, or perverse orders that no reasonable person would pass.The Court reiterated that the High Court cannot act as an appellate authority over the sufficiency of material or the correctness of the ITSC's interpretation of documents. Even a wrong interpretation by the ITSC does not amount to violation of the Act warranting interference.Further, the Court highlighted the legislative intent behind Chapter XIX-A, which encourages settlement and self-surrender, and cautioned that disturbing reasoned orders of the ITSC may erode the confidence of bona fide assessees and lead to multiplicity of litigation.Issue 4: Revenue's submissions on alleged miscalculations and non-consideration of admissionsThe Revenue argued that the ITSC erred in its calculation of unaccounted income and expenditure, and failed to consider admissions made by the assessee during the search proceedings. The Court observed that these submissions were considered by the learned Single Judge but found that the Department itself did not contend that there was no true and full disclosure.The Court emphasized that if the Revenue believed there was a calculation error, it could have sought correction from the ITSC, but no such step was taken. Hence, these grounds did not justify interference with the settlement order.Issue 5: Retrospective effect of judicial decisions on challenge to ITSC orderThe appellant relied on the principle that judicial decisions operate retrospectively, as held by the Apex Court in Assistant Commissioner of Income-tax vs. Saurashtra Kutch Stock Exchange Ltd. The Court accepted that even if the subsequent judgment of the Bombay High Court was not available at the time of the impugned order, the law as discovered by later decisions applies retrospectively.This principle reinforced the appellant's submission that the Revenue's challenge was not maintainable, as the settled legal position precluded such challenge in absence of fraud or malice.Issue 6: Role and powers of the ITSC as a forum for self-surrender and settlementThe Court reiterated the observations in N. Krishnan vs. Settlement Commission that the ITSC is a forum for self-surrender and seeking relief, not a forum for challenging the legality of assessment orders or other proceedings.The ITSC's powers are wide and akin to statutory arbitration, with limited scope for judicial interference. The Court emphasized that the Revenue's petition challenging the ITSC order was tantamount to sitting in appeal over the Commission's findings, which is impermissible unless there is clear evidence of jurisdictional error, procedural irregularity, or malice.3. SIGNIFICANT HOLDINGS'The Commissioner of Income-tax cannot sit in appeal or judgment over the findings of the ITSC.''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.''The High Court cannot sit in appeal as to the sufficiency of material and particulars placed before the Commission based on which the Commission proceeded to pass its orders.''The scope of judicial review is very narrow. The High Court may not interfere with an order of the Commission passed in exercise of its discretionary powers except on grounds of violation of mandatory procedure or natural justice.''The ITSC is a 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.''Unsettling reasoned orders of the Settlement Commission may erode the confidence of bona fide assessees, thereby leading to multiplicity of litigation where settlement is possible.''Unless a case of bias or fraud or malice is alleged, not being a bald allegation, no petition by Revenue impugning an order by the ITSC should be entertained.''The members of the ITSC have been appointed because of their integrity and outstanding ability and for the special knowledge and experience in problems relating to direct taxes and business accounts.'The Court concluded that the learned Single Judge erred in setting aside the ITSC order and accordingly quashed and set aside the impugned order, allowing the appeal. The Revenue was granted liberty to approach the Interim Board for correction of the ITSC order if permissible by law, without any opinion expressed on the merits of such an application.