Kotak Mahindra Bank is given relief as SC sustains its immunity from fines and prosecution for failing to disclose lease rental income

27 Sep 2023 , 10:45 AM

The Supreme Court upheld a tax settlement commission decision exempting Kotak Mahindra Bank from prosecution and fines for failing to report lease rental income under the Income Tax Act, concluding that closely examining reasoned decisions ‘may erode the confidence of the bonafide assesses’ and also result in an increase in litigation.

A Bench made up of justices BV Nagarathna and Ujjal Bhuyan overturned the Karnataka High Court’s order remanding the case back to the commission to decide on the immunity from punishment and prosecution in the case of Kotak Mahindra Bank (formerly ING Vysya Bank), stating that frequent court intervention in disputes before such commissions could erode the confidence of the assesses who choose to approach settlement commissions.

‘Considering the legislative aim, frequent intervention with the Settlement Commission’s orders or processes should be avoided… As an appellate court, the High Court shouldn’t review a Settlement Commission order or action. Unsettling reasoned orders from the Settlement Commission may make bona fide assessees lose faith in them, which could result in numerous lawsuits where a settlement is conceivable. It stated, ‘This larger picture must be kept in mind.

According to the bench in the Kotak Mahindra Bank case, ‘the high court ought not to have sat on appeal as to the sufficiency of the material and particulars placed before the commission, on the basis of which the commission proceeded to grant immunity from prosecution and penalty.’

‘There isn’t a straight jacket formula that would work in every situation. The apex court agreed with the commission’s decision to grant the bank immunity from prosecution and to waive the payment of any penalty that would otherwise be due from the bank and stated that immunity under Section 245H may be granted when the commission is satisfied that the applicant (a) has disclosed all of his income and the sources of that income and (b) has cooperated with the commission in its proceedings.

For taxpayers looking to settle issues involving taxes and excise matters, Settlement Commissions offer an alternative dispute resolution method.

A fine for hiding the bank’s lease rental income was imposed by an Assessing Officer in 2000. The bank requested a determination of its taxable income from a tax settlement commission. While the commission estimated that the bank owed more than Rs 196 crore in excess income, it exempted the bank from punishment for its cooperation and thorough disclosure.

The HC upheld the settlement commission’s ruling on tax liabilities following a departmental appeal. It did, however, request that the settlement commission reconsider the issue of immunity from punishment and prosecution.

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