Facts of the Case

A search operation under Section 132 of the Income Tax Act was conducted on the business premises of the assessee and associated group entities. During the search, incriminating materials, documents, and cash were seized, allegedly revealing bogus purchases of cement and steel amounting to approximately Rs.117.98 crores from five entities located in Delhi and Gurgaon.

The assessee initially filed an application before the Income Tax Settlement Commission under Section 245C(1) and admitted undisclosed income of Rs.39.53 crores in relation to non-genuine purchases. During subsequent proceedings and based on detailed reports submitted by the Commissioner of Income Tax, the disclosed amount increased first to Rs.43.78 crores and eventually to Rs.117.98 crores.

The majority of the Settlement Commission granted immunity from prosecution and penalties, while one member dissented and held that immunity should not be granted because the assessee had failed to make full and true disclosure.

 Issues Involved

  1. Whether immunity under Section 245H of the Income Tax Act can be granted where the assessee did not initially make full and true disclosure of concealed income.
  2. Whether subsequent disclosure made only after adverse material and reports are brought on record can satisfy statutory requirements of Section 245H.
  3. Whether the Settlement Commission exceeded its statutory powers by granting immunity despite non-compliance with statutory conditions.
  4. Whether High Courts can exercise judicial review over Settlement Commission orders where such orders are contrary to statutory provisions.

 Petitioner’s Arguments (Revenue)

The Revenue argued that:

  • The majority opinion of the ITSC was contrary to Section 245H(1) of the Income Tax Act.
  • The assessee had failed to satisfy the mandatory twin requirements of:
    • full and true disclosure of income; and
    • co-operation in proceedings.
  • The assessee disclosed additional income only after repeated reports and investigation by the Department exposed the concealment.
  • Such conduct could not be treated as voluntary co-operation.
  • The Settlement Commission adopted an erroneous and perverse view of facts and evidence.

 Respondent’s Arguments

The assessee argued that:

  • It had disclosed income that had not been disclosed before the Assessing Officer.
  • It co-operated throughout the settlement proceedings.
  • Additional income was offered in the spirit of settlement upon the Commission's advice.
  • Therefore, requirements of Section 245H(1) stood satisfied and immunity was rightly granted.

Court Findings and Order

 

The Delhi High Court allowed the writ petition filed by the Revenue and quashed the majority decision of the Settlement Commission granting immunity from penalty and prosecution based on the following findings:

  • Failure of Statutory Pre-conditions: The Court held that the assessee failed to satisfy the mandatory requirements under Section 245H(1) of the Income Tax Act, as a full and true disclosure was not made in the initial application.
  • Non-Compliance Found: The Court found that the dynamic upward revision of undisclosed income from Rs.39.53 crores to Rs.117.98 crores—triggered only after the Revenue produced adverse evidence—did not meet the statutory legal standard for settlement.
  • Invalidation of Immunity: Because the true extent of the bogus purchases was intentionally withheld at the initial filing stage, the Court ruled the Settlement Commission's order of immunity to be legally unsustainable and officially set it aside.

 Important Clarification

The judgment clarifies that:

  • Full and true disclosure is a mandatory pre-condition for obtaining immunity under settlement proceedings.
  • Subsequent disclosure after confrontation with evidence does not cure the defect of an incomplete original disclosure.
  • Immunity under Section 245H cannot become an automatic or routine consequence of settlement proceedings.
  • Judicial review can be exercised where Settlement Commission orders violate statutory provisions.

 Sections Involved

Income Tax Act, 1961

  • Section 132 – Search and Seizure
  • Section 245A to Section 245M – Settlement Proceedings
  • Section 245C – Application for Settlement
  • Section 245D – Procedure on Settlement Application
  • Section 245H – Power to Grant Immunity from Penalty and Prosecution
  • Section 245I – Conclusiveness of Settlement Order

Constitution of India

  • Article 226 – Writ Jurisdiction of High Courts

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:785-DB/RVE10022014CW52622013.pdf

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