TaxTMI 
TaxTMI 
2009 (8) TMI 86
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....2007 (hereinafter referred to as F.A. 2007) with effect from 1st June, 2007 as being ultra vires and violative of Article 14 of the Constitution of India. 2. Chapter XIX-A was inserted in the Act by Taxation Law Amendment Act, 1975 with effect from 1st April, 1976. Since then, there have been several amendments. Some of the relevant provisions with which we are concerned with and need to be considered are, Section 245C which provides for making an application by an assessee before the Settlement Commission at any stage of a case relating to them by making a full and true disclosure of their income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income-tax payable on such income and such other particulars as may be prescribed The other provisions of the Section need not be adverted to. Section 245D sets out the procedure to be followed by the Commission on receipt of an application under Section 245C. Before its substitution by Finance Act 2007 sub-section (1) mandated the Settlement Commission to call for a report from the Commissioner and on the basis of the material co....
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.... or before the 31st day of March, 2008; (ii) in respect of an application made on or after the 1st day of June, 2007, within twelve months from the end of the month in which the application was made." 5. Under Section 245H there is power in the Settlement Commission to grant immunity from prosecution and penalty in the manner and circumstances set out therein. 6. Section 245HA of which some provisions are challenged to the extent necessary is reproduced and reads as under:- "245HA. Abatement of proceeding before Settlement Commission. (1) Where - (i) an application made under Section 245C on or after the 1st day of June, 2007 has been rejected under sub-section (1) of Section 245D; or (ii) an application made under section 245C has not been allowed to be proceeded with under sub-section (2A) or further proceeded with under sub-section (2D) of Section 245D; or (iii) an application made under section 245C has been declared as invalid under sub-section (2C) of section 245D; or (iv) in respect of any other application made under Section 245C, an order under sub-section (4) of section 245D has not bee....
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....missioner under sub-section (1) shall not be made after the imposition of penalty after abatement." (3) The Commissioner may, subject to such conditions as he may as he may think fit to impose, grant to the person immunity from the imposition of any penalty under this Act, if he is satisfied that the person has, after the abatement, co-operated with the income-tax authority in the proceedings before him and has made a full and true disclosure of his income and the manner in which such income has been derived." 278AB. (1) A person may make an application to the Commissioner for granting immunity from prosecution, if he has made an application for settlement under Section 245C and the proceedings for settlement have abated under Section 245HA. (2)......... (3) The Commissioner may, subject to such conditions as he may think fit to impose, grant to the person immunity from prosecution for any offence under this Act, if he is satisfied that the person has, after the abatement, co-operated with the income-tax authority in the proceedings before him and has made a full and true disclosure of his income and the manner in which such income has been deriv....
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.... a large number of litigations with the Income Tax Department as to the basis and quantum of taxability of the petitioner in respect of advertisement and subscription revenue being repatriated from India. According to the petitioner the Income Tax Department had adopted conflicting basis of assessment in respect of its various group companies With a view to have a speedy resolution of the various litigations and with a view to avoid multiplicity of proceedings the petitioners approached the Settlement Commission. The application of the petitioner was placed before the Special Bench of Five Members which by order dated September 11, 2007 declared the application filed by the applicant as valid and allowed the same to be proceeded with for final settlement. It is the case of the petitioner that for no fault of theirs the Commission could not proceed to dispose of the application inspite of various dates that were given. The respondent No.2, it is pointed out, has a huge backlog of cases and was hearing very old applications of 1990-91 on first come first serve basis. The petitioner, therefore, was under reasonable apprehension that the application would not be disposed of and in the ....
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....sion, and subject to the jurisdiction of the internal audit as also the audit by the Comptroller General of India, he is not likely to exercise the power objectively and fearlessly. (iv) Income of the applicant being determined by the Assessing Officer or CIT (A) not having wide knowledge and experience of the scale that the members of the Commission have, being equivalent in status to the members of the Central Board of Direct Taxes. (v) Proceedings before the Assessing Officer are conducted by one person and are quasi-judicial. Those before the Commission are by a Bench of three independent persons and the proceedings are judicial in nature. (vi) Commission's order is final and conclusive and application is decided on one-stop basis. Regular assessments after abatement would have to go through a plethora of appeals before a final decision gets arrived at. (vii) Commission's jurisdiction was exclusive and plenary while the income tax authority, after abatement, will have no such exclusive jurisdiction or plenary power. (viii) Settlements, unlike regular assessments, are through adjudication. The issues by the Commission are thus viewed ....
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....cannot be assailed on the ground of being arbitrary or evasive, but it is based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved without violating the equal protection clause of Article 14. There is always a presumption in favour of the constitutionality of a statute and the burden in this regard is upon the person who alleges transgression of the constitutional principles. According to the respondents from experience they have found that in many cases the assessee found it convenient to move the Settlement Commission and postpone their tax liability perpetually by a deliberate act of non-cooperation with the proceedings. It is submitted that there was no fundamental right in the petitioner to approach the Settlement Commission. The right to file an application before the Settlement Commission is a statutory right and as such, can be taken away by the statute. Also no prejudice will be occasioned as the law has been amended to empower the Commissioner of Income Tax to grant impunity from penalty and prosecution in cases which abate. For all the aforesaid reasons it is set out that the petition should be dismissed. ....
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....adverse criticism which, we are told, has been responsible for the slow rate of disposal of disclosure petitions. We would, therefore, recommend that settlements may be entrusted to a separate body within the Department, to be called the Direct Taxes Settlement Tribunal. It will be a permanent body with three Members. The strength of the Tribunal can be increased later, depending on the work-load. To ensure impartial and quick decisions, and to encourage officers with integrity and wide knowledge and experience to accept assignments on the Tribunal, we recommend that its members should be given the same status and emoluments as the members of the Central Board of Direct Taxes. ... The terms of the award will be set down in writing and it will be open to the Tribunal to determine not only the amount of tax, penalty or interest but also to fix date or dates of payment. The quantum of penalty and interest will be in the discretion of the Tribunal. Similarly, the Tribunal may also in its discretion grant immunity from criminal prosecution in suitable cases. The award will be binding both on the petitioner and on the Department. The application of its decisions on questions of ....
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....ued litigation in complicated cases. During the period 1976 to 1983, the Settlement Commission has settled 1213 cases of which only one case was admitted by the Supreme Court. The Direct Tax Laws Committee in its final report submitted in September, 1978 further recommended that all restrictions on the powers of the Settlement Commission to entertain cases should be removed. As a result of this recommendation w.e.f. 1.4.79, the powers of the Settlement Commission were further widened. Earlier, if the Commissioner objected to the application of an assessee from being proceeded with, the Commission could not proceed with it. The proviso to section 245D (1A) inserted w.e.f. 1.4.79 gave the Commission power to proceed with it, inspite of the objection but only after giving the Commissioner, opportunity of being heard. Besides the gain to revenue, the Department's manpower increased significantly, as a result of the creation of Settlement Commission. Several new posts were created. In 1976, 14 posts (2 D.Is., 1 Secy., 10DDs. & 1 A.O.) became available. There has been no increase in the strength of personnel, since then.". 15. While considering the scheme of Chapter XIX....
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....ment Commission. 17. Scheme of the Act and Relevant Changes in Chapter XIX-A of the Act by the Finance Act, 2007. Prior Scheme (i) An application to the Settlement Commission was submitted in accordance with Form 34B in Appendix II to the Income-tax Rules.The Annexure to Form 34B required the applicant, inter alia, to state - (a) amount of income which has not been disclosed before the assessing officer; (b) additional amount of income-tax payable on such income; and (c) the manner in which the income disclosed before the Settlement Commission has been derived. The disclosure made by the applicant to the Settlement Commission in the said Annexure was to be kept confidential unless the application was admitted by the Settlement Commission. Once admitted, the disclosure made to the Commission in the said Annexure and the accompanying material was conveyed to the income-tax authorities (hereinafter referred to as "IT Authorities") and could be used by IT Authorities only for the limited purpose of making submissions to the Settlement Commission, and the Settlement Commission alone was empowered to pass a final order. Prior to the 2007 Act, if the appli....
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....al of cases pending before the commission and realization of taxes thereon." It is important to note that the selection of members to the Commission, and filling of vacancies is completely within the control of the Government of India. (vi) (a) The 2007 Act substituted the definition of "case" in subsection (b) of section 245A of the Act, providing a more restrictive definition, thereby limiting the proceedings in which an application could be made to the Settlement Commission after the amendment of the law w.e.f. 1st June, 2007. (b) By virtue of sub-sections 245D(2A) and 245D(2D) as substituted by the 2007 Act, in the case of an application filed before 1st June 2007 where no order of admission/rejection had been passed under the erstwhile sub-section 245D(1), or where an order of admission had been passed but no final order under the erstwhile sub-section 245D(4) had been passed, such application could not be proceeded with further unless the additional tax on the income disclosed in such application and the interest thereon was paid on or before 31st July 2007. Failure to pay such additional tax or interest thereon by the aforesaid date would result in abatemen....
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....n has cooperated with the Income-tax Authority in the proceedings before such Authority and has made a full and true disclosure of his income and the manner in which such income has been derived. In other words the decision to grant immunity is by an authority which would normally in the ordinary course not be the authority before whom the proceedings were but another authority. The Commissioner then will have to address himself to the issue whether there was a true and full disclosure. A party may be aggrieved by the order of the Income Tax Authority in which event the party may prefer an appeal. Would the Commissioner still then consider the information disclosed as a true and full disclosure. On the other hand under Section 245H power was in the Settlement Commission to grant immunity from prosecution for any offence under this Act or under the Indian Penal Code or any other Central Act for the time being in force. Thus the very body which considers the application under Section 245C has been conferred the powers unlike Sections 273AA and 278AB. 18. Before further dealing with the issue we may consider some data and the stand of the Respondents. Bench wise institution a....
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....y of cases under Section 245D(4) as on 31.12.2007 before the Income Tax Settlement Commissioner is given herein below:- Age of Application Principal Bench, Delhi Kolkatta Bench Mumbai Bench Chennai Bench Total More than 6 years 62 86 365 62 1175 (575) Between 5-6 years 148 20 59 14 241 Between 4-5 years 111 13 55 25 204 Between 3-4 years 90 43 47 35 215 Between 2-3 years 43 41 73 37 194 Between 1-2 years 49 44 56 21 170 Less than 1 year Filed between 01.04.2007 to 01.06.2007 543 162 147 18 870 Filed after 01.06.2007 11 4 6 0 21 Total *1657 (1057) 413 808 212 *3090 (2490) *(Seems to be calculation error) 20. In the reply filed in the D....
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....no fault of the applicant has also resulted in the confidential information being available to the A.O. and other authorities under the Act. It is this which has resulted in the challenge in the present petition. 23. The law on the scope and meaning of Article 14 is now well settled. We may gainfully refer to D.S. Nakara & Ors. vs. Union of India, (1983) 1 S.C.C. 305, wherein the Supreme Court observed as under:- "10. The scope, content and meaning of Article 14 of the Constitution has been the subject-matter of intensive examination by this Court in a catena of decisions. It would, therefore, be merely adding to the length of this judgment to recapitulate all those decisions and it is better to avoid that exercise save and except referring to the latest decision on the subject in Maneka Gandhi v. Union of India from which the following observation may be extracted: "...what is the content and reach of the great equalising principle enunciated i in this article? There can be no doubt that it is a founding faith of the Constitution. It is indeed the pillar on which rests securely the foundation of our democratic republic. And, therefore, it must not ....
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.... by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary. (4). The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another if as regards the subject matter of the legislation their position is substantially the same. (6). The law can make and set apart the classes according of the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive. (7). The classification must n....
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.... and that differentia must have a rational nexus to the object sought to be achieved by the statute in question. 16. As a corollary to this well established proposition, the next question is, on whom the burden lies to affirmatively establish the rational principle on which the classification is founded correlated to the object sought to be achieved? The thrust of Article 14 is that the citizen is entitled to equality before law and equal protection of laws. In the very nature of things the society being composed of unequals a welfare state will have to strive by both executive and legislative action to help the less fortunate in the society to ameliorate their condition so that the social and economic inequality in the society may be bridged. This would necessitate a legislation applicable to a group of citizens otherwise unequal and amelioration of whose lot is the object of state affirmative action. In the absence of doctrine of classification such legislation is likely to flounder on the bed rock of equality enshrined in Article 14. The court realistically appraising the social stratification and economic inequality and keeping in view the guidelines on which the....
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....ring the number of Benches. 25. It is inconceivable considering these figures that there could be any realistic expectation that the Settlement Commission could dispose of within a period of ten months (June 2007 to March 2008) the 3,069 (2490) cases which were filed before the Settlement Commission prior to 1st June 2007. Even assuming a period of thirteen months (commencing at the end of February 2007 when the Finance Bill, 2007 was tabled), from what is stated above, achieving such disposal of cases was clearly impossible. The Delhi High Court in Vatika Farms Pvt. Ltd., has noted this. It is also pertinent to note that the amendments introduced did not bar fresh applications, and further ensured that in respect of pending and fresh applications Government did not lose out even on the interest on the income disclosed by making it mandatory to pay interest due thereon. Thus the Government had recovered both tax and interest on admission itself of the application. 26. In our opinion, the choice of 31st March 2008 as the cut-off date is not supported by any rationale reasons. From the statistics of the Income-tax Department itself it is indisputable that the cut-of....
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....rom the objects sought to be achieved by the impugned action. In other words, if the choice is shown to be thoroughly arbitrary and introduces discrimination violative of Article 14, the date can be struck down." The Court stated the principle "that when a certain date or eligibility criteria is selected with reference to legislative or executive measure which has the pernicious tendency of dividing an otherwise homogeneous class and the choice of beneficiaries of the legislative/executive action becomes selective, the division or classification made by choice of date or eligibility criteria must have some relation to the objects sought to be achieved." In the present case, the choice of the illusory, unreasonable and arbitrary date of 31st March 2008 as the cutoff date, on which pre-June 2007 applications will abate if not disposed of by the Settlement Commission, has no rational relation to the purported objective of the amendments in Chapter XIX-A of the Act introduced by the 2007 Act, viz. "to streamline the proceedings before the Settlement Commission" and "to ensure expeditious disposal of cases pending before the commission and realization of taxes thereon". 30. On ....
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....cut-off date keeping in view the economic conditions, financial constraints and many other administrative and other attending circumstances of the respondents therein. Reliance is also placed on the judgment of this Court in All India Federation of Tax Practitioners vs. Union of India, (1997) 228 ITR 0068. That was a case in which tax payer sought to challenge the VDIS scheme. The challenge was rejected. Large number of authorities were also cited to hold that once the right is created by statute it is open to the same Legislature to also withdraw or take away that right (see Kuldip Nayar & Ors. vs. Union of India & Ors., (2006) 7 S.C.C. 1. In our opinion there can be no quarrel with the proposition. The stand of the Respondents in justifying the cut-off date is based on no material. The petitioners having discharged the burden that the cut-off date is whimsical or arbitrary, the respondents have failed to discharge the burden cast on them. 31. Arbitrary Withdrawal of Earlier Assurance of Confidentiality. The disclosure made by the applicant to the Settlement Commission in Annexure to Form 34B was to be kept confidential unless the application wa....
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.... off within the time stipulated. As much as such an applicant cannot be visited with such great hardship, disadvantage and prejudice for no fault of its own but solely by reason of the inability of the Settlement Commission to dispose of such application by the specified date the provisions of section 245HA(1)(iv) read with Section 245HA(3) of the Act, so read would have to be held as arbitrary, unreasonable and violative of Article 14 of the Constitution,. 34. The arbitrariness becomes more palpable when even in cases where the applicant has paid the additional tax and the interest thereon as required under the amended provisions of the Act and has fully co-operated with the Settlement Commission in ensuring expeditious disposal of its application, the availability of such confidential information to the IT Authorities is made dependent solely on a fortuitous circumstance, viz. the inability or failure on the part of the Settlement Commission to dispose of the application by the specified date, an event over which the applicant has no control. Thus, even two applicants who had filed their applications on the same date, equally fulfilled requirements of payment of tax and ....
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....d consider the case and not impose penalty inspite of the stand of the Department is now subject to adjudication provisions and penal consequences. Under Section 245H on an application being allowed the Settlement Commission was empowered on an applicant satisfying the the conditions provided in Section 245H(1) to grant immunity from prosecution. An applicant is now denied the benefit of consideration from being prosecuted on account of failure by the Commission to dispose off the application and/or for no fault on the part of the applicant. This power continues in the Commission even after the amendment if the Commission disposes of the application within twelve months on or after 1.6.2007. In other words it becomes dependent on the efficiency of the machinery over which an applicant has no control. 37. Does Section 278AB introduced by the Finance Act, 2008 w.e.f. 1.4.2008 make any difference. Is the purported remedy completely illusory and ineffective as the grant of immunity from penalty/prosecution is conditional upon the Commissioner after the application has abated in the proceedings before the I.T. Authority being satisfied that the person "has ....
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....lready been taken it is impossible to conceive that the Income Tax Authority will take a view different from the view taken before the Settlement Commission. . In our opinion, the amendment made by the Finance Act 2008 in no way will remedy the unconstitutionality and the arbitrariness of the impugned provisions and in fact disclose the harshness of the consequences thereunder by attempting to create an illusory remedy. 38. Section 245HA(1)(iv) will, therefore, in the ordinary course have to be held to be arbitrary, unreasonable and violative of Article 14 of the Constitution of India in as such as such an applicant cannot be visited with such great hardship, disadvantage and prejudice for no fault of its own but solely by reason of the inability of the Settlement Commission to dispose of such application by the specified date. Even in cases where the applicant has paid the additional tax and the interest thereon as required under the amended provisions of the Act and has fully co-operated with the Settlement Commissioner in ensuring expeditious disposal of its application, the availability of such confidential information to the Income Tax Authorities is made dep....
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....had held that where the plain literal interpretation produces an absurd or manifestly unjust result which could never have been intended by the legislature, the court might fine tune the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. This Court also held that Courts must construe provisions of statutes consistent with the constitutional mandate and the principle to avoid a provision being rendered unconstitutional. Therefore, we held that the purported object of the amendment was not to protect an assessee who dragged on an appeal whilst enjoying the benefit of an interim order but correspondingly to impose a duty on the Tribunal to dispose of an appeal within the prescribed time limit. The Court, therefore, read the provision as imposing a limitation on the power of the Tribunal to continue interim relief in a case where the hearing of the Appeal has been delayed for acts attributable to the assessee. Thus the Court observed that it cannot mean that a construction be given that the power to grant interim relief is denuded even if the acts attributable are not of the assessee but of the Revenue or of the....
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....egislature. ... A Judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases." 44. In Arun Kumar v Union of India [286 ITR 89 (SC)] The Hon'ble Supreme Court had to consider the validity of Rule 3 of the Income Tax Rule as amended in 2001. The Court "read down" the provisions of the Rule, holding the same only to apply in cases where there was "a concession" in respect of accommodation. Where there is no concession the Court held the Rule can not apply. The Court also laid down - "In considering the validity of a statute the presumption is always in favour of constitutionality and the burden is upon the person who attacks it to show that there has been transgression of constitutional principles. For sustaining the constitutionality of an Act, a court may take into consideration matters of common knowledge, reports, preamble, history of the times, object of the legislation and all other facts which are relevant. It mu....
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....n intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. [See Bhudan Singh and Ano v Nabi Bux and Ano - (1969) 2 SCC 481, K. P. Varghese v. ITO -(1981) 4 SCC 173, C.W.S. (India) Ltd. v C.I.T. -1994 Supp (2) SCC 296,Calcutta Gujarati Education Society v Calcutta Municipal Corpn. - (2003) 10 SCC 533. 48. In Narang Overseas P. Ltd. v ITAT [supra] the Division Bench referred to the observation of the Supreme Court in C.I.T. v J.H. Gotla - (1985) 156 ITR 323] that: "Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than injustice, then such a construction should be preferred to the literal construction." 49. This Court whilst interpreting the third proviso to Section 254(2A) in Narang Overseas P. Ltd. v ITAT had relied on a decision of the Supreme Court in Commr. Of Customs & Central Excise v Kumar Cotton Mills (P) Ltd (supra) which had considered a similar provision as contained in section 35-C(2A) ....
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....e applicant's control. As set out above, the Court will presume that the legislature enacts laws which are honest, fair and equitable and that the legislative process is influenced by considerations of justice and reason. Accordingly, an interpretation leading to such an unjust, inequitable, harsh and absurd result must be rejected. Consequently section 245HA(1)(iv) must be read in the manner set out above only to applications where the applicants have, by some willful act or omission, prevented the Settlement Commission from fulfilling its statutory mandatory duty under section 245D(4A) only such applications will abate. will abate. To do so will also avoid the inequitable and unjust result whereby an applicant, who has been induced to pay the tax on the income disclosed and interest thereon by reason of a statutory assurance that its application will be settled by the Settlement Commission on or before 31st March 2008, is penalized for no fault of its own by the abatement of its application and the attendant consequences, including disclosure of the confidential information and material to the IT Authorities for use in proceedings before them as also possible proceedings for pena....
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.... words'". The Court also relied on the decision in Siraj-ul-Haq v S.C. Board of Waqf AIR 1959 SC 198. 54. By reading the words "any other application made under section 245C" in section 245HA(1)(iv) as "any other application made under section 245C, where due to reasons attributable to the assessee" this Court would avoid rendering any part of either section 245D(4A)(i) or section 245HA(1)(iv) otiose, meaningless or redundant. The two provisions, read in such a harmonious manner, would mean that the Settlement Commission must fulfill its mandatory statutory duty in disposing of such applications as are referred to in section 245D(4A)(i) by the date specified therein except where prevented from doing so due to any reason attributable on the part of the applicant, and that an application in respect of which the Settlement Commission has been prevented from fulfilling the aforesaid mandatory statutory duty due to any reasons attributable on the part of the applicant shall abate on the specified date under section 245HA(1)(iv). In this manner both section 245D(4A)(i) and section 245HA(1)(iv) will have applicability, meaning and effect. We may also clarify that the expression '....