Settlement Commission rejection revives appellate proceedings and does not bar a merits challenge to the assessment order.

Section 245HA of the Income-tax Act, 1961 applies when a settlement application is rejected without terms of settlement, and the appellate proceedings then revive. The assessee is not required to abandon a merits challenge to the assessment order merely because the settlement application has been rejected in that manner. On the facts, the Tribunal's discretion in condoning delay, setting aside the Commissioner (Appeals) order, and restoring the first appeal was upheld. The appellate proceedings were directed to remain in abeyance until disposal of the settlement application.

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Issues: (i) Whether Section 245HA of the Income-tax Act, 1961 applies only when an application before the Settlement Commission is rejected without terms of settlement, and whether the assessee is required to abandon the challenge to the assessment on merits; (ii) whether, on the facts, the delay was rightly condoned and the first appeal restored.

Issue (i): Whether Section 245HA of the Income-tax Act, 1961 applies only when an application before the Settlement Commission is rejected without terms of settlement, and whether the assessee is required to abandon the challenge to the assessment on merits.

Analysis: Section 245HA becomes relevant only upon rejection of the settlement application without terms of settlement, whereupon the appellate proceedings revive. The assessee does not lose the right to contest the assessment order on merits merely because the settlement application is rejected in that manner.

Conclusion: The Revenue's contention was rejected.

Issue (ii): Whether, on the facts, the delay was rightly condoned and the first appeal restored.

Analysis: In the peculiar facts, the Tribunal's exercise of discretion in condoning the delay, setting aside the order of the Commissioner of Income Tax (Appeals), and restoring the first appeal was justified.

Conclusion: The Tribunal's order was upheld.

Final Conclusion: The special leave petition failed, while the appellate proceedings were directed to remain in abeyance until disposal of the settlement application.

Ratio Decidendi: Where a settlement application is rejected without terms of settlement, appellate proceedings revive under Section 245HA of the Income-tax Act, 1961 and the assessee is not compelled to forgo the merits challenge to the assessment order.

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