The Kerala High Court has dismissed an appeal by businessman Thomas Philip against the Income Tax Interim Board for Settlement-II. The court ruled that loans availed by Philip from his companies should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. It held that these transactions qualified as undisclosed income for tax purposes.
Philip was the majority shareholder in Delta Aggregators and Sand Pvt. Ltd. and Delta M-sand Pvt. Ltd. The Income Tax Department conducted a search and seizure operation on October 13, 2017, leading to notices under Section 153A for the assessment years 2012-13 to 2017-18. Philip later applied for a settlement of tax liabilities and admitted to undisclosed income of Rs.44 lakh.
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The Income Tax Department found additional unreported income of Rs.10.5 crore. The Interim Board for Settlement (IBS) finalized his total taxable income at Rs 35.36 crore.
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The appellant argued that the loans he received from his companies should not be classified as undisclosed income. The Settlement Commission ruled that, as Philip held a 70% stake in his firms, these loans fell under Section 2(22)(e), which deems loans from closely held companies to shareholders as taxable dividends.
The Single Bench of the Kerala High Court held that settlement orders cannot be interfered with under Article 226 unless they violate legal provisions or principles of natural justice. The division bench upheld this ruling. It stated that once an assessee opts for a settlement process, they cannot later dispute unfavorable findings.
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A division bench comprising Justice Dr. A.K. Jayasankaran Nambiar and Justice Easwaran S. upheld the Settlement Commission’s findings. The court stated that it cannot interfere with settlement orders unless there is a legal violation or a procedural error.
The court relied on past Supreme Court judgments to support its decision. In CIT v. Hindustan Bulk Carriers (2003), the Supreme Court clarified the discretionary powers of the Settlement Commission. In Brij Lal v. CIT (2011) , the court ruled that settlement orders are final unless there is fraud or misrepresentation. In Jyotendra Sinhji v. S.I. Tripathi , the court stated that judicial review of settlement orders is limited to checking legal violations and does not allow re-evaluation of findings.
The Kerala High Court ruled that settlement orders are final and cannot be easily challenged in court. Loans from closely held companies to major shareholders can be taxed as dividends under Section 2(22)(e) of the Income Tax Act.
In Conclusion, the writ appeal was dismissed.
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