Opinion — Recent High Court judgements on abatement of pending settlement
applications – Need for urgent action

S.R. Wadhwa, Advocate

Former Chairman, Income-tax Settlement Commission

1. In our article, “Income-tax Settlement Commission – Consequences of Abatement Provisions and Some Remedies”, published in the Souvenir issued at the time of 14th National Tax Convention of All India Federation of Tax Practitioners held at New Delhi during 7th-9th December, 2007, we had made several suggestions to solve, in a holistic manner, the problem of nearly 4,500 settlement applications which are likely to abate on 31st March, 2008, because of clause (iv) to section 245HA(1) of the Income-tax Act, 1961 (the Act) inserted by the Finance Act, 2007, simply due to the Settlement Commission’s inability to dispose them off and pass orders of settlement in those cases.

2. We had suggested (followed by a letter to the Hon’ble Finance Minister, Government of India) that the period for abatement of the pending settlement applications may be extended by two years till 31-3- 2010 and four additional fast track Benches may be created by withdrawing 12 existing Chief Commissioners of Income-tax or recalling recently retired members of the Commission to man them. Such fast track Benches could be assigned pending settlement applications with total incomes, including undisclosed income of up to say Rs. 25 lakhs. They should settle the applications on the basis of the reports of the CsIT and comments of the applicants thereon and after hearing both the sides. The regular Benches can deal with the other settlement applications. This arrangement will ensure wholehearted attention to settle all the old applications because, with some other amendments to section 245C by the Finance Act, 2007, effective from 1-6-2007, fresh applications can be filed only in non-search cases, non-reassessment cases and that too only during regular assessment proceedings pending before the AO. Very few applications, in all about 20, are likely to be received under the new procedure till 31-3-2008. The current work load is, therefore, insignificant and will not justify an annual expenditure of Rs 5.50 crores of the Commission. Besides, very little time, unlike in the past, will be spent on admission of applications as the admission is now automatic on the tax payer paying the tax and interest along with the settlement application.

3. A large number of representations have been made to the Finance Minister and the Central Board of Direct Taxes for amending the present law to extend the period for abatement of pending settlement applications.

4. We had also suggested in that article that in case the law is not amended and the pending settlement applications abate as on 31-3-2008, the applicants will have no choice except to file writ petitions in the High Courts all over the country and possibly, before the Supreme Court of India in March 2008 after the presentation of Finance Bill 2008, when the cause of action will clearly be available.

Delhi High Court’s Judgement of 17th December, 2007

5. While the Finance Ministry seems to be examining suggestions made for extending the abatement period, several writ petitions have already been filed before the Delhi High Court and possibly before some other High Courts.

6. In a batch of writ petitions filed before the Delhi High Court e.g. C.M. Nos. 10116/2007 and 11964/2007 in WP (C) No. 5462/2007 with WP(C) Nos. 5110, 5303, 5322, 5461, 5467, 5468, 5469, 5480, 5512, 5526, 5535, 5557 and 5559, the petitioners have not only challenged the constitutional validity of the provisions contained in the newly inserted sub-section (4A) to section 245D and clause(iv) of sub-section (1) to section 245HA concerning the abatement of pending applications but have also challenged the constitutional validity of sub-sections (2A) and (2D) to section 245D whereby the applications filed before 1st June 2007 will abate if tax and interest due thereon is not paid by 31st July 2007. The constitutional validity has been challenged broadly on the lines we had indicated in our article referred above. They are mainly the following.

Grounds for challenge

7. The provisions are violative of Article-14 of the Constitution of India because of the following, among other, reasons:—

i) On admission of the settlement application, the applicant gets a vested right to get its tax liability and interest and immunity from penalty and prosecution under the Income-tax Act and other Central laws decided by the S.R. Wadhwa, Advocate Opinion — Recent High Court judgements on abatement of pending settlement applications – Need for urgent action QUEST 30 AIFTP JOURNAL January, ‘08 high powered Commission which assumes exclusive jurisdiction under section 245F(2) over any other tax authority, till the order of settlement is passed. The Commission’s jurisdiction covers both substantive and procedural powers to compute the income, tax and interest payable by the applicant.

ii) No refund of additional tax and interest paid is permitted on abatement of the settlement application. iii) The settlement application once filed cannot be withdrawn by the applicant because of the prohibition contained in section 245C (3) of the Act.

iv) Settlement Commission can deviate, somewhat, from the provisions of the Act in the interest of settling the case and resolving the dispute. There is no such power vested with the AO, the CIT (A) or any other income-tax authority.

v) Under section 245H(1) of the Act, the Settlement Commission has the power to grant immunity from penalty and prosecution. There is no such power conferred on the AO or any other income-tax authority even in respect of abated applications. The power to grant immunity being purely a substantive power, the applicants cannot be deprived of its benefit for no fault of theirs.

vi) The applicants made confessions by making true and full disclosure of additional income not disclosed before the AO, in their settlement applications and furnished material in support of such disclosure in the bonafide belief that it will be used by the Commission to settle their tax liabilities and grant them immunities from penalty and prosecution. This material will, in respect of abated applications, be available to and used by the assessing authorities against the applicants and their confessions would be utilized to levy penalty and to launch prosecutions for the evasion of tax because of the newly inserted sub-section (3) of the Act. This sub-section also appears violative of Article 20(3) of the Constitution of India against self incrimination.

vii) There are no intelligible criteria laid down in the law as to what type of cases will abate e.g. where the applicants have not been cooperating or any other criteria. Huge pendency of unsettled applications that cannot be disposed of by the Commission by the 31st March, 2008 is no good criteria in law to justify their abatement.

Ratio of the Delhi High Court’s judgement

8. The Hon’ble Delhi High Court in its judgment of 17th December, 2007 have admitted the writ petitions and has held that the impugned legal provisions will, “no doubt, seriously prejudice the applicants”. It is further held that “the noble intention of Parliament is sought to be defeated by the Respondents by frustrating the implementation of the law, without actually saying so. Is this what speedy justice is all about? It is in this context that we say that the rights of citizens cannot be trampled over by the Respondents, under the banner of speedy justice.”

9. The Hon’ble High Court could not finally decide the writ petitions because there was, “complete absence of any effective assistance rendered by the respondents by way of facts or figures which could suggest that the amendments to the Act are not only necessary, but do not fall foul of Constitutional imperatives.” Another reason for not finally deciding the petitions was “the theoretical possibility that all these petitions may become infructuous if in fact, the settlement applications of the petitioners before us are decided by the Commission on or before 31st March, 2008.” The Court has also confirmed the interim orders of not charging interest from the applicants in the cases where the settlement applications were admitted before 1st June, 2007 and they were required to pay the tax and interest u/s 245D(2A) of the Act before 31-7-2007. The High Court has adjourned the hearing of the applications to 3rd March, 2008 to review if in those cases, the Commission is able to pass the final orders of settlement.

Suggested future course of action

10. The case specific directions given by the Delhi High Court in the writ petitions pending before it will spur the Commission to try to dispose them of before 31st March, 2008. It may therefore be advisable to file similar writ petitions in the respective High Courts and get similar directions issued from them. This may help the petitioners to get their settlement applications disposed of before 31st March, 2008 in case the abatement provisions are not extended. In any case, they will not be worse of compared to those who may not file the writ petitions or may wait to file writ petitions till after their settlement applications actually abate on the 31st March, 2008. Lastly, a large number of writ petitions, and the consequent judicial pressure, may persuade the Government to see the justice of the case of the applicants and it may propose legislative amendments in the Finance Bill, 2008 to extend the time limit for abatement of the applications well beyond 31st March, 2008 to enable their disposal by the Settlement Commission.

Courtesy : AIFTP JOURNAL - January 2008.