Facts of the Case

The Petitioner, Unitech Wireless (Tamil Nadu) Private Limited, was a subsidiary of the Norway-based Telenor Group. Pursuant to a Business Transfer Agreement, its telecom business was transferred to Telenor India on a slump sale basis. Thereafter, its telecom licenses were surrendered and the company became non-operational with proposed liquidation proceedings.

For Assessment Year 2012–13, scrutiny proceedings were initiated under Section 143(2), and transfer pricing adjustments were proposed by the Transfer Pricing Officer. Similar proceedings for Assessment Years 2013–14 to 2016–17 were also pending.

During pendency of assessment proceedings, the Petitioner approached the Income Tax Settlement Commission (ITSC) under Section 245C(1), offering certain income adjustments by withdrawing claims for depreciation, legal expenses, finance charges, and other deductions which were earlier claimed in the original returns. The ITSC rejected the application holding that no “fresh income” had been disclosed.

 Issues Involved

  1. Whether withdrawal of previously claimed deductions amounts to disclosure of income under Section 245C(1)?
  2. Whether the ITSC was justified in rejecting the settlement application for absence of a new source of income?
  3. Whether Section 245C(1) mandates disclosure of a fresh source of income for settlement proceedings?

 Petitioner’s Arguments

  • The Petitioner argued that Section 245C(1) requires disclosure of income not previously offered to tax and does not require disclosure of a new source of income.
  • Withdrawal of excessive deductions and offering them to tax amounts to valid disclosure for settlement purposes.
  • The ITSC adopted an overly narrow interpretation by insisting upon a fresh income source.

 Respondent’s Arguments

  • The Revenue contended that the amounts offered before the ITSC were not new income but merely reversal of earlier deduction claims.
  • Since no new income source was disclosed, the application failed the requirement of Section 245C(1).
  • Therefore, the ITSC correctly rejected the settlement application.

 Court Findings / Order

The Delhi High Court held that the approach adopted by the Income Tax Settlement Commission was legally erroneous. The Court clarified that:

  • Section 245C(1) does not require disclosure of a fresh source of income.
  • If an assessee withdraws an excessive deduction previously claimed and offers the corresponding amount to tax, it qualifies as income not earlier disclosed.
  • The requirement of “full and true disclosure” is satisfied when income not originally offered to tax is subsequently disclosed before the Settlement Commission.

The Court set aside the impugned order dated 4 November 2016 and restored the settlement application to the file of the ITSC for further proceedings.

 Important Clarification by the Court

The Court expressly clarified that:

Section 245C(1) does not mandate a fresh source of income. Even revision of earlier claims by withdrawing inadmissible deductions and offering such amounts to tax constitutes valid disclosure for settlement proceedings.

This clarification strengthens the interpretation of settlement provisions in favor of substantive disclosure over technical interpretation.

Relevant Sections Involved

  • Section 245C(1), Income Tax Act, 1961 – Settlement application and disclosure of undisclosed income
  • Section 245D(1), Income Tax Act, 1961 – Procedure on receipt of settlement application
  • Section 143(2), Income Tax Act, 1961 – Scrutiny assessment
  • Articles 226 and 227 of the Constitution of India – Writ jurisdiction of High Court

         Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:4426-DB/SMD11082017CW112562016.pdf

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