New Hope Foundation Vs Union of India (Kerala High Court)
Summary: The Kerala High Court, in New Hope Foundation v. Union of India & Ors., 2024:KER:64938, WP(C) No.44252 of 2023 and 12 connected writ petitions, decided on 22 August 2024, examined the eligibility of assessees to file applications before the Income-tax Settlement Commission following its abolition by the Finance Act, 2021. The principal controversy was whether assessees subjected to a search under Section 132 of the Income-tax Act, 1961, before the statutory transition could maintain settlement applications under Section 245C, even though notices initiating proceedings under Section 153A were issued after 1 February 2021. The petitioners included New Hope Foundation, Aayana Charitable Trust, Growth in Fraternity Trust, Love India Ministries, Believers Eastern Church and other charitable organisations and individuals. The Finance Act, 2021 amended Chapter XIX-A of the Income-tax Act, abolished the Settlement Commission with retrospective effect from 1 February 2021 and introduced the Interim Board for Settlement to deal with pending cases. The petitioners contended that searches conducted before the statutory change had already brought their assessment years within the scope of proceedings eligible for settlement. However, the Interim Board rejected their applications on the ground that no qualifying proceedings were pending on the prescribed cut-off date because the relevant assessment notices had been issued subsequently. The High Court was therefore required to determine whether settlement eligibility depended upon the date of search, the date of issuance of the assessment notice or the retrospective cut-off introduced through the Finance Act, 2021.
The petitioners argued that the right to approach the Settlement Commission could not be retrospectively withdrawn merely because the Income Tax Department issued notices under Section 153A after the statutory cut-off. They submitted that the search and assessment proceedings under Sections 132 and 153A were intrinsically connected, since a search reopened the relevant assessment years for examination irrespective of whether the formal notice was issued immediately or subsequently. Reliance was placed on the definition of ‘case’ under Section 245A(b), read with Section 245C, to contend that settlement eligibility should be determined by the substantive pendency of assessment proceedings rather than the administrative timing of notices. The petitioners further emphasised that the Finance Bill, 2021 was introduced on 1 February 2021 but received Presidential assent only on 28 March 2021, and the enacted legislation came into force on 1 April 2021. They relied on Jain Metal Rolling Mills v. Union of India, Senapati Santaji Ghorpade Sugar Factory Ltd. v. ACIT, Vishwakarma Developers v. CBDT and Vetrivel Infrastructure v. DCIT in support of preserving settlement rights accruing before the legislation became operative. Another important submission concerned CBDT Order F.No.299/22/2021-Dir(Inv.III)/174 dated 28 September 2021, issued under Section 119(2)(b), which permitted eligible assessees to file settlement applications up to 30 September 2021. According to the petitioners, denying settlement merely because the Department issued notices after the cut-off would create an arbitrary distinction between persons subjected to searches during the same period. The Revenue opposed these submissions, contending that Explanation (iiia) to Section 245A(b) expressly treated assessment proceedings under Sections 153A and 153C as commencing from the date of issuance of the relevant notice. It further argued that the CBDT’s extension of the filing deadline could not revive the abolished Settlement Commission or enlarge the statutory class of eligible applicants.
After examining the rival submissions, Justice Gopinath P. undertook a detailed interpretation of Chapter XIX-A of the Income-tax Act, particularly Sections 245A, 245B, 245AA and 245C, together with the provisions governing search assessments. The Court noted that the Finance Act, 2021 inserted Section 245C(5), prohibiting fresh settlement applications on or after 1 February 2021, and provided for the abolition of the Settlement Commission and establishment of an Interim Board to dispose of pending applications. However, the Court held that the definition of ‘case’ under Section 245A(b) could not be interpreted as being controlled or restricted by Explanation (iiia) to that provision. While Explanation (iiia) specified that assessment or reassessment proceedings under Section 153A would formally commence upon issuance of the notice and conclude upon completion of the assessment, that deeming provision did not necessarily determine when a case became pending for the purposes of settlement. The Court examined the legislative amendments made through the Finance Act, 2010, including the deletion of the earlier restrictive provisions, and concluded that the statutory definition had to be read in a manner consistent with the broader legislative scheme. A search under Section 132 had the effect of bringing the assessment years covered by Section 153A within the scope of assessment or reassessment, including years for which assessments had previously been completed. Consequently, a ‘case’ for settlement purposes could be regarded as pending from the date of search or immediately thereafter, even though the formal Section 153A notice was issued subsequently. The Court considered it inappropriate to equate the commencement of formal assessment proceedings with the substantive existence of a pending case in every situation. Such a restrictive interpretation would allow the timing of departmental notices to determine whether similarly situated assessees could exercise a valuable statutory remedy.
The High Court also considered the interpretation of the transitional provisions adopted by other High Courts. It examined the Madras High Court’s judgment in Jain Metal Rolling Mills v. Union of India, which recognised that the retrospective amendment could not extinguish settlement rights already accrued before the Finance Act, 2021 came into force unless Parliament had clearly intended that consequence. The Kerala High Court also considered the Bombay High Court judgments in Senapati Santaji Ghorpade Sugar Factory Ltd. and Vishwakarma Developers, which adopted a substantially similar approach to protecting settlement rights during the legislative transition. The Court expressed agreement with these decisions and considered the effect of the CBDT order issued under Section 119(2)(b), which enabled eligible applicants to submit their applications until 30 September 2021. The Court distinguished between extending the actual filing period for persons already entitled to seek settlement and conferring eligibility upon persons who had no such entitlement under the amended legislation. It recognised that the CBDT order facilitated the exercise of existing settlement rights and did not independently restore the abolished Settlement Commission for every category of assessee. The Court therefore concluded that the relevant dividing line for the petitioners was whether the search under Section 132 had occurred on or before 31 March 2021. Where that condition was satisfied, the subsequent issuance of the Section 153A notice did not defeat settlement eligibility. The judgment also clarified that the extended deadline of 30 September 2021 applied to the filing of applications by persons satisfying the applicable conditions, and did not create an unrestricted right to settlement for searches conducted after the statutory transition.
Accordingly, the Kerala High Court held that **where a search under Section 132 had been conducted on or before 31 March 2021, the assessee was entitled to maintain an application for settlement under Section 245C, provided the application had been filed on or before 30 September 2021**. Such applications were required to be considered and disposed of in accordance with law by the Interim Board for Settlement constituted under Section 245AA. Conversely, the Court clarified that a settlement application could not be maintained on the basis of a search conducted on or after 1 April 2021, since the Settlement Commission had ceased to exist under the amended statutory framework. As the searches concerning the petitioners had admittedly taken place before 31 March 2021, the Court ruled that their applications could not be rejected solely because the relevant notices were issued after the cut-off date. The orders of the Interim Board declaring the settlement applications not maintainable were consequently set aside, and the applications were restored to its files for disposal in accordance with the legal principles declared in the judgment, subject to the applications having been filed within the extended deadline. The Court did not itself settle the tax liabilities or determine the merits of the disclosures made by the applicants; those matters remained for examination by the Interim Board under the applicable statutory provisions. The decision is significant for assessees affected by the transition from the Income-tax Settlement Commission to the Interim Board for Settlement, as it establishes that procedural delay in issuing search assessment notices cannot, by itself, extinguish the settlement rights of persons whose cases had substantively arisen before the relevant legislative cut-off.
Cases Discussed
1. Vishwakarma Developers v. Central Board of Direct Taxes & Ors., 2024 SCC OnLine Bom 2507 (Bombay High Court) — Relied upon for the proposition that the retrospective operation of the Finance Act, 2021 could not extinguish settlement rights accruing before 1 April 2021. The Kerala High Court agreed with the Bombay High Court’s interpretation of the transitional settlement provisions.
2. Vetrivel Infrastructure v. Deputy Commissioner of Income-tax, (2024) 164 taxmann.com 123 (Gujarat High Court) — Cited by the petitioners concerning settlement applications made during the transitional period. The Revenue sought to distinguish the decision by arguing that the relief granted was confined to cases satisfying the relevant notice-related conditions.
3. Senapati Santaji Ghorpade Sugar Factory Ltd. v. Assistant Commissioner of Income Tax, Central Circle 1(1) & Ors., MANU/MH/2202/2024 (Bombay High Court) — Followed for the interpretation that vested rights of eligible assessees to approach the Settlement Commission could not be retrospectively defeated merely through the statutory cut-off introduced by the Finance Act, 2021.
4. Jain Metal Rolling Mills v. Union of India & Ors., MANU/TN/6417/2023 (Madras High Court) — Followed for the proposition that Section 245C(5), as amended by the Finance Act, 2021, had to be interpreted so that the retrospective cut-off did not extinguish settlement rights accruing before the legislation came into force. The decision also considered the CBDT’s extension of the filing period.
5. Sushil Kumar Goyal & Ors. v. Principal Commissioner of Income Tax-1 & Ors., 2023 SCC OnLine Del 2921 (Delhi High Court) — Distinguished and expressly disagreed with. The Kerala High Court declined to adopt the restrictive interpretation of the definition of ‘case’ under Section 245A(b) expressed in that decision.
6. N.T. Veluswami Thevar v. G. Raja Nainar, AIR 1959 SC 422 (Supreme Court) — Relied upon for the principle that where two statutory interpretations are possible, courts should prefer the interpretation that avoids anomalous results. The Kerala High Court applied this principle while interpreting the scope of ‘case’ under Section 245A(b) following the deletion of the restrictive provisos.
