Pawan Kumar, proprietor of Prasad Hardware V. The Union of India, through the Secretary, Department of Revenue, Ministry of Finance, Government of India and The Income Tax Settlement Commission (Income Tax & Wealth Tax), Additional Bench and The Commissioner of Income Tax, Ranchi and The Commissioner of Income Tax, Central Revenue Building, Ranchi and The Income Tax Officer, Ward 2(3), Central Revenue Building, Ranchi

WPC/6904/2013

AI Insights

The case involves Pawan Kumar, the proprietor of M/s Prasad Hardware, who challenged the orders of the Income Tax Settlement Commission that made additions to his declared income for the assessment years 2010-11 and 2011-12. The additions were based on the Commission's findings that the petitioner had undisclosed turnover and had not maintained proper books of accounts. The petitioner argued that the Commission exceeded its jurisdiction by acting beyond its procedural powers and effectively reassessing the tax, which is the domain of the Assessing Officer. The court agreed with the petitioner's arguments, citing a lack of evidence and the improper application of legal provisions, leading to the quashing of the Commission's orders and notices.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 811700 (HC-JHARKHAND)
• Appeal Type: Others
• Pronouncement Date: 18-05-2015
• Assessment Year: misc
• Other Referred Cases: Canara Jewellers Vs. Settlement Commission [2009] 315 ITR 328 (Madras)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: DEEPAK ROSHAN
• Assessee Lawyers: BIREN PODDAR; MAHENDRA DARSHANA PIYUSH AMRITA CHOUDHARY PODDAR PODDAR SINHA
• Keywords: Additional income disclosure; Income tax settlement; Settlement Commission Jurisdiction; Assessment Years 2010-11 and 2011-12
• Section: 144; 44AD; 145; 133A; 245C(1); 245D(4); 245D(2C); 44AF; 226(3); 245D(6B)

Judgement Text

"1 IN THE HIGH COURT OF JHARKHAND AT RANCHI W .P .(T) No. 6904 of 2013 with I.A. No. 835 of 2015 with I.A. No. 2153 of 2015 with I.A. No. 8553 of 2013 Pawan Kumar, proprietor of M/s Prasad Hardware, son of Sri Shyam Kishore Prasad, resident of Ratu Road Chowk, Upper Bazar, P .O. G.P .O. & P .S. Kotwali, District­Ranchi, Jharkhand­834001. ……Petitioner Versus 1. The Union of India, through the Secretary, Department of Revenue, Ministry of Finance, Government of India, Central Secretariat, North Block, New Delhi 110 001. 2. The Income Tax Settlement Commission (Income Tax & Wealth Tax), Additional Bench, 10C, Middleton Row, 2nd Floor, Kolkata­700 071. 3. The Commissioner of Income Tax, Ranchi. 4. The Commissioner of Income Tax, Central Revenue Building, Main Road, P .O. G.P .O. & P .S. Kotwali, Ranchi­834001. 5. The Income Tax Officer, Ward 2(3), Central Revenue Building, Main Road, P .O. G.P .O. & P .S. Kotwali, Ranchi­834001. ........ Respondents ­­­­­­­ CORAM: HON’BLE MR. JUSTICE D.N. PATEL HON’BLE MR. JUSTICE RATNAKER BHENGRA For the Petitioner : Mr. Biren Poddar, Sr. Advocate M/s Mahendra Choudhary, Darshana Poddar, Piyush Poddar, Amrita Sinha, Advocates For the Respondents : Mr. Deepak Roshan, Advocate ­­­­­­­­­ 10/Dated: 18th May, 2015 Oral order: Per D.N. Patel, J.: 1. This writ petition has been preferred challenging the order passed by the Settlement Commission dated 27th/28th June, 2013 under Section 245D(4) of the Income Tax Act, 1961 (hereinafter referred to as 2 the Act, 1961 for the sake of brevity) which is at Annexure­6 to the memo of this writ petition. By this order additions have been made of Rs.62,50,000/­ and Rs.73,50,663/­ in respect of assessment years 2010­ 11 and 2011­12 respectively, over and above income declared by this petitioner in its settlement application preferred for the aforesaid period under Section 245C (1) of the Act, 1961. 2. Factual Matrix • Petitioner filed Returns for the assessment years 2010­11 and 2011­12 on 23rd September, 2010 and 29th September, 2011, respectively. • Survey under Section 133A of the Act, 1961 was conducted by the Income Tax Department on 21st/22nd October, 2011. • This petitioner preferred settlement application under Section 245(C)(1) of the Act, 1961 before the Settlement Commission. Alongwith this application this petitioner is also paying income tax with interest at Rs.38,45,471/­ on disclosure of additional income of Rs.1,04,00,000/­. • The Settlement Commission passed an order under Section (preferred by the assesee under Section 245C) 245D(2C) of the Act, 1961 has allowed an application to proceed with. This order is dated 27th March, 2012/3rd April, 2012 (Annexure­4 to the memo of this petition). This order was passed after calling for report from the Commissioner of Income Tax. The report given by the Commissioner of Income Tax is at Annexure­3 and 5 of this writ petition. Thereafter adequate opportunity of being heard was given to the petitioner and ultimately, final hearing was fixed by the Settlement Commission and vide order dated 27/28th June, 2013 final order was passed by the Settlement Commission under Section 245D(4) which is at Annexure­6 to the memo of this petition which is the impugned order passed by the Settlement Commission. By virtue of this order Settlement Commission has made additions of Rs. 62,50,000/­ and Rs.73,50,663/­ totaling Rs.1,36,00,663/­ for the assessment years 2010­11 and 2011­12 respectively over and above the declared income of this petitioner. 3 This is being reflected from para 11 of the order passed by the Settlement Commission. This order has been passed under Section 245D(4) of the Act, 1961. • A recall/rectification petition was preferred by this petitioner before the Settlement Commission under Section 245D(6B) of the Act, 1961. This application was dismissed by the Settlement Commission vide order dated 24th September, 2013. This is at Annexure­7 to the memo of this petition. • Thereafter, the department of the Income Tax has passed an order and served demand notices for the assessment years 2010­11 and 2011­12 on 24th July, 2013, to give effect to the order passed by the Settlement Commission. • Two garnishee notices both dated 27th January, 2015 were issued by the respondents­Income Tax Department under Section 226(3) of the Act, 1961 for attaching the bank account of this petitioner. • Thus, being aggrieved by the order passed by the Settlement Commission dated 27/28th June, 2013 as well as against the order passed by the Settlement Commission dated 24th September, 2013 and also being aggrieved by the notices issued by the respondents, the present writ petition alongwith I.A. No. 835 of 2015 has been preferred by this petitioner. 3. Arguments canvassed by the counsel for the petitioner: • It is submitted by the counsel for the petitioner that the Settlement Commission has exceeded its jurisdiction, by additions of Rs.62,50,000/­ and Rs.73,50,663/­ for the assessment years 2010­11 and 2011­12 respectively, over and above the income declared by the petitioner, while passing an order dated 27/28th of June, 2013 which is at Annexure­6 to the memo of this petition. • Looking to the order passed by the Settlement Commission dated 27th/28th June, 2013 the whole calculation arrived at by the Settlement Commission is on the basis of the presumptions and surmises and in absence of any evidence on record. Much has 4 been argued out by the counsel for the petitioner upon paragraph nos. 6, 7, 8 and 9 of the impugned order at Annexure­6, passed by the Settlement Commission. • It is submitted by the counsel for the petitioner that if the Settlement Commission is of the opinion that there is no true and full disclosure of the income by the assessee in its application under Section 245C(1) of the Act, 1961, after looking to the report given by the Commissioner of Income Tax which are at Annexure­3 and 5 the Settlement Commission should have rejected the application of this petitioner and nothing beyond that. • The Settlement Commission in the facts of the present case has played the role of Assessing Officer. No power under Section 245F permits the Settlement Commission for additions of any amount of income over and above the declared income. Powers under Section 245F never permits Settlement Commission to wear the rob of Assessing Officer. Annexure­3 report given by the Commissioner of Income Tax is under sub section 1 of Section 245D and another report given by the Commissioner of Income Tax at Annexure­5 is under Rule of the Income Tax Settlement Commission (Procedure) Rules, 1997. One more chance was given to the Settlement Commission to reject the application preferred by this petitioner after the perusal of report given by the Commissioner of Income Tax and after admission of the application before the Settlement Commission. In the facts of the present case initially an order was passed by the Settlement Commission dated 27th March, 2012/3rd April, 2012 (Annexure ­4) that the application preferred by this petitioner cannot be considered as “not full and true disclosure of his income”. This is a language used in para­8 of the said order by the Commission, but, on 2nd occasion the chance which was given to the Settlement Commission to reject the application preferred by this petitioner has not been properly appreciated by the Settlement Commission and Settlement Commission has wrongly exercised the powers of the Assessing Officer in the garb of powers under 5 Section 245F of the Act, 1961 to be read with Section 44 AD of the Act, 1961. • It is further submitted by the counsel for the petitioner that addition of income totaling at Rs.1,36,00,663/­ for the assessment years 2010­11 and 2011­12, over and above the income declared by the petitioner and that too on the basis of the presumptions and surmises and in absence of any cogent and convincing evidence on record tantamounts that Settlement Commission is of the opinion that there is “not full and true” to the income by the applicant­petitioner and therefore, instead of wear a rob of Assessing Officer Settlement Commission should have rejected the application preferred by this petitioner for settlement and thereafter, the matter will be upon for the Assessing Officer for assessing the income of the petitioner for the assessment years 2010­11 and 2011­12. • Counsel appearing for the petitioner is relied upon the decision rendered by the Madras High Court reported in [2009] 315 ITR 328(Madras). On the basis of this judgment it is submitted by the counsel for the petitioner that the Settlement Commission cannot play the role of the Assessing Officer. Power under Section 245F is given to the Settlement Commission only for adopting the procedural powers vested in the Income Tax Authorities and not the substantive powers which are vested in the Income Tax Authorities can be grabed by the Settlement Commission. Counsel for the petitioner has read over this judgment in detail and has matched the facts of the present case and submitted that on the basis of this decision also the order passed by the Settlement Commission dated 27th/28th June, 2013 (Annexure­6) may be quashed and set aside and therefore, the consequential order at Annexure­7 dated 24th September, 2013 may also be quashed by this Court and consequential notices issued by the Income Tax Department and two garnishee notices dated 27th June, 2013 may also be quashed and set aside as per the prayers made in Interlocutory Application No. 835 of 2015. 4. Arguments canvassed by the counsel for the respondents: 6 • Counsel for the Income Tax Department submitted that no error has been committed by the Settlement Commission while passing the order dated 27th/28th June, 2013 whereby there is an additions of income, over and above the income declared by this petitioner, totaling at Rs.1,36,00,663/­ for assessment years, 2010­2011 and 2011­12. • It further appears by the counsel for the respondents that once the order is passed by the Settlement Commission it cannot be challenged in the court of law. As per Section 245(A) of the Act, 1961 every order of the Settlement Commission passed under Section 245D(4) shall be conclusive. • Counsel for the respondents submitted that the Settlement Commission is not a silent spectator. Once it is brought to the notice of the Settlement Commission by virtue of the report given by the Commissioner of Income Tax either under sub section 1 of Section 245C or under Rule 9 of the Income Tax Settlement Commission (Procedure) Rules, 1997, the Settlement Commission can always make additions, over and above the income declared by the petitioner in exercise of powers under Section 245F of the Act, 1961. This is a discretion vested in the Settlement Commission. • It is submitted by the counsel for the respondents that huge turnover was kept outside the books of accounts and therefore, as per paragraph 6, 7, 8 and 9 of the order passed by the Settlement Commission there are additions, over and above the income declared by the petitioner. The additions which are made are absolutely in consonance with the provisions of the Act, 1961, including in consonance with Section 145 read with 144 of the Act, 1961 and also to be read with Section 44AD of the Act and hence, this Court may not interfere with the order passed by the Settlement Commission dated 27th/28th June, 2013 and rest of the consequential orders passed by the department in the form of notice under Section 3 of Section 226 of the Act, 1961 and therefore, neither this petition nor the I.A. may be allowed by this 7 Court. Both deserves to be dismissed. • Counsel for the respondents is heavily relied upon paragraph no. 16 of the counter affidavit filed by the respondents Income Tax Department and has submitted that once the order is passed by the Settlement Commission, this type of writ petitions are not tenable at law. Reasons: 5. Having heard counsels for both the sides and looking to the facts and circumstances of the case, we hereby, quash and set aside the orders passed by the Settlement Commission dated 27th/28th June, 2013 (Annexure­6 to the memo of this petition) as well as the orders passed by the Settlement Commission dated 24th September, 2013 (Annexure­ 7 to the memo of this petition as well as the notice issued by the Income Tax Department under Section 226(3) of the Act, 1961 dated 27th January, 2015 mainly on the following facts and reasons:­ (i) The petitioner is engaged in the business of trading in hardware items in the name and style of M/s Prasad Hardware. Petitioner is sole proprietor thereof who filed his income tax returns for the assessment years 2010­11 and 2011­12 on 23rd September, 2010 and on 29th September, 2011, respectively. (ii) Survey was conducted by the Income Tax Department under Section 133A on 21st/22nd October, 2011 and this petitioner preferred settlement application under Section 245C of the Act, 1961. On 30th December, 2011 alongwith others this petitioner paid the income tax at Rs. 38,45,471/­ with interest on an additional income of Rs.1,04,00,000/­ thereafter Settlement Commission obtained the report of the Commissioner of Income tax under 245D(1) of the Act, 1961. The report filed by the Commissioner of Income Tax is Annexure­3 and on the basis of this report an order was passed by the Settlement Commission under Section 245D(2C) of the Act, 1961 on 27th March, 2012/3rd April, 2012 (Annexure­4). For ready reference Section 245D(2C) of the Income Tax Act reads as under:­ “245­D. Procedure on receipt of an application under Section 245C.­ 8 (2C) Where a report of the Commissioner called for under sub­section (2­B) has been furnished within the period specified therein, the Settlement Commission may, on the basis of the report and within a period of fifteen days of the receipt of the report, by an order in writing, declare the application in question as invalid, and shall send the copy of such order to the applicant and the Commissioner: Provided that an application shall not be declared invalid unless an opportunity has been given to the applicant of being heard: Provided further that where the Commissioner has not furnished the report within the aforesaid period, the Settlement Commission shall proceed further in the matter without the report of the Commissioner” (Emphasis Supplied) (iii) In exercise of powers under the aforesaid Section following are the observations of the Settlement Commission. Paragraph 8 and 9 of the order dated 27th March, 2012 read as under:­ “8. We have heard both the sides, perused the documents filed by the Ld. CIT(DR) and Ld. AR and considered the facts of the case. We are of the view that the pendency of the proceedings for A.Y. 2010­11 is there in view of the cited Board's Circular and as per the recent Hon'ble Single Bench decision of Hon'ble Calcutta High Court in the case of OUTOTEC Group. The disclosure made in the application also, prima facie, cannot be considered as 'not full and true'. The other prescribed conditions have also been complied with. We, therefore, allow the application to be further proceeded with u/s 245D(2C) of the I.T. Act. 9. Secretary, ITSC, will call for a report under Rule 9 of the ITSC (Procedure) Rules, 1997, from the CIT as per proceedings.” (iv) Thus, in view of paragraph nos. 8 and 9 of the aforesaid order passed by the Settlement Commission the application preferred by this petitioner has been, prima facie, accepted by the Settlement Commission. This is always a step no. 1 in the proceedings before the Settlement Commission. It is also popularly known as Admission of the application before the Settlement Commission. Thus, prima facie, it cannot be said that there is no “full and true” disclosure by the applicant. Now procedure for step no. 2 starts. (v) In a 2nd step the Settlement Commission will call for the report under Rule 9 of the Income Tax Settlement Commission 9 (Procedure) Rules, 1997. Under this Rule Commissioner of Income Tax has given a detailed report, which is at Annexure­5 to the memo of this petition. (vi) Now the Settlement Commission role starts for the settlement of the dispute. (vii) Settlement Commission has passed a final order on 27/28th June, 2013 after giving adequate opportunity of being heard to the applicant­who is petitioner before this Court and the Commissioner of Income Tax has made additions of Rs. 62,50,000/­ and Rs.73,50,663/­ (totaling Rs.1,36,00,663/­), in respect of assessment years 2010­11 and 2011­12, respectively over and above the income declared by the petitioner. The reasons for this additions have been given in para 6, 7, 8 and 9 as under:­ “6. We have considered the facts of the case carefully. We have also taken into account the documents available on record. The submissions made on behalf of the applicant as well as the Department have been taken note of by us. We find that the applicant has disclosed additional income of Rs. 90,00,000/­ in the A.Yr. 2010­11 over and above the total income of Rs. 6,39,760/­ disclosed in the return of income. As seen from the seized document and as admitted by the applicant, the applicant was keeping a large part of his turnover outside the books of account. This is also corroborated by the fact that there were trade debtors of Rs.88,59,517/­ as on 31st March, 2010/1st April, 2010 which have been kept outside books of account. Similarly, the quantum of such undisclosed trade debtors as on 31st March, 2011/1st April, 2011 was Rs. 87,08,211/­. It is appellant's contention that the trade debtors of Rs. 88,59,517 as on 30th March, 2010 represented clandestinely earned income for A.Yr. 2010.­11. It is noted that the additional income of Rs. 90,00,000/­ disclosed in the A.Yr. 2010­11 just about covers the undisclosed trade debtors as on 1st April, 2010. Unfortunately, the amount of the unaccounted turnover for A.Yr. 2010­11 is not available. However, the undisclosed turnover during the accounting periods relevant to A.Yrs. 2011­12 and 2012­13 (not before us) is available. Such turnover in the A.Yr. 2011­12 was Rs. 1.98 crore while the corresponding figure for A. Yr. 2012­13 was Rs. 2.31 crore. From these figures, one can reasonably estimate the unaccounted turnover for the A. Yr. 2010­11 at Rs. 1.75 crore. The gross profit from this turnover has to be taken into account while working out the additional income which needs to be taxed in the A. Yr. 2010­11. Similarly, the gross profit from the turnover of Rs. 1.98 crore has to be taken into account in respect of A.Yr. 2011­12. 7. As stated above, the books of account maintained by 10 the applicant are no good. We find that for A. Yr. 2010­11, the applicant has shown net profit of Rs. 7,80,388/­ on sales of Rs. 5,49,25,594/­ which works out to 1.42%. It is not possible to accept that the profitability in the trade that the applicant is engaged in would be so low. For the A.Yr. 2011­12, the net profit shown on turnover of Rs. 7,02,29,797/­ is Rs.10,06,898/­ which works out to 1.43%. In our view, it would be reasonable to apply an estimated gross profit rate of 12% to both the disclosed as well as the undisclosed turnover. 8. Applicant's contention that the entire undisclosed income of F . Yr. 2009­10 is embedded in the undisclosed trade debtors of Rs. 88,59,517/­ as on 31.03.2010 is not acceptable, particularly because this is not a search case and the possibility of a part of the clandestinely earned income having been spent, invested elsewhere cannot be discounted. An addition of Rs. 45,00,000/­ is made on this account. However, as the additional gross profit (worked out by applying gross profit rate of 12%) is less than the undisclosed trade debtors as at the end of the relevant accounting year, no separate G.P . additions is called for. 9. In so far as A.Yr. 2011­12 is concerned, additional gross profit, over and above the gross profit shown in the books, will amount to Rs. 85,20,663/­ This amount will be added to the returned income. The additional income of Rs. 14,00,000/­ disclosed in the Settlement Application will be subsumed in the Gross Profit addition of Rs. 85,20,663/­ (supra).” (viii) It appears from the aforesaid logic advanced by the Settlement Commission for additions made to the income disclosed is based upon turnover largely kept outside the books of accounts. Settlement Commission has also arrived at conclusion that books of accounts has not been maintained truly and correctly and thereby reasonably estimated unaccounted turnover for the assessment year 2010­11 at Rs. 1.75 crore. This figure of estimated unaccounted turnover has been arrived at looking to the turnovers for the assessment year 2011­12 and turnover for the assessment year 2012­13, no record for assessment year 2012­13 was before the Settlement Commission. This assessment year 2012­13 was not to be assessed or judged by the Settlement Commission. This methodology adopted by the Settlement Commission that in the assessment year 2011­12 if the turn over is Rs. 1.98 crore and for the assessment year 2012­2013 if the turnover is Rs.2.31 crore, safely Settlement Commission can be presumed turnover of Rs. 1.75 crore for the assessment year 2010­ 11 11. This methodology normally the scientists are using for the weather forecast etc. That today temperature is this much and then tomorrow can be that much, but this novice methodology is not permissible under the Income Tax Act. These are extraneous considerations which are considered by the Settlement Commission for presuming unaccounted turnover for the assessment year 2010­11. This process of consideration, of irrelevant considerations, in the eye of law known as wensbury unreasonableness. This is not permissible in the eye of law on the basis of the turnover of the assessment year 2011­12 and for the assessment year 2012­2013 a graph can be drawn and thereafter there will be extrapolation of the graph. This is how estimated unaccounted turnover for the assessment year 2010­11 has been arrived at. There ought to be evidence on record otherwise any figure can be arrived at by the Settlement Commission for the assessment year 2010­11. Not necessary that, as per extrapolation of graph, the turnover should be lessor than the turnover of the assessment year 2011­12 and should be lessor than for the assessment year 2012­13 e.g. in the assessment year 2010­11 the market may be favourable for this assessee who is a sole proprietor of M/s Prasad Hardware for his trading in the hardware items and there may be recession for the assessment year 2011­12 and for the assessment year 2012­13. In this eventuality the estimated unaccounted turnover for the assessment year 2010­11 may be double or triple than the turnover of the year 2011­12 or 2012­13. All depends upon the market also. There may be a very good period for this type of trading business in the year 2010­11 and for subsequent assessment year the market might have fallen therefore, presumption on the part of the Settlement Commission that next two years turnover is Rs.1.98 crores and Rs. 2.31 crores and therefore, for the assessment year 2010­11 it will be Rs.1.75 crore. This is absolutely baseless estimation. In the example given hereinabove if the market has fallen down then the said estimation will be even higher for the assessment year 2010­11 12 then that of subsequent assessment years. Therefore, evidences are must. Unless there are evidences on record this type of estimation of unaccounted turnover by the methodology adopted by the Settlement Commission of extrapolation of the graph is absolutely absurd. This is known as wensbury unreasonableness. The factors ought should have been considered if are considered by any authority, his orders will be said to have been suffered by this wensbury unreasonableness principle. If this type of powers are permitted by the Settlement Commission it will lead to discrimination. For few assessee Settlement Commission can also presumed that for the earlier assessment years, market was much favorable and hence, his turnover can be double or triple than those of subsequent assessment years or sometimes Settlement Commission can adopt extrapolation of graph methodology. In this case the estimated unaccounted turnover will be lessor than the next year's assessment and will be lessor than further next year totaling turnover. Thus, the logic advanced and the reason given in paragraph no. 6 of the impugned order at Annexure­6 dated 27/28 June, 2013 is absolutely illegal and unlogical and suffers from wensbury unreasonableness principle irrelevant consideration have been considered by this Settlement Commission. (ix) Looking to the reasons given in para nos. 7, 8 and 9 of the impugned order at Annexure­6 it appears that not only the estimated unaccounted turnover has been presumed, but, the percentage of the profit has also been presumed by the Settlement Commission @ 12%. This is also unreasonable presumption on the part of the Settlement Commission. Without any basis and without any support of law or rules, much less, of the Income Tax Act, 1961 or any rules made thereunder and also in violation of Section 44AF of the Income Tax Act, 1961 presumption of the profit @ 12% as stated in paragraph nos. 7, 8 and 9 of the impugned order has no basis and only wide discretion has been used by the Settlement Commission. In the eye of law too much wide discretion is known as arbitrariness and that too without any 13 guidance. Whenever there is discretion given without guidance such type of exercise of discretion leads to discrimination. For few assessees percentage of the profit may be presumed 10% and for some of the assessees it may be 12% and for rest of the assessees it may go even higher to 12%. There is no basis why the Settlement Commission has chosen profit rate of 12%, otherwise as per Section 45AF of the Income Tax Act 12% presumption of a profit is not permissible. For the ready reference section 44AF of the Income Tax Act, 1961 read as under: “44­AF . Special provisions for computing profits and gains of retail business.—(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”: Provided that nothing contained in this sub­section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year. (2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of sub­section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed: Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub­section (1) subject to the conditions and limits specified in clause (b) of Section 40. (3) The written down value of any asset used for the purpose of the business referred to in sub­section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The provisions of Sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub­section (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded. (5) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub­section (1), if he keeps and maintains such books of account and other documents as required under sub­section (2) of Section 44AA and gets his accounts audited and furnishes a report of such audit as required under Section 44AB. (6) Nothing contained in this section shall apply to any 14 assessment year beginning on or after the 1st day of April, 2011.” (Emphasis Supplied) (x) Thus, it appears from the aforesaid para 6, 7, 8 and 9 without any basis, without any evidence, both, estimated unaccounted turnover as well as rate of profit has been presumed. This type of presumptions are not permissible and therefore, in this eventuality, the Settlement Commission should have been dismissed the application preferred by this petitioner observing that after receiving report of the Commissioner of Income Tax under Rule 9 of the Rules, 1997, finally, the Settlement Commission is arrived at conclusion that there is “no true and full disclosure” of income by the applicant, who has preferred application under Section 245C of the Act, 1961 otherwise, the Settlement Commission has to take all evidences before arriving the conclusions about additions which is missing in this case. (xi) For the assessment year 2011­12 the percentage of profit, as submitted by the counsel for the petitioner, may be covered under Section 44AD of the Act, 1961, but, that is never travelled beyond 8% whereas Settlement Commission has presumed profit at the rate of 12%. For the ready reference Section 44AD of the Income Tax Act 1961 reads as under: “44­AD. Special provision for computing profits and gains of business on presumptive basis.—(1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”. (2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of sub­section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed: Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub­section (1) subject to the conditions and limits specified in clause (b) of Section 40. 15 (3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The provisions of Chapter XVII­C shall not apply to an eligible assessee in so far as they relate to the eligible business. (5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub­section (1) and whose total income exceeds the maximum amount which is not chargeable to income tax, shall be required to keep and maintain such books of account and other documents as required under sub­section (2) of Section 44AA and get them audited and furnish a report of such audit as required under Section 44AB” (Emphasis Supplied) (xii) It appears that the Settlement Commission has presumed that 8% of the net profit which is permitted under Section 44AD or 5% of the net profit permitted under Section 44AF = 12% of the gross profit. This is an absurd presumption. This is permissible only for conversion from centigrade to fahrenheit and from foot to meter, but, not in arriving at a conclusion about additions of incomes. This approach of the Settlement Commission of conversion of centigrade to fahrenheit and foot to meter i.e. 8% of net profit under Section 44AD or 5% of net profit under Section 44AF may be = 12% of the gross profit is not permissible. This is extraneous consideration, considered by the Settlement Commission. This novice methodology adopted by the Settlement Commission is nothing, but, exercise of excess of jurisdiction. (xiii) It has been held by Hon'ble Madras High Court in Canara Jewellers Vs. Settlement Commission reported in [2009] 315 ITR 328 (Madras) in para no. 11 and 12 as under:­ “11 So far as section 245F is concerned, though the Settlement Commission is empowered to have all powers which are vested in an Income­tax Authority under the Act, in addition to the power conferred under Chapter XIX­A, but such power can be exercised for the purpose of procedure of settlement of application under section 245C and not for reassessment of tax of a particular year which is vested with the Assessing Authority. 12. For the reasons aforesaid, while we cannot uphold the impugned order dated 21­5­1998 passed by the 16 Settlement Commission, for the same reason, the order passed by the learned Single Judge dated 28­2­2001 deserves to be set aside. We order accordingly, and set aside the order dated 21­5­1998 passed by the Settlement Commission and the order dated 28­2­2001 passed by the learned Single Judge. However, this judgment shall not stand in the way of the Assessing Officer/Competent Authority to proceed in accordance with law, if otherwise it is not barred by limitation. We may also add that we have noticed the provision of section 153(3)(v) of the Income­ tax Act as referred to by the learned Senior Standing Counsel. The writ appeals are allowed with the aforesaid observations, but there shall be no order as to costs.” (Emphasis supplied) In view of the aforesaid decision, the Settlement Commission cannot exercise substantive powers of Income Tax Authorities, but, only the procedural powers vested in the Income Tax Authorities can be exercised by the Settlement Commission under Section 245F of the Income Tax Act. (xiv) It is contended by the counsel for the Income Tax Department that the Settlement Commission can even travel beyond the application preferred under Section 245C(1) while exercising the powers under Section 245D(4)(ii). The aforesaid arguments is not accepted by this Court, looking to the facts of the present case, mainly for the following reasons:­ (a) In absence of any evidence before the Settlement Commission, it has estimated unaccounted turnover for the assessment year 2010­11. (b) Looking to the provisions of Section 245D(4)(ii) evidence before the Settlement Commission is a must. For the ready reference Section 245D(4) of the Act read as under: “245D Procedure on receipt of an application under section 245C­ ….............................................................. …............................................................. (4) After examination of the records and the report of the Commissioner, if any, received under: (i) sub­section (2B) or sub­section(3), or (ii) the provisions of sub­section (1) as they stood immediately before and after giving an opportunity to the applicant and to the Commissioner to be heard, either in person or through a representative duly authorised in this 17 behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner. (4A) The Settlement Commission shall pass an order under sub­section (4)­ (i) in respect of an application referred to in sub­section (2A) or sub­section (2D), on or before the 31st day of March, 2008; (ii) in respect of an application made on or after the 1st day of June, 2007 but before the 1st day of June, 2010, within twelve months from the end of the month in which the application was made. (iii) in respect of an application made on or after the 1st day of June, 2010, within eighteen months from the end of the month in which the application was made. (5) ….............................. …...........................” (Emphasis Supplied) (b) The conditions precedent for application for this Section 245D(4) is existence of the evidence before the Settlement Commission over and above the reports of the Commissioner of Income Tax. This is an essential ingredients or sine qua non for applicability of this sub section 4 of Section 245D which is not present in the facts of the present case. This essential ingredients is missing. (c) There is also a presumption on the part of the Settlement Commission about presumption of 12% of the gross profit. No law prescribes this formula and much less the Income Tax Act and the Rules made thereunder. 6. As a cumulative effect of the aforesaid facts, reasons and judicial pronouncements, we hereby, quash and set aside the order passed by the Settlement Commission dated 27th/28th June, 2013 (Annexure­6 to the memo of this petition). As the order at Annexure­6 is hereby, quashed and set aside, the consequent orders passed by the Settlement Commission dated 24th September, 2013 in recall/rectification petition 18 preferred by this petitioner is also quashed and set aside. We also allow the prayer in I.A. No. 835 of 2015 in this writ petition by quashing and setting aside two garnishee notices both dated 27th January, 2015 issued under sub section 3 of Section 226 of the Income Tax Act, 1961 by the Deputy Commissioner of Income Tax, Circle­II. We also allow I.A. No. 2153 of 2015 by quashing the garnishee notice issued upon the debtors of this petitioner as contained in Annexure­13 series and 14 series, which are consequent upon the orders passed by the Settlement Commission. I.A. No. 8553 of 2013 counsel appearing for the applicant is not pressing this application in view of the aforesaid orders passed by this Court. Thus, all interlocutory applications as well as the writ petition are disposed of. The matter is remanded to the Settlement Commission for fresh decision. This writ petition is hereby, allowed to the aforesaid extent as the impugned orders are at Annexure­6 and 7 are hereby, quashed. (D.N. Patel, J.) (Ratnaker Bhengra J.) VK "