Section 245D of Income-tax Act, 1961

HIGH COURT OF DELHI Vatika Farms (P.) Ltd. v. Union of India Madan B. Lokur and V. B. Gupta, JJ. WP(C) No. 5462 of 2007 March 28, 2008 Section 245D of Income-tax Act, 1961 – Settlement Commission – Procedure on application under section 245C – Assessee had filed settlement application before Settlement Commission – Pending said application, provisions of sections 245D(2A), 245D(2D), 245D(4A) and 245HA(1) were amended by Finance Act, 2007 – Effect of amendment is that where a settlement application has been filed under section 245C in Settlement Commission before 1-6-2007, Settlement Commission shall pass an order effectively deciding settlement application on or before 31-3-2008, failing which, settlement application will abate – Assessee challenged provisions of sections 245D(2A), 245D(2D), 245D(4A) and 245 HA as amended by Finance Act, 2007, as being arbitrary and unconstitutional on ground that merely because of inaction on part of revenue to dispose of pending applications before specified date, same would abate and, consequently, they would be required to face regular assessment – Whether even though true purpose of said amended provisions was to ensure expeditious disposal of settlement applications pending before Settlement Commission and in such situation some cut off date has to be fixed but that date could not be arbitrarily fixed without having any reasonable or rational basis particularly when Settlement Commission itself filed an affidavit on 29-1-2008 admitting that it was not possible for it to dispose of all pending applications before 31-3-2008 – Held, yes – Whether in such circumstances, requirement that settlement application shall abate if an order under section 245D(4) is not made by 31-32008 was unfair, unjust and arbitrary and, therefore, a direction was to be issued to effect that application for settlement filed by assessees under section 245C would not abate on 31-3-2008 – Held, yes Facts The assessee had filed settlement application before the Settlement Commission. Pending the application, the provisions of sections 245D(2A), 245D(2D), 245D(4A) and 245HA (1) were amended by the Finance Act 2007. The effect of the amendment is that where a settlement application has been filed under section 245C in the Settlement Commission before 1-6-2007, the Settlement Commission shall pass an order under sub-section (4) effectively deciding the settlement application on or before 31-3-2008 failing which the settlement application shall abate. The assesses filed instant writ petition claiming, inter alia, that their settlement application should be disposed of on or before 31-3-2008 so that it does not abate and they are not required to face the consequences of abatement. The assessees submitted that the consequence of a settlement application not being disposed of by 31-3-2008 would be calamitous inasmuch as (i) they would be required to face a regular assessment by the income tax authority, in most cases, the authority would be the Assessing Officer whose superior, the Commissioner, may have opposed the admission of the settlement application before the Settlement Commission and under such circumstances, the assessee could not be expected to get a fair and just hearing or treatment from the Assessing Officer, that (ii) the Assessing Officer would be inherently biased against the assessees in such a situation because he would be fully aware of the fact that the assessees had approached the settlement commission for a settlement on the basis of material not earlier disclosed, and that (iii) Confidential information disclosed by the assessees to the Settlement Commission (which was otherwise not available to the Assessing Officer) would now be made available to him and could be used by him against them. The assessee further submitted that the amended provisions of sections 245D(2A), 245D(2D), 245D(4A) and 245HA (1) were arbitrary and unconstitutional. Held There are certain facts which suggested that the Settlement Commission is not a redundant appendage. Firstly, the Act provides that the Settlement Commission shall have ‘exclusive jurisdiction to exercise the powers and perform the functions of an income-tax authority under this Act in relation to the case’ before it [Section 245-F(2)]. Secondly, when a taxpayer (or a tax evader, as the case may be) files a settlement application before the Settlement Commission , he cannot withdraw the application [section 245-C(3)]. It may either be dismissed by the Settlement Commission (not further proceeded with) or it would have to result in a settlement under section 245-D(4). Thirdly, section 245-I makes every order passed by the Settlement Commission conclusive as to the matters stated therein and no matter covered by the final order passed by the Settlement Commission shall be re-opened in any proceeding under the act or under any other law for the time being in force. All these facts show the enormous power wielded by the Settlement Commission , which still exists and which it still retains. All the assumptions and facts also show that the Settlement Commission is unlikely to be wound up in the near future. (Para 25) For these reasons, prima facie it appeared that even though the Settlement Commission continue to exist, the requirement that the settlement application ‘shall abate’ if an order under section 245D(4) is not made by 31-3-2008 was unfair, unjust and arbitrary. This was all the more so since the abatement could have been prevented by the respondents by taking remedial measures, which they failed to take. The result of the inaction of the respondents was clear, obvious and foreseeable, but they unfortunately, shut their eyes to realism and pragmatism. (Para 26) The true purpose or object of the challenged provisions of the Finance Act, 2007 appeared to be to ensure expeditious disposal of settlement applications pending before the Settlement Commission . If that was so, the arbitrary though expeditious abatement of these applications was not the only solution or the most appropriate solution. When the assessee were desirous of having their settlement applications disposed of quickly, the respondents could not be permitted to say that they will not dispose of the applications, but wait for them to abate, because that was ‘the comparatively easier option. The assessee could not be prejudiced for no fault of theirs and entirely on the basis of the whims, and fancies of the respondents who might or might not finally decide a settlement application on or before 31-3-2008. (Para 8) In this regard, another question of seminal importance was raised by assessee what is the criterion for deciding which settlement application should be taken up first? With such a large number of pending applications, the Settlement Commission may, at its whims and fancies take up the application of one assessee for disposal and postpone the disposal of the settlement application of another assessee. The ‘first’ assessee would have the benefit of disposal of his settlement application by the Settlement Commission , while the settlement application of the ‘second’ assessee would abate and he would be relegated to a regular assessment by the Assessing Officer. Why should one assessee benefit or steal a march over another, when all things are equal? This would lead to a hostile discrimination and palpable arbitrariness in the selection criteria, completely violating the equality clause enshrined in article 14 of the Constitution. Insofar as the assessee were concerned, there was no basis for a valid classification for disposing of or not disposing of a particular settlement application, and if there was a valid classification, it had no nexus with the object sought to be achieved, namely, expeditious disposal of all settlement applications within a time-bound period. In other words, similarly placed person were being subjected to hostile discrimination. (Para 29) While it was true that in situations such as the present, some cut-off date has to be fixed, that date could not be arbitrarily fixed without having any reasonable or real basis. Why the date for disposal of all pending settlement applications on or before 31-3-2008 was unrealistic (if not illusory) was clear from the affidavit filed by the Settlement Commission on 29-1-2008 in which it was candidly admitted that it was not possible for the Settlement Commission to dispose of all the pending cases before 31-3-2008. (Para 34) The cut-off date of 31-3-2008 appeared to have been fixed without giving a thought to ground realities and it was so wide off the mark and incapable of being adhered to that it was nothing but capricious and whimsical. The unreasonableness could be tested, even today, by the fact that presently a few thousand settlement applications are pending and they will abate in a few days from now. On the other hand, some fortunate assessees (or others similarly placed) may yet get the benefit of a settlement by the Settlement Commission. There was no apparent reason for this discriminatory treatment by which some persons were left out in the cold. (Para 35) Another issue that was greatly agitated by the assessee related to a breach in the confidentiality of materials made available to the Settlement Commission. To appreciate the prejudice to the assessee after abatement of the settlement application, it was necessary to understand the procedure laid down by law that is binding on the Settlement Commission . (Para 38) A perusal of rule 44CA (1) of the Income-tax Rules, 1962 shows that the Settlement Commission may call for a report from the Commissioner under sub-section (1) of section 245D and while doing so it shall forward a copy of the application in Form No. 34B in Appendix II to the rules other than the annexure and the statement and other documents accompanying such annexure. It is only when a settlement application is admitted for final consideration under section 245D (and, therefore, the Settlement Commission has exclusive jurisdiction over the case) that the information contained in the annexure as well as in the statement and other documents accompanying the annexure shall be disclosed to the Commissioner. (Para 41) Under the provisions of section 245-F(7), the Settlement Commission is .entitled to regulate its ‘own procedure. In exercise of this power the Income-tax Settlement Commission (Procedure), rules, 1997 have been framed. Rule 6 prescribes that the Settlement Commission shall forward a copy of the settlement application, excluding the annexure to the Commissioner for furnishing a report and rule 9 of the 1997, Rules prescribes that where the settlement application is allowed to be proceeded with or admitted by the Settlement Commission , only then would the Commissioner be entitled to receipt of the annexure to Form No. 34B in Appendix II to the Income-tax Rules furnished by the assessee. This is in consonance with rule 44CA of the Income-tax Rules. (Para 42) The proceedings before the Settlement Commission are judicial proceedings (section 245-L) and they are not open to the public (rule 16 of the 1997, Rules). Similarly, under section 245-G no person (other than the applicant) is entitled to inspect or obtain copies of any report made by any income tax authority to the Settlement Commission . In other words, the proceedings before the Settlement Commission are completely confidential and any material adverse to the assessee is kept away from the public eye and cannot be used against the assessee for any purpose whatsoever. (Para 44) By virtue of section 245-HA(3), as incorporated by the Finance-Act, 2007, the Assessing Officer or any other income-tax authority shall be entitled to use all the confidential information produced by the assessees before the Settlement Commission and can even use it in proceedings before him against the assessee. The result of this is that the confidentiality of the settlement proceedings, earlier guaranteed by the Act and the Rules framed there under, has now been taken away and materials that were strictly within the domain of the Settlement Commission prior to the Finance Act, 2007 can now be used against the assessee for all purposes including for assessment proceedings, penalty proceedings and for prosecution purposes also. This appeared to be clearly arbitrary. (Para 46) The Settlement Commission had already filed an affidavit saying that it was not possible for it to decide all the pending settlement applications before 31-3-2008. The Settlement Commission had not indicated what steps it had taken to comply with the mandate of the law. Similarly, the Central Government had also not provided for any remedy to the assessee against the abatement of their settlement applications either by urging Parliament to extend the time limit for disposal of the settlement application by the Settlement Commission or any other remedial step. The Central Government had also not indicated what steps, if any, had been taken to .comply with the mandate of the law. It could not be that only the assessee and other citizens are bound by the law, but the Settlement Commission and the central government are not bound by the law. Such a situation would lead to anarchy, and a situation whereby the rule of law is effectively disabled. (Para 50) Merely because the assessee had been conferred a statutory right did not mean that they could be discriminated against and arbitrarily treated in the exercise of that right. Nor could the respondents be heard to say that they will arbitrarily decide which assessee or applicant before the Settlement Commission be given the benefit of that right. Similarly, that statutory right could not be taken away and the assessee placed in a worse position than what they were in before. It may be another question if the status quo ante is restored, but that is not what has been legislated by the Finance act, 2007 - the Settlement Commission continues to exist and continues to deal with cases that are similar if not identical in law to those of the assessee. In that sense, the right available to the assessee had not been taken away, except by fixing the cut-off date of 31-3-2008. (Para 52) As regards the effect of abatement of the settlement applications, the respondent did not make any submissions except to say that since the law mandates the abatement of the settlement applications on 31-3-2008, the assessee could not challenge the procedure adopted by the Parliament in the matter of abatement. The respondent did not give any indication about what steps, if at all, have been, taken ‘either by the Settlement Commission or the central government to comply with the mandate of the law to ensure that the Settlement Commission ‘shall’ decide all the settlement applications pending before it on or before 31-3-2008. It appeared that no steps have been taken by the respondents to comply with the mandate of the law prescribed by Parliament and the assessee had been simply left to fend for themselves and to face the dire consequences of the inaction of the Settlement Commission as well as the central Government. (Para 53) On the issue of bias, the respondent did not make any submissions, while on the question of confidential information being revealed, it was submitted that as of now the information ceased to be confidential because all the settlement applications had either been admitted or were deemed to have been admitted and, therefore, all the confidential Information was already known to the Income-tax department. Consequently, the information revealed by the assessee in the annexure to Form 34B in Appendix II to the Income-tax Rules was no longer confidential and there was no harm if it was used against the assessee who were in any case tax evaders. (Para 54) The respondent had overlooked that the confidential information was and continued to remain within the exclusive domain of the Settlement Commission during the pendency of the settlement application in the Settlement Commission , even after it is disclosed to the Commissioner. Whatever information is disclosed by the assessee before the Settlement Commission can be used and will be used only by persons of integrity and experience and exclusively for the purpose of settling the dispute raised by the assessee before the Settlement Commission . The confidential information cannot be used for any purpose other than for the settlement of applications filed under section 245C(1). The procedure having been set into motion by the assessee by filing settlement applications under section 245C, they are precluded from withdrawing that application and the Settlement Commission is obliged to settle or decide the matter one way or the other, as required by law. There is no halfway house once the process is set into motion. Moreover, even after the matter is settled, it cannot be reopened by any authority, under the Act for any other purpose and the decision of the Settlement Commission is final. In other words, there is a complete termination of all matters that are dealt with by the Settlement Commission as postulated by section 245-I. (Para 55) The trust that the assessee placed in the Settlement Commission was completely dashed by the amendments brought about by the Finance Act, 2007 and the entire confidential and undisclosed material can be used by any income tax authority for any purpose, prejudicial to the interests of the assessee. The confidential information disclosed by the assessee will be put into the hands of the Assessing Officer who is likely to have an implicit and inherent bias against them knowing fully that they have approached the Settlement Commission for a settlement in respect of income which they have not disclosed to any income tax authority. (Para 56) Hence, under these circumstances, irreparable harm and injury would be caused to the assesses if they were relegated to the position which would follow as a result of the abatement of the settlement applications. There was no doubt that the balance of convenience would lie in favour of the prayer of the assessee being granted at least until the disposal of these writ petitions which pertain to the constitutional validity of some provisions of the Finance Act, 2007 including those relating to: abatement of the settlement applications filed by the assessee. (Para 57) Even though the court is obliged to presume every statute to be constitutionally valid, the circumstances in the instant batch of writ petitions was such that severe harm and prejudice will be caused to the assessee if the provisions incorporated in the Act by the Finance Act, 2007 were permitted to operate. This was particularly so since the provisions (despite the presumption) appeared to be discriminatory and arbitrary. No rational basis had been shown by the revenue for providing for abatement or for fixing the cut-off date of 31-3-2008 despite knowing fully well that it was not possible for the Settlement Commission to dispose of all the pending applications before that date, particularly in the face of an affidavit having been filed by the Settlement Commission on 29-1-2008. The respondent had also not been able to show any reason whatsoever why the impugned provisions of the Finance Act, 2007 were incorporated - there was no statement of objects and reasons for the amendment brought about and there was absolutely no reason given whatsoever why the period of four years that was earlier in existence for the disposal of settlement applications by the Settlement Commission in the-statute prior to the Finance Act, 2007 had been unreasonably curtailed, in the case of the assessee, to a maximum period of eight months. (Para 58) For all these reasons, the following directions were to be issued: (a) The application for settlement filed by the assessee under section 245-C would not abate on 31-3-2008. (b) In keeping with the ‘mandate of Parliament, the Settlement Commission would endeavour to dispose of all pending applications as expeditiously as possible. (c) To enable the Settlement Commission to dispose of all pending applications as expeditiously as possible, the central government will render all assistance to the Settlement Commission including, if necessary, setting up additional benches. (d) Any information disclosed by the assessee in the annexure to Form 34B in Appendix II to the Income-tax Rules, 1962 will not be used against the assessee for any purpose whatsoever until the disposal of the settlement application of the assessee by the Settlement Commission . (Para 59)