Settlement Commission Must Examine ‘Full & True Disclosure’ of Undisclosed Income Before Rejection: Madras HC in Khazana Jewellery Case [Read Order]

In a recent ruling, the Madras High Court held that the Income Tax Settlement Commission must properly examine whether there was “full and true disclosure” of undisclosed income before rejecting a settlement application and remanded Rs. 80 Crore settlement plea for fresh consideration.

Khazana Jewellery Pvt. Ltd., engaged in jewellery business, was subjected to a search under Section 132 of the Income Tax Act. During the search, the Managing Director admitted that the company inflated refinery loss by 3% to 5% and siphoned off excess gold for sale in black market.

It was stated that about Rs. 70.66 Crores was generated from AY 2011-12 to 2016-17. In a letter, the company offered Rs. 80 Crores towards stock in trade for AY 2017-18. While assessment under Section 153A was pending, the company filed a settlement application on 16.10.2018 under Section 245C.

The Settlement Commission rejected the application saying there was no full and true disclosure. The Single Judge dismissed the writ petition against this order. The company then filed the present appeal.

The appellant’s counsel argued that it had clearly explained in its settlement application how the undisclosed income was derived by inflating refinery loss. They submitted that detailed explanation was given in a confidential enclosure running into many paragraphs. According to the appellant, the authority did not properly consider these details.

The revenue counsel argued that the assessee failed to substantiate the Rs. 80 Crores claim with proper evidence and did not make full and true disclosure as required under Section 245C of the Income Tax Act.

The Division Bench comprising Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan observed that Section 245C requires full and true disclosure and also explanation of the manner in which income was derived.

The court observed that the application contained detailed explanation about inflated refinery loss and how income was generated. It explained that rejection of settlement may lead to penalty, interest and even prosecution, so the authority must carefully examine the material placed.

The court also pointed out that even as per Revenue, the assessee was eligible for settlement for the remaining Rs. 70 Crores. In view of this, the court set aside the order of the Single Judge and the rejection order. The matter was sent back to the competent authority for fresh consideration of the settlement application. The writ appeal was allowed.

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