2026 (2) TMI 1091 - HC - Income Tax

Full and true disclosure: authority must re examine detailed evidential disclosures before rejecting a tax settlement application.

Whether a settlement application can be rejected for non compliance with the requirement of full and true disclosure was addressed: the authority declined ... Rejection of settlement application for non-disclosure - question of changing the stand by converting the undisclosed portion of income into the income under Section 69B of the Act is beyond the scope of settlement proceedings - full and true disclosure as per mandate of law as contained in Section 245C(1) HELD THAT:- Since the present case relates to the period prior to the abolition of the scheme of settlement u/s 245C of the Act, the provisions contained in Section 245C are applicable. A perusal of the provisions contained in Section 245C(1) makes it clear that a prayer for settlement could be made giving full and true disclosure of income which has not been disclosed; the manner in which the said income has been derived; the additional amount of income tax payable on such income; and other particulars as may be prescribed. The order passed by the authority rejecting the application, however, says that full and true particulars of the materials and evidences have not been disclosed with regard to the manner in which the undisclosed income i.e. Rs. 80 Crores was derived. We are of the view that the assessee has submitted details of the manner in which the undisclosed income i.e. Rs. 80 Crores was derived. According to the assessee, the stock in trade is directly related to Rs. 80 Crores which in turn was result of inflation of refinery loss, which perhaps the assessee was not correct in claiming as such, and this appears to be only a device not to disclose an income which the assessee otherwise had accumulated. The aforesaid aspect, in our view, was not taken into consideration in a proper manner by the competent authority. Since the rejection of the application for settlement not only results in imposition of interest, penalty, but also in prosecution, we are of the view that the competent authority was required to closely examine and scrutinize the manner in which income was derived, as was stated by the assessee in his application dated 16.10.2018. Interest of justice would be served if the competent authority scrutinizes in detail the manner in which the assessee derived undisclosed income of Rs. 80 Crores. We make it clear that even according to the revenue, as far as the remaining Rs. 70 Crores is concerned, the writ petitioner is already eligible for settlement. Issues: Whether the Settlement Commission/competent authority was justified in rejecting the assessee's settlement application under Section 245C(1) of the Income-tax Act, 1961 for alleged failure to make full and true disclosure in respect of Rs. 80 crores claimed as undisclosed income linked to inflated refinery loss.Analysis: The assessee submitted a confidential enclosure detailing the manner in which the additional income was derived, describing the process of inflating refinery loss and correlating stock in trade with the claimed undisclosed income. The authority's rejection recorded that full and true particulars and evidential materials were not disclosed, but did not adequately examine the detailed explanation provided by the assessee. Given that rejection under Section 245C(1) carries consequences including interest, penalty and potential prosecution, the authority was required to closely scrutinize and verify the manner in which the undisclosed income was shown to have been derived before concluding there was no full and true disclosure. The record shows that, on the remaining amounts, the revenue accepted eligibility for settlement.Conclusion: The rejection cannot stand without a detailed re-scrutiny of the materials tendered by the assessee; the matter is remitted to the competent authority for fresh consideration of the settlement application keeping in view the detailed disclosures made by the assessee. The writ appeal is allowed and the impugned orders are set aside.