Facts of the Case

The Revenue filed writ petitions before the Delhi High Court challenging the order passed by the Income Tax Settlement Commission (ITSC) dated 27 June 2013, specifically to the extent that immunity from prosecution and penalty had been granted to the respondents/assessees. During the settlement proceedings, based on the Revenue’s report, additions were made over and above the income originally disclosed by the assessees. However, the final determination of tax liability by the ITSC was not challenged by the respondents.

The dispute was confined only to the legality of the immunity granted by the Settlement Commission.

Issues Involved

  1. Whether the Income Tax Settlement Commission can grant immunity from prosecution and penalty without expressly recording satisfaction regarding full and true disclosure of income?
  2. Whether compliance with Section 245H(1) of the Income Tax Act is mandatory before granting such immunity?
  3. Whether the ITSC’s order was legally sustainable in absence of recorded satisfaction regarding the manner in which such income was derived?

Petitioner’s Arguments (Revenue’s Case)

The Revenue contended that the Settlement Commission granted immunity from penalty and prosecution without recording the mandatory satisfaction that the assessees had made a full and true disclosure of undisclosed income and had disclosed the manner in which such income had been derived.

It was argued that such satisfaction is a statutory prerequisite under Section 245H(1) of the Income Tax Act, and failure to record the same vitiated the order granting immunity.

Respondent’s Arguments (Assessee’s Case)

The respondents relied upon the settlement proceedings and the final tax determination made by the Settlement Commission. Since the determination of tax liability was accepted and remained unchallenged, the respondents defended the immunity granted under the settlement framework.

The respondents relied on the settlement mechanism and sought continuation of immunity granted by the Commission.

Court Findings / Observations

The Delhi High Court noted that both parties relied upon the earlier judgment in Commissioner of Income Tax (Central)-II v. BDR Builders and Developers (2016) 385 ITR 111 (Del.), where under similar circumstances the Court had held that grant of immunity without recording statutory satisfaction was unsustainable.

The Court observed that Section 245H(1) imposes a mandatory obligation upon the Settlement Commission to record satisfaction regarding:

  • Full and true disclosure of income; and
  • Disclosure of the manner in which such income was derived.

Without such satisfaction, immunity cannot be legally granted.

Court Order / Final Decision

The Delhi High Court set aside the impugned order of the Income Tax Settlement Commission only to the extent it granted immunity from prosecution and penalty.

The matter was remanded back to the Settlement Commission for fresh consideration on the issue of immunity in accordance with law.

The writ petitions were accordingly disposed of.

Sections Involved

  • Section 245H(1), Income Tax Act, 1961 – Power of Settlement Commission to grant immunity from prosecution and penalty
  • Chapter XIX-A, Income Tax Act, 1961 – Settlement of Cases
  • Provisions relating to full and true disclosure of undisclosed income

Important Clarification

The judgment clarifies that:

  • Grant of immunity under Section 245H is not automatic.
  • The Settlement Commission must expressly record satisfaction regarding statutory conditions.
  • Mere settlement of tax liability does not entitle an assessee to immunity from penalty or prosecution.
  • Compliance with “full and true disclosure” is jurisdictional and mandatory. 

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8918-DB/SMD21072017CW90162014_153855.pdf

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