RNS INFRASTRUCTURE LIMITED vs. INCOME TAX SETTLEMENT COMMISSIONER

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 7TH DAY OF DECEMBER, 2016 BEFORE THE HON’BLE MR. JUSTICE L. NARAYANA SWAMY WRIT PETITION Nos.46275-46289 OF 2016 (T-IT)

BETWEEN:

RNS INFRASTRUCTURE LIMITED REPTD. BY ITS MANAGING DIRECTOR, SRI.NAVEEN R SHETTY, AGED ABOUT 47 YEARS, OFFICE AT NO. 14, 7TH FLOOR, NAVEEN COMPLEX, M.G. ROAD, BENGALURU – 560 001. PAN : AACCR7165G

... PETITIONER

(BY SRI.SUKUMAR S, ADV.)

AND:

CENTRAL REVENUES BUILDING, QUEEN’S ROAD, BENGALURU – 560 001 ... RESPONDENTS

(BY SRI.PRABHULING K NAVADGI, ASG FOR R-1; SRI.K V ARAVIND FOR C/R2 & 3)

THESE WRIT PETITIONS ARE FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE ORDER PASSED BY R-1 UNDER SEC. 245D(4) OF THE INCOME-TAX ACT, 1961 DATED 27.05.2016 AND 11.08.2016 IN ANNEX-A1 AND A2 AS WITHOUT JURISDICTION AND BARRED BY LIMITATION; QUASH THE ORDER PASSED BY R-3 GIVING EFFECT TO THE ORDERS OF THE R-1 AND CONSEQUENT NOTICE OF DEMAND ISSUED UNDER SEC. 156 OF THE ACT BY R-3 DATED 20.06.2016 IN RESPECT OF ASSESSMENT YEARS 2006- 07 TO 2012-13 AT ANNEX-A3 TO A9; QUASH THE ORDERS OF PENALTY UNDER SEC. 271(1)(C) OF THE ACT AND THE CONSEQUENT DEMAND NOTICE ISSUED UNDER SEC. 156 OF THE ACT BY R-3 DATED 20.06.2016 IN RESPECT OF ASSESSMENT YEARS 2006-07 TO 2011-12 AT ANNEX-A10 TO A15; QUASH ALL CONSEQUENTIAL PROCEEDINGS INITIATED BY THE R-2 AND 3 IN RELATION TO RECOVERY OF AMOUNT, TREATING THE PETITIONER AS WILLFUL DEFAULTER AND INITIATION OF PROSECUTION PROCEEDINGS ETC.,

THESE PETITIONS HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 23.09.2016 AND COMING ON FOR

PRONOUNCEMENT OF ORDERS, THIS DAY, THE COURT MADE THE FOLLOWING: O R D E R

These petitions are filed by the petitioner challenging the order passed by the respondent No.1, Income-tax Settlement Commission, Chennai under Section 245D(4) of Income Tax Act, 1961, hereinafter referred to as `the Act’ for short, dated 27th May 2016 and 11th August 2016 as without jurisdiction and barred by limitation and the orders passed by the respondent No.3 giving effect to the orders of respondent No.1 dated 20th June 2016 in respect of Assessment Years 2006-07 to 2012-13 and the consequential demand notices and for such other reliefs.

Act so as to proceed with it. After considering the report of the respondent No.2, respondent No.1 passed an order under Section 245D(2C) of the Act on 3rd April 2014 holding that the application of the petitioner is not invalid.

(4) of Section 245D of the Act in respect of the application made on or after 1st June 2010 within 18 months from the end of the month in which the application was made. The application was filed on 6th February 2014 and the respondent No.1 ought to have passed the order on or before 31st August 2015. However, the order was passed on 27th May 2016. 7. Petitioner states that there are several situations emerging on the peculiar facts of the case and the order of the Settlement Commission is clearly barred even after taking into consideration the period for which the stay was granted by this court in the Writ petitions. Clause (iv) of Sub-section (1) of Section 245HA of the Act provides that where an order under Section 245D(4) of the Act has not been passed within the time period specified in Section 245D(4A) of the Act, the proceedings shall abate on the specified date. Respondent No.1 having not passed its order on or before the due date, could not have passed an order determining the total income for various years and deciding to impose penalty under Section 271(1)(c) of the Act for all the six years as per its order dated 27th May 2016. On

the application filed by the petitioner under Section 245D(6D) of the Act the respondent No.1 has passed an order on 11th August 2016 rejecting the application on untenable grounds. 8. Respondent No.1 did not apply for certified copy immediately and hence the time limit has to be reckoned only from the date of pronouncement. The date of order alone should be taken for the purpose of limitation. The period for which the copy of the order is not ready, cannot be excluded in the present case and it is applicable only when a further appeal is to be filed. It is stated that the letters submitted by the petitioner cannot be construed as the consent and further consent cannot confer jurisdiction which did not exist or extend the limitation. It is also settled position of law that the order should leave the control of the officer before the limitation day. The order was received on 2nd June 2016 which merely demonstrates that it did not leave the control of the Settlement Commission even on 27th May 2016 by which date the order had already been barred by time. 9. It is submitted, the digital evidence referred to is an alleged mirror image of the computer server/hard disc of the

petitioner collected at Naveen Complex, VII Floor, No.14, MG Road, Bengaluru. Searches have been conducted in Hubballi and Tarikere also but no incriminating material in the form of digital evidence was found in those places. Based on the digital evidence, the Department claims to have unearthed a hypothetical non-disclosure of Rs.19,68,44,556/-. It is stated that the department has failed to follow the correct procedure in relation to the digital evidence. It is stated the digital evidence provided to the petitioner by the Department had no semblance of reality against whopping Rs.99.00 crore. The amount found in the digital evidence was only Rs.19,09,609.00. Therefore, the figures allegedly culled out from the hard discs are not real ones. No adequate time was provided to the petitioner to offer his comments as to the hard disc containing voluminous details running into thousands of pages. 10. The respondent No.2 has not mentioned as to whether the information retrieved was password protected. The absence of this vital information appears to be deliberate. The petitioner disowned all the entries in the digital evidence on account of

several reasons mentioned in paragraph 34 of the petition. It is stated all the cash withdrawals in all the concerns have been meticulously accounted and there are no cash withdrawals which have been unaccounted for. The correctness and completeness of the audited regular books of account have never been questioned by the Department. The say of the Department that there may be inflation of wages is only surmise and suspicion. While the sundry payment in the debited folder is unauthenticated, the wages shown in the books is supported by vouchers. Therefore, the allegation that sundry payments have been booked as wages, is only a figment of imagination. 11. There are nine firms which have undertaken the work relating to supply of labour for cleaning of land identified for mining, leveling and making it fit for exploration of minerals, excavation, transportation of ore, quarry development, etc. The transactions with the firms are within the framework of law. Anyway, they do not pertain to the petitioner and thus it cannot be taxed in the hands of the petitioner. The Department which took up the case for scrutiny of the assessments of M/s.

Murudeshwara Ceramics Ltd. and nine firms, did not disallow the entire cash withdrawals in their assessments. If the entire cash withdrawal is used for sundry payment, the projects, which are all labour intensive, could not have been completed. The allegations of the Department referred to in paragraph 15.2 at page 62 of the order dated 27th May 2016 are proved to be imaginary and without basis. The Department is blowing hot and cold together. On the one hand the department is taking a stand that the so called sundry payments have been made from out of the cash withdrawals made by M/s. Murudeshwara Ceramics Ltd, and nine partnership firms and withdrawals in petitioner’s books (which means the sources are available), but, on the other hand, the department clams that the expenditure had been incurred for which there are no sources available. 12. The respondents No.2 and 3 or any other officer of the Department before seeking the services of lab systems, should have called for objections from the petitioner. Due to the breach of standard operating procedure, the report from a private party is to be ignored. Having failed to get the acquisition and

analysis done by a competent person, the report obtained from lab systems is not reliable. Petitioner submits that the levy of penalty is in violation of principles of natural justice, as no opportunity of hearing was granted. 13. Respondents No.2 and 3 filed statement of objection to the interim prayer made in the writ petition. It is stated that sworn statements were recorded from various persons including the Managing Director of the petitioner Company. It was admitted that the petitioner has accepted “on money” in respect of Shantinivas Project from Sale of flats. During the pendency of the scrutiny of the assessment proceedings the assessee realized the effect of the incriminating material and preferred to file an application before the Income Tax Settlement Commission. The petitioner offered additional income of Rs.16,80,07,102.00 for the Assessment Years 2008-09 to 2012-13. It is stated that this Court vide order dated 29th April 2015 granted interim order in the writ petition and the same was extended from time to time till 3rd December 2015. Writ Petition was disposed of on 18th January 2016. Pursuant to the disposal of the writ petition, the

petitioner filed a letter dated 9th February 2016 contending that the period of pendency of the writ petition is to be excluded for the purpose of computing limitation provided under Section 245D(4A) of the Act. It was contended that time limit gets extended up to 31st December 2016. The Settlement Commission, by taking note of the letter arrived at a conclusion that the time limit would be up to June 2016. The Settlement Commission finally passed an order on 27th May 2016 by quantifying the tax liability of the petitioner taking into consideration the seized material, statements recorded during the course of search and also by examination of various physical evidences from hard discs and other material.

petitioner that due to financial difficulties the demand raised by the third respondent cannot be paid, is incorrect. The petitioner has not placed any material to demonstrate that the petitioner is facing financial difficulties. The order passed by the Settlement Commission discloses that majority of the addition is in respect of the illegal payments made by the petitioner to various political parties, leaders, and the Government officials for taking official favour. Those payments are opposed to the public policy and are specifically not to be allowed in view of Explanation to Section 37 of the Act. The apprehension of the petitioner to the show-cause notice is premature. The contention of the petitioner that the order passed by the Settlement Commission is barred by limitation is not correct. The limitation provided under Section 245D(4A) of the Act would be directory and not mandatory. At each and every stage of the proceedings the petitioner has been extended due opportunity and at no point of time the petitioner has been denied any opportunity and all the materials placed by the petitioner has been taken note of by the Commission. The digital evidence is not an admissible evidence and the procedure followed in relation to digital evidence is

unsustainable and agency is not competent, is not sustainable. The provisions of Evidence Act and the Information Technology Act are not strictly applicable before the Settlement Commission. The hard disc, which has clearly established illegal payments to various political leaders and public servants would be opposed to public policy and provisions of Section 37 of the Act. In view of the serious nature of payments, the petitioner is not entitled for any interim relief of stay of demand.

which was filed before 1.6.2007 and the order (Para-8) clearly stated that in the instant petition they were not concerned with an application made to the settlement commission after 1st June, 2007. On the date of judgment of Bombay High Court i.e., 7.8.2009 Section 245D(4A)(iii) which came into effect from 1.6.2010, was not on the statute and therefore, it cannot be said to have seized with the said provision. It is the statutory obligation on the part of the Settlement Commission to dispose of the application within the time frame and in case reason for the delay is not attributable on the part of the applicant and the Settlement Commission has not been prevented from fulfilling the mandatory statutory duty due to reason attributable on the part of the applicant, proceedings shall abate on the specified date under Section 245HA(1)(iv) of the Act. The said exception to read down the language is not applicable to the present case where the applicable provision is 245D(4A)(iii) of the Act and the facts and circumstances of the said case and the present case are quite different. Therefore, the learned counsel for the petitioner submits that rejection of the application filed to rectify

the order dated 27.5.2016 is erroneous and cannot be sustained and thus prays for allowing the writ petitions.

Additional Solicitor General thus prays for rejecting the writ petitions.

an order thereon was 18 months from the end of the month in which the application was made. This 18 months excluding the month in which the application was filed i.e., 6.2.2014 would come to an end on 31.08.2015. The Revenue filed W P No.44007/2014 & W P No.2745-2750/2015 challenging the order passed by the Income tax Settlement Commission dated 03.04.2014 holding that the application filed by the petitioner is not invalid and obtained stay on 29.04.2015 till next date of hearing. On 9.6.2015 again the stay was extended till next date of hearing. The writ petitions were listed on 18.6.2015, 2.7.2015, 28.7.2015, 01.09.2015, 30.09.2015, 08.10.2015 but stay was not extended. The writ petition was listed on 14.10.2015 and the court ordered that the interim order earlier granted is continued until 3rd December, 2015. Thereafter writ petition was listed on 03.12.2015 and 16.12.2015 but stay was not extended. On 13.1.2014 arguments were heard and writ petition was reserved for judgment. On 18.1.2016 the order pronounced dismissing the writ petition. Only the period in which the stay was operating is entitled to be excluded/added to the date of limitation. There was no stay between the period

18.6.2015 and 14.10.2015. On 14.10.2015 the Court ordered “interim order earlier granted is continued until 3.12.2015”. Even if it is presumed that the stay was there up to 3.12.2015, the Revenue is entitled to add 125 days, which is the period available on the date of original grant of stay i.e., 29.4.2015. If it is so done, the Settlement Commission ought to have passed order on 07.04.2016. The order passed on 27.5.2016 is well beyond the limitation prescribed under Section 245D(4A)(iii) of the Act and by operation of Section 245HA(1)(iv) of the Act, the proceedings before the Settlement Commission was abated much earlier to 27.5.2016 and therefore the order passed by the Settlement Commission on 27.5.2016 is not sustainable in the eye of law. In the said circumstances, the Settlement Commission ought to have entertained the rectification application filed by the petitioner to set at naught the order dated 27.5.2016 which is barred by time, which is an error of law apparent on the face of the records.

limitation provided under Section 245D(4A) of the Act. The said submission has not been substantiated by the Revenue. However, as an alternative contention, the Revenue has contended that the limitation provided in Section 245D(4A) of the Act is directory and it is not mandatory and hence even if it is presumed that the order is not passed within the time, the proceedings before the Income tax Settlement Commission does not abate. In this regard, the Revenue has heavily relied upon the decision of the Bombay High Court in Star Television News case, referred to supra.

(ii) In respect of an application made on or after the 1st day of June, 2007 but before the 1st day of June, 2010, within twelve months from the end of the month in which the application was made. (iii) In respect of an application made on or after the 1st day of June, 2010, within eighteen months from the end of the month in which the application was made.” From the above it is clear that a statutory duty is cast on the Settlement Commission to pass the order within the specified period as mentioned above. The word used is “shall” and it is always mandatory and it cannot be directory as sought to be contended by the Revenue.

judgment is referred to and relied upon by various other High Courts.

applicant for the inability of the Settlement Commission to fulfill its statutory obligation, for matters completely beyond the applicant’s control…” 54. From the above discussion having arrived at a conclusion that fixing the cut-off date as 31st March, 2008 was arbitrary the provisions of s.245HA(1)(iv) to that extent will be also arbitrary. We have also held that it is possible to read down the provisions of s.245HA(1)(iv) in the manner set out earlier. This recourse has been taken in order to avoid holding the provisions as unconstitutional. Having so read, we would have to read s.245HA(1)(iv) to mean that in the event the application could not be disposed of for any reasons attributable on the part of the applicant who has made an application under s.245C. consequently only such proceedings would abate under s.245HA(1)(iv). Considering the above, the Settlement Commission to consider whether the proceedings had been delayed on account of any reasons attributable on the part of the applicant. If it comes to the conclusion that it was not so, then to proceed with the application as if not abated.”

245-HA(1)(iv) to that extent will be also arbitrary. We have also held that it is possible to read down the provisions of Section 245-HA(1)(iv) in the manner set out earlier. This recourse has been taken in order to avoid holding the provisions as unconstitutional. Having so read, we would have to read Section 245-HA(1)(iv) to mean that in the event the application could not be disposed of for any reasons attributable on the part of the applicant who has made an application under Section 245-C. Considering the above, the Settlement Commission has to consider whether the proceedings had been delayed on account of any reasons attributable on the part of the applicant. If it comes to the conclusion that it was not so, then to proceed with the application as if not abated. Respondent 1 if desirous of early disposal of the pending applications, to consider the appointment of more Benches of the Settlement Commission, more so at the Benches where there is heavy pendency like Delhi and Mumbai.”

passed the order holding that the proceedings had abated. The delay caused in passing the order was not attributable to the assessee. On the conjoint reading of Sections 245C, 245D(4A) and Section 245HA(1)(iv) and considering the aims and objects of the legislation and the delay caused in passing the order was not attributable to the applicant, the Court was pleased to hold that only when the Settlement Commission is prevented from fulfilling its mandatory statutory duty due to any reason attributable to the applicant, only in that situation, the time-limit for disposal of an application under s.245D(4A)(i) will have to be read as `may’. Therefore, at any stretch of imagination it can be said that the mandatory statutory duty cast upon the Settlement Commission to dispose of the application within the time–frame fixed under Section 245D(4A) is taken out. In that view of the matter, I am of the clear view that the judgment in Star Television News case is not applicable to the facts of the present case as sought to be contended by the Revenue. The order passed by the Settlement Commission dated 27.5.2016 is beyond the time after the proceedings before it stood abated.

Sd/- JUDGE akd