Supreme Court clarifies Settlement Commission’s power on interest waiver: Kakadia Builders vs. Income Tax Officer (2019)

Date of the Judgment: 05 March 2019

Citation: (2019) INSC 186

Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.

Can the Income Tax Settlement Commission waive interest on tax dues? The Supreme Court of India addressed this critical question in a recent judgment, clarifying the extent of the Commission’s powers. This case revolves around whether the Settlement Commission, while settling tax disputes, can waive or reduce the interest that is statutorily payable under the Income Tax Act, 1961. The judgment impacts taxpayers seeking settlement and the scope of the Commission’s authority. The bench comprised Justices Abhay Manohar Sapre and Dinesh Maheshwari, with the judgment authored by Justice Abhay Manohar Sapre.

Case Background

The case involves Kakadia Builders Pvt. Ltd. and its promoter director (referred to as “the appellants” or “assessee”) and the Income Tax Officer (referred to as “the respondents” or “Revenue”). On 19 January 1994, a search and seizure operation was conducted at the appellants’ premises under the Income Tax Act, 1961. Following this, assessment proceedings were initiated to determine the tax liability.

During the pendency of these proceedings, the appellants filed settlement applications before the Settlement Commission on 12 March 1996 and 3 September 1996, seeking to settle their tax matter as per Chapter XIXA of the Income Tax Act, 1961. On 11 August 2000, the Settlement Commission issued an order under Section 245D(4) of the Income Tax Act, 1961, making certain additions and waiving interest chargeable under Sections 234A, 234B, and 234C of the Income Tax Act, 1961.

Aggrieved by this order, the appellants filed rectification applications on 29 December 2000. The Revenue also filed a rectification application under Section 154 of the Income Tax Act, 1961, on 26 July 2002, contesting the waiver of interest. On 11 October 2002, the Settlement Commission dismissed the appellants’ applications and partly allowed the Revenue’s application, rectifying its earlier order to remove the waiver of interest. The appellants then filed petitions in the High Court of Gujarat.

Timeline:

Course of Proceedings

The High Court of Gujarat initially allowed the petitions filed by the appellants on 3 March 2014, setting aside the Settlement Commission’s order dated 11 October 2002. The High Court granted liberty to the Revenue to pursue remedies against the Settlement Commission’s order dated 11 August 2000. Subsequently, the Revenue filed petitions (SCA Nos. 7814 of 2014 and 7820 of 2014) challenging the legality of the 11 August 2000 order.

The High Court disposed of these petitions on 28 July 2016, effectively modifying the Settlement Commission’s order of 11 August 2000. The High Court reversed the waiver of interest, adopting the directions contained in the Settlement Commission’s order dated 11 October 2002. This modification led the appellants to file the present appeals before the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of the Income Tax Act, 1961, specifically concerning the powers of the Settlement Commission. The relevant sections include:

• Section 245B: This section deals with the constitution of the Settlement Commission.
• Section 245D: This section outlines the procedure for settlement of cases by the Settlement Commission, including the passing of orders. Specifically, Section 245D(4) is relevant, which pertains to the final order of the commission.
• Section 154: This section provides for the rectification of mistakes apparent from the record.
• Sections 234A, 234B, and 234C: These sections deal with the charging of interest for defaults in payment of advance tax and filing of returns.
• Section 119: This section empowers the Central Board of Direct Taxes (CBDT) to issue circulars and instructions to the subordinate authorities.
• Chapter XIXA: This chapter of the Income Tax Act, 1961 deals with the settlement of cases.

The legal framework is designed to provide a mechanism for taxpayers to settle their tax disputes, while also ensuring that the statutory provisions regarding interest are not unduly compromised. The Supreme Court’s interpretation of these sections is crucial in determining the extent of the Settlement Commission’s powers.

Arguments

Appellants’ Arguments:

• The appellants argued that the High Court erred in modifying the Settlement Commission’s order dated 11 August 2000, by reversing the waiver of interest.
• They contended that the High Court should not have adopted the directions of the Settlement Commission’s order dated 11 October 2002, as that order had already been set aside by the High Court itself in a previous proceeding.
• The appellants relied on the fact that the Settlement Commission’s initial order was passed before the Supreme Court’s decisions in Commissioner of Income Tax, Mumbai vs. Anjum M.H. Ghaswala & Ors., [(2002) 1 SCC 633] and Brij Lal & Ors. vs. Commissioner of Income Tax, Jalandhar, [(2011) 1 SCC 1], which clarified the powers of the Settlement Commission regarding interest waivers.

Respondents’ Arguments:

• The respondents argued that the High Court was justified in modifying the order of the Settlement Commission dated 11 August 2000.
• They contended that the Settlement Commission did not have the power to waive interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961, as clarified by the Supreme Court in Ghaswala (supra) and Brij Lal (supra).
• The Revenue sought to uphold the High Court’s decision to reverse the waiver of interest.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in allowing the petitions and thereby modifying the order dated 11 August 2000 passed by the Settlement Commission.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Cases:

• Commissioner of Income Tax, Mumbai vs. Anjum M.H. Ghaswala & Ors., [(2002) 1 SCC 633] – This case, decided by a Constitution Bench of the Supreme Court, held that the Settlement Commission does not have the power to reduce or waive interest statutorily payable under Sections 234A, 234B, and 234C of the Income Tax Act, 1961, except to the extent of granting relief under the circulars issued by the Board under Section 119 of the Act.
• Brij Lal & Ors. vs. Commissioner of Income Tax, Jalandhar, [(2011) 1 SCC 1] – Another Constitution Bench decision, this case clarified that Sections 234A, 234B, and 234C are applicable to the proceedings of the Settlement Commission. It further held that the terminal point for the levy of interest under Section 234B is up to the date of the order under Section 245D(1) and not up to the date of the order of settlement under Section 245D(4). It also held that the Settlement Commission cannot reopen its concluded proceedings by invoking Section 154 to levy interest under Section 234B.

Legal Provisions:

• Section 245B of the Income Tax Act, 1961: Deals with the constitution of the Settlement Commission.
• Section 245D of the Income Tax Act, 1961: Outlines the procedure for settlement of cases by the Settlement Commission.
• Section 154 of the Income Tax Act, 1961: Provides for the rectification of mistakes apparent from the record.
• Sections 234A, 234B, and 234C of the Income Tax Act, 1961: Deals with the charging of interest for defaults in payment of advance tax and filing of returns.
• Section 119 of the Income Tax Act, 1961: Empowers the Central Board of Direct Taxes (CBDT) to issue circulars and instructions to the subordinate authorities.

Judgment

How each authority was viewed by the Court?

• The Supreme Court relied on Commissioner of Income Tax, Mumbai vs. Anjum M.H. Ghaswala & Ors., [(2002) 1 SCC 633]* to hold that the Settlement Commission does not have the power to waive or reduce interest statutorily payable under Sections 234A, 234B, and 234C of the Income Tax Act, 1961.
• The Supreme Court relied on Brij Lal & Ors. vs. Commissioner of Income Tax, Jalandhar, [(2011) 1 SCC 1]* to hold that Sections 234A, 234B, and 234C are applicable to the proceedings of the Settlement Commission and that the Settlement Commission cannot reopen its concluded proceedings by invoking Section 154 to levy interest under Section 234B.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that the Settlement Commission’s powers are exercised within the framework of the Income Tax Act, 1961, and as interpreted by the Supreme Court’s previous judgments. The Court emphasized the importance of adhering to the law laid down in Ghaswala (supra) and Brij Lal (supra), which clarified the limits of the Settlement Commission’s authority regarding interest waivers. The Court’s reasoning also reflected a concern that the High Court had overstepped its jurisdiction by modifying the Settlement Commission’s order instead of remanding the case for fresh consideration.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• The Settlement Commission does not have the power to waive or reduce interest statutorily payable under Sections 234A, 234B, and 234C of the Income Tax Act, 1961, except as provided under Section 119 of the Act.
• The High Court should not modify the orders of the Settlement Commission on merits, especially when the law on the issue has been clarified by the Supreme Court after the Settlement Commission’s order. Instead, the High Court should remand the matter for fresh consideration by the Settlement Commission.
• The Settlement Commission cannot reopen its concluded proceedings by invoking Section 154 of the Income Tax Act, 1961, to levy interest under Section 234B.
• This judgment reinforces the principle that the powers of the Settlement Commission are limited and must be exercised within the bounds of the Income Tax Act, 1961, and the law laid down by the Supreme Court.

Directions

The Supreme Court set aside the impugned order of the High Court and the order of the Settlement Commission dated 11 August 2000, to the extent it decided the issue in relation to waiver of interest. The Court remanded the case to the Settlement Commission to decide the issue relating to waiver of interest afresh, keeping in view the law laid down in Ghaswala (supra) and Brij Lal (supra), after affording an opportunity to the parties. The Settlement Commission was directed to decide the matter within six months from the date of the order.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the High Court should not modify the orders of the Settlement Commission on merits, especially when the law on the issue has been clarified by the Supreme Court after the Settlement Commission’s order. Instead, the High Court should remand the matter for fresh consideration by the Settlement Commission. The judgment also reaffirms the principles laid down in Ghaswala (supra) and Brij Lal (supra), clarifying that the Settlement Commission does not have the power to waive or reduce interest statutorily payable under Sections 234A, 234B, and 234C of the Income Tax Act, 1961, except as provided under Section 119 of the Act. This judgment does not introduce a new position of law but reinforces the existing legal framework and clarifies the procedure to be followed by the High Court in such cases.

Conclusion

The Supreme Court’s judgment in Kakadia Builders Pvt. Ltd. vs. Income Tax Officer clarifies the limitations on the Settlement Commission’s power to waive interest under the Income Tax Act, 1961. The Court held that the High Court erred in modifying the Settlement Commission’s order and should have remanded the case for fresh consideration in light of the Supreme Court’s decisions in Ghaswala (supra) and Brij Lal (supra). This judgment reinforces the principle that the Settlement Commission must operate within the bounds of the law and that the High Court should not overstep its jurisdiction by modifying orders on merits, especially when the law has been subsequently clarified by the Supreme Court. The case was remanded to the Settlement Commission for fresh consideration in light of the legal position.