TaxTMI 
TaxTMI 
2009 (8) TMI 86
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....e, 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 contained in such report and having regard to the nature and circumstances of....
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....ne, 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 been passed within the time or period specified under sub-section (4A) of Section 245D, the proceedings before the Settlement Commissioner shall abate on the specified date. ....
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....der 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 derived: Provided that where the application for settlement under Section 245C had been made before the 1st day of June, 2007, the Commissioner may grant immunity from prosecution for any offence under this Act or under the Indian Penal Code (45 of 1860) or under any other Central Act for the....
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....ct 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 light of that approached this Court for the relief as prayed for. The petition was admitted on 12th March, 2008 as similar other petitions had been admitted and interim order was passed not to treat the application as having abated. 10. It is the case of the petitioner that the provisions of Section 245HA(1)....
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....on 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 in an entirely different way from those by the Assessing Officer. (ix) The Assessing Officer being a litigant himself before the Commission may not be realistic and provide fair and even-handed treatment to the applicant. (x) The criteria for abatement, being the inability of the Commission to dispose of the applications, is not a valid and reasonable one in the eyes of law and su....
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....ciples. 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. 13. Before answering the issue we may briefly set out the historical background of the Settlement Commission. The Settlement Commission was established pursuant to the introduction of Chapter XIX-A in the Act and Chapter V-A in the Wealth-tax Act (w.e.f. 1st April 1976 vide the Taxation Law Amendment Act, 1975). The said provisions were introduced on the basis of the recommendations in the Final Report (submitted in December 1971) ....
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....cers 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 law will, however, be confined to the case under settlement and will not in any way interfere with the interpretation of law in general. No appeal will lie against the decision of the Tribunal by the petitioner or the Department, whether on questions of fact or of law. 2.34 The success of this measure will, to a very large extent, depend on the confidence which this Tribunal can inspire in the minds of the taxpayers as to its fairness and impartiality. For this re....
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....ssioner 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-A of the Act, the Supreme Court [in C.I.T. v B.N. Bhattacharjee - (1979) 4 SCC 121 observed: "It is not inappropriate to state that the policy of the law as disclosed in Chapter XIXA is not to provide a rescue shelter for big tax-dodgers who indulge in criminal activities by approaching the Settlement Commission. The Settlement Commission will certainly take due note of the gravity of the economic offences on the wealth of the nation which the Wanchoo Committee had emphasised and will exercise its power of immunisati....
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.... 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 application filed by the applicant was rejected as not admitted, the disclosure made by the applicant in the said Annexure and the accompanying material would not be available to the IT Authorities. (ii) Once the Settlement Commission had admitted the application filed under Section 245C of the Act, the Settlement Commission alone had the power to pass the final settlement order and there was no provision for the application to revert back to the IT Authorities for any reason whatsoever. (iii) While there was no mandatory time limit provided by the Act within which the Settlement Commission was obliged to pas....
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....ore 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 abatement of such application, with the attendant consequences set out hereunder. (c) By virtue of section 245D(4A) as substituted by the 2007 Act, in respect of an application filed before June 2007 a mandatory statutory duty was cast on the Settlement Commission to pass a final settlement order under sub-section (4) of section 245D on or before 31st March 2008. As inserted by the 2007 Act, Section 245HA(1)(iv) of the Act provides that in the case of such an application, in the event that the Settlement Commission has not passed a final settlement order on or before 31st March 2008 as mandated by section 245D(4A), the said application would abate on the aforesaid date. An a....
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....osure. 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 and disposal of settlement applications during the F.Y. 2007-08. (i) Applications received on or before 31-5-2007 and pending on 31-3-2008: Particulars Delhi Mumbai Kalkata Chennai Total Applications received as on 1-4-2007 1103 738 311 286 2438 Add: Applications received from 30-6-2007 to 31-3-2008 685 266 265 55 1271 Total for disposal 1788 1004 576 341 3709 Less Disposal between 30-6-2007 and 31-3-2008 563 340 446 326 1675 Balance as on 31-3-2008 1225 664 130 15 2034 (ii) Applications received on or after 1-6-2007 and till 31-3-2008: Particulars Delhi ....
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.... 2006-07 as 100, 88, 75, 85 and 101 respectively (See Vatika Farms Pvt. Ltd. vs. Union of India (Delhi) (2008) 302 ITR 98 (Delhi)." 21. Considering the provisions pursuant to the F.A. 2007 it would be clear that the Legislation has created only two classes of applicants. Those applicants whose applications were pending before 1st June, 2007 and others whose applications were filed on or after 1st June, 2007. The Legislature, therefore, identified only two classes based on the date of the application. It would be difficult to accept the contention that this classification by itself is unreasonable, considering the object of the Legislature in making the classification is based on the date of application, with the object of disposal of the applications within a time frame. 22. The real controversy, however, arises on account of fixing 31st March, 2008 as the date for disposal of those applications which were filed and pending as on 1st June, 2007. Such of these applications which could not be disposed of on or before 31st March, 2008 stand abated. Therefore, in one homogeneous class of applicants who had filed and whose applications were pending as of 31st June, 2007 ....
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....y or non-arbitrariness pervades Article 14 like a brooding omnipresence." 11. The decisions clearly lay down that though Article 14 forbids class legislation, it does not forbid reasonable classification for the purpose of legislation. In order, however, to pass the test of permissible classification, two conditions must be fulfilled, viz., (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from those that are left out of the group; and (ii) that that differentia must have a rational relation to the objects sought to be achieved by the statute in question, (see Shri Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar and Ors). The classification may be founded on differential basis according to objects sought to be achieved but what is implicit in it is that there ought to be a nexus i.e., causal connection between the basis of classification and object of the statute under consideration. It is equally well settled by the decisions of this Court that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure. 12. After an exhaustive review of almost a....
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....he object sought to be achieved by the Act. 13. The other facet of Article 14 which must be remembered is that it eschews arbitrariness in any form. Article 14 has, therefore, not to be held identical with the doctrine of classification. As was noticed in Maneka Gandhi's case in the earliest stages of evolution of the Constitutional law, Article 14 came to be identified with the doctrine of classification because the view taken was that Article 14 forbids discrimination and there will be no discrimination where the classification making the differentia fulfils the aforementioned two conditions. However, in EP. Royappa v. State of Tamil Nadu it was held that the basic principle which informs both Articles 14 and 16 is equality and inhibition against discrimination. this Court further observed as under: From a positivistic point of view, equality is antithetic to arbitrariness. In fact, equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is, therefo....
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....only be satisfied if the State establishes not only the rational principle on which classification is founded but correlate if to the objects sought to be achieved. This approach is noticed in Ramana Dayaram Shetty v. The International Airport Authority of India and Ors., when at page 1034, the Court observed that a discriminatory action of the Government is liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory." 24. Arbitrary Cut-off Date The National Website of the Income-tax Department, inter alia, states that "During the period 1976 to 1983, the Settlement Commission has settled 1213 cases of which only one case was admitted by the Supreme Court." This works out to an average disposal rate of around 152 cases a year during the aforesaid 8 year period. In Special Leave Petition (C) No. 17498 of 2008 filed by the Union of India, the Settlement Commission and the Director of Income Tax (International Taxation) Mumbai it is stated that the average rate of disposal of cases until 2006-07 has been about 200 cases a year. In t....
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....mittee and the rationale given by it for establishing the Settlement Commission are still valid and applicable. In the present circumstances, the choice of 31st March 2008 as the cut-off date cannot but be described as a date of imaginative exercise having no basis or rationale whatsoever. 27. By fixing such an unrealistic and arbitrary cut-off date, into which of the two abovementioned classes an applicant would fall, depended entirely on the fortuitous circumstance of the Settlement Commission, entirely at its whim and fancy, deciding whether or not to dispose of its application by 31st March 2008. Thus, even two applicants who had filed their applications on the same date could be classified differently on the basis of aforesaid fortuitous circumstance. 28. A Constitution Bench of the Supreme Court in Union of India v M.V. Valliappan - (1999) 6 SCC 259, held that "It is settled law that the choice of a date as a basis for classification cannot always be dubbed as arbitrary even if no particular reason is forthcoming for the choice unless it is shown to be capricious or whimsical in the circumstances; while fixing a line, a point is necessary and there is no mathematical or l....
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....l by the Commission. In the affidavit filed before this Court it is the stand of the respondents that the object of the amendment was for early settlement of the cases. The cut-off date did not take into consideration whether the failure to dispose of the application is on account of any act on the part of the applicant or not . The pendency of matters itself will show that the matters could not be disposed of as the adjudicating machinery created by the Act (Legislature) was not in a position to dispose of the applications on or before 31st March, 2008 for no fault of the applicant. The application before the Commission was dependent on various circumstances like the matter pending before a particular Bench, a particular matter being taken up by the Commission earlier to others which were pending before it and/or sheer inability to dispose of the petitions. In our opinion, considering the material on record the fixation of date was capricious and/or whimsical. The Legislature having statistics before it of the inability of the machinery created by it to dispose of the applications, nevertheless choose to fix the date which was unrealistic and incapable of being adhered to by....
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....plication. The confidential information could only be used by the Settlement Commission. 32. As a consequence of the amendments introduced by the 2007 Act, an application which abates for no fault of the applicant would, under section 245HA(2) revert back to the IT Authorities as if no application had, in the first place, been made under section 245C to the Settlement Commission. As inserted by the 2007 Act, Section 245HA(3) of the Act further provides that where an application so reverts to the IT Authorities upon abatement, the IT Authorities, including the assessing officer will be entitled to use all material and other information produced by the applicant before the Settlement Commission, including that disclosed in confidence based on the protection provided by law when the application was filed. 33. Section 245HA(3) thus has the effect of severely prejudicing the interest of applicants who in good faith that the case would be settled were induced to part with the confidential information based on the bona fide belief and a legitimate expectation, on the basis of the law in force when such applications were filed, that settlement orders would be passed and confidential in....
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....o this submission is that the Legislature has advisedly amended the provisions of the Act and introduced Section 273AA. In our opinion Section 273AA as inserted only confers a power on the Commission for granting immunity from penalty. It does not prevent the authorities under the I.T. Act from using the confidential information which was filed including for prosecution and which was treated as confidential even if the petitioners application was not allowed to be proceeded with. What would be effect of Section 278AB introduced by the Finance Act 2008, will be considered separately. 36. Similarly, consequent to the amendment, if the application abates even for the reasons of the settlement Commission's inablity or failure to decide the same by the specified cut-off date the confidential information becomes available to the Authorities, including the Assessing Officer. The consequences of therefore, upholding Section 245HA(3) would be to cause prejudice to the interest of the applicants, who were induced to part with the confidential information based on the bona fide belief and a legitimate expectation, on the basis of the law in force when such applications were filed, that sett....
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.... before the Settlement Commission in most pending cases that the disclosure by an applicant is not full and true, will in purporting to exercise the aforesaid powers do a volte face and declare such disclosure as full and true even if now what he considers is full and true disclosure before the I.T. Authorities the true and full disclosure is before proceedings before the I.T. Authorities. The Commissioner by the very nature of his post is a part of taxing machinery. The Commissioner, who may have taken a stand on the application before the Settlement Commission, has now become the judge as in the Petitioners own case by filing a Petition challenging the order to proceed with the application. This would violate the basic principles of natural justice which is inherent in the said provisions of the Act and the purported exercise of power thereunder will result in a flood of litigation impugning such purported exercise. A further anomaly is that in cases where the Settlement Commission has allowed the application to be proceeded with on a decision that the applicant's disclosure is full and true, the Commissioner will now sit in effect as an appellate authority over such decision of ....
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....ch independent person and statutorily conferred on persons who are not independent or are otherwise have an interest in the matter, then such provisions of law are per se unreasonable and the provisions per se contravene the values attached to the principles of natural justice. When there is substantive unreasonableness in a statute, it may have to be declared unconstitutional and the decision making process may suffer from an institutional bias." 40. Reading Down the Provisions to Uphold Their Constitutionality: The choice, therefore, before the Court is whether considering the discussion above, to strike down Section 245D(4A)(1), Section 245HA(1)(iv) and Section 245HA(3) or read them down to uphold their constitutionality. We may at this stage note that in the petition the petitioners have not sought a prayer challenging the vires of Section 245D(4A)(1), on the ground that fixing of 31st March, 2008 for disposal of applications filed before 1.6.2007 is arbitrary, though the said plea has been taken and arguments advanced.. This Court in Narang Overseas Pvt. Ltd. vs. ITAT, (2007) 295 ITR 22 (Bom.) read down the provisions of Section 254(2A) of the Act as amended by the 2007 Ac....
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.... in service on March 31, 1979 and retiring from service on or after that date" and "the new rates of pension are effective from April 1, 1979 and will be applicable to all service officers who became/become non-effective on or after that date" occurring therein, in order to uphold the constitutional validity of the impugned memoranda. In paragraph 59 of the judgment, the Court observed as follows: "In reading down the memoranda, is this Court legislating? Of course 'not'. When we delete [sic] basis of classification as violative of Article 14, we merely set at naught the unconstitutional portion retaining the constitutional portion." 43. In Ahmedabad Municipal Corpn v. Nilaybhai R. Thakore [(1999) 8 SCC 139 the Supreme Court read the words "and includes a permanent resident of the Ahmedabad Municipality who acquires the above qualifications from any of the high schools or colleges situated within the Ahmedabad Urban Development Area" into the impugned rule in order to save the same from offending Article 14. The Court did so "with a view to iron out the creases in the impugned rule which offends Article 14". The Court relied on "the famous and oft-quoted principle" relied on by....
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....he provisions if it becomes necessary to uphold the validity of the law." 45. It has been submitted on behalf of the petitioners in this petition and other companion petitions that to avoid striking down, in their entirety, the impugned provisions as unconstitutional, this Hon'ble Court ought to read section 245HA(1)(iv) as under: "in respect of any other application made under section 245C, where due to reasons attributable to the assessee an order under subsection (4) of section 245D has not been passed within the time or period specified under sub-section (4A) of section 245D" 46. Just, Equitable and Reasonable Interpretation It is further submitted that following settled principles of statutory interpretation, this Hon'ble Court would read the provisions of section 245HA(1)(iv) in the manner suggested by the petitioners. viz. it is only 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) would stand the application abate. 47. Ordinarily the Court assumes that that the entire legislative process is influenced by considerations of ju....
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....eason of other administrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed of within the time specified. ... ... However, we should not be understood as holding that any latitude is given to the Tribunal to extend the period of stay except on good cause and only if the Tribunal is satisfied that the matter could not be heard and disposed of by reason of the fault of the Tribunal for reasons not attributable to the assessee." 50. The principles set out above in the abovementioned decisions squarely apply in the present case where the purported objective of the amendments introduced in Chapter XIX-A by the 2007 Act is to streamline the proceedings before the Settlement Commission and to ensure expeditious disposal of pending cases. The said amendments cannot be construed as punishing an applicant for the inability or failure of the Settlement Commission to dispose of its application within the period specified in section 245D(4A) where such delay in disposal is not attributable to the applicant. The time limit for disposal of an application under Section 245D(4A)(1) will have to be read as 'may' to the extent that it is not on ac....
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....slature are to be presumed" See Ram Krishna Dalmia v Justice Tendolkar, it must also be presumed that the Settlement Commission (being an instrumentality of the State) would fulfill the aforesaid mandatory statutory command and dispose of all such applications by the specified date. In that case there would be no question of any application abating under section 245HA(1)(iv) by reason of an order under section 245D(4A)(1) not having been passed within the specified time, and section 245HA(1)(iv) being rendered otiose and redundant. Accordingly, for an application to abate under section 245HA(1)(iv) it must mean that Parliament assumed that the Settlement Commission would disregard the aforesaid mandatory statutory command to dispose of all such applications by the specified date - an assumption or intention, it is submitted, that can never be ascribed to Parliament. However, even if such an intention could be ascribed to Parliament, the result would necessarily be to render section 245D(4A)(i) redundant and otiose. 53. In Surjit Singh Kalra v. Union of India (1991) 2 SCC 87, the Supreme Court relied on Craies' Statute Law (7th Edn., pg 109). The Court held "True it is not p....