What does ‘settlement’ mean?

The Court has reasoned that according to the provisions of the section 245C(1)5, the Settlement Commission can admit only such assessee’s settlement application who has made ‘full and true disclosure’ of its income before the Commission. The Court has held that making of ‘full and true disclosure’ is one of the pre-condition for valid application. Therefore, settling income higher than income disclosed by the applicant would amount to holding firstly, that the applicant’s income disclosure in the application was not ‘full and true’ and secondly, it would also amount to assessing the applicant’s income. The Court further held that the Commission should dismiss such application leaving the option to the applicant to work out the legal remedies when it becomes clear to the Commission that the disclosure of the applicant is not full and true. However, in any case, the Commission cannot proceed to assess the income of the applicant, as the Commission is not empowered to assess the income. Hence, the settlement order assessing the applicant’s income is without jurisdiction, bad in law and void ab initio.

In the backdrop of the above judgment, this article discusses some of the arguments on the powers of the Settlement Commission particularly as to whether the Commission has power to assess the applicant’s income. It also discusses the pre-condition of ‘full and true’ disclosure for the admission of the case before the Settlement Commission. It may be mentioned that the honourable Court did not have the occasion to consider and give its findings on many of the arguments advanced in this article, as the parties did not place the same before the Court.

Concept of ‘Settlement’ After this judgment, many have wondered and have raised a question as to if the Settlement Commission is not empowered to assess the income then what is the job of the Settlement Commission ? The obvious known answer to this question is that the job of the Settlement Commission is to ‘settle’ the income of the applicant. However, this answer leads to more fundamental questions as to what is the meaning of ‘settlement’ ? Does ‘settlement’ includes assessment ? Answer to these questions will vary; as the Act does not define the word ‘settlement’, nor does it provide clear answer to the second question. This article makes a humble attempt to answer these questions.

According to the Black’s Law Dictionary, ‘settlement’ means ‘an agreement ending a dispute or lawsuit’. However, it also may be worthwhile to discuss ‘settlement’ conceptually rather than discussing only its legal meaning. The concept of ‘settlement’ may be a better-appreciated form the familiar occurrence of ‘out of the court settlement’6. The parties resolve the dispute among them possibly with the spirit of ‘give and take’ in the ‘settlement out of the court’. From it, one may infer that; ‘settlement’ is a resolution of the dispute possibly in the spirit of compromise shown by both the sides.

The Settlement Scheme in the Income-tax Act envisages a settlement incorporating the elements of compromise, according to which an applicant pays tax on the income not disclosed before the Income-tax Department and the Department in return may have to forego levying penalty and initiating prosecution. Further, both the sides give up their right to further appeal on the issues decided against them by the Settlement Commission. It may be recalled that the Supreme Court in Brijlal’s7 case has equated the dispute resolution method adopted by the Commission with arbitration. The similarity with the arbitration is not only with the Settlement Commission’s method of the dispute resolution but due to the fact that there is finality in the decision of the Commission and also due to the fact that the applicant cannot withdraw after he submits himself to the Settlement Commission. There is no provision under which the Department also can withdraw from the proceedings before the Commission. Finality of the order and submission without the possibility of the withdrawal thereafter, are essential ingredients of the alternate dispute resolution methods.

In the case of B. N. Bhattachargee8, the Supreme Court has held that the Settlement Commission is a Tribunal. It is obvious that the function of the Tribunal is to adjudicate the dispute between two parties. Based on these positions it becomes clear that the work before the Commission is limited to the resolution of dispute between two sides by way of arbitration on the issues raised by the applicant in its application and the issues raised by the Commissioner in its report on the applicant’s application. This jurisdiction of the Settlement Commission is provided in the section 245D(4) which reads as follows:

‘the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner u/ss.(1) or u/ss.(3)’

‘Settlement’ includes limited power of assessment The Supreme Court has held that the Settlement Commission passes the ‘Order’, but does not ‘assess’ income and its ‘Order’ is not described either as original assessment or reassessment.9 However, The Supreme Court in Brijlal’s case10 has mentioned that ‘When Parliament uses the word “as if such aggregate would constitute total income”, it presupposes that under the special procedure the aggregation of the returned income plus income disclosed would result in computation of total income, which is the basis for levy of tax on the undisclosed income is nothing but ‘assessment’.’ These decisions may appear to be contradictory on the Commission’s power of assessing income, however it is not so.

It may be necessary to understand the term ‘assessment’ for appreciating the above judgments. The Supreme Court has explained this term in the judgment delivered by the three-Member Bench in the case of S. Sanakappa11 as under:

‘. . . . the word ‘assessment’ is used in the IT Act in a number of provisions in a comprehensive sense and includes all proceedings, starting with the filing of the return or issue of notice and ending with determination of the tax payable by the assessee. Though in some sections, the word ‘assessment’ is used only with reference to computation of income, in other sections it has more comprehensive meaning mentioned by us above.’

The Act has entrusted the work of assessing income to the Assessing Officer by providing procedural machinery provisions and providing enabling powers such as carrying out enquiries and verifications. On the contrary, the Law has not empowered the officers of the Commission to carry out verifications to arrive at settled income although the Settlement Commission enjoys all the powers of the Income-tax Authority u/s.245F(1). Further, time provided to the Commission for settling the case is not the same as provided for completing the assessment. Therefore, the Act does not envisage the Commission the work of the assessing applicant’s income in the same way as the Law has entrusted it to the Assessing Officer in view of its limited jurisdiction, lesser time available, and in absence of the powers of carrying out enquiries and verification to the Officers of the Commission. Therefore the term of ‘assessment’ cannot have a comprehensive meaning as mentioned in the above judgment of the Supreme Court with respect to the work done by the Commission. This aspect is clarified by the Supreme Court in the case of Brijlal12 by holding that, ‘It contemplates assessment by settlement and not by way of regular assessment or reassessment u/s.143(1) or u/s.143(3) or u/s.144 of the Act.’

However, the Commission is required to settle the issues before it in a fair manner taking assistance of the Officers of the Commission when necessary and by taking independent view of the issues which are required to be settled. The Commission in this process may determine income, which would amount to assessment as held by the Supreme Court. Therefore, the Commission does have power to assess the applicant’s income, although limited to the issues before it.

This conclusion is also supported by the provisions of the section 245D(6). It provides that ‘Every order passed u/ss.(4) shall provide for the terms of settlement including any demand by way of tax, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other matters to make the settlement effective…’ This provision does not make sense, if the Commission is not empowered to settle the case at the income higher than what is disclosed by it in the settlement application. The demand can only be raised if the Commission decides any issue against the applicant based on the records and evidence before it.

The Settlement Scheme is in favour of Revenue

The legal provision that all the Members of the Commission are ex-Revenue Service senior officers and are not accounting professionals from outside the Department also support this proposition. Moreover, the Law does not create distinction among Members of the Commission, such as ‘Accountant Member’ and ‘Judicial Member’ as provided in the case of the Members of the Income-tax Appellate Tribunal. Therefore, considering powers of the Income-tax Authority given to the Commission, power to have investigation conducted, nature of pre-conditions for the valid application before the Commission and the composition of the Commission, it is clear that the Settlement Scheme is in favour of the Revenue. These aspects of the Settlement Scheme as against the provisions in the Arbitration and Conciliation Act, 1996 otherwise do not make sense, but seem to have been provided with the object mentioned above.

Disclosure of ‘full and true’ income according to the applicant

In the case of the Ajmera Housing Corporation13, the Supreme Court has held that ‘full and true disclosure’ is one of the basic requirements for valid settlement application. The Supreme Court in this case has further held that unless the Commission records its satisfaction on this aspect, it will not have any jurisdiction to pass any order on the matters covered by the application. This judgment as understood by me, lays down the Law in the facts of the case, in which the applicant after disclosing Rs.1.94 crore before the Commission had revised its disclosure by filing revised application containing confidential annexure and related papers and offering additional income of Rs.11.41 crore. On these facts, the Supreme Court in para 36 of its order has held that the disclosure of the applicant could not be considered as ‘full and true’.14

It may be pointed out that the Act does not provide for fulfilment of this requirement at the satisfaction of the Settlement Commission. Therefore, in absence of the statutory requirement of ascertaining ‘full and true’ disclosure at the satisfaction of the Commission, fulfilment of this condition should be viewed from the applicant’s perspective. For example, applicant’s disclosure without including income on a legal issue may be ‘full and true’ according to the best of his knowledge and belief. However, merely because the Settlement Commission settling the case takes a view against the applicant on such an issue the applicant’s disclosure made in the application would not cease to be ‘full and true’. Therefore, the Supreme Court’s judgment in the case of Ajmera should be read as the Commission should record its satisfaction that the disclosure is ‘full and true’ to the best of knowledge and belief of the applicant at the stage of the admission of the application.

Moreover, the Law does not intend that the Commission arrive at satisfaction of ‘full and true’ disclosure at the stage of the admission of the case. Such a provision would not only make the entire process of the settlement redundant which is followed after the admission of the case, but also it is practically impossible to arrive at such a judgment without hearing both the sides at length and examining the records. It is settled that the Law does not require achieving the impossible.

The requirement of making ‘full and true disclosure’ is provided to ensure that the applicant honestly and with the bona fide intentions invokes the jurisdiction of the Settlement Commission without playing the game of hide and seek. It is held in many Court judgments that the facility of the Settlement Commission for resolution of disputes is not available to the dishonest assessees.

Revival of the abated proceedings

Presently, neither the section 245HA of the Income-tax Act, nor the Clause 280 of the proposed Direct Taxes Code (DTC) allow revival of the abated proceedings before the Assessing Officer when the Court annuls the settlement order passed u/s.245D(4) or holds the settlement order void. It may be mentioned that the Finance Act 2008 had inserted such a provision in the section 153A on the search assessment to provide revival of the assessment or reassessment proceedings in case of the annulment of assessment or reassessment. Therefore, it would not be surprising that the Government would introduce such an amendment in the near future on similar lines in the Chapter-XIX-A of the Income-tax Act on the Settlement Commission to prevent the assessees taking the advantage by getting declared the Settlement Order void on technical grounds. At the same time, such annulment also prevents the reassessment of income due to lapse of the time permitted by law. The Government may find it difficult to accept such a situation, in which the assessees would get away by paying lesser revenue than what was due from it.

To conclude, this author is of the view that the Settlement Commission is empowered to settle the case at the income above what is disclosed before the Commission as the concept of ‘full and true disclosure’ should be viewed from the applicant’s perspective.

It is besides the point that an enactment of the Law is a dynamic process. Once the Law is amended as discussed above, the arguments and discussion on the topics such as this become irrelevant.

1. The author is Commissioner of Income-tax. The
views expressed in the article are personal views of the author and not
necessarily of the Government of India.

2. G. Jayaraman v. Settlement Commission (Additional Bench) (2011) 196 TAXMANN 552 (Mad.).

3. Ace Investments v. Settlement Commission (2003) 264 ITR 571 (Mad.), (2004) 186 CTR (Mad.) 486.

4. Canara Jewellers v. Settlement Commission (2009) 315 ITR 328 (Mad.), (2009) 226 CTR (Mad.) 79.

5  Section 245C(1).

‘An
assessee may, at any stage of a case relating to him, make an application in
such form and in such manner as may be prescribed, and containing a full and
true disclosure of his income which has not been disclosed before the Assessing
Officer, the manner in which such income has been derived, the additional
amount of income-tax payable on such income and such other particulars as may
be prescribed, to the Settlement Commission to have the case settled and any
such application shall be disposed of in the manner hereinafter provided:

6. Section 89(1) of the Civil
Procedure Code deals with the ‘Settlement outside the Court’

7       Bij Lal v. CIT, (2010) 328
ITR 477 (SC) at p-506, (2010) 235 CTR (SC) 417

8       CIT v. B. N. Bhattacgagee,
(1979) 118 ITR 461 (SC) at p-480, (1979) 10 CTR (SC) 354

9       Para-12, CIT v. Hindustan
Bulk Carriers, (2003) 259 ITR 449 (SC) at p-463, (2003) 179 CTR (SC) 362

10      Para-11, Bij Lal v. CIT,
(2010) 328 ITR 477 (SC) at p-501, (2010) 235 CTR (SC) 417

11      Para-2, S. Sankappa v. ITO, (1968) 68 ITR 760
(SC)

14      At p 659, see note 12