Introduction

For a long time, there has been a suggestion that there has to be a mechanism for resolution of tax disputes otherwise than by way of litigation. Like in commercial transactions, where conciliation proceedings are resorted to instead of litigation, similarly for tax disputes there has to be an alternative dispute resolution mechanism. First few steps in the said direction have been initiated, some of which are: (i) no elaborate procedure for admission of a case;
(ii) final disposal of case within twelve months of filing application; and (iii) case to go back if settlement does not take place within twelve months. Time is essence in any economic activity and a provision whereby within twelve months, all the issues for an assessment year, whether of tax, interest or penalty or even prosecution, being decided by a single authority will attract many assessees to give a quick quietus to an issue rather than prolong it for 20 years before finality is achieved. Though to achieve true status of alternative dispute mechanism, certain further changes are still required, it is felt that at least a beginning has been made and with time, the legislature will make necessary changes to make the mechanism a first choice over appeals.

For better understanding of amendments made and new provisions, they have been discussed in two separate parts, provisions applicable to applications for settlement filed on or after 1-6-2007 and provisions applicable to applications for settlement filed up to 31-5-2007.

A. Provisions as applicable to new applications filed on or after date 1-6-2007

1. Definition of case

An application for settlement of a ‘case’ can be filed by the assessee. Clause (b) of S. 245A defined case to mean any proceedings for assessment or reassessment or appeal or revision in pursuance of assessment or reassessment pending before an Income Tax Authority. Therefore for an assessment year, application could have been filed any time before the Commissioner of Income Tax (Appeals) (CIT(A) for brief) decided the appeal against the assessment. The assessment could be assessment order u/s. 143(3) or an order u/s. 147 r. w. s. 143(3) or even an assessment order on set aside by ITAT, CIT(A) or CIT for de novo assessment.

The definition is substituted and in respect of application filed on or after 1-6-2007, only assessment proceedings pending before Assessing Officer is case and it has been specifically provided that proceedings would be pending from the first day of assessment year to the date on which assessment is made. Reassessment proceedings, appeal proceedings, nor even assessment proceedings on set aside are case and application for settlement can be filed only when assessment proceedings u/s. 143(3) are pending. The definition of ‘case’ is further expanded w.e.f. 1-6-2010 to include such cases of search or requisition of books etc. It is provided that proceedings for assessment or reassessment for any relevant assessment shall be deemed to have commenced on the date of issue of notice initiating such proceedings and concluded on the date on which assessment is made.

The scope is further expanded from 1-10-2014 to include such cases where the proceedings for assessment or reassessment
u/s. 147 shall be deemed to have commenced from the date on which such notice u/s. 148 is issued. Further amendment is made w.e.f. 1-6-2015 that the assessee can approach the Settlement Commission for other assessment years as well even if notice under section 148 has not been issued for such years/other years. However, a return of income for such other assessment years should have been furnished u/s. 139 of the Act or in response to notice under section 142 of the Act. Similarly, proceedings for making fresh assessment in pursuant to order u/s. 254 or u/s. 263 or u/s. 264 shall be deemed to have commenced on the date of which such order, setting aside or cancelling an assessment was passed and also in cases where returns have been submitted u/s. 139 or in response to notice u/s. 142.

2. Additional tax payable

Section 245C(1) provides that an application should make a true and full disclosure of income. In first proviso thereto it was provided that additional tax payable on income so declared has to be in excess of ₹ 3,00,000/-. The limit has now been increased w.e.f. 1-6-2010 to ₹ 50 lakhs in cases of search and requisition of books etc. and to ₹ 10 lakhs in all other cases.

With effect from 1-6-2011 new category of the applicant has been added for the purpose of limit of additional tax payable. In case where the applicant is related to the person who is searched or requisition of the books is made and proceedings under sections 153A, 153B or 153C are initiated against such specified person and in such case additional income tax payable shall be ₹ 10 lakhs. Specified person has been defined.

3. Payment of additional tax and interest thereon

Though under the old provisions, additional income was required to be disclosed in the application, tax thereon was payable only after application was admitted and allowed to be proceeded with in accordance with S. 245D(2A). There was no provision for payment of interest except when final order was passed u/s. 245D(4) r. w. s. 245D(6).

Under the new scheme, proviso to S. 245C(1) provides that tax along with interest has to be paid along with application itself and proof of payment has to be attached. Interest has to be computed as if such income has been disclosed in return of income and date of filing application for settlement is date of filing return for the purpose of calculation of interest.

4. Filing of return of income before filing application for settlement

Under the old scheme, proviso to S. 245C(1) provided that application for settlement could be filed only if assessee has filed return of income which was due. It was subject to lot of criticism and the proviso has been done away with and it is no more necessary that assessee has filed return of income before he is eligible to file application for settlement. As pendency of proceedings is from first day of assessment year, an assessee may instead of filing return of income due u/s. 139(1) and even before such time expires, directly file an application for settlement.

5. Confidentiality

Earlier annexure as prescribed by clause 11 of Form 34B, the prescribed form in which application for settlement was to be made, was treated confidential until application was admitted. (Rule 6 of ITSC Rules).

Now sub-section (4) of 245C requires that an intimation in prescribed format shall be furnished to Assessing Officer on the same date as of filing of application with ITSC.

This amendment is in line with new scheme and also important as now exclusive jurisdiction rests with ITSC the moment application is filed unlike earlier when ITSC assumed jurisdiction only on admission of application.

6. Admission of application

Under the old scheme, S. 245D(1) provided that an application for settlement may be admitted having regard to complexities of investigation involved or nature and circumstances of the case. It created lot of litigation as to which applications are fit for admission and led to uncertainty as to whether a case would be admitted or not.

The scheme for admission of a case has been completely altered and admission of an application would now be in two stages.

Section 245D(1) is substituted and it provides that a notice be issued by the ITSC to the applicant within 7 days of filing of application, to explain as to why his application be allowed to be proceeded with. Within 14 days of filing an application, ITSC has to decide whether to admit the application or to reject the same. If no order is passed within 14 days, application shall be deemed to be admitted. Further, unlike old provisions which provided for opportunity to be heard if application is rejected, now no specific provision for hearing has been made. No conditions or criteria have been prescribed for deciding whether an application is fit for settlement. Therefore one can say that only conditions prescribed in S. 245C(1) are relevant for deciding whether to allow an application to be proceeded with. At this first stage, no report or communication from department is required for ITSC to decide whether or not to allow an application to be proceeded with.

In the second stage of admission of an application for settlement, S. 245D(2B) provides that if application is allowed to be proceeded with in first stage, a report has be called for from the Commissioner of Income Tax (CIT in brief) within 30 days of filing of application and CIT has to furnish report within 30 days of receipt of communication. If report u/s. 245D(2B) is received within time, then on the basis of report, the ITSC may declare the application as invalid in accordance with S. 245D(2C). Such an order has to be on the basis of the report and within 15 days of receipt of the report. Opportunity of being heard is to be allowed to applicant if application is to be declared as invalid. If report is not received within specified time, ITSC to proceed without the report. Again no condition or criteria have been prescribed to decide whether application is invalid, therefore only if condition prescribed by S. 245C(1) not satisfied, that an application can be declared as invalid.

7. Calling for further report on investigations required by ITSC u/s. 245D(3)

Provisions of sub-section (3) of S. 245D empowers the ITSC to call for a report on further investigation by CIT, if felt necessary. Though the sub-section is proposed to be substituted, the provisions are substantially the same except that CIT has to furnish report within 90 days of receipt of communication from ITSC. Also if report is not received within specified time, ITSC may proceed with final settlement u/s. 245D(4) without such report.

8. Time limit for passing final order u/s. 245D(4) – Section 245D(4A)

Earlier, S. 245D(4A) provided for a recommendatory time limit of four years from date of filing application for passing order
u/s. 245D(4). Now it is provided that final order u/s. 245D(4) has to be passed within twelve months of end of month in which application is made. This time limit is extended to 18 months in case of applications made on or after 1st June, 2010. If order is not
passed within prescribed time, provisions of s. 245HA would be attracted.

9. Interest u/s. 245D(6A) for delay in payment of amount due as per order u/s. 245D(4) r. w. s. 245D(6)

S. 245D(6A) provides that if amount due in pursuance of order u/s. 245D(4) r. w. s. 245D(6) is not paid within 35 days, interest was payable @ 15% p.a. Now, prescribed rate of interest is @ 1.25% p.m.

10. Rectification of order passed under section 245D(4)

The Settlement Commission may within a period of six months from the date of order rectify any mistake apparent from record the order.

There was no provision for additional time where the assessee or the Commissioner files a application for rectification towards the end of the limitation period. W.e.f. 1-6-2015, it has been provided that the Settlement Commission may on application made by the Principal Commissioner or Commissioner or the applicant before the end of six months from the end of month in which order was passed, at any time within a period of six month from the end of the month in which such application was made.

11. Reopening of completed assessment u/s. 245E

S. 245E gave power to reopen completed assessment with consent of applicant. It is proposed to amend s. 245E whereby in respect of application made on or after 1-6-2007, ITSC will not have power to reopen completed assessments.

12. Exclusive jurisdiction over the case u/s. 245F

S. 245F(1) of the Act provides that in addition to provisions of Chapter XIX-A, the ITSC has all the powers of an Income Tax Authority. Sub-section (2) thereof gives exclusive jurisdiction to ITSC over the case from the date of admission of an application till order is passed u/s. 245D(4).

Proviso is proposed to be inserted to the said sub-section granting exclusive jurisdiction to provide that in respect of applications made on or after 1-6-2007, ITSC shall exercise exclusive jurisdiction from date of filing of application. It would mean that Assessing Officer cannot pass assessment order once an application is filed.

Second proviso inserted to take care of a situation where application rejected or declared invalid or not allowed to be proceeded with to say that once that eventuality has taken place, ITSC will no more have exclusive jurisdiction.

13. 245H – Immunities

In respect of application filed on or after 1-6-2007, ITSC cannot grant immunity from prosecution except in respect of provisions of IT Act or WT Act. It has power to grant immunity or waiver of penalties chargeable under the Act. The Settlement Commission while granting immunity to any person shall record the reason in writing in the order passed by it.

14. 245HA – Abatement of proceedings

Proceedings shall abate and proceedings shall revive before respective IT authority as if no application was made, if:

1. New application is rejected u/s. 245D(1) – abate on the date of rejection.
2. New application is declared invalid u/s. 245D(2C) – abate on last day of month in which application declared invalid.
3. W.e.f. 1-6-2015, in respect of any application made u/s.245C, an order has been passed without providing the terms of Settlement, the proceedings before the Settlement Commission shall abate on the date on which such order u/s. 245D(4) was passed.

The IT authority including Commissioner of Income Tax (Appeals) shall be entitled to use all material produced by applicant as well as any information gathered by ITSC.

For determination of time limit for making assessment as well as for computing time for payment of interest on refund, the period from date of application to date of abatement shall be excluded. The Finance Act, 2008 has amended S. 153 and it now allows a minimum time period of one year after excluding the period mentioned in
S. 245HA(4) for making an assessment/reassessment/re-computation of income, if the proceedings before Settlement Commission abates. The amendment is made retrospectively from 1-6-2003.

15. 245HAA – Credit for taxes paid

Once proceedings abate as above, A.O. has to give credit for taxes paid at time of making application or before ITSC.

16. 245K – Bar on making application

In respect of application made on or after 1-6-2007, if application is allowed to be proceeded with u/s. 245D(1), assessee shall not be entitled to make an application ever again. The scope of this section is further widen w.e.f. 1-6-2015 that any person related to the person who has already approached the Settlement Commissions once, also cannot approach settlement commissions subsequently. The definition of related persons has also been expanded.

Irrespective of whether subsequently declared invalid, or abates, or final order passed, the disqualification shall apply.

17. Adjustment of Assets seized u/s.132 or requisition u/s.132A

W.e.f. 1-6-2015, the assets seized u/s.132 or requisition u/s.132A may also be adjusted against the amount of liability arising on an application made before the Settlement Commission u/s.245C(1) of the Act.

B. Provisions as applicable to application filed on or before 31-5-2007

1. Application filed but not admitted as on 1-6-2007

If an application has been filed on or before 31-5-2007 but has not admitted up to 1-6-2007, then if applicant pays tax plus interest before 31-7-2007, the application shall be deemed to be admitted by order dated 31-7-2007 as provided by amended D(2A). If applicant does not so pay the tax and interest, then the proceedings shall abate (S. 245HA(1)(ii)).

After such admission, on or before 7-8-2007, the ITSC shall call for a report from CIT and CIT shall submit report within 30 days of receipt of communication (S. 245D(2B)).

If report u/s. 245D(2B) is received within time, then on the basis of report, the ITSC may declare the application as invalid. Such order shall be passed within 15 days of receipt of report and on the basis of report. Opportunity of being heard has to be given to the applicant if application is to be declared as invalid. If no report is received from CIT within prescribed time, ITSC to proceed with the application without the report. No condition has been prescribed on the basis of which application can be declared invalid, therefore only if condition prescribed by 245C(1) not satisfied that an application can be declared invalid. (S. 245D(2C)).

2. Application filed and admitted before 1-6-2007, but final D(4) order not passed

S. 245D(2D) provides that in respect of applications admitted before 1-6-2007 but where order u/s. 245D(4) is pending, application shall not be allowed to be proceeded with unless tax plus interest is paid before 31-7-2007, irrespective of whether the ITSC has allowed time to pay tax.

3. Final orders

Final orders u/s. 245D(4) has to be passed by 31-3-2008 in respect of all old applications.

4. 245HA – Abatement of proceedings

Proceedings shall abate and proceedings shall revive before respective IT authority as if no application was made, if:

1. Old application which is not allowed to be proceeded with for non-payment of tax and interest by 31-7-2007 (245D(2A) or (2D) – abate on 31-7-2007.
2. Old application which was not admitted on 1-6-2007 and was admitted on payment of taxes is declared invalid u/s. 245D(2C) – abate on last day of month in which application declared invalid.
3. Order u/s. 245D(4) is not passed within time prescribed u/s. 245D(4A) – abate on the date on which prescribed time expires.

The IT authority shall be entitled to use all material produced by applicant as well as any information gathered by ITSC.

For determination of time limit for making assessment as well as for computing time for payment of interest on refund, the period from date of application to date of abatement shall be excluded.

5. 245HAA – Credit for taxes paid

Once proceedings abate as above, A.O. has to give credit for taxes paid at time of making application or before ITSC.

C. Judgment in the case of Star Television News Limited Writ Petition No. 952 of 2008

Settlement Applications not disposed of by 31-3-2008 for reasons not attributable to the applicant cannot be treated as having abated.

S. 254D(4A) was amended by the Finance Act, 2007 to provide that if in respect of an application filed before 1-6-2007, the Settlement Commission did not pass a final order before 31-3-2008, the proceedings would abate. S. 245HA(3) provided that the consequence of such abatement was that the income-tax authorities could, in making the assessment, use all the confidential material furnished by the assessee before the Settlement Commission. The said provisions were challenged as being ultra vires Article 14 of the Constitution before the Bombay High Court. The Bombay High Court in the case of Star Television vs. Union of India has held the followings:

1. The choice of 31-3-2008 as the cut-off date was arbitrary & irrational.
2. S. 245HA(3) which makes available to the A.O. the hitherto confidential information furnished by the applicant has the effect of severely prejudicing the assessee for no fault of his but solely for the inability of the Settlement Commission to dispose of the application by the specified date.
3. In order to save these provisions from being struck down as being unconstitutional, they will have to be read down as applying only to cases where the Settlement Commission is unable to pass an order on or before 31-3-2008 for any reason attributable on the part of the applicant. If in the writ petition, the applicant has urged that it was not responsible for the non-disposal of the application and the same is not denied by the revenue, the circumstance should be considered in favour of the applicant.
4. Accordingly, the Settlement Commission has to consider whether the proceedings have been delayed on account of any reasons attributable on the part of the applicant. If it comes to the conclusion it is not so, then it has to proceed with the application as if not abated.