The Supreme Court has ruled that an Assessing Officer cannot invoke the reassessment provisions of the Income Tax Act, 1961 to reopen an issue already covered by a final order of the Income Tax Settlement Commission.
The bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria has observed that once a settlement application is admitted and the Settlement Commission passes a conclusive order under Section 245D(4), the regular assessment machinery cannot be independently revived by issuing a notice under Section 148.
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The dispute concerned Assessment Year 2006-07 and the company’s claim for deduction under Section 80IB(10) in respect of its housing projects. The reassessment had resulted in the disallowance of the deduction and an addition of approximately ₹65.65 crore to the company’s taxable income.
The petitioner/assessee filed its income-tax return on November 30, 2006, declaring a taxable income of approximately ₹89.20 crore. It also claimed a deduction of about ₹78.99 crore under Section 80IB(10) for eligible housing projects.
Earlier, on September 22, 2005, the Income Tax Department had conducted search and seizure operations at the company’s business premises, its associated concerns and the residences of its directors.
While the regular assessment for Assessment Year 2006-07 was pending, assessee filed an application under Section 245C before the Income Tax Settlement Commission. The application covered Assessment Years 2000-01 to 2006-07.
On March 17, 2008, the Settlement Commission passed its final order under Section 245D(4). For Assessment Year 2006-07, it accepted an additional income disclosure of ₹18 lakh and determined the company’s taxable income at approximately ₹89.38 crore after accounting for the deduction claimed under Section 80IB(10).
The Income Tax Department subsequently conducted a survey at the company’s premises on December 17 and 18, 2009.
According to the Department, documents impounded during the survey included minutes of a meeting attended by the company’s senior executives. The documents allegedly indicated that the company was planning to transfer the commercial portions of certain housing projects to wholly owned subsidiary companies at cost.
The Department alleged that this arrangement was intended to strengthen the company’s claim for deduction under Section 80IB(10), despite the commercial area in some projects exceeding the permissible statutory limit.
Based on the survey material, the Assessing Officer issued a notice under Section 148 on June 30, 2010. The officer recorded that deductions amounting to approximately ₹55.59 crore had allegedly been wrongly claimed and that income had escaped assessment.
The assessee objected to the reopening on the ground that the Settlement Commission’s order had attained finality under Section 245-I. It argued that the Assessing Officer lacked jurisdiction to reopen the assessment year already settled by the Commission.
The Assessing Officer rejected the objections and passed a reassessment order on November 8, 2011. The deduction under Section 80IB(10) was disallowed and ₹65,65,17,999 was added to the company’s total taxable income.
The Commissioner of Income Tax also filed an application under Section 245D(6), requesting the Settlement Commission to declare its earlier settlement order void on the ground that it had allegedly been obtained through misrepresentation of facts.
The Settlement Commission rejected the Department’s application on December 16, 2011.
It found that the documents discovered during the survey did not establish any misrepresentation by the company. The Commission observed that the meeting minutes merely referred to strengthening the claim under Section 80IB(10) and did not show that the company had misstated or suppressed any material fact.
The Commission further held that the difference between the Department and the company over what constituted a housing “project” eligible for deduction was a legal dispute and could not be characterised as misrepresentation.
It also described the Department’s position as contradictory. On the one hand, the Department claimed that the deduction issue was not covered by the settlement order; on the other, it alleged that the company had misrepresented the same issue before the Settlement Commission.
The assessee challenged both the reassessment notice and the reassessment order before the Delhi High Court.
The High Court quashed the proceedings, holding that the Settlement Commission acquired exclusive jurisdiction after admitting the settlement application. Once the final settlement order was passed, the Assessing Officer could not initiate reassessment proceedings concerning the same assessment year and matters covered by the settlement.
The High Court also found that the deduction under Section 80IB(10) was reflected in the company’s original return and had been taken into account while the Settlement Commission computed its taxable income. The issue, therefore, formed part of the settlement proceedings.
Aggrieved by the ruling, the Income Tax Department approached the Supreme Court.
The Revenue argued that the Settlement Commission’s order was conclusive only in relation to matters specifically stated and decided in the order.
It submitted that the assessee had offered only ₹18 lakh as additional income for Assessment Year 2006-07 and that the validity of the Section 80IB(10) deduction was not specifically adjudicated by the Commission.
According to the Department, the reassessment proceedings did not reopen the settlement order. Instead, they sought to assess income that had escaped taxation due to an allegedly inadmissible deduction discovered through the subsequent survey.
The Revenue also stressed that a settlement application under Section 245C must contain a full and true disclosure of previously undisclosed income and the manner in which that income was derived.
The assessee however, argued that its taxable income before the Commission had been computed after taking the statutory deduction into account. The Settlement Commission had considered the return, the additional disclosure and the net taxable income before passing its final order.
The company maintained that if the Revenue believed the settlement had been obtained through fraud or misrepresentation, its remedy lay exclusively under Section 245D(6), which the Department had already invoked unsuccessfully.
The Supreme Court explained that Chapter XIX-A constituted a specialised settlement mechanism which displaced the regular assessment process once the settlement application was admitted.
The Court said that the filing of an application by itself did not immediately restrict the Assessing Officer. However, once the Commission passed an order under Section 245D(1) allowing the application to proceed, Section 245F(2) became operative and the Commission acquired exclusive jurisdiction over the case.
At that stage, the ordinary assessment machinery—including assessment, reassessment, rectification and demand proceedings—was placed in statutory abeyance.
If the settlement application was ultimately rejected or abated, the Assessing Officer’s jurisdiction would revive. But if the Commission passed a final order under Section 245D(4), that order conclusively settled the matters covered by it and permanently displaced the regular assessment machinery for the relevant assessment years.
Rejecting the Revenue’s principal contention, the Supreme Court observed that the assessee had disclosed its gross total income and arrived at its net taxable income by claiming deductions permissible under the Income Tax Act.
Once the case was admitted for settlement, the Court said, the entire return for the relevant assessment year—including the deductions claimed—fell for consideration.
The Department was entitled to submit a report, place relevant materials before the Settlement Commission and oppose the continuation of settlement proceedings. There was no basis to presume that the Revenue had not examined the company’s deduction claim while participating in those proceedings.
The Court observed that once the matter was finally concluded under Section 245D(4), it acquired statutory finality.
The Supreme Court held that treating the Assessing Officer’s powers under Sections 143(2), 148 or 154 as independently available after a final settlement order would defeat the finality expressly attached to the Settlement Commission’s decision.
Parliament had not contemplated parallel or successive determination of the same taxpayer’s income by the Settlement Commission and the Assessing Officer for the same assessment year.
“The AO’s power to reassess the Settlement Order passed by the ITSC is unavailable,” the Court observed.
The Bench reiterated that Chapter XIX-A was a self-contained code intended to achieve settlement of tax liability. The mechanism allowed the taxpayer to disclose additional income and pay the resulting tax while permitting the Department to scrutinise the disclosure, submit reports and oppose the application.
Once both sides participated in the statutory settlement process and the settlement became final, neither could selectively accept its benefits and disregard its consequences.
The Court clarified that the Revenue was not left without a remedy where a settlement order had allegedly been obtained by fraud or misrepresentation.
Section 245D(6) specifically permitted such a settlement order to be declared void. If the Revenue successfully established fraud or misrepresentation before the Settlement Commission, the ordinary assessment machinery could be restored and escaped income could be assessed.
However, unless the settlement order was declared void through the prescribed statutory procedure, the Assessing Officer could not independently reopen it through reassessment.
In the present case, the Department had already invoked Section 245D(6), but its application was rejected by the Settlement Commission on December 16, 2011. That order had attained finality.
Upholding the Delhi High Court’s decision, the Supreme Court concluded that the Assessing Officer lacked jurisdiction to reopen the issue covered by the final settlement order.
The Court found no merit in the Revenue’s appeal and dismissed it. Consequently, the quashing of the Section 148 notice and the reassessment order disallowing the Section 80IB(10) deduction remained undisturbed.
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