Revenue And Assessee Must Take “Crust And Crumb” Together: Supreme Court On Income Tax Reassessment After Final ITSC Settlement
The Court noted that once income tax settlement commission's order attains finality, taxman cannot reopen assessment, only recourse is approaching commission itself on fraud or misrepresentation, dismissing revenue's appeal in Omaxe case.
Justice S.V.N. Bhatti, Justice N.V. Anjaria, Supreme Court
The Supreme Court has held that once a settlement is concluded before the Income Tax Settlement Commission (ITSC), both the Revenue and the assessee must accept the consequences of that settlement in full, and neither side can later revert to the ordinary machinery of assessment to claim what it gave up by opting for settlement. The Court described this reciprocal finality using its own metaphor of the "crust and the crumb", holding that the benefits and burdens of settlement must be taken together, not selectively.
Dismissing the Revenue's appeal, the Court held that once the ITSC passes a final order under Section 245D(4) of the Income Tax Act, 1961, an Assessing Officer cannot invoke reassessment powers to reopen an issue already covered by that settlement. The only route available to the Revenue to unsettle such an order is an application before the ITSC itself, on the specific grounds of fraud or misrepresentation.
A Division Bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria observed, “…Once the matter is concluded under Section 245D(4), the decision attains finality, and the scope of judicial review, in view of the precedents referred to above, is also limited. The Revenue is not without recourse to realise tax on undisclosed income, even in cases filed under Chapter XIX-A of the Act, 1961. The Revenue has the option to move under Section 245D(6) of the Act, 1961 on the grounds of fraud and misrepresentation. The words ‘fraud and misrepresentation depend on the circumstances and are to be decided on a case-to-case basis; by making out a case under either head, the ITSC’s Order is reopened, which ultimately leads to the Settlement Order being declared void. The normal assessment procedure is restored or enabled, but not otherwise. 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. On the contrary, while reopening the issues before the ITSC is provided for, judicial review by the Constitutional Courts under Articles 226 29 and 32/136 is available, but the AO’s power to reassess the Settlement Order passed by the ITSC is unavailable”.
“In fine, through the mechanism under Chapter XIX-A of the Act, 1961, the Assessee and the Revenue avoid the crust and crumb. To wit, the Revenue avoids the crust by realising the crumb of tax on suppressed or undisclosed income through the Assessee's voluntary disclosure. Similarly, through complete and fair disclosure of suppressed income and entries, the Assessee avoids the crust of penal interest, prosecution, etc., and the crumb offered is payment of tax beforehand. The Revenue and the Assessee must take the Crust and the Crumb together. By operation of Section 245C(3), the Assessee is precluded from withdrawing the Application filed under Section 245C…”, the Bench further said.
Senior Advocate Arijit Prasad appeared for the appellant and Advocate Kavita Jha appeared for the respondent.
The dispute concerned OMAXE Limited's return for Assessment Year 2006-07, in which the company had claimed a deduction under Section 80IB(10) for housing projects it had developed. While proceedings for that year were pending, the company approached the ITSC under Section 245C, disclosing additional income, and the Commission passed a final settlement order on March 17, 2008 computing the company's total taxable income after accounting for the deduction.
Following a survey conducted in December 2009, the Revenue alleged that the company had planned to transfer commercial portions of certain projects to subsidiary companies in order to retain eligibility for the Section 80IB(10) deduction, and issued a reassessment notice in June 2010 disallowing the deduction, resulting in a substantial addition to the company's taxable income.
The company challenged the reassessment notice and the subsequent order before the Delhi High Court, which quashed both, holding that the ITSC's exclusive jurisdiction under Chapter XIX-A barred any parallel exercise of reassessment powers by the Assessing Officer once the settlement order had attained finality. Separately, the Revenue's own application before the ITSC under Section 245D(6), seeking to declare the settlement void on grounds of alleged misrepresentation, had already been rejected by the Commission on December 16, 2011.
Examining the scheme of Chapter XIX-A, the Court noted that the settlement mechanism allows both sides to avoid harsher consequences in exchange for accepting a negotiated outcome, the Revenue secures tax on disclosed income without protracted litigation, while the assessee secures immunity from penalty and prosecution through voluntary disclosure.
“…The Revenue can oppose continuation before the ITSC based on the material and grounds discovered during the search and seizure against the Assessee. The Revenue participates before the ITSC in the Assessee's Application, including any income further disclosed by the Assessee. Therefore, the argument that, after the proceedings before the ITSC attain finality, the regular assessment/re-assessment is still available to the Revenue is contrary to the defining expressions in Sections 245C, 245D(2), 245D(3), and finally 245D(4) of the Act, 1961. The Revenue has to revisit the procedure under Section 245D(6) by making out a case before the ITSC, but not otherwise. Thus, the Assessee and the Revenue are aware of the crust and the crumb in this settlement procedure before the ITSC. Once the crust is avoided and the crumb is accepted, further crust and crumb are not the intention of Chapter XIX-A of the Act, 1961”, the Bench said.
The Revenue's remedy, the Court clarified, lies exclusively in approaching the ITSC under Section 245D(6) on grounds of fraud or misrepresentation, a remedy the Revenue had already pursued and lost.
Finding no infirmity in the High Court's judgment, the Court dismissed the Civil Appeal, with pending applications disposed of accordingly.
Cause Title: Assistant Commissioner of Income Tax & Another v. M/s. Omaxe Limited (Neutral Citation: 2026 INSC 1000)
Appearances:
Appellant: Arijit Prasad, Senior Advocate.
Respondent: Kavita Jha, Advocate.