S. 254 D (4A) was amended by the Finance Act 2007 to provide that if in respect of an application filed before 1.6.2007, the Settlement Commission did not pass a final order before 31.3.2008, the proceedings would abate. S. 245 HA (3) provided that the consequence of such abatement was that the income-tax authorities could, in making the assessment, use all the confidential material furnished by the assessee before the Settlement Commission. The said provisions were challenged as being ultra vires Article 14 of the Constitution. HELD, upholding the challenge:
(i) Though Article 14 does not prohibit classification, the same has to be reasonable and not arbitrary. The FA 2007 created two classes of applicants – those whose applications were pending as of 1.6.2007 and those who filed thereafter. While the classification was not unreasonable, the choice of 31.3.2008 as the cut-off date was arbitrary & irrational. The question whether an application could be disposed of by 31.3.2008 depended on the fortuitous circumstance of the Settlement Commission at its whims and fancies deciding to do so. The said date had no rational relation to the object of expeditious disposal of cases;
(ii) S. 245HA (3) which makes available to the AO the hitherto confidential information furnished by the applicant has the effect of severely prejudicing the assessee for no fault of his but solely for the inability of the Settlement Commission to dispose of the application by the specified date. This provision is also arbitrary, unreasonable and violative of Article 14;
(iii) S. 278 AB inserted by the FA 2008 to confer power in the Commissioner to grant immunity from penalty and prosecution in abated proceedings is no remedy to the unconstitutionality because it is inconceivable that the CIT who may have earlier objected to the maintainability of the application would now hold the applicant to be worthy of immunity;
(iv) The fixing of the cut-off date u/s 245 D (4A) (1), the abatement of proceedings u/s 245HA (1)(iv) & the making available of confidential information u/s 245HA (3) for no fault of the applicant are ultra vires the Constitution. In order to save these provisions from being struck down as being unconstitutional, they will have to be read down as applying only to cases where the Settlement Commission is unable to pass an order on or before 31.3.2008 for any reason attributable on the part of the applicant. The expression “reasons attributable” should be reasonably construed. If in the writ petition, the applicant has urged that it was not responsible for the non-disposal of the application and the same is not denied by the revenue, the circumstance should be considered in favour of the applicant;
(v) Accordingly, the Settlement Commission has to consider whether the proceedings have been delayed on account of any reasons attributable on the part of the applicant. If it comes to the conclusion it is not so, then it has to proceed with the application as if not abated;
(vi) The Government should consider appointment of more benches of the Settlement Commission if it desires early disposal of pending applications.