Muthoot Fincorp Ltd. v. Income Tax Settlement Commission (Interim Board for Settlement) and Others

**IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE GOPINATH P. MONDAY, THE 3RD DAY OF APRIL 2023 / 13TH CHAITHRA, 1945** ## **WP(C) NO. 24042 OF 2022** ## **PETITIONER:** M/S. MUTHOOT FINCORP LTD. MUTHOOT CENTER, PUNNEN ROAD, TRIVANDRUM REPRESENTED BY ITS AUTHORIZED SIGNATORY SHRI. BINU RAMACHANDRAN, PIN - 695039 BY ADVS. G.HARIKUMAR (GOPINATHAN NAIR) AKHIL SURESH ANU BALAKRISHNAN NAMBIAR ## **RESPONDENTS:** 1 INCOME TAX SETTLEMENT COMMISSION ADDITIONAL BENCH, SATGURU COMPLEX, 640, ARMASALAI, NANDANAM, CHENNAI - 600034, PRESENTLY REPLACED BY THE INTERIM BOARD FOR SETTLEMENT, SATGURU COMPLEX,640 ANNA SALAI, NANDANAM CHENNAI REPRESENTED BY ITS SECRETARY, PIN - 600035 2 THE PRINCIPAL COMMISSIONER OF INCOME TAX(CENTRAL) 5TH FLOOR, KANDAMKULATHY TOWERS, MG ROAD, COCHIN, PIN - 682011 3 THE DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRELE, TRIVANDUM, PIN - 695003 BY ADVS. JOSE JOSEPH P.K.RAVINDRANATHA MENON (SR.)(R-348) P.S. RAMAN (SR.ADV.)FOR PETITIONER. THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 03.04.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: W.P.(C)No.24042/2022 -2- **==> picture [42 x 12] intentionally omitted <==** ## **JUDGMENT** The petitioner has approached this Court being aggrieved by Ext.P12 order of the Income Tax Settlement Commission (1[st] respondent) through which the application filed by the petitioner for settlement has been rejected. 2. The brief facts are that, on 05.08.2016, there was a search and seizure under Section 132 of the Income Tax Act (In short 'the Act') in various business premises of the petitioner. The petitioner opted to settle the issues by adopting the procedure under Chapter XIX A of the Income Tax Act, 1961 [‘the Act’ - as it stood at the relevant time]. The period for which the application was filed relate to the Assessment Years 2010-11 to 2017-18. In the application before the Settlement Commission, the petitioner made disclosures under the following three heads:- _“(i)_ _**'E xcess realisation of gold'** :- This is stated to be the difference between the gold which was shown in the records of the petitioner as sold for the realisation of amounts due under gold loans availed by its customers and the actual quantity of gold sold during the relevant period. In other words, the disclosure referred to the excess of gold sold over and above the accounted figures. The petitioner disclosed Rs.85.37 Crores as income under this head;_ _(ii) An ad-hoc voluntary disclosure of Rs.2 Crores; and_ _(iii) ‘_ _**Dis-allowance of interest on debentures amounting to Rs.109.92 Crores’** :- This represents the income received by the petitioner on account of late disbursement of interest on debentures issued by the petitioner from time to time.”_ 3. The petitioner's application before the Settlement Commission W.P.(C)No.24042/2022 -3- passed through the 1[st] stage under Section 245D(1) of the Act, after the commission was satisfied that proceedings were pending for the years in question, there was a full and true disclosure ( _prima facie_ ) and on a finding that the tax liability arising out of the disclosures (mentioned above) had been remitted in full by the petitioner. The Settlement Commission thereafter directed the 2[nd] respondent to file a report as contemplated under Section 245D(2B) of the Act. However, the 2[nd] respondent chose not to file any report under Section 245D(2B) of the Act. The application, therefore, proceeded to the final stage of adjudication. At that stage, the 2[nd] respondent filed a report as contemplated by Section 245-D(3) of the Act, where four objections were raised to the application for settlement. One objection was that the petitioner had not provided for interest on non-performing assets. It was pointed out that since the petitioner was following the mercantile system of accounting as opposed to the cash system, the petitioner was required to disclose, as income, the interest accruing on Non-Performing Assets. It was pointed out that during search and seizure, the Managing Director of the petitioner had agreed that such disclosure would be made. Another objection was regarding the disclosure on account of excess realisation of gold, as explained above. According to the 2[nd] respondent, the purity of gold sold in auction, which has a huge impact on the income realised by the petitioner under this head, was shown as 80%. It was pointed out that in respect of a W.P.(C)No.24042/2022 -4- transaction relating to one P.M.Reji, the Branch Manager of the petitioner had accepted that the purity of gold pledged by the aforesaid P.M.Reji was about 85%. This document was, according to the 2[nd] respondent, sufficient to establish that the petitioner had not made a full and true disclosure which alone would entitle it to have the case settled at the hands of the Settlement Commission. Based on the findings of the aforesaid two issues the Settlement Commission has rejected the application filed by the petitioner for settlement, on the finding that there was no _‘full and true disclosure’_ . The other objections raised by the 2[nd] respondent need not be discussed here because those objections do not form part of the reasons for rejecting the application for settlement. 4. The petitioner initially challenged the order of the Settlement Commission before the Madras High Court. However, by Ex.P14 judgment, a learned Judge of the Madras High Court disposed of the writ petition filed by the petitioner [W.P(C)No.22792/2019], holding that the writ petition was not maintainable before the Madras High Court and the petitioner ought to challenge the order of the Settlement Commission before this Court. It is accordingly that this writ petition was filed before this Court. 5. Sri. P.S. Raman, learned Senior counsel appearing for the petitioner on the instructions of Adv. G.Harikumar, would contend that the W.P.(C)No.24042/2022 -5- order passed by the Settlement Commission is clearly irrational and unsustainable in law. 6. Regarding the issue of non-accounting of interest on nonperforming assets, it is a specific case of the learned Senior Counsel that there is a specific bar under Section 45Q of the Reserve Bank of India Act which prohibits non-banking financial companies like the petitioner from recognising as income, the interest on non-performing assets. It is submitted that despite pointing out before the Settlement Commission that the issue has been settled by the judgment of the Supreme Court in _**CIT v. Vasisth Chay Vyapar Ltd; [2018] 90 taxmann.com 365,**_ [where the Supreme Court categorically found that the provisions of the Reserve Bank of India Act will take precedence over the provisions of the Income Tax Act] the commission proceeded to hold that the petitioner had failed to make full and true disclosure. It is submitted that the Settlement Commission strangely found that the Managing Director of the petitioner had undertaken to declare this income at the time of the search. It is submitted that the Settlement Commission also did not advert to the contention taken on the basis of the judgment of the Supreme Court in _**Vasisth Chay Vyapar Ltd.,** (supra)_ as also the relevant provisions of the Reserve Bank of India Act and wrongly held that the failure to disclose income relatable to interest on nonperforming assets was actually a failure on the part of the petitioner to make W.P.(C)No.24042/2022 -6- full and true disclosure for the purposes of proceedings before the Settlement Commission. 7. It is submitted that the Settlement Commission has given extremely strange reasons for not accepting the purity of gold sold by the petitioner as 80%. It was submitted that the only reason found by the Settlement Commission is the case of the aforesaid P.M.Reji. It is submitted that according to the Settlement Commission this solitary instance of the purity of gold pledged by the aforesaid P.M.Reji (being recorded as 85%) was sufficient to discredit the disclosure made by the petitioner that the purity of gold sold should be determined at 80%. It is submitted that the Settlement Commission irrationally found that the petitioner did not produce any document which substantiated that when the gold ornaments pledged by the aforesaid P.M.Reji were subsequently sold, the purity of gold was found to be 79.24% as opposed to the recording made by the Branch Manager at the time when the gold was pledged that the purity of gold was 85%. It is submitted that the finding of the Settlement Commission that the petitioner did not produce these documents at any earlier stage is itself unreasonable, as the first opportunity that the petitioner got to produce the documents in question was when the objection was raised by the 2[nd] respondent in the report filed as contemplated by Section 245 D (3). It is pointed by the learned Senior Counsel that the amount of gold actually pledged by the aforesaid P.M.Reji W.P.(C)No.24042/2022 -7- was 172.5 grams which are about 0.00058% of the gold actually sold by the petitioner in auction during the relevant period. It is submitted that the record shows that the petitioner had actually sold 29.6 Tons of gold during the relevant period. In other words, it is the submission of the learned Senior Counsel that the solitary case of the gold pledged by P.M.Reji could not have been seen as representing the purity of the entire quantity of gold actually sold in auction by the petitioner during the relevant period. 8. Sri. Jose Joseph, the learned Standing Counsel for the Income Tax Department, would contend that the Settlement Commission had rightly rejected the application filed by the petitioner. It is submitted that one condition that is fundamental to an application for settlement of cases under the provisions of the Income Tax Act, 1961, is full and true disclosure, as evident from a reading of Section 245-C of the Act. It is submitted that the fact that purity of gold which had been sold in various auctions, was estimated at 80% for working out the income of the petitioner under this head. It is submitted that if the claim of 80% purity is accepted, the quality of gold is only 19.20 Carat which is substantially less than the 22 Carat, which is the usual standard for the manufacture of gold ornaments. It is submitted that the contention that the petitioner started checking the purity of gold only after RBI made it mandatory to give a certificate of purity is neither reliable nor convincing. It is submitted that no prudent businessman would sanction W.P.(C)No.24042/2022 -8- loans by accepting gold having 80% purity as security. It is submitted that the assessment of purity at 80% across all the Assessment Years in question makes it clear that the disclosure of income under this head was not correct, and there was no full and true disclosure. It is submitted that during the search, Excel worksheets were found, which revealed a vast difference between interest income offered to tax and interest income as recorded in the Excel Sheets. It is submitted that the Managing Director of the petitioner Company had given a statement which clearly indicated that the actual interest income was not offered for taxation. It is submitted that subsequent retraction from the statement cannot be accepted, and the failure to offer any additional income under this head also amounts to a failure to make full and true disclosure. It is submitted that the petitioner is offering interest on loans on an accrual basis while it is calculating interest on NPA accounts on a cash basis. It is also submitted that in the statement given by the Managing Director of the petitioner Company, an amount of Rs.75 crores was stated to be undisclosed income for the Financial Year 2016-17 on account of unrecognized interest income. This income was not offered in the application for settlement, and only an ad-hoc amount of Rs.2 crores was offered as additional income. It is, therefore, submitted that the failure of the petitioner to make full and true disclosure resulted in the rejection of the application for settlement, and the order of the Settlement Commission is not liable to be W.P.(C)No.24042/2022 -9- interfered with in the exercise of jurisdiction vested in this Court under Article 226 of the Constitution of India. 9. The learned Senior Counsel, for the petitioner, in reply, reiterates the contentions taken and submits that the formula for ascertaining the purity of gold and analysing the actual income is one suggested by the petitioner. It is submitted that while the Department has accepted the methodology, the Department only disputes the percentage of purity of gold for the purposes of ascertaining the income to be offered for settlement. It is submitted that this difference in percentage is a matter for ascertainment and cannot be a ground to hold that there was no full and true disclosure by the petitioner. It is submitted with reference to internal page 8 of Ext.P12 order that in the case of gold pledged by the aforesaid P.M.Reji, the purity of the gold that was sold in the auction as per the auction conducted in terms of the guidelines issued by the RBI shows that the purity of gold pledged by P.M. Reji was only 79.24 %, which is even less than the value adopted by the petitioner while offering amounts for settlement. It is submitted that this is a clear indication of the fact that the report filed by the Department before the Commission is wrong. It is submitted that after the Fair Practices Code of the RBI came into force, the purity of the gold was verifiable. It is reiterated that the statement given by the Managing Director cannot be the basis to hold that the petitioner had to offer interest on NPA accounts for reasons already W.P.(C)No.24042/2022 -10- stated. 10. Having heard the learned Senior Counsel appearing for the petitioner and the learned Standing Counsel appearing for the respondents, I am of the view that the writ petition is liable to be allowed. The procedure for settlement, as contemplated by Chapter XIX-A of the Income Tax Act, 1961 as it then stood, was a procedure enabling assessees to declare their previously undisclosed income and arrive at a settlement of their case. The Scheme, as is evident from a reading of the relevant provisions, is that the assessee is to make an application disclosing the income under various heads which were not earlier offered for assessment and must pay the admitted tax on such income. After considering the reports of the Department, the Settlement Commission would proceed to adjudication to arrive at a conclusion as to whether any further tax is to be paid by the assessee under any head. While the assessee is required to make a full and true disclosure, the Settlement Commission is also authorised to render findings on any additional income that must be brought to tax and, consequently, the amount of tax, penalty or interest payable by the assessee that should be paid in addition to the tax, penalty or interest already paid on the income offered in the application for settlement. This is clear from a reading of Sub-Sections (4) and (6) of Section 245-D of the Act. The provisions of Section 245-J make it clear that any amount found due and payable by an assessee in terms of an order issued W.P.(C)No.24042/2022 -11- under Section Sub-Section (4) of Section 245-D can be recovered in accordance with the provisions contained in Chapter XXVII of the Act. The provisions of Section 245-K make it clear that an application for settlement is a one-time measure, and further applications for settlement will not be entertained at the instance of the assessee in question. An overall reading of the provisions of Chapter XIX of the act and the procedure to be adopted by the Settlement Commission clearly indicate that while the assessee is expected to make a full and true disclosure, a further process of adjudication at the hands of the Settlement Commission is involved, and the Settlement Commission can determine any further amounts payable by the assessee towards the tax, interest or penalty and such amount is also liable to be paid by the assessee in question. In other words, it is clear that the Settlement Commission does not proceed merely on the basis of the statements contained in the application for settlement or any further pleadings before it and can, for reasons to be recorded, come to a conclusion that some higherincome had to be offered by the assessee for arriving at a settlement. Therefore, taking into consideration the spirit and mandate of the provisions contained in Chapter XIX and merely for the reason that further amounts had to be offered by the assessee, the Settlement Commission cannot reject the application for settlement. This is not to say that the assessee is not required to make full and true disclosure. W.P.(C)No.24042/2022 -12- 11. In the facts of this case, one of the main reasons which weighed with the Settlement Commission is the alleged non-disclosure owing to the fact that the purity of gold which was sold in the auction was determined at 80% (on average) to arrive at the previously undisclosed income under this head. There appears to be some material on record to suggest that the yardstick adopted by the assessee was correct. Similarly, the documents produced by the Department could also be scrutinised by the Commission to determine whether the purity of gold sold in auction should be taken at some higher value than 80% for the purpose of determining whether the assessee is required to disclose further income and to pay tax, interest and penalty on the same. However, it was wrong on the part of the Settlement Commission to come to the conclusion that merely because the purity of gold recorded at the time of issuing the loan in favour of one P.M. Reji was higher than the average recorded or disclosed in the settlement application, there was failure to make a full and true disclosure. 12. The second aspect made with the Settlement Commission is the failure to offer the interest accruing on Non-Performing Assets as part of the income. It is not disputed before me that the regulations/instructions issued by the Reserve Bank of India regarding income recognition do not permit a non-banking financial institution like the petitioner to recognise interest on income on non-performing assets. The decision of the Supreme Court in W.P.(C)No.24042/2022 -13- _**Vasisth Chay Vyapar Ltd.**_ (supra) is the authority for the proposition that the instructions issued by the Reserve Bank of India on income recognition will take precedence over any contrary provision in the Income Tax Act, 1961. Therefore, I am of the view that the finding of the Settlement Commission that the failure to offer interest income on non-performing assets constitutes a failure to make a full and true disclosure for the purpose of Section 245-C of the Act, is unsustainable. 13. By virtue of provisions contained in Finance Act, 2021, Sections 245-A and 245-B of the Act have been amended, and the Settlement Commission has ceased to exist. In the place of the Settlement Commission, an Interim Board has been constituted to consider and entertain applications for settlement which were pending. The question as to whether, in a case like this (where the order of the Settlement Commission is required to be quashed), the matter can be reconsidered by the Interim Board, came up for consideration of a Division Bench of the Madras High Court in _**K.S. Thirumalaivasan**_ v. _**The Chairman, Income Tax Settlement Commission and others;**_ (judgment dated 27.6.2022 in W.A.No.1851/2021) where in paragraph 31 it was held as follows:- _“31. …............................... Upon the matter being remanded, the application filed by the Appellant would have to be treated as a pending application and appropriate orders are to be passed after giving the appellant sufficient opportunity and by considering all the materials placed by him. ..........”_ I am in respectful agreement with the view taken by the Division Bench of the W.P.(C)No.24042/2022 -14- Madras High Court in the aforesaid judgment. The effect of an order quashing the order passed by the Settlement Commission would result in the application for settlement filed by the petitioner being treated as a ‘pending application’ which has to be disposed of by the interim board. The Writ Petition is allowed. Ext.P12 order is quashed. It is directed that the application for settlement of the petitioner, which stands restored on account of the fact that Ext.P12 order of the Settlement Commission has been quashed, will be considered afresh by the Interim Board after affording an opportunity to the petitioner and to the respondent Department. The writ petition will stand allowed in the manner indicated above. I make it clear that no observation in this Judgment will prevent the Interim Board from considering and disposing of the application for settlement in accordance with law or from determining the actual income to be offered to tax, by the petitioner, for the purposes of settlement. sd/- **GOPINATH P. JUDGE** acd W.P.(C)No.24042/2022 -15- ## **APPENDIX OF WP(C) 24042/2022** PETITIONER EXHIBITS Exhibit P1(a) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2011-12 Exhibit P1(b) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2012-13 Exhibit P1(c) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2013-14 Exhibit P1(d) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2014-15 Exhibit P1(e) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2015-16 Exhibit P1(f) A TRUE COPY OF NOTICE ISSUED UNDER SECTION 153A DATED 22.02.2017 FOR THE A.Y 2016-17 Exhibit P2 A TRUE COPY OF THE NOTICE ISSUED UUNDER SECTION 148 DATED 28.03.2017 FOR THE A.Y 2010-11 Exhibit P3 A TRUE COPY OF THE APPLICATION FOR SETTLEMENT DATED 26.12.2017 FILED BY THE PETITIONER BEFORE THE LST RESPONDENT - Exhibit P4 A TRUE COPY OF THE ORDER U/S 245(D1) DATED 05.01.2018 - Exhibit P5 A TRUE COPY OF THE LETTER NO. F NO. KL/TV51/2017-18/63IT DATED 15.02.2018 - Exhibit P6 A TRUE COPY OF THE RULE 9 REPORT W.P.(C)No.24042/2022 -16- DATED 09.04.2018 Exhibit P7 A TRUE COPY OF REPLY TO EXT P-6 (RULE 9) REPORT ON 28.05.2018 Exhibit P8 A TRUE COPY OF THE ORDER DATED 11.04.2019 Exhibit P9 A TRUE COPY OF THE VERIFICATION RIPORT DATED 13.05.2019 Exhibit P10 A TRUE COPY OF REPLY TO THE VERIFICATION REPORT DATED 04.06.2019 Exhibit P10(a) A TRUE COPY OF WRITTEN SUBMISSION OF THE PETITIONER AT THE FINAL HEARING DATED 12.06.2019 Exhibit P11 A TRUE COPY OF LETTER DATED 12.06.2019 ALONG WITH ITS ANNEXURES Exhibit P12 A TRUE COPY OF IMPUGNED ORDER DATED 19.06.2019 PASSED BY THE 1ST RESPONDENT Exhibit P13 A TRUE COPY OF THE ORDER DATED 17.09.2019 IN WP NO.22792 OF 2019 AND WMP NOS. 22354 AND 22359 OF 2019 PASSED BY THE HIGH COURT OF MADRAS Exhibit P14 A TRUE COPY OF THE JUDGMENT DATED 29.06.2022 IN WP NO.22792 OF 2019 AND WMP NOS. 22354 AND 22359 OF 2019 PASSED BY THE HIGH COURT OF MADRAS