Settlement of Tax Cases under Income Tax Act, 1961

CA Raj Kumar - Avatar Image Written by CA Raj Kumar - Updated on June 15, 2024. Estimated Reading Time: 14 minutes.
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Settlement of Tax Cases under Income Tax Act, 1961

We all know that Income Tax Laws are very complex. Often, knowingly or unknowingly there are many lapses in compliances. Income Tax is a source of revenue for the government. It makes it harder for the government to have any leniency for such defaults. However, Government also doesn’t want one time evaders and innocent defaulters to go to harsh procedures for defaulting. It becomes a challenging task for the government too, to fight legal battles for years and recover its revenue. It was this view that Wanchoo Committee felt necessary to have scope for settlement in some cases. Nearly all developed nations have a way for settlement of non-serious defaults. Either it is the United Kingdom that has provisions for confession or it is the United States which allows compromises between authorities and defaulters, nearly all major developed nations have this scope of the settlement. Accordingly, Chapter XIXA was incorporated on the recommendations from Wanchoo Committee and was enacted by Taxation Laws (Amendment) Act, 1975. This enactment allowed –

  • Central Government to constitute a Settlement Commission headed by a Chairman. It consists of A Chairman along with Vice-Chairman and other members as the Central Government thinks fit. (Where Central Government appoints a member of the Central Board of Direct Taxes as its Chairman or a member, he ceases to be a member of the Board.)
  • It vested all powers of appointing Chairman, Vice-Chairman and members, to the Central Government. Central Government chooses persons of integrity and outstanding ability, having special knowledge of, and experience in, problems relating to direct taxes and business accounts.
  • This Commission functions within the Department of Revenue and Banking of the Central Government.

The contents of provisions related to settlement commission are in series of Section 245A, B, C…. and so on along with the provisions of Authority for Advance Ruling. List of such section are given below-

Section 245A – Definitions

Section 245B – Income-tax Settlement Commission

Section 245BA – Jurisdiction and powers of Settlement Commission

Section 245BB – Vice-Chairman to act as Chairman or to discharge his functions in certain circumstances

Section 245BC – Power of Chairman to transfer cases from one Bench to another

Section 245BD – Decision to be by majority

Section 245C – Application for Settlement for settlement of cases

Section 245D – Procedure on receipt of an application under section 245C

Section 245DD – Power of Settlement Commission to order provisional attachment to protect revenue

Section 245E – Power of Settlement Commission to reopen completed proceedings

Section 245F – Powers and procedures of Settlement Commission

Section 245G – Inspection, etc., of reports

Section 245H – Powers of Settlement Commission to grant immunity from prosecution and penalty

Section 245HA – Abatement of proceeding before Settlement Commission

Section 245HAA – Credit for tax paid in case of abatement of proceedings

Section 245I – Order of settlement to be conclusive

Section 245J – Recovery of sums due under order of settlement

Section 245K – Bar on subsequent application for settlement

Section 245L – Proceedings before Settlement Commission to be judicial proceedings

Section 245M – Certain persons who have filed appeals to Appellate Tribunal entitled to make applications to the Settlement Commission

As per Section 245C, an assessee may, at any stage of a case relating to him, make an application in the prescribed form and manner, containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer. The form in which such application is to be prescribed in 34-B which is notified under the Income-Tax Rules, 1962. [This form can be submitted by Assessee or his Authorised Representative in person or through Post].

He should also disclose the following to the Settlement Commission for settlement of his case –

  • The manner in which such income has been derived,
  • The additional amount of income-tax payable on such income and
  • Other particulars as may be prescribed.

But, before we explain other procedures in this regard, it is very much important to understand the meaning of “case” under Income-tax Act, 1961. As an application has to be made at any stage of a case, its meaning becomes vital for understanding the whole provision in this regard.

Section 245A clause (b) defines “case” as any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub-section (1) of Section 245C (i.e. application) is made. Further four explanations (earlier five but the second explanation has been deleted) are given. In short, the case is defined as a proceeding which is pending before an Assessing Officer. Such proceedings can be pending on account of notices from Assessing Officer, or where notice for any Assessment Year is given, an assessee can approach for any other Assessment Year too for which notices under section 148 could have been issued (although they are not issued). Such Proceedings can also be on account of revision by authorities for revenue or where cases are referred back by Appellate Tribunals.

For proceedings other than those above mentioned, it starts when a return under section 139 is furnished or a notice under section 142 is served. It concludes on a date, on which the assessment is made, or on the expiry of two years from the end of the relevant assessment year.

Admission of the Application

Under Section 245, the Commission can reject the application within 14 days of the filing of the Settlement application. In case it is not rejected it is deemed to have been admitted by it. Grounds for which such application can be rejected are –

  • Where disclosure to the commission is not for an additional amount of income tax which is at least Rupees ten lakhs (for the person in the case of Search and Seizure cases, this limit is enhanced to Rupees fifty lakhs).
  • The applicant should not have made any other settlement application after 1st June 2007, which has been allowed to be proceeded with. (This option of settlement is allowed for once in a lifetime. Also, a related person cannot go to the Commission. Related means a company in which such person has 50% shares or more voting powers, HUF in which such person is Karta. For a Company, related means an individual who held more than 50% of shares or voting power. For a Firm or AOP or BOI, such related person means a member who was entitled to more than 50% of profits. If it is HUF, the Karta of that HUF is barred from going to the Commission.)
  • No assessment order should have been passed by the concerned income tax authority for the assessment year for which applicant is approaching the Commission and the statutory time-limit for the passing of assessment order for that year has not lapsed.

Some important notes –

  • An application should be accompanied by the proof of payment of full amount of additional tax and interest and the prescribed fee of ₹ 500, else it will be rejected.
  • A copy of the application should also be sent to the concerned income tax Authority on the date of application in form no. 34BA, failing which the application will be rejected.

Procedure on receipt of application (Section 245D)

  • On receipt of the settlement application, the Commission shall issue a notice to the applicant, requiring him to explain as to why the application made by him be allowed to be proceeded with, within seven days from the date of receipt of application.
  • After hearing the applicant, the Commission shall pass an order either rejecting it or allowing it.
  • As mentioned earlier, if it is not rejected within 14 days, it is to be treated as admitted.
  • A copy of every order under 245D(1) has to be sent to the applicant and to the Principal Commissioner or Commissioner.
  • The Commission shall call for a report from the Principal Commissioner or Commissioner within 30 days from the date of application.
  • Such Principal Commissioner or Commissioner is required to furnish the report within 30 days from the receipt of communication from the Settlement Commission.
  • On basis of the report of the Principal Commissioner or Commissioner, the Commission can pass an order declaring the application as invalid.
  • Such order should be passed in writing within 15 days of the receipt of the report after giving the applicant an opportunity of being heard. The copy of such order should be sent to the applicant and the Principal Commissioner or Commissioner.
  • In case, a report is not furnished by the Principal Commissioner or Commissioner, the Settlement Commission shall proceed further in the matter without such report.
  • Commission on getting report can require such Principal Commissioner or Commissioner to make further enquiry or investigation and furnish a report on the matters covered by the application and any other matter relating to the case. Such additional report shall be submitted within 90 days of receiving such communication from the Settlement Commission.
  • If Commission doesn’t receive such reports with the time specified, it can pass its order without such report.
  • Before passing an order, the Commission should give an opportunity of being heard to the applicant and the Principal Commissioner or Commissioner.

Time limit for passing orders

  1. In respect of an application made on or after 1st June 2010 – Within 18 months from the end of the month in which the application was made.
  2. In respect of an application made between 1st June 2007 and 31st May 2010 – Within 12 months from the end of the month in which the application was made.

All the orders passed by the Commission shall contain the terms of the settlement. It shall include any demand by way of tax, penalty, the manner in which any amount due as a result of the settlement should be paid and all other matters which are essential to make the settlement of the case effective. The order should also provide that the settlement shall be void if it is subsequently found by the Commission that the Settlement order was obtained by fraud or any misrepresentation of facts by the applicant. In cases where the settlement becomes void, the proceeding, in respect of which the settlement order was passed, must be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission and the Income-tax authority concerned may complete the proceedings for assessment or re-assessment of income or the levy of penalty, fine, etc., at any time before the completion of 2 years from the end of the financial year in which the settlement becomes void.

Some Important Points –

  • Where the order passed requires any tax payment, it should be paid within 35 days of receipt of a copy of the final Otherwise, the assessee will be liable for simple interest @ 1.25% for every month or part of a month on the outstanding amount from the date of expiry of 35 days. Such liability will arise even in the cases where the Commission extended the time allowed for such payment or permitted payment by installment.
  • The Settlement Commission may rectify its orders for any mistake apparent from the record at any time within six months from the end of the month in which –
    • The order was passed; or
    • An application for rectification has been made by the Principal Commissioner or the Commissioner or the applicant, as the case may be.

Proceedings under the Settlement Commission are considered as Judicial within the meaning of section 193, 196 and 228 of the Indian Penal Code.

Some additional Random but Important points

  • The commission can under section 245DD, attach property belonging to the applicant for protecting the interest of the revenue for six months. After six months the order of attachment ceases to be valid. However, the Commission can extend by recording the reasons in writing for further such period as it thinks fit.
  • There are benches. It is presided by the Chairman or a Vice-Chairman and shall consist of two other members. The one presided by Chairman is the Principal Bench. He may authorise the Vice-Chairman or other Member appointed to one bench to discharge also the functions of the Vice-Chairman or other member of another bench. Where the presiding officer or other member of a bench is unable to discharge his functions owing to absence, illness or any other cause or where a vacancy occurs in the office of the presiding officer or a member, the remaining two persons may function as the bench. And if the presiding officer is not one of the members, the senior member will be the presiding officer. However, if it is felt that the case is such that it should be heard by a bench of 3 members the Chairman has powers to transfer the case to such a bench. The Chairman for the disposal of a particular case can institute a Special Bench consisting of more than three members. Central Government has notified New Delhi as the Principal Bench and Bombay, Calcutta and Madras as the places where Additional Benches of the Commission shall ordinarily sit.
  • Decisions are made by majority vote. If they are equally divided than they should state it and it will be either on hearing by the Chairman be decided by him or be heard by such other members as decided by the Chairman. Subsequently, it will be decided by the majority of opinion of those hearing it and those who have already heard it.
  • The Commission has exclusive rights over cases admitted by it over income-tax authorities. Such right begins from the date of filing of the case with the Commission and end on the passing of the order or rejection of such application.
  • The Settlement Commission, if satisfied with cooperation from the Applicant, can grant immunity from prosecution for any offence under the Income-Tax Act, 1961 or under the Wealth-tax Act, 1957. However, on granting such immunity the reasons for such shall be recorded in writing in the order passed by it. Such immunity may include for matters of penalty under the Income-tax Act, 1961 for matters covered by the settlement.
  • No such immunity shall be granted by the commission in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of the application for settlement.
  • Also, such immunity is invalidated if the person doesn’t pay the taxes as per order on time or fails to comply any conditions mentioned in the order.

Some Frequently asked Queries

  1. What is a limit of additional disclosure of income tax for assessee against whom a proceeding has been initiated after a search and seizure at a related assessee?

Ans. – Such assessee should show additional disclosure of income tax of Rupees Ten Lakhs unless search and seizures are carried at his location and proceedings are initiated on him as a consequence of such direct search and seizures.

  1. Who are considered as related assessee in Query 1?

Ans. – Related assessee includes related persons or entities under Income-tax Act,1961. In general, it includes relatives of persons, persons with a substantial interest in business, directors in case of a company, partners in case of a firm, members in case of AOP/BOP, and such as mentioned in Income-tax Act, 1961.

  1. How is such limit of additional income tax calculated?

Ans. – It is calculated as below –

Where such application is for only one previous year

  1. If the applicant has not furnished a return in respect of the total income of that year, the tax should be calculated on the income disclosed in the application as if such income is the total income. Such tax represents the additional amount of income-tax.
  2. If the applicant has furnished a return in respect of the total income of that year, the tax should be calculated on the aggregate of total income returned and the income disclosed in the application i.e. as if the aggregate represents the total income. The additional amount of income-tax is the amount calculated on such aggregate as reduced by the amount of tax calculated on the total income returned for that year.

Where an application is for more than one year, the above procedure is to be adopted for each previous year and the aggregate of tax payable is to be calculated.

  1. Can an application be withdrawn?

Ans. – No, once an application is made, it cannot be withdrawn by the applicant.

  1. Can the Commission reopen any completed proceedings?

Ans. – No, the Commission doesn’t have any power to reopen the proceedings in respect of an application made on or after 1st June 2007.

  1. Can the order of the Settlement Commission be challenged?

Ans. – No, the order is considered as conclusive (except to the power given to the Commission to reopen its completed proceedings).  It cannot be reopened under any existing law. However, like any other law, Article 136 of the Constitution allows it be challenged in Supreme Court.

In CIT vs. B.N. Bhattacharjee (1979) 118 ITR 461, Supreme Court held that the Article 136 of the Constitution was wide enough to bring within the Supreme Court’s jurisdiction to orders passed by the Settlement Commission.

  1. Can a person who has approached the Settlement Commission approach again through any of the entity controlled by him?

Ans. – No. Although it was allowed earlier, with an amendment in Section 245K to restrict related persons as well, this backdoor has been closed. It is only once in a lifetime option for any assessee.

Some Important Links for Foms –

[wiki slug=’form-34b-application-settlement-commission-income-tax’ /]

[wiki slug=’form-34ba-notice-applying-settlement-assessing-officer’ /]

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CA Raj Kumar Post Author Avatar
CA Raj Kumar

I love blogging and studying taxation. I write articles related to Tax laws and common issues in handling taxation in India. Often, common but small mistakes make things complicated. I write and share them to save precious time of others.

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