Introduction

The case of Agson Global Pvt. Ltd. & Ors. vs. Income Tax Settlement Commission And Ors. S [Delhi High Court, 6th January 2016] addresses a critical question concerning the scope of powers vested in the Income Tax Settlement Commission (ITSC) under the Income Tax Act, 1961. The primary issue revolved around whether the ITSC had the authority to direct a special audit under Section 142(2A) during settlement proceedings under Chapter XIX-A of the Act.

The petitioners, comprising Agson Global Pvt. Ltd. and seven other entities, sought to settle their tax liabilities through the ITSC by making a full and true disclosure of undisclosed income. The ITSC, however, directed a special audit of their accounts, invoking Section 142(2A), leading the petitioners to challenge this decision in the Delhi High Court.

Summary of the Judgment

The Delhi High Court examined whether the ITSC, in the context of settlement proceedings under Chapter XIX-A, possessed the authority to mandate a special audit as per Section 142(2A) of the Income Tax Act. The court concluded that the ITSC does not have such power within settlement proceedings. Specifically, the court held that the authority to direct a special audit pertains exclusively to assessment proceedings under Chapter XIV and does not extend to settlement proceedings under Chapter XIX-A.

Consequently, the High Court quashed the ITSC’s impugned order dated April 26, 2013, which directed a special audit of the petitioners' accounts. The court directed that the matter be revisited by the ITSC without the directive for a special audit, allowing the ITSC to proceed with the settlement applications as per the prescribed procedures in Chapter XIX-A.

Analysis

Precedents Cited

The judgment extensively analyzed several precedents to delineate the boundaries of the ITSC’s powers:

• CIT v. Om Prakash Mittal (2005) 2 SCC 751: Highlighted the exclusive jurisdiction of the ITSC in settlement proceedings, emphasizing that it exercises plenary jurisdiction distinct from regular assessment authorities.
• Brij Lal v. CIT, Jalandhar (2011) 1 SCC 1: Established a clear demarcation between assessment in law (under Chapter XIV) and assessment by settlement (under Chapter XIX-A), reinforcing that settlement proceedings are akin to arbitration and do not incorporate regular assessment processes.
• Canara Jewellers v. Settlement Commission [2009] 315 ITR 328 (Madras): Affirmed that the ITSC’s powers are confined to settlement procedures and do not extend to conducting assessments or audits outside the settlement framework.
• Additional cases such as Picasso Overseas v. DGRI, Ashwani Tobacco Pvt. Ltd. v. Union of India, Union of India v. Dharampal, and Director General of Central Excise Intelligence v. Murarilal Harishchandra Jaiswal Pvt. Ltd. were referenced, though deemed less directly applicable as they pertained to other tax statutes like the Central Excise Act and the Customs Act.

These precedents collectively reinforced the distinction between settlement proceedings and regular assessment processes, limiting the ITSC’s authority within the boundaries of settlement under Chapter XIX-A.

Legal Reasoning

The court meticulously dissected the relevant sections of the Income Tax Act to ascertain the ITSC’s jurisdiction:

• Section 142(2A): Pertains to special audits within the context of assessment proceedings under Chapter XIV, explicitly aimed at determining the correct income during assessment.
• Section 245F: Grants the ITSC all powers vested in an income tax authority but within the scope of settlement proceedings under Chapter XIX-A.

The High Court emphasized that while Section 245F confers broad powers to the ITSC, these powers are intrinsically linked to settlement proceedings and do not extend to assessment tasks such as directing special audits, which are exclusive to Chapter XIV. The court underscored that settlement proceedings are distinct, resembling arbitration, and do not incorporate the assessment mechanisms established under regular assessment chapters.

Furthermore, the court observed that the ITSC’s role is to facilitate the settlement of tax liabilities based on full and true disclosure of income, not to undertake or facilitate assessments akin to those conducted under Chapter XIV. Therefore, directing a special audit under Section 142(2A) falls outside the ITSC’s jurisdiction in settlement proceedings.

Impact

This judgment has significant implications for the functioning of the ITSC and taxpayers seeking to utilize settlement provisions:

• Clarification of ITSC’s Powers: Reiterates that the ITSC’s authority is confined to settlement proceedings, preventing it from overstepping into assessment territories such as conducting special audits.
• Preservation of Procedural Integrity: Ensures that settlement proceedings remain streamlined and focused on disclosure and settlement, without the encumbrance of assessment-related investigations unless it shifts entirely back to regular assessment mechanisms.
• Guidance for Taxpayers: Provides clarity to taxpayers regarding the limits of ITSC’s powers, encouraging adherence to the proper channels of settlement without anticipating additional assessment procedures during settlement.
• Future Litigation: Sets a precedent for similar cases where the extent of the ITSC’s authority is questioned, thereby influencing future judicial interpretations and actions.

Complex Concepts Simplified

Income Tax Settlement Commission (ITSC)

The ITSC is a quasi-judicial authority established under Chapter XIX-A of the Income Tax Act, 1961. Its primary role is to offer a mechanism for taxpayers to settle their unpaid tax liabilities by disclosing undisclosed income and paying the prescribed settlement tax, thereby avoiding lengthy regular assessment proceedings.

Section 142(2A) of the Income Tax Act

This section empowers the Assessing Officer to direct a taxpayer to conduct a special audit of their accounts when the accounts are complex, and such an audit is deemed necessary to determine the correct income. This provision is applicable within the framework of regular assessment proceedings under Chapter XIV.

Chapter XIV vs. Chapter XIX-A

Chapter XIV of the Income Tax Act details the procedures for regular assessment of taxes, including filing returns, conducting inquiries, and making assessment orders. In contrast, Chapter XIX-A provides for the settlement of tax cases, allowing taxpayers to disclose previously undisclosed income and settle their tax liabilities through a simplified process, akin to arbitration.

Special Audit

A special audit is an in-depth examination of a taxpayer’s financial records conducted by a qualified auditor, directed by the Assessing Officer under Section 142(2A) to ensure accurate determination of tax liabilities during assessment proceedings.

Conclusion

The Delhi High Court’s judgment in Agson Global Pvt. Ltd. & Ors. vs. Income Tax Settlement Commission And Ors. S significantly demarcates the boundaries of the ITSC’s authority. By ruling that the ITSC lacks the power to direct special audits under Section 142(2A) during settlement proceedings, the court preserves the integrity and procedural delineation between settlement and assessment proceedings as outlined in the Income Tax Act, 1961.

This decision reinforces the principle that settlement mechanisms operate distinctly from regular assessment processes, ensuring that each has its defined scope and processes. For practitioners and taxpayers, the judgment provides clear guidance on the procedural pathways and the limitations of the ITSC’s powers, thereby fostering a more predictable and orderly approach to tax settlements and assessments.