Facts of the Case

The respondents/assessees approached the Income Tax Settlement Commission for settlement of tax liabilities. During the proceedings, based on the Revenue’s report, additions were made beyond the income originally disclosed by the assessees. The assessees accepted the determination and did not challenge the tax liability fixed by the Settlement Commission.

However, the Settlement Commission granted immunity from prosecution and penalty. The Revenue challenged this part of the order before the Delhi High Court on the ground that the Commission failed to record mandatory satisfaction as required under Section 245H(1) before granting such immunity.

Issues Involved

1.     Whether the Settlement Commission can grant immunity from penalty and prosecution without recording satisfaction regarding full and true disclosure?

2.     Whether compliance with Section 245H(1) is mandatory before granting immunity?

3.     Whether the Settlement Commission’s order granting immunity was legally sustainable?

Petitioner’s Arguments (Revenue)

  • The Settlement Commission granted immunity mechanically and without statutory compliance.
  • Section 245H(1) mandates a clear finding that the assessee made a full and true disclosure.
  • The manner in which income was derived must also be satisfactorily disclosed.
  • In the absence of recorded satisfaction, immunity from prosecution and penalty cannot be sustained.

Respondent’s Arguments (Assessee)

  • The settlement proceedings had attained finality regarding tax determination.
  • Additional income was accepted and taxes were determined accordingly.
  • Immunity granted by the Settlement Commission was within its statutory powers.
  • The order should not be interfered with.

Court Findings / Court Order

The Delhi High Court held that the Settlement Commission must comply strictly with the statutory requirements under Section 245H(1) before granting immunity.

The Court observed that recording satisfaction regarding:

  • full and true disclosure of income, and
  • the manner in which such income was derived

is a mandatory pre-condition.

Relying upon its earlier judgment in Commissioner of Income Tax (Central)-II v. BDR Builders and Developers (2016) 385 ITR 111 (Del.), the Court set aside the portion of the Settlement Commission’s order granting immunity and remanded the matter back for fresh consideration in accordance with law.

Sections Involved

  • Section 245H(1), Income Tax Act, 1961 – Power of Settlement Commission to grant immunity from penalty and prosecution
  • Chapter XIX-A, Income Tax Act, 1961 – Settlement of cases
  • Provisions relating to full and true disclosure of income

Important Clarification by the Court

The High Court clarified that:

  • Settlement of tax liability and grant of immunity are distinct legal consequences.
  • Even if tax settlement is accepted, immunity cannot be granted automatically.
  • Satisfaction under Section 245H must be explicit and reasoned.
  • Absence of recorded satisfaction vitiates the immunity order

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8918-DB/SMD21072017CW90162014_153855.pdf

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