I-T – Settlement Commission – mandatory payment of interest – new provisions challenged – rights of citizens cannot be trampled over by Government, under the banner of speedy justice : Delhi HC

NEW DELHI, JAN 07, 2008 : IN this batch of writ petitions, the prayer is that the provisions of Section 245D(2A), Section 245D(2D), Section 245D(4A) and Section 245HA(1) of the Income Tax Act, 1961 be declared unconstitutional. The provisions under challenge relate to settlement applications made by the Petitioners to the Settlement Commission under Section 245C of the Act prior to 1st June, 2007.

Broadly speaking, the sections provide for the following:

(i) If a settlement application is not yet admitted for hearing, then it would be deemed to be admitted for hearing if the applicant pays the admitted or additional income tax and interest thereon or before 31st July, 2007. [Section 245D(2A)].

(ii) If the applicant pays the additional tax and interest before 31st July, 2007 then the date of admission of the application shall be deemed to be 31st July, 2007. [Explanation to Section 245D(2A)]. If the applicant does not pay the additional tax and interest thereon before 31st July, 2007 then the application shall be deemed to have been rejected on that date. [Explanation to Section 245D (2A)].

(iii) If a settlement application had earlier been admitted for final disposal (prior to 1st June, 2007) even then the additional tax and interest thereon has to be paid before 31st July, 2007. [Section 245D(2D)]. If the additional tax and interest is not paid, the consequences laid down in the Explanation to Section 245D(2A) would follow. This is notwithstanding any extension of time having earlier been granted by the Commission for payment of additional tax.

(iv) Every settlement application filed before 1st June, 2007 and admitted for hearing by the Commission shall be finally decided in accordance with Section 245D(4) of the Act before 31st March, 2008. [Section 245D(4A)].

(v) Even if an applicant who has filed a settlement application before 1st June, 2007 pays the additional tax and interest before 31st July, 2007 but the Commission does not dispose of the settlement application on or before 31st March, 2008 then the settlement application would abate on that date. [Section 245HA(1)].

(vi) The consequence of abatement of a settlement application in terms of Section 245HA(1) is that the proceeding before whom the case was pending prior to 1st June, 2007 shall continue before that authority as if no settlement application was made under Section 245C of the Act. [Section 245HA(2)].

(vii) The authority acting under Section 245HA(2) of the Act would be entitled to use all materials and information available with the Commission during the course of proceedings before him. [Section 245HA(3)].

The provisions under challenge were introduced in the Act by the Finance Act, 2007 with effect from 1st June, 2007 and this batch of writ petitions was filed in the last week of July, 2007. Between 26th July, 2007 and 30th July, 2007, the High Court heard the interim applications for stay filed by the Petitioners and passed interim orders to the effect that the settlement application filed by the Petitioners would not abate due to non-payment of interest on the additional tax and that the Commission should dispose of their settlement application on or before the cut-off date of 31st March,
2008 as postulated by the Finance Act, 2007.

Procedure prior to 1st June, 2007

1. The pre-condition was that the applicant was required to deposit the additional amount of income tax payable on such income. There are some exceptions to this general rule but these do not concern us for the time being.

2. The Commission was entitled to reject the application or to allow it to be proceeded with, that is to say that it was entitled to admit the settlement application for final disposal.

3. Upon admission of the settlement application, the applicant was required to pay the additional income tax on the income disclosed in the settlement application.

4. an applicant was not required to pay any interest on the additional income tax except where the Commission had extended time for payment of the said amount or where it had allowed payment thereof by installments.

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5. However, at the time of passing the final order under Section 245D (4) of the Act, the Commission could pass an order with regard to payment of interest on the additional income tax.

After 1st June, 2007

1. Apart from the additional income tax, the applicant is also required to pay interest thereon and that the total payment is required to be made on or before 31st July, 2007.

2. the benefit that an applicant may have obtained of making a deferred payment or payment in installments, is given a complete go-bye, making it mandatory for the applicant to deposit both the
additional tax as well as interest thereon on or before 31st July, 2007.

3. Additionally, in terms of Section 245HA(1) of the Act, if the applicant does not either deposit the additional income tax and the interest thereon by 31st July, 2007, the settlement application will abate on that date.

4. Furthermore, if the Commission fails to dispose of the settlement application finally on or before 31st March, 2008 then too, the settlement application will abate.

5. In either event, the applicant would then be liable to undergo a regular assessment.

The problem with undergoing a regular assessment, in so far as an applicant is concerned, is that the Revenue, in terms of Section 245HA(3) of the Act, is entitled to use all the material and information produced by the applicant before the Commission, as indeed all other material available with the Commission. An applicant faced with such a situation, cannot withdraw his settlement application, nor is he entitled to any refund of the additional income tax and interest thereon, if the settlement application abates due to its non-disposal by the Commission.

Why this amendment?

The Revenue informed the Court that because cases were pending before the Commission for several years, and were not being disposed of, it became necessary for Parliament to introduce the drastic measures that it did and that we cannot question the wisdom of Parliament in this regard.

The Court observed that the simple answer to such a submission is that if the Commission does not function effectively, the Government should find out the causes for its deficient functioning and remove the bottlenecks. Rather than do that, the Act was amended.

Based on a CAG report, the High Court observed that the Commission has not been able to dispose of pending settlement applications fast enough to cope up with the fresh institutions.

The Court further observed, “The consequence of non-disposal of the pending settlement applications by the Commission is that a large number of them will abate and the applicants will have to face regular assessment on the basis of material that they have disclosed in confidence along with their settlement applications. This will, no doubt, seriously prejudice the applicants but the Respondents do not seem to be concerned about it. 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.

It was urged by the Additional Solicitor General that there is no vested right in the Petitioners to seek a settlement of their cases and that there was always a requirement in law, even prior to the impugned amendments, that the applicant should pay both the admitted amount of tax on the income disclosed as well as the interest thereon.

The High Court did not agree with this submission and observed, that none of the Petitioners here, some of whom have been waiting for the disposal of their applications by the Commission for over ten years, have been ever called upon to pay interest on the admitted tax relatable to the disclosed income.”

The Additional Solicitor General submitted that the integrity of the applicants are doubtful and that is why they have applied for settlement of their cases.

The High Court could not proceed on this assumption since every person is presumed to be innocent until he is found guilty and in so far as the settlement applications pending before the Commission are
concerned, there is no question of anybody being guilty or innocent. There may be a variety of reasons prompting an applicant to approach the Commission for settlement of their case, some of which may have absolutely no connection with the integrity or otherwise of the applicant.

The High Court further observed,

1. However, since the Respondents have not expressed their inability to decide the settlement application of the Petitioners before 31st March, 2008, we assume (theoretically) that it is possible that the Respondents may set up a very large number of Benches of the Commission to deal with the pending settlement applications so that they are disposed of on or before 31st March, 2008.

2. We certainly cannot overlook this theoretical possibility but as things stand today, it seems a remote possibility considering what we have been told by learned counsel for the Petitioners that over the last few months since 1st August, 2007, less than 15 settlement applications have been disposed of by the Commission.

3. Where we really find difficulty in proceeding to decide on the merits of the writ petition is the 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.

4. In view of this handicap, we are not inclined to dispose of the writ petitions finally at this stage because of 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.

5. What the factual position would be can only be known when we are quite close to 31st March, 2008. In fact, the learned Additional Solicitor General had at one point of time submitted that the present writ petitions may be pre-mature since the crucial date of 31st March, 2008 is still quite far away.

So the High Court has decided to wait till 31st march 2008 to see whether the Settlement Commission is able to dispose of all the applications by then, to decide the issue of the constitutional validity observing, “For the present, we need only reiterate that the Respondents have not submitted or stated that they cannot dispose of the pending settlement applications before 31st March, 2008. That being so, we expect them to do so” So the stay is not vacated.__._,_.___

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