CASES REFERRED: 1. AIR 1955 SC 233 - H.V Kamath v. Ahmed Isque (Ref) 2. (1980) 3 SCC 54 : AIR 1979 SC 1724 - I.T Commr. v. Bhattacharjee (Foll) 3. (1987) 3 SCC 723 : AIR 1987 SC 2045 - CDPT Sangam v. Balasubramania Foundry (do)

BOOK REFERRED: Income Tax Law - Chaturvedi & Pithisaria

Mr. G. Sargan for Petitioner

Messrs K. Srinivasan & H. Raghavendra Rao for Respondents

Rama Jois, J.:—

In these four petitions presented by the same person praying for quashing the order passed by the Settlement Commission (Income Tax and Wealth Tax) constituted under the provisions of the Income Tax Act 1961 (‘the Act’ for short), the following two questions of law arise for consideration:

1. Whether a person who approaches the Income Tax Settlement Commission constituted under the provisions of the Income Tax Act 1961 seeking full and final settlement of his case is entitled to question the legality of its decision in a petition under Article 226 of the Constitution of India?

2. If the answer to the first question is in the affirmative, what is the scope for interference under Article 226 of the Constitution of India against a decision of the Settlement Commission?

2. The facts of the case, in brief, are as follow: The petitioner is a regular assessee being assessed to Income Tax under the provisions of the Act. He is the Managing Director of International Instruments Limited, a public limited company, established under the technical collaboration with a German based company VDO Tachometer Werke GmbH (VDO for short). The petitioner was interested in acquiring a business for manufacturing hose clips, which was being run under the name and style “Noridex” by a German national by name Mr. Klug. In view of its superior quality and reputation, the petitioner desired to acquire the business. For that purpose, the petitioner negotiated a loan from VDO. This was approved by the Government of India, subject to the following conditions:

1) The petitioner should raise the loan personally and the maximum interest payable would be 10 ¾%;

2) The petitioner had to establish a limited company to take over the business;

3) VDO as a lender would be empowered to appoint a General Manager to look after the affairs of the company till the loan is outstanding;

4) The purchase price of DM 3,80,000 had to be paid in three instalments, the first one of DM 2,20,000 and two subsequent equal instalments of DM 80,000 each;

5) The principal and the interest had to be paid from out of the profits of the business acquired by the petitioner in Germany and the loan had to be repaid within a period of five years.

3. Subsequently the pre-condition regarding existence of profits was withdrawn by the Government of India. Further the petitioner had to establish a parallel unit for the manufacture of hose clips within a period of three years in India. According to the petitioner he was constrained by certain conditions to raise a personal loan and to establish a private limited company to take over the business. No foreign exchange was to be released by the Government of India. If there were to be default in repayment and the Government were to release foreign exchange, the petitioner was to pay penalty in an equal amount. These conditions were incorporated in the letter of the Government of India dated 10-8-1970 (Annexure-A).

4. Pursuant to the directives of the Government of India, a loan agreement was entered into between the petitioner and VDO on 8-10-1970. The stipulations of the Government of India had been incorporated in the Agreement dated 8-10-1970, a copy of which is produced as Annexure-B to the petitions. The agreement was also ratified by the Government of India. After the agreement, the petitioner carried on business in his individual capacity for a short while. Thereafter, in compliance with, the directives of the Government of India, a limited company “Noridex GmbH” was established on 21-11-1970 in Germany, governed by the General Law. The company had a share capital of DM 20,000, out of which the petitioner held shares in his individual capacity worth DM 18,000 which was 90% of the issued share capital. The remainder of 10% of the total share capital was held by a German national and a representative of VDO. The petitioner transferred the business including raw-materials, work-in-progress, machinery etc., to the limited company. The petitioner transferred the assets of the business to the German Private Limited Company. The balance of the assets over and above the shares held by the petitioner were treated as loans to the private limited company. The petitioner, however, retained the world-wide patent rights of the hose clips.

5. Subsequently, the patent rights in respect of several countries were sold for 1,75,000 DM to Aprotec SA on 25-10-1972 while retaining the rights in the rest of the world. The loan liability towards VDO remained that of the petitioner and was not and could not be transferred to the limited company, in view of the express stipulation by the Government of India that the loan shall be the personal liability of the petitioner.

6. In accordance with the conditions imposed by the Government of India, a parallel, unit for manufacture of hose clips namely “Avalon Fasteners Private Limited” was established in India within about a period of six months. Some of the machinery, working tools, jigs, raw materials and semi-finished products, were transferred from Noridex GmbH to Avalon Fasteners Private Limited on deferred payment basis. The Indian company fared well as the cost of production was much lower in India. But unfortunately, the limited company at Germany did not prosper for varied reasons. At that stage, there was a proposal to shift the production from West Germany to India, keeping the private limited company at Germany as a marketing organisation. The Government of India did, not accept this proposal, on the ground that the permission granted was only to run a manufacturing concern. In the circumstances, Noridex GmbH was closed down on 30th September 1974. The loss of the German company far exceeded its capital and as a result the petitioner could not collect even partially the loan amount from the private limited company. Ultimately, the loan advanced had to be written off as a bad debt in the accounting year relevant to assessment year 1975-1976 while even the share capital contributed to Noridex GmbH was lost, the personal liability of the petitioner to repay VDO, the loan taken with the interest specified thereon continued.

7. The petitioner had claimed the interest paid to VDO as also the consultancy charges and industrial taxes, paid for the assessment years 1973-1974 to 1975-1976. The Income Tax Officers, however, took the view that as the business had been transferred to the private limited company, the petitioner had ceased to carry on the business and therefore the claim for allowance of interest could not be accepted. The following are the particulars of the claim for interest deduction made by the petitioner:

Assessment Year Interest paid to VDO Tachometer Werke GmbH - DM Industrial taxes and Consultancy charges Total In Rs. 1973-1974 24,919 5,456 30,375 80,357 1974-1975 26,720 2,550 29,270 92,044 1975-1976 25,347 8,909 34,256 83,105

For the assessment year 1972-1973, the petitioner had claimed a business loss amounting to Rs. 94,334-00 (41,696 DM). This claim was also negatived by the Income Tax Officer on the ground that the business had been discontinued. The claim for bad debt in a sum of Rs. 5,84,182-00 (1,78,175 DM) for the assessment year 1975-1976 was also disallowed for the same reason.

8. Aggrieved by these orders, the petitioner appealed to the Appellate Assistant Commissioner/Commissioner of Income Tax (Appeals). The contention of the petitioner before the Appellate Authority was that there was no discontinuance of the business and therefore the interest paid as also the business loss as also bad debts incurred in respect of German Company were liable to be allowed in the assessment. The Appellate Authority for the very reasons stated by the Income Tax Officer dismissed the appeals. Thereafter, the petitioner filed appeals before the Income Tax Appellate Tribunal for the years 1972-1973 to 1974-1975. The request made by the petitioner before the Commissioner of Income Tax, Karnataka, to give deduction, by the exercise of his discretion was also rejected on 24-1-1978.

9. It is at this stage, the petitioner chose to withdraw the appeals preferred before the Appellate Tribunal and desired to approach the Settlement Commission under Section 245-M of the Act. As the matter was of considerable complexity, permission to withdraw the appeals was granted. The petitioner filed applications before the Settlement Commission for the assessment years 1972-1973 to 1977-1978. The application of the petitioner for assessment years 1976-1977 to 1977-1978 was rejected by the Commission on the ground that in respect of those years no proceedings were pending before the Departmental Authorities. The applications for the assessment years 1972-1973 to 1975-1976 were taken up for hearing by the Commission. Before the Settlement Commission the petitioner explained all the difficulties experienced by him as explained earlier and prayed for granting the deduction. The Settlement Commission, however, rejected the application for all the four years. The relevant portion of the order reads:

“From the facts and circumstances, it is quite clear that the applicant had not carried on any business in West Germany in any of the assessment years before us. Interest paid in respect of capital borrowed for the purpose of business or profession is permissible in respect of a business which is being ‘carried on’ under the provisions of Section 36(i)(iii). It is a well settled principle in law that no allowance can be claimed under this provision if the borrowing was for the purposes of a business discounted before the commencement of the accounting year nor can interest on such borrowings for a defunct business be deducted from or set off against any other income. As we have already stated, the proprietory business of the applicant became defunct the moment it was sold to the limited company in West Germany.

As regards the claim of bad debt, there is absolutely no justification to make such a claim. Noridex GmbH which was floated in 1970-1971 closed its operations on 30-9-74. The liquidation proceedings were subsequently initiated and the applicant was informed that there was no hope of recovery from the company of the outstandings payable to him. This is clearly a capital loss and it cannot be allowed as a deduction as claimed by the applicant.

Hence the total income of the applicant will be the same as determined by the I.T.O and sustained on appeal by the Appellate Assistant Commissioner of Income-tax viz.,

1972-1973 Rs. 2,77,450 1973-1974 Rs. 1,32,200 1974-1975 Rs. 1,27,740 1975-1976 Rs. 1,47,340

The Income-tax Officer has levied interest under the following Sections:

Asst. year Interest u/s 139(8) Interest u/s 215 Interest u/s 217(1A) 1972-1973 552 — 18,992 1973-1974 120 — - 1975-1976 2057 15084 - 1976-1977 1790 9666 - 1977-1978 612 9180 -

The applicant has requested for cancellation of the interest charged as above under the various Sections. The applicant has been filing applications in Form No. 6 for existence of time for submission of returns. Hence the charging of interest under Section 139(8) is in order and they are allowed to stand.

In regard to the levy of interest under Sections 215 and 217(1A), the position is slightly different. The estimates of advance tax payable fell short of 75% of the tax determined on regular assessment mainly on account of the applicant setting off the loss of Noridex against his other income. But for the set off, the estimates filed by him cannot be characterised as false or untrue. Reading Section 215(4) with Rule 40 of the I.T Rules, we are of the opinion that interest under Section 215 need not be charged. Therefore, on the facts of the case, the interest charged in the assessments for assessment years 1975-1976, 1976-1977 and 1977-1978 are cancelled.

For the assessment year 1972-1973, the applicant had claimed a set off of the loss of Noridex amounting to Rs. 94,334-00 in the belief that such a set off was warranted in the circumstances of his case. Although we have not allowed this claim, we are, however, of the opinion that the interest chargeable under Section 217(1A) has to be waived under Rule 40 of the I.T Rules. Accordingly, the interest of Rs. 18,992/- charged by the I.T.O is cancelled.

The Income-tax Officer has initiated action under Section 271(a) for the same reasons stated above. We direct that these proceedings should be dropped.

All the returns except for the assessment year 1972-1973 had been filed beyond the prescribed dates but it is seen that the applicant had been approaching the I.T.O regularly with the applications in Form No. 6 for grant of extension of time. It is seen that the ITO had not initiated penalty proceedings for any of these years under Section 271(1)(a). We would, therefore, not impose any penalties for any of these years under Section 271(1)(a).As there is no question of concealment, provisions of Section 271(1)(c) are not attracted for any of the years.

The applicant should pay the taxes and the interest under Section 139(8) in the normal course.

This settlement shall be void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts.”

Aggrieved by the said order, the petitioner has presented these petitions.

10. In support of the prayer for quashing the decision of the Settlement Commission, the petitioner has urged the following grounds:

(i) The Settlement Commission was not justified in rejecting the contention of the petitioner that he had not discontinued the business and in coming to this conclusion the Commission failed to appreciate that the petitioner was compelled by the Government of India to set up a limited company.

(ii) Even assuming that the petitioner was not carrying on the business during the relevant accounting year, the interest paid to VDO ought to have been allowed.

11. The first contention urged for the Department is that the machinery of Settlement Commission constituted under the Act was an extra-Qrdinary one and under the scheme a party could approach the Settlement Commission seeking full and final settlement of all the matters concerning the liability under the Act and once the assessee voluntarily approached the Settlement Commission and the Settlement Commission rendered a decision, it is final and therefore the petitioner was not entitled to challenge the same in a Writ Petition. The second contention was that even on the basis that the provisions of the Act making the decision of the Settlement Commission final, does not take away the power of judicial review of administrative action conferred on this Court by the Constitution, this Court cannot, having regard to the scheme of the Settlement Commission go into correctness or propriety of the decision of the Settlement Commission. Therefore, the two questions set out first arises for consideration.

12. Before considering the validity of the contentions, it is necessary to allude to the legislative background as also the salient aspects of the provisions providing for the establishment of Settlement Commission as also the scope of its powers and the special procedure regulating the exercise of its powers. Recommendation was made by the Wanchoo Committee for establishing a settlement machinery. Relevant portion of the recommendation reads:

“Settlement machinery”:

2.32 This, however, does not mean that the door for compromise with an errant tax payer should for ever remain closed. In the administration of fiscal laws, whose primary objective is to raise revenue, there has to be room for compromise and settlement. A rigid attitude would not only inhibit a one-time tax-evader or an unintending defaulter from making a clean breast of his affairs, but would also unnecessarily strain the investigational resources of the Department in cases of doubtful benefit to revenue, while needlessly proliferating litigation and holding up collections. We would, therefore, suggest that there should be a provision in the law for a settlement with the taxpayer at any stage of the proceedings. In the United Kingdom the ‘confession’ method has been in vogue since 1923. In the U.S law also, there is a provision for compromise with the tax payer as to his tax liabilities. A provision of this type facilitating settlement in individual cases will have this advantage over general disclosure schemes that misuse thereof will be difficult and the disclosure will not normally breed further tax evasion. Each individual case can be considered on its merits and full disclosures not only of the income but of the modus operandi of its buildup can be insisted on, thus sealing off chances of continued evasion through similar practices.

2.33 To ensure that the settlement is fair, prompt and independent, we would suggest that there should be a high level machinery for administering the provisions, which would also incidentally relieve the field officer of an onerous responsibility and the risk of having to face adverse criticism which, we are told has been responsible for the slow rate of disposal of disclosure petitions. We would, therefore, recommend that settlements may be entrusted to a separate body within the Department, to be called the Direct Taxes Settlement Tribunal. It will be a permanent body with three Members. The strength of the Tribunal can be increased later, depending on the workload. To ensure impartial and quick decisions and to encourage officers with integrity and wide knowledge and experience to accept assignments on the Tribunal, we recomment that its members should be given the same status and emoluments as the members of the Central Board of Direct Taxes.

Any taxpayer will be entitled to move a petition before the Tribunal for settlement of his liability under the direct tax laws. We do not think that it is necessary to provide for cases being referred to the Tribunal by the Department. However, we wish to emphasize that the Tribunal will proceed with the petition filed by a taxpayer only if the Department raises no objection.

“Where the taxpayer takes the initiative and voluntarily discloses the fact of his past frauds and their full extent and is also prepared to facilitate investigations, and to furnish full evidence (including not only the business books and records but also private bank books) as may be required on behalf of the Board as to the amount of the correct liability, the Board will not institute criminal proceedings, but will accept a pecuniary settlement”.

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The award will be binding both on the petitioner and on the Department. The application of its decisions on questions of law will, however, be confined to the case under settlement and will not in any way interfere with the interpretation of law in general. No appeal will lie against the decision of the Tribunal by the petitioner or the Department, whether on question of fact or of law.”

(Underlining by us)

Pursuant to the aforesaid recommendation, Chapter XIXA consisting of Sections 245A to 245K for settlement of cases was introduced into the Act by the Taxation Laws Amendment Act 1973.

13. The Synopsis of the provisions incorporated in Chapter XIXA of the Act as inserted by Taxation Laws (Amendment) Act, 1973, is as below: Any proceeding pending under the provisions of the Act has been defined as falling within the meaning of the word “Case” used in the Chapter (Section 245A). An Income-tax Settlement Commission consisting of not less than three members to be constituted by the Board (Section 245B). An assessee is at liberty to apply to the Settlement Commission to have his case settled, but once he made an application he would not be entitled to withdraw the same (Section 245C). Full power is conferred on the Settlement Commission to call for report from any of the Income-tax authorities and to pass orders allowing the application filed by an assessee fully or partly or to reject the application, but the application could not be proceeded with by the Settlement Commission if it forms the opinion that there has been concealment of particulars of income or perpetration of fraud by the applicant. No order could be passed adverse to the applicant without giving an opportunity of hearing (Section 245D). Every order made by the Settlement Commission has to be complied with and it is also subject to the condition that the settlement shall be void if it is subsequently found by the Commission that it had been obtained by fraud or misrepresentation of facts (Section 245D(6). The Settlement Commission has got the power to reopen the completed proceedings of assessment also if eight years had not elapsed from the end of the assessment year concerned (Section 245E). The Settlement Commission is conferred with all the powers vested in any income-tax authority (Section 245F). No person is permitted to inspect or obtain copies of any reports made by any income-tax authority to the Settlement Commission, but the Settlement Commission has the discretion to furnish copies thereof on an application made to it. However, if the person whose case is under consideration before any Settlement Commission wants any document to rebut any evidence against him, the Settlement Commission has to furnish copies of the documents sought for (Section 245G). The Settlement Commission is invested with the power to give immunity against prosecution and or imposition of penalty on being satisfied that the applicant had made full and true disclosure of his income (Section 245H). Any amount specified in an order of Settlement passed under Section 245D could be recovered and penalty for default in paying such sum, could be imposed and recovered in accordance with the provisions of Chapter XVII (Section 245J). Lastly, Section 245-1, which provides that the decision of the Settlement Committee is final and conclusive reads:

“245-I. ORDER OF SETTLEMENT TO BE CONCLUSIVE - Every order of settlement passed under sub-section (4) of Section 245D shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in this Chapter, be reopened in any proceeding under this Act or under any other law for the time being in force.”

The scheme of the provisions discloses that they are intended to give an opportunity to a defaulter to seek pecuniary settlement of all the violations of the tax laws by him and to seek exemption from penalty both under the Act and under the penal law of the land. It is for an assessee to voluntarily submit to its jurisdiction after giving up his right to the ordinary remedies under the Act. In other words, it is an opportunity to surrender and to have the matter settled through the Settlement Commission. The decision of the Settlement Commission is made final and conclusive by Section 245-1 of the Act.

14. Even so, as regards the first question is concerned, it should be remembered that the power of judicial review of administrative action including those of Courts and Tribunals conferred on the High Courts under Articles 226 and 227, constitutes one of the basic structures of the Constitution. Therefore, irrespective of the nature of an administrative Tribunal or the width of its power or a provision in the relevant provision of law that its decision is final and conclusive, the High Court's power of judicial review remains unaffected, though the scope of judicial review might vary. That power can be curtailed or varied only by a constitutional provision. (See: H.V Kamath v. Ahmed Ishaque)1 Moreover with reference to the Settlement Commission itself the question as to whether its decisions are appealable to the Supreme Court under Article 136 has been the subject matter of consideration by the Supreme Court in I.T Commissioner v. B.N Bhattacharjee . 1980 3 SCC 54 on a preliminary objection. The Supreme Court held thus:

“47. The preliminary objection raised by Shri A.K Sen need not detain us because we are satisfied that the amplitude of Article 136 is wide enough to bring within its jurisdiction orders passed by the Settlement Commission. Any Judgment, decree, determination, sentence or order in any case or matter passed or made by any Court or Tribunal, comes within the correctional cognisance and review power of Article 136. The short question, then, is whether the Settlement Commission cannot come within the category of “Tribunals”. To clinch the issue, Section 245L declares all proceedings before the Settlement Commission to be judicial proceedings. We have hardly any doubt that it is a Tribunal. Its powers are considerable; its determination affects the rights of parties; its obligations are quasi-judicial; the orders it makes at every stage have tremendous impact on the rights and liabilities of parties.

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In short, Settlement Commissions are Tribunals. The preliminary point fails.”

Thus the Settlement Commission is held to be a Tribunal. That being the position, the petitioner is entitled to seek judicial review of the order of the Settlement Commission in a petition under Articles 226 and 227 of the Constitution of India. For these reasons, we answer the first question in the affirmative.

15. With reference to the second question arising for our consideration, as we have pointed out earlier, the provision for constitution of the Settlement Commission was not in existence earlier. This legislative step was taken on the recommendation of the Wanchoo Committee. As observed by us earlier, the Settlement Commission was to be constituted for settling the complicated claims of chronic tax evaders as an extraordinary measure, for giving an opportunity to such persons to make true confession and to have the matters settled once for all, and earn peace of mind. It is a Forum for self surrender and seeking relief and not a Forum for challenging the legality of assessment order or orders passed in any other proceedings. This is not only evident from the provision of the Act which prevents the application made, from being withdrawn as also the provision which makes the decision of the Settlement Commission final and conclusive both on question of law and fact. The power conferred on the Settlement Commission is so wide that it can take any view on any questions of law, which it considers appropriate, having regard to the facts and circumstances of a case, which would be applicable only to that case and it has also the power to give immunity against prosecution or imposition of penalty. It is in this background we should find out the answer to the second question, namely, the scope for interference against a decision of Settlement Commission in a petition under Article 226 of the Constitution of India. The provision for settlement would show that it is in the nature or statutory arbitration, to which a person may submit himself voluntarily. Therefore, it appears to us that the scope is much more restricted than the power of the Court to interfere with an arbitration award. Regarding the jurisdiction of the Civil Court to deal with an arbitration award, the Supreme Court in the case of Coimbatore District Podu Thozillar Samgam v. Bala Subramania Foundry . 1987 3 SCC 723 has stated thus:

“The Court was also entrusted with the power to modify or correct the award on the ground of imperfect form or clerical errors, or decision on questions not referred, which were severable from those referred. The Court had also power to remit, the award when it had left some matters referred undetermined or when the award was indefinite, where the objection to the legality of the award was apparent on the face of the award. The Court might also set aside the award on the ground of corruption or misconduct of the arbitrator, or that a party had been guilty of fradulent concealment or wilful deception. But the Court could not interfere with the award if otherwise proper on the ground that the decision appeared to it to be erroneous. The award of the arbitrator was ordinarily final and conclusive, unless a contrary intention was disclosed by the agreement. The award was the decision of a domestic Tribunal chosen by the parties, and the Civil Courts which were entrusted with the power to facilitate arbitration and to effectuate the awards, could not exercise appellate powers over the decision. Wrong or right the decision was binding, if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. This Court reiterated in the said decision that it was now firmly established that an award was bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it, there was found some legal proposition which was the basis of the award and which was erroneous.”

In our opinion, many of the grounds on which arbitration award could be set aside, would not be available in view of the nature and jurisdiction of the Settlement Commission. We are of the view that a decision of Settlement Commission could be interfered with only.

(i) if grave procedural defect such as violation of the mandatory procedural requirements of the provisions in the Chapter XIX-A and/or violation of Rules of natural justice is made out;

(ii) if it is found that there is no nexus between the reasons given and the decision taken by the Settlement Commission.

(iii) this Court cannot interfere either with an error of fact or error of law, alleged to have been committed by the Settlement Commission.

We answer the second question accordingly.

16. As far as the present case is concerned, there is neither violation of any mandatory procedure prescribed under any of the Sections of Chapter XIXA of the Act nor any violation of any of the Rules of natural justice. Further, it cannot be said that the reasons assigned by the Settlement Commission for rejecting the relief sought for, by the petitioner, have no nexus to the decision taken.

17. In the result, we make the following order: The Writ Petitions are dismissed but without any order as to costs.