10 December 1996
Supreme Court


Case number: C.A. No.-000233-000235 / 1982
Diary number: 63592 / 1982






DATE OF JUDGMENT:       10/12/1996




JUDGMENT:                       J U D G M E N T      B.P. Jeevan  Reddy, J.      The order  of the  Settlement Commission  dated October 15, 1980 has given rise to these appeals. Kuldeep Industrial Corporation had  filed an application under Section 245-C of the Income  Tax Act  in respect  of three  assessment  years 1977-78, 1978-79  and  1979-80.  The  Settlement  Commission refused to  admit the case relating to assessment year 1977- 78 for  settlement, against  which the  assessee  has  filed Civil Appeals  233-35 of  1982  (Civil  Appeals  236-237  of 1982). The  Settlement Commission has, however, admitted the case  relating   to  the  other  two  assessment  years  for settlement, against  which the  Revenue has  preferred Civil Appeals 238-239 of 1982.      During the  previous years  relevant to  the said three assessment  years,   the   assessee   received   substantial quantities of  stainless steel sheets from M.M.T.C. claiming to be  a manufacturer  of sterilizers.  It filed returns for the said  three assessment  years disclosing losses in a sum of  Rs.1,31,143/-   (for  A.Y.  1977-78),  Rs.39,939/-  (for A.Y.1978-79) and a profit Rs.7,340/- (for the A.Y. 1979-80). Certain inquiries were made by the Income Tax Officer in the Month of December 1979. She also impounded the account books of the assessee. On February 13, 1980 the Income Tax Officer visited the premises of the appellant where the assessee was said to be carrying on the manufacturing activity. She found no such  activity being  carried on  there. On  February 14, 1980 the  Income  Tax  Officer  issued  a  notice  proposing addition of  three items  of income.  At this stage i.e., on February 29,  1980, the assessee filed an application before the Settlement  Commission seeking  settlement of  his  case relating to  all the  said three  assessment years.  By  its letter dated  March 1, 1980 the assessee informed the income Tax Officer  that it  has filed  an application  before  the Settlement  Commission   in  respect   of  the   said  three assessment years  and, on that basis, called upon the Income Tax Officer to stop all further proceedings. To this letter, the assessee  enclosed a  photocopy of  the  acknowledgement from the  office of the Settlement Commission. By her letter dated March  3, 1980,  the Income  Tax Officer requested the



assessee to  furnish copies  of the  application filed by it before the Commission. The assessee declined to do so on the ground that  his application  was  a  secret  document.  The Income  Tax   Officer  refused   to  stay   the   assessment proceedings and  called upon  the  assessee  to  submit  his replies/explanation to  the notices  already issued  by her. The Income  Tax Officer  once again  requested for copies of the application filed by the assessee before the Commission. The assessee  complained to the Commission about the refusal of the  Income Tax Officer to stay the assessment proceeding but at  the same  time refused  to  furnish  copies  of  its application to the Income Tax Officer. By letter dated March 11/12, 1980,  the Income Tax Officer again requested for the copies of the application. She also called upon the assessee once again to furnish replies to the notices already issued. The assessee  still  refused.  In  these  circumstances  the Income Tax  Officer made  a draft  assessment order  on 19th March, 1980  and communicated  the same  to the assessee, as required by  Section 144-B,  which was  then in  force. This assessment order  pertains to  the assessment  year  1977-78 only. Under this order the Income Tax Officer determined the income of the assessee at Rs.44,40,500/- as against the loss of Rs.1,28.691/-  returned by  the assessee. It was received by the assessee on 31st March, 1980.      By its  letter dated  March 14,  1980,  the  Settlement Commission forwarded  a copy  of the  assessee’s application filed under  Section 245-C to the Commissioner of Income Tax for his  objections. This  communication was received by the Commissioner on  3rd April,  1980. On  5th  June,  1980  the Commissioner filed his objections enclosing therewith a copy of  the   draft  assessment   order  dated  March  19,  1980 pertaining to the assessment year 1977-78. After hearing the parties, the  Commission unanimously  refused to  admit  the assessee’s application  for settlement  with respect  to the assessment year  1977-78. So far as the other two assessment years are concerned, the majority (two out of three members) admitted the case for settlement while one member dissented. The  dissenting   member  was   of  the   opinion  that  the application for  settlement should be rejected for the other two assessment years also.      In its  application under  Section 245-C,  the assessee stated the  following facts:  the  assessee,  a  partnership firm, is  engaged in manufacture and sale of stainless steel utensils, sterilizers and other items in its factory located at Chandigarh.  For the  two assessment  years  1977-78  and 1978-79 it  had filed  returns disclosing  loss in  a sum of Rs.1,31,113.06  and   Rs.39,939/-  respectively.   For   the assessment year  1979-80 it returned a profit of Rs.7,340/-. It is  holding a  quota for  the purchase of stainless steel sheets from  M.M.T.C During the accounting years relevant to the said  three assessment  years, the  assessee  could  not carry one  the manufacturing  activity on  account of  acute shortage of funds. With a view to ensure that its quota does not lapse,  it obtained  the quota  and sold  it to  various brokers in  Bombay, Delhi  and Madras.  The assessee set out the arrangement  with those  brokers. From  these sales, the assessee said  it derived  a profit  of Rs.1,28,691/- in all the three assessment years put together. It offered the said amount to tax.      In his  objections filed to the assessee’s application, the   Commissioner   stated   the   following   facts.   The investigations made for the assessment year 1977-78 revealed that the assessee has tried to evade tax on a massive scale. It had  fabricated its  account books to defraud the Revenue and had  filed a  return showing a loss of Rs.1,31,113/-. On



the basis  of investigations,  the Income  Tax  Officer  has proposed  an   addition  of   Rs.45,71,703/-  in  her  draft assessment order  sent to  the assessee for objections under Section 144-B.  The story  of manufacturing  and the sale of manufactured products  to  certain  named  concerns  is  all fictitious. The  parties, to  whom the manufactured products were allegedly  sold, denied  having  made  such  purchases. Their  account   books  also   did  not  disclose  any  such transactions. The verification of the sales tax record shows that no  trucks carrying  stainless steel sheet ever crossed the sales  tax barriers  enroute to  Chandigarh.  The  goods receipts produced  by the assessee did not contain the stamp of sales  tax barriers.  The spot  inspection of the factory disclosed that  no manufacturing  activity was being carried on there.  The books  of account  for the  assessment  years 1978-79 and  1979-80 were  not produced  inspite of  summons issued under  Section 131.  The inquiries  revealed that the stainless steel  sheets were never brought to Chandigarh but were sold  at premium  at  Bombay,  Madras  and  Delhi.  The various entries  in the  account books  which were  produced latter were found to be fictitious. Indeed, the assessee was in the  habit of  manipulating its  account-books to defraud the Revenue.  In 1974  a search  and seizure  operation  was conducted in  the assessee’s  premises which  disclosed mis- utilisation of  the stainless  steel sheets.  On  the  above facts the  Commissioner stated  that he  strongly objects to the application under Section 245-C being proceeded with. He submitted that  in view  of the  fraud  perpetrated  by  the assessee having  already been  established,  the  assessee’s application may be rejected.      So far as the assessment year 1977-78 is concerned, all the three members of the Commission unanimously rejected the application on the following reasoning:      "83. Viewing the facts of this case      against the observations made by us      above, it  appears to  us that  for      the A.Y.  1977-78,  the  Department      has a  very strong  case  to  raise      objection  on   the   ground   that      concealment   of   particulars   of      income or  perpetration of fraud by      the applicant has been or is likely      to be established - particularly so      in regard  to the  perpetration  of      fraud. In  so far  as this  year is      concerned,    there     is    clear      fabrication   of    accounts,   the      balances in  the account  have been      fudged; the sale vouchers and goods      receipts have been cooked up, and a      false facade  is created to mislead      the Department  and  cover  up  the      real  state   of   the   assessee’s      business transactions.  It  strains      our sense  of credulity  too far to      accept the  applicant’s claim  that      all this  was being  done  only  to      save  its   skin  from  some  other      departments and its intentions vis-      a-vis the  Revenue were nothing but      honourable. If that be so, how does      the assessee  in any  case  explain      the inflation  by Rs.10 lacs of the      carried forward  balance in "Kuldip      Parkash Imprest  Account".  To  our



    minds,  the   Department  has  also      succeeded in substance in rebutting      the assessee’s  claim of  so-called      inaccuracies in  the Commissioner’s      report.  We   do   not   find   any      distortion  or   misconception   of      facts in the Commissioner’s report,      nor can  we subscribe  to the  view      that  it  involves  any  colourable      exercise of  his powers.  In  fact,      the Commissioner  would have failed      in his  duty enjoined  upon him  by      law, if he had not raised objection      for the year 1977-78."      The  findings   recorded  by  the  Commission  are  too eloquent to  call for any emphasis. They could not have been expressed in more stronger language.      So far  as the  other two assessment years (1978-79 and 1979-80) are  concerned, there  was a  difference of opinion between the  three members.  The majority held that the case with respect  to thee  two  assessment  years  stands  on  a different footing,  inasmuch as  no inquiries appear to have been made  by the Income Tax Officer in respect of these two assessment years. No bogus sales have also been conclusively established by  the Income Tax Officer by the date of filing of the  application under  Section 245-C, said the majority, except the  entries regarding  sale of  scrap in the account books of the assessee. The were of the view that there is no adequate material  on the basis of which it can be said that the concealment  of income has been established or is likely to be established. The inspection of the factory premises by the Income  Tax Officer  on February  8, 1980  too is not of much relevance,  they said,  since the  inspection  is  long after the  expiry of  the relevant  previous years. The non- production of  the account  books for  these years  was also said to  be not  of much  relevance because  the  department itself has  been  giving  repeated  adjournments  for  their production.      The dissenting  member, however,  based his  opinion on the  following   reasoning.  The  facts  placed  before  the Commission  conclusively  establish  that  no  manufacturing activity was  being carried  on by  the assessee  during the relevant years.  The account  books for  all the three years were fabricated  with a  view to conceal the assessee’s true activity. It is not even the assessee’s case that it carried on any  manufacturing activity  during  the  previous  years relevant to  assessment years  1978-79 and  1979-80. In  the course of hearing before the Commission it was categorically admitted by  the counsel  for the  assessee that  the losses claimed by  it in  its returns  were not  true and  that  no manufacturing activity  was carried  on during  the relevant years. The  assessee has  also admitted that it has sold the stainless steel  quota at  Bombay, Delhi and Madras and that it never  transported the  same to  Chandigarh. It  is  also admitted that  the books  of account,  showing the  sale  of manufactured goods to various parties are admittedly untrue. The assessee itself has made no distinction as between these three assessment  years. Its case is common to all the there assessment years.  No distinction is, therefore, permissible as between  these three  assessment  years.  The  facts  and record clearly  prove that  the assessee  refused to produce its account  books for  the two  subsequent assessment years inspite of notices and summons; they were produced later and were found  to be  fabricated. The  inspection by the Income Tax Officer  on February  8, 1980 disclosed no manufacturing



activity at  the alleged  factory premises except some small scale electro-plating  work being done there. The dissenting member further  observed: "I  do not  see any reason why the admission made  on behalf of the applicant that there was no manufacturing  activity  carried  on  and  that  the  losses claimed as  per return  are not  genuine can be or should be ignored. These admissions have been made in the papers filed along with  the application  and also  in the  course of the hearing before  us........... I also feel that the applicant should  not   be  allowed  to  take  advantage  of  his  own deliberate default  before the  Income Tax  Officer  and  he should not  be heard  to plead before us that the Income Tax Officer has not examined the books or pointed any defects or deficiencies therein  so as  to be  able  to  establish  any concealment for  these years.  The applicant  should not  be allowed to  take advantage  of his own deliberate default to find  a   short-cut  to   approach  the  Commission  and  to circumvent the  normal processes  of law  prescribed in  the Income-tax  Act."  The  dissenting  member  emphasised  that making a  distinction between assessment year 1977-78 on one hand and  1978-79 and  1979-80 on  the other  would lay  the Commission open  to charge  of  inconsistency,  particularly when it is not even the case of the assessee itself.      Another proposition  stated in  the impugned  order  is that the  Commissioner cannot refer in his objections to any material collected after the filing of the application under Section 245-C  and that  any material  collected  after  the filing of  such application  cannot  be  lolled  into  while deciding the  question whether  to admit  the application or not.      Mr. Harish  Salve, learned  counsel  for  the  assessee submitted that  this  is  a  case  where  the  assessee  has genuinely repented  for his  lapses and  has  made  a  clean breast of  all its  wrong-doing. It has admitted that it had not  carried   on  any  manufacturing  activity  during  the relevant years,  that it had sold the entire stainless steel quota at Bombay, Delhi and Madras, that the returns filed by it were  untrue, that  the books of account maintained by it were untrue  and fabricated  and that  it had  disclosed its true  income  for  the  said  assessment  years  before  the Commission. Indeed  the assessee  has disclosed  many  other items of  income apart from the three items mentioned in the notice dated  February 14,  1980 issued  by the  Income  Tax Officer. Mr.  Salve complained  that the  Income Tax Officer has  drawn   several  facts   mentioned  in  the  assessee’s application under  Section 245-C  and made them the basis of her draft assessment order. This was wholly unfair, said Mr. Salve. Having  regard to the candour with which the assessee approached  the   Commission,  the  Commission  should  have admitted the  case relating  to assessment year 1977-78 also for settlement.  Counsel further  submitted  that  the  very statements made  and facts  stated by  the assessee  in  its application cannot  be made a basis for rejecting it. Mr. J. Ramamurthy, learned  counsel for  the Revenue  on the  other hand assailed  the order  of the  majority insofar  as  they admitted the  assessee’s case  for the two latter assessment years for settlement. He submitted that in view of the facts and circumstances  of the  case which  have been  fully  and clearly pointed out by the dissenting member on his opinion, the application  of the  assessee should  have been rejected outright  and   should  not   have  been  admitted  for  any assessment year.  The distinction  made  between  the  three assessment  years,   the  counsel   submitted,  is   equally untenable.      The scheme  of chapter  XIX-A has  been set  out in the



earlier decisions  of this  Court including  Commissioner of Income-Tax, (Central;),  Calcutta v. B. N. Bhattacharjee and Another [1979  (118) I.T.R.  461] and Commissioner of Income Tax v.  Express Newspapers  Limited [1994  (206) I.T.R. 443] and need  not be  reiterated here.  For the  purpose of this case it is sufficient to notice subsections (1) and (1-A) of Section 245-D. They read:      "245D.  (1)   On  receipt   of   an      application under section 254C, the      Settlement  Commission  shall  call      for a  report from the Commissioner      and on  the basis  of the  material      contained in such report and having      regard   to    the    nature    and      circumstances of  the case  or  the      complexity  of   the  investigation      involved  therein,  the  Settlement      Commission may, by order, allow the      application to  the proceeded  with      or reject the application:      Provided that  an application shall      not be  rejected  under  this  sub-      section unless  an opportunity  has      been  given  to  the  applicant  of      being heard.      [Second  proviso   omitted  by  the      Finance    Act,     1979,    w.e.f.      1.4.1979.]      [(1A)   Notwithstanding    anything      contained in  sub-section  (1),  an      application shall  not be proceeded      with under  that subsection  if the      Commissioner   objects    to    the      application being proceeded with on      the  ground   that  concealment  of      particulars of  income on  the part      of the applicant or perpetration of      fraud by him for evading any tax or      other sum  chargeable or  imposable      under the  Indian  Income-tax  Act,      1922 (11  of 1922)  or  under  this      Act, has  been  established  or  is      likely to  be  established  by  any      income-tax authority,  in  relation      to the case:      Provided that  where the Settlement      Commission is  not  satisfied  with      the correctness  of  the  objection      raised  by  the  Commissioner,  the      Settlement  Commission  may,  after      giving    the    Commissioner    an      opportunity  of   being  heard,  by      order, allow  the application to be      proceeded  with  under  sub-section      (1) and send a copy of its order to      the Commissioner.]"      The meaning and purport of these Sections has also been dealt with  and set  out in  Express  Newspapers.  The  said decision rejects  the argument  that once  an application is filed  by  an  assessee  under  Section  245-C,  no  further investigations or  inquiries can be carried on by the Income Tax Officer  and that  he is  obliged to  stop  all  further proceedings with effect from the said date. It has been held that the  Income Tax  Officer is not bound to do so and that he can  continue with  the proceedings  before him  till the



date of submitting the report by the Commissioner under sub- section (1-A)  of Section  245-D -  and may be, even beyond. The Commission  was, therefore,  in error  in holding to the contrary.      The contention  of Mr.  Salve that  the assessee sent a copy of  his application  filed under  Section 245-C  to the Income Tax  Officer immediately  and  that  the  Income  Tax Officer acted  unfairly in  drawing upon  the facts  in said application to  make the draft assessment order (relating to the assessment  year  1977-78)  is  factually  incorrect  as pointed out  hereinabove. The truth is that not only did the assessee not  send a  copy of it’s application to the Income Tax Officer  but it refused to supply copies thereof inspite of repeated  requests by  the Income  Tax Officer. A copy of the application  was communicated  by the  Commission to the Commissioner only  on 14th  March, 1980  and was received by the Commissioner  on April 3, 1980, as would be evident from the statement in the preamble to the objections filed by the Commissioner. The  draft assessment  order was made on March 19, 1980  and communicated  to the  assessment  alongwith  a covering letter  on March  20, 1980. Even by the date of the making of  the draft assessment order the Income Tax Officer had made  elaborate inquiries  and had discovered that there was no  manufacturing activity,  that there was no transport of stainless steel sheets to Chandigarh, that they were sold in Delhi,  Bombay and  Madras,  that  the  alleged  sale  of manufactured goods  to various parties is false and that the account books  were totally fabricated. The draft assessment order states  all these facts. Mr. Salve could not point out any particular  fact or facts which have been taken from the assessee’s application  and used  as a  basis for making the draft assessment  order. It  is significant  to notice  that according to the application filed by the assessee its total income for all the three years put together is Rs.1,28,691/- , whereas according to the draft assessment order the income of the  assessee is  in the region of Rs. 45 lacs during the first assessment  year alone.  The allegation  of unfairness levelled against  the  Income  Tax  Officer  is,  therefore, factually incorrect and is unwarranted.      The dissenting  member is right in emphasizing the fact that the  assessee itself did not make a distinction between the assessment  year 1977-78  on one hand and the assessment years 1978-79  and 1979-80  o the  other. A  Perusal of  the application filed  by the  assessee before  the Commissioner shows that  it has  set out  facts and  figures relating  to stock  received  from  M.M.T.C.,  their  sale  to  different parties, the expenses and brokerage paid in that connection, the profits  made from  such sales  and all  other  relevant particulars. Neither  the application  nor  the  particulars stated therein are confined to one assessment year (1977-78) but extend  to all  the three  assessment years.  In  short, whatever was  stated or  disclosed in  the said  application related to  all the  three years; no distinction was made or suggested as  between assessment  year 1977-78 and other two assessment years.  As a  matter of fact, the "computation of Income" (Annexure  C) at the end of the application gave the figures of  "Total sale  of stainless  steel sheets", "gross sale value",  "cost of  purchase", "transport  charges"  and "brokerage" for  all the  three years  combined.  The  total profit from  the sale  of stainless steel sheets for all the three years  was worked out at Rs. 1,28,698.10 p. It was one package and  indivisible. We  are,  therefore,  inclined  to agree with  the opinion  of the  dissenting member  that  by making such  a distinction,  the Commission laid itself open to the  charge of inconsistency. Indeed it must be said that



the majority  of the  members of the Commissioner have tried to make  out a  new case for the assessee not put forward by it in  its application.  We are also of the opinion that the facts found  proved and stated in the draft assessment order aforesaid and  the facts  admitted by  the assessee  in  its application before  the Commission  and during the course of hearing before  the Commission  do  clearly  show  that  the "concealment of  particulars of  income on  the part  of the applicant or  perpetration of  fraud by  him for evading any tax or  other sum chargeable or impossible ........... under this  Act   has  been  established."  Now,  so  far  as  the assessment year  1977-78 is  concerned, the draft order does bear out  the aforesaid  facts and since the assessee’s case and all  the material facts are one and the same for all the three assessment  years (as  set out  in its own application filed under  Section 245-C)  it must  be said  that the very same facts  also established  the  said  factors  even  with respect  to   the  two   latter  assessment  years.  In  the circumstances  it  must  be  said  that  the  main  limb  of subsection (1-A)  was fully satisfied in this case. No valid or relevant  reasons have  been assigned  by the Commission, within the  meaning of  the proviso  to subsection  (1-A) to admit the  application for  the two latter assessment years. It  was  a  gross  case  where  the  assessee  brazenly  and deliberately perpetrated  fraud upon the Revenue with a view to evade the taxes legitimately and lawfully payable by him. The fraud  played by him, which was discovered by the Income Tax Officer  even by the date of submission of report by the Commissioner, disentitles  the assessee  from claiming  that his  case   should  be   admitted  for   settlement  by  the Commissioner. There is neither law in its favour nor equity. The fact  that it  has admitted its fraud in its application is of  no consequence since its fraud was already discovered by the Income Tax Officer by her own extensive and elaborate inquiries.      It has  been held  by this  Court that  the  nature  of jurisdiction exercised  by this Court over the orders of the Settlement Commission  is in  the nature of judicial review. [See Sriram  Durga Prasad  v. Settlement  Commissioner  (176 I.T.R. 169)  and Jyotendra  Singhji v.  S.I.Tripathi (A.I.R. 1993 S.C.  1991)]. In these cases, we find that the impugned orders of  the Commission  are vitiated  by  more  than  one misdirection in  law. Firstly, the Commission held, wrongly, that the  Income Tax Officer had no power to proceed with or collect any  material after  the date  of submission  of the application under  Section 245-C.  Secondly, having  rightly rejected to admit the case relating to assessment year 1977- 78 for settlement, it (the majority) made out a new case for the assessed  by creating  a distinction between 1977-78 and 1978-79 and  1979-80, when no such distinction was suggested even by  the assessee; indeed such a distinction is contrary to the  case put  forward by the assessee in its application under Section  245-C. The  Commission  (the  majority)  also ignored the  several statements,  admissions  and  averments made by  the assessee  before the Commission while admitting the case relating to assessment year 1978-79 and 1979-80 for settlement.      For the  above reasons the Civil Appeals 238 and 239 of 1982 filed  by the  Revenue are  allowed with  costs and the Civil Appeals  233-235  of  1982  (and  Civil  Appeals  236- 237/1982) filed  by the  assessee are  dismissed with costs. The cost  payable by  the assessee  in all  the appeals  put together are assessed at Rs. 50,000/- consolidated.