INCOME TAX ACT, 1961

--Settlement Commission--Order under section 245DHuge investment in unlisted and unknown company vis-a-vis cash credits--On 16-12-2009 the petitioner filed an application before the Settlement Commission under section 245C(1) seeking a settlement of a 'case' as defined in section 245A(b) for assessment years 2008-2009 and 2009-2010 which was pending before the AO, no assessment having been made under section 143(3). The petitioner made a disclosure of income to the extent of Rs. 10 lakhs each for the two assessment years in question, being income which had not been disclosed before the AO. The basis on which the Settlement Commission was moved was that during the course of assessment years 2008-09, and 2009-10 the petitioner was engaged in transactions in which the petitioner would locate sellers in the grey market who would sell goods to prospective buyers. According to the petitioner, the goods would be delivered directly by the seller to the buyer; and payment would be routed through the petitioner who in turn would effect payment to the seller after deducting its share. This activity, was undertaken in respect of items which did not form part of the inventory of the petitioner. The difference was earned in cash and was not accounted in the regular books of account. The petitioner stated that the activity was since discontinued, but in order to 'buy peace of mind', the petitioner was willing to offer the income earned from the activity during assessment years 2008-09 and 2009-10, each in the amount of Rs. 10 lakhs to tax. The terms of settlement which the petitioner proposed were that — (i) The total income of the petitioner be determined at the amount disclosed in the petition; (ii) A waiver of interest be granted under the provisions of the IT Act, 1961 as may be permissible; (iii) Immunity be granted to the petitioner from the levy of penalty and prosecution under the Act; and (iv) such other relief as the Settlement Commission may deem fit in the circumstances of the case be granted. On 24-12-2009, the Settlement Commission passed an order under the provisions of section 245D(1) directing that the application be proceeded with. On 30-12-2009 the Settlement Commission sought a report from the CIT under section 245D(2B). In terms of the provisions of section 245D(2B) the report of the CIT as required to be submitted within a period of thirty days from the order of the Settlement Commission. The period stipulated in the provision expired on 29-1-2010 in spite of which no report was received. By an order dt. 23-2-2010 the Commission directed that further proceedings shall take place in the matter and that the application could not be regarded as invalid. On 21-9-2010 a report was submitted by the CIT under rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997. Under section 245D(1), as it stood prior to amendment, the Settlement Commission was under a mandate to call for a report from the CIT on receipt of an application under section 245C. This procedure was modified when Parliament substituted the provisions of sub-section (1) as they now stand by the Finance Act, 2007 with effect from 1-6-2007. As it now stands, the earlier requirement of a report from the Commissioner on the receipt of an application under section 245C and before the Commission decides whether to proceed with the matter, has been dispensed with. Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997 required, under the provisions of the earlier version of section 245D(1) that the report of the Commissioner (Appeals) had to be furnished within a period of ninety days. The Settlement Commission by an order dt. 18-10-2010 directed the Commissioner to conduct a further inquiry and investigation and to submit his report under section 245D(3) on or before 22-11-2010. The time limit for the disposal of the proceedings before the Settlement Commission was to end on 31-12-2010 and after that the proceedings would abate. In its order dt. 18-10-2010, the Settlement Commission noted that during the course of assessment year 2008-09 the petitioner had unsecured loans of Rs. 3.73 Crores, the genuineness of which needed to be verified, bearing in mind the modus operandi adopted by the group. During assessment year 2008-09 the petitioner claimed to have received two loans of Rs. 2.0 crores from two companies by the name of Oleander Manufacturing Credit Pvt. Ltd. and Tristar Agency Pvt. Ltd. During the course of assessment year 2009-10, further amounts of each of Rs. 90 lacs were received from the two companies. During assessment year 2009-10, the petitioner allotted 30,000 shares each to the two companies on 13-3-2009 of a face value of Rs. 10 at a premium of Rs. 990 per share. This resulted in share capital of Rs. 3 lakhs and share premium of Rs. 2.97 crores being realized from each of the two companies. The Settlement Commission noted from the sketchy details that were available on record, it was difficult to understand the loan transactions which resulted in the conversion of loans into share capital and share premium particularly since the petitioner is not a listed company. The Commissioner was accordingly directed to submit a factual report under section 245D(3) on several aspects. Held : The bank accounts, copies of which were furnished, revealed that although huge sums were deposited and withdrawn, a major portion of the income was from sale of shares of which there were no details. The net income is meager in both cases and is not commensurate with companies who could have afforded to make such huge investments in shares of an unknown and unlisted company by payment of such a high premium. It is in this background that the Settlement Commission has arrived at a considered finding of fact that the transactions of the two companies were not genuine transactions; that the two companies lacked a credit standing which would have enabled them to pay large amounts towards share premium of Rs. 990 on a face value of Rs. 10 per share and that neither the past performance or the financials of the petitioner itself would justify the payment of such a large premium.