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  • Writer's pictureTrivedi and Parashar (Advocates and Solicitors)

Judicial Update -

Delhi High Court - Delhi high court upholds the principle of non-double taxation in cases of undisclosed income.

In the matter of Principal Commissioner of Income Tax v. Surya Agrotech Infrastructure Limited [ITA 927/2019], the intricate issue was whether undisclosed income, which has already been taxed in the hands of a flagship company, can be subjected to taxation again when it is utilised as share capital in the hands of the Assessee-companies.

The case revolved around companies affiliated with the M/s Priya Gold Group, referred to as the Respondent/ Assessee-companies . The Income Tax Department had initiated search and seizure proceedings under Section 132 of the Income Tax Act, 1961 (“Act”) in connection with the Priya Gold Group. During these proceedings, Mr. Shekhar Aggarwal, the Director of Surya Food & Agro Limited, the flagship company of the group, gave a statement under Section 132(4) of the Act wherein he acknowledged that the group had generated unaccounted income, subsequently funnelled as bogus share capital.

Remarkably, the entire undisclosed income of the group was voluntarily surrendered by the flagship company, Surya Food & Agro Ltd., during the assessment years through proceedings before the Settlement Commission.

The crux of the dispute arose from the stance taken by the Assessing Officer. Relying on Mr. Shekhar Aggarwal's statement, the Assessing Officer asserted that the investment, represented by share capital in various companies within the Priya Gold Group, constituted nothing more than an accommodation entry. Consequently, the Assessing Officer sought to assess this income as taxable in the hands of the Assessee-companies.

However, the Assessee-companies found success in the second appeal, where the Income Tax Appellate Tribunal (‘ITAT’) reversed the orders. The Income Tax Department argued that the assessee companies were not parties to the settlement proceedings, and the Settlement Commission had not issued any specific findings concerning the Assessees. Therefore, the department contended that the Assessee companies should not benefit from the proceedings before the Settlement Commission. However, the ITAT concluded that since the undisclosed income in question had already been subjected to taxation through the Settlement Commission proceedings involving Surya Food & Agro Limited, it could not be taxed again. This taxation would result from the application of the income as share capital by the respondent/ Assessee-companies . Moreover, the Court cited Section 245I of the Act, which deems the Settlement Commission's order as conclusive. Consequently, any attempt to reopen proceedings regarding matters covered by the Commission's order is statutorily barred.

The Delhi High Court's decision in the case sets a valuable precedent, reinforcing the fundamental principle that income should not be taxed twice unless expressly mandated. It underscores the importance of respecting the conclusive nature of the Settlement Commission's orders and the need for tax authorities to apply a coherent and consistent approach to taxation in cases of undisclosed income. This judgment serves as a significant legal reference for future disputes involving the taxation of undisclosed income in the hands of different entities within corporate groups.


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