The Supreme Court on Wednesday (September 16) held that an Assessing Officer (AO) cannot use the ordinary reassessment route under Section 148 of the Income Tax Act to reopen an issue covered by a final order of the Income Tax Settlement Commission (ITSC). The court said allowing the AO to independently reopen such a matter would defeat the finality attached to the Settlement Commission’s order.
A bench of Justice SVN Bhatti and Justice NV Anjaria said the Revenue does have a remedy if it believes that a settlement was obtained through fraud or misrepresentation, in a 30-page judgment, seen by Moneycontrol. In such a case, it can approach the ITSC under Section 245D(6). But the AO cannot independently reopen the settled matter through Section 148.
“If the jurisdiction of the AO under Sections 143(2), 148, 154, etc., is made independent and available for exercise again, the finality attached to the Settlement Commission will be defeated. Parliament did not envisage this course,” the court said.
The court further made it clear: “the AO’s power to reassess the Settlement Order passed by the ITSC is unavailable.”
What was the Omaxe dispute?
The case concerned real estate company Omaxe Limited and Assessment Year 2006-07. A search and seizure operation had been conducted at the company’s premises, associate concerns and the residences of its directors on September 22, 2005.
Omaxe filed its return on November 30, 2006, declaring taxable income of Rs 89,20,76,630. It claimed a deduction of Rs 78,99,00,509 under Section 80IB(10) for its housing projects.
On May 31, 2007, Omaxe approached the ITSC under Section 245C for settlement covering assessment years 2000-01 to 2006-07. The ITSC passed its final order under Section 245D(4) on March 17, 2008. It accepted an additional income surrender of Rs 18 lakh and determined Omaxe’s net taxable income at Rs 89,38,76,630 after allowing the Section 80IB(10) deduction.
Why did the tax department reopen the case?
The Revenue conducted another survey at Omaxe on December 17 and 18, 2009. It alleged that the company had planned to transfer commercial portions of certain housing projects to wholly owned subsidiaries and that the commercial area exceeded the limit prescribed under Section 80IB(10).
The four projects involved were Omaxe City Lucknow, Omaxe City Sonepat, Omaxe Heights Sonepat and Omaxe Heights Faridabad. The AO issued a Section 148 notice on June 30, 2010, proposing to disallow Rs 55,58,96,486. The reassessment eventually resulted in an addition of Rs 65,65,17,999 to Omaxe’s taxable income.
Omaxe challenged the reopening, arguing that the ITSC’s final order was conclusive under Section 245-I and could not be reopened by the AO.
What about fraud or misrepresentation?
The Revenue separately moved the ITSC under Section 245D(6) on October 29, 2010, seeking to have the 2008 settlement declared void on the ground of misrepresentation.
The ITSC rejected the application on December 16, 2011. It found that the survey material did not establish misrepresentation and said the dispute over the interpretation of the Section 80IB(10) requirement was a legal dispute. It held that this “can by no stretch of imagination be said to be misrepresentation on part of the applicant.”
The Supreme Court said Section 245D(6) remains the specific statutory route where fraud or misrepresentation is alleged. If such a case is established, the settlement can be declared void and the normal assessment process can revive.
Why did the Supreme Court reject the Revenue’s argument?
The court explained that once a settlement application is admitted, the ITSC gets exclusive jurisdiction over the case. The settlement mechanism under Chapter XIX-A is intended to bring finality to the matters covered by the settlement.
The court described the process as a way of “purification of accounts from distorted, suppressed and misrepresented entries of income and expenditure” and said it is “not a simple holy shower but an opportunity to purge by paying the tax, penalty, and interest as may be determined by the ITSC.”
The court also said the Revenue and the assessee must take the “crust and the crumb together” — meaning the settlement’s benefits and finality must operate along with the tax liability determined through it.
Senior Advocate appeared for the Revenue, while Senior Advocate appeared for Omaxe Limited.
The Supreme Court dismissed the Revenue’s appeal and upheld the finality of the Settlement Commission’s order. The Section 245D(6) application filed by the Revenue had already been rejected and had become final.
