The High Court of Delhi, in a recent judgment has held that income tax settlement commission does not have the power to direct a special audit under section 142(2A) in the course of settlement proceedings under Chapter XIX-A of the Income Tax Act, 1961.

Case Details:
W.P.(C) 2927/2013
AGSON GLOBAL PVT LTD& ORS (Petitioners) vs. INCOME TAX SETTLEMENT COMMISSION AND ORS (Respondents)
Judgment delivered on: 06.01.2016
CORAM:- Hon’ble Mr Justice Badar Durrez Ahmed and Hon’ble Mr Justice V. Kameswar Rao

Question before the Court:
Whether the income tax settlement commission has the power to direct a special audit under section 142 (2A) in exercise of its power vested in section 245F of the Income Tax Act, 1961?

Important Case Laws relied upon:
Commissioner of Income Tax v. Income Tax Settlement Commission & Ors.: MANU/DE/1816/2013 [=[2014]360ITR407(Delhi)]
CIT v. Om Prakash Mittal: (2005) 2 SCC 751
Brij Lal v. CIT: (2011) 1 SCC
Canara Jewellers v. Settlement Commission: [2009] 315 ITR 328 (Madras)

Brief Facts of the Case:
Petitioners filed a settlement application before the income tax settlement commission, New Delhi under the provisions of chapter XIX-A. During the proceedings, the Commissioner of income tax, Delhi submitted a supplementary report which noted that after examining the accounts submitted by the petitioners, the assessing officer was of the opinion that the accounts were very complex in nature and that the same ought to be audited under section 142 (2A) for determining the correct income of the petitioner group. The Commissioner indicated that he was also of the opinion that owing to the complexity in the maintenance of accounts, to arrive at the correct income of the assessee group for all the assessment years for which settlement applications had been filed and admitted by the settlement commission, the accounts of the assessee group were required to be audited under section 142 (2A). The settlement commission was therefore requested to direct a special audit of the accounts of the assessee group.

The petitioners objected and submitted that a special audit under section 142 (2A) of the said act could only be directed at the stage of assessment and cannot be conducted in the course of settlement proceedings. This argument was rejected by the settlement commission which directed that the special audit be carried out.

Contention of the petitioners:
There is a clear distinction between a settlement and an assessment. The procedure fo assessment is provided in chapter XIV of the said act. On the other hand the procedure for settlement of cases is set out in chapter XIX-A of the said act. The requirement of a special audit is spelt out in section 142 (2A) of the said act which falls within the ambit of inquiry before assessment therefore, the settlement commission which is concerned with settlement of cases would not have the jurisdiction to direct a special audit. It was also contended that merely because section 245F confers powers on the settlement commission which are vested in an income tax authority, does not mean that all the powers of an income tax authority under the said act vest in the income tax settlement commission.

Contention of the revenue:
It was contended that the settlement commission by virtue of the provisions of section 245F acquires exclusive jurisdiction in respect of a case when an application under section 245C is made. It was also argued that the filing of an application before the settlement commission is akin to the filing of a return before the assessing authority under section 139.

Important Excerpts from the Judgment:
…… It is obvious that the expression “at any stage of the proceedings before him” has clear reference to the assessment proceedings. Thus, the assessing officer, subject to the pre-conditions set out in the said provision, could require a special audit to be conducted but this is with the sole and ultimate object of making an assessment under the said act. The language employed in section 142 clearly indicates that the steps, including that of special audit, taken thereunder are part and parcel of the assessment proceedings with the object and purpose of enabling the assessment to be made under the said act by the assessing officer.

………..that in addition to the powers conferred on the settlement commission under chapter XIX – A, it shall have all the powers which are vested in an income tax authority under the said act. But, in our view, this has to be read in the context of and the scope of settlement proceedings. It does not entail that the powers of regular assessment which are vested in an income tax authority can be exercised by the settlement commission. What we mean to say is that the settlement commission does not engage itself in the process of assessment and cannot make an assessment order. The order that the settlement commission makes under section 245D(4) is not in the nature of an assessment but by way of a settlement and contains the terms of settlement income tax authority and could be exercised by the settlement commission are such which have a nexus with the settlement proceedings which does not include, in our view, the making of an assessment under the said act.

In our view, the exclusivity of jurisdiction which is contemplated by the said provision is that once an application for settlement is made before the settlement commission, no income tax authority would have jurisdiction to deal with the case. It does not mean that the settlement commission from that date steps into the shoes of the income tax authority who was hitherto dealing with the case.

In other words, if the accounts put forth by the assessee before the settlement commission are found by the settlement commission on the basis of the available records and/or the reports of the Commissioner to be neither full nor true then the only option available with the settlement commission is to reject the application for settlement and relegate the assessee to the normal provisions of assessment under the said act.

The Supreme Court, in Brij lal (supra), made a clear distinction between assessment in law (regular assessment under Chapter XIV) and “assessment” by way of settlement. It clearly held that there is a difference between “procedure for assessment” under Chapter XIV and “procedure for settlement” under Chapter XIX-A. In fact, it reiterated that under the said Act, there is a clear difference between ‘assessment in law’ [regular assessment or assessment under Section 143(1)] and ‘assessment by settlement’ under Chapter XIX-A. It also held categorically that an order of settlement under Section 245D(4) is not an order of regular assessment nor is it an order under Section 143(1) or Section 143(3) or Section 144.

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