Assessee a partnership firm was engaged in production and trading of mustard oil, mustard seeds, oil cakes etc. A search and seizure operation under section 132 was conducted and cash and jewellery was seized. Incriminating documents in form of loose papers, registers, diary were also seized. Application was filled under section 245C(1) before the Settlement Commission. The Settlement Commission rejected the settlement application and held that assessee had failed to establish sources of undisclosed income, extent and manner in which such income was derived. The statement of affairs were lacking credible evidence and were unreliable.

The pre-condition for invoking jurisdiction of the Settlement Commission are that the provisions do not postulate revision of the undisclosed income. Declaration contemplated under section 245C(1) is in the nature of warranty that a disclosure made must be true and fair disclosure. 

Thus, Settlement Commission held that conditions prescribed in section 245C(1) were not fulfilled.  The High Court held that opinion formed by Settlement Commission in case of rejection under section 245D(1) should be conclusive and final and not tentative or prima facie. If Settlement Commission is unable to form a decisive opinion to give a definitive finding for rejection of settlement application after initial and preliminary hearing, proceeding to second stage is the only option. Further, the Settlement Commission should have as per statutory mandate called Principal Commissioner / Commissioner to submit their report as second stage examination under section 245D(2C) in which in-depth scrutiny and verification takes place, notwithstanding earlier preliminary scrutiny under section 245D(1). Thus, the petition was allowed and impugned order of the Settlement Commission rejecting the settlement applications was set aside. (AY. 2010-11 to AY. 2015-16)