Relief To Kotak Mahindra Bank: Supreme Court Upholds Order of Settlement Commission Granting Immunity From Penalty Under Income Tax [Read Order]

The Supreme Court of India upheld the order of the settlement commission granting immunity to Kotak Mahindra from penalty under the Income Tax Act, 1961.

The appellant-assessee, Kotak Mahindra Bank Limited (formerly, “M/s ING Vysya Bank Limited”) challenged the judgment passed by the High Court of Karnataka at Bangalore whereby the judgment of the Single Judge remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution, was affirmed.

The assessee is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the appellant also carries out leasing business on receiving approval from the Reserve Bank of India (RBI) vide Circular dated 19.02.1994.

The appellant filed its income tax returns and assessment orders were passed up to assessment year 1997-1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997-1998, the Assessing Officer made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994-1995 to 1996-1997 were proposed to be reopened.

The Assessing Officer then passed an Assessment Order and the main issue pertained to the income in respect of the activity of leasing. It was stated that the appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In such cases, the ownership of the assets is vested with the lessees. However, the appellant claimed depreciation on those assets under Section 32 of the Income Tax Act, 1961 though the appellant was not the owner of the assets for the said transactions. 

The Assessing Officer also passed a penalty order dated 14.06.2000 levying a penalty under Section 271 (1)(c) of the Income Tax Act after being satisfied that the appellant had concealed its income as regards lease rental. The appellant approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C (1) of the Income Tax Act, by way of an application.

The Settlement Commission allowed the application filed by the appellant by way of a speaking order and permitted the appellant to pursue its claim under Section 245D. The Revenue challenged the Order before the High Court of Karnataka at Bangalore. The Single Judge disposed of the Writ Petition by way of an Order in favour of the appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Settlement Commission upheld the maintainability of the application filed by the appellant and passed an Order dated 04.3.2008 under Sections 245D(1) and 245D(4)of the Income Tax Act, determining the additional income at Rs.196,36,06,201/-. 

The Commission granted immunity Section 245H(1) from the imposition of penalty and prosecution under the Income Tax Act on the fact that the appellant had co-operated in the proceedings before the Settlement Commission and true and full disclosure was made.

Further, the Settlement Commission annulled the penalty levied by the Assessing Officer under Section 271(1)(c) of the Income Tax Act for the assessment year 19971998 in respect of non-disclosure of lease rental income.

In the meanwhile, Revenue preferred Special Leave before the Court against the Order. A Division Bench of the High of Karnataka dismissed the Writ Appeal preferred by the appellant and upheld the Order passed by the Single Judge. It was observed that the Order of the Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Sri Shyam Divan submitted that when the Settlement Commission rendered a positive finding that the appellant had extended cooperation and had made a true and full disclosure and thereafter, in the exercise of power under Section 245H of the Income Tax Act, the Commission granted immunity from prosecution and penalty to the appellant, the High Court ought not to have interfered with the decision of the Settlement Commission. Per contra, Sri Balbir Singh, Additional Solicitor General appearing on behalf of the respondents-Revenue submitted that the impugned judgment of the High Court is based on a correct appreciation.

Section 245D deals with the procedure to be followed by the Commission on receiving an application for settlement under Section 245C. Sub-section (1) of Section 245C enables the Commission to call for a report from the Commissioner. Section 245H of the Income Tax Act bestows upon the Settlement Commission, the discretion to grant immunity to an applicant from prosecution for any offence under the Income Tax Act or the Indian Penal Code, or from the imposition of any penalty under the Income Tax Act, concerning the case covered by the settlement.

A two-judge Bench of Justice B.V. Nagarathna and Justice Ujjal Bhuyan viewed that the Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles.

It was observed that the appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Income Tax Act.

“The Order of the Settlement Commission dated 04.03.2008 was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 06.07.2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20.05.2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, is hereby set aside. Consequently, the order of the learned Single Judge is also set aside. The Order of the Settlement Commission dated 04.03.2008 is restored.”, the Court held while allowing the appeal.

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