Income-tax Settlement Commission – Consequences of abatement provisions and some remedies

Should There Be Cut In the Income Tax Rates?

The Income-tax Settlement Commission was set up, w.e.f. 1st April, 1976, under Chapter XIX-A of the Income-tax Act, 1961(‘the Act’) for the purpose of quick settlement of cases, by the Taxation Laws (Amendment) Act, 1975. This was done consequent upon the recommendations made by Wanchoo Committee in paras 2.32 and 2.33 of Chapter 2 of its Report titled “Black Money and Tax Evasion”. The rationale for the setting up of the Commission, in the words of the Committee, was as under:-

2.32

In the administration of fiscal laws, whose primary objective is to raise revenue, there has to be room for compromise and settlement.  A rigid attitude would not only inhibit a one-time tax evader or an unintending defaulter from making a clean breast of his affairs, but would also unnecessarily strain the investigational resources of the Department in cases of doubtful benefit to Revenue, while needlessly proliferating litigation and holding up collections.  We would, therefore, suggest that there should be a provision in the law for a settlement with the taxpayer at any stage of the proceedings.  In the United Kingdom, the ‘confession’ method has been in vogue since 1923.  In the US law also, there is a provision for compromise with the taxpayer, as to his tax liabilities.  A provision of this type facilitating settlement in individual cases will have this advantage over general disclosure schemes that misuse thereof will be difficult and the disclosure will not normally breed further tax evasion.  Each individual case can be considered on its merits and full disclosures not only of the income but of the modus operandi of its build-up can be insisted on, thus sealing off chances of continued evasion through similar practices.

2.33 

To ensure that the settlement is fair, prompt and independent, we would suggest that there should be a high level machinery for administering the provisions, which would also incidentally relieve the field officer of an onerous responsibility and the risk of having to face adverse criticism which, we are told, has been responsible for the slow rate of disposal of disclosure petitions.  We would, therefore, recommend that settlement may be entrusted to a separate body within the Department, to be called the Direct Taxes Settlement Tribunal. It will be a permanent body with three Members.  The strength of the Tribunal can be increased later, depending on the workload.  To ensure impartial and quick decisions, and to encourage officers 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”. 

2.  In tune with the above recommendations, the Commission is manned by senior officers of the Income tax Department of the rank of Members of the      Central Board of Direct Taxes (CBDT). Even some Chairpersons of the CBDT, on retirement, have been inducted to work in the Commission. It has     been functioning with its offices at Delhi, Mumbai, Chennai and Kolkata.

Important changes made by Finance Act, 2007

3. The Finance Act, 2007 has, with effect from 1st June, 2007, made drastic and far reaching changes in its powers and functions.  The first of such change is the severe limitation in the jurisdiction of the Commission.  Prior to the amendment, an assessee could make an application to the Commission at any stage of the proceedings in his case pending before the income-tax authorities, namely, assessment before an AO and/or appeal before a CIT(A) or a  revision before an administrative  CIT.   Now he can make an application only during the pendency of regular assessment proceedings before the Assessing Officer (AO).  Where assessments or re-assessments u/s 147 or search assessments 153A, and 153C or original assessments set-aside in pursuance of orders u/s 254, 263 and 264 are involved, the assessees have been debarred from filing settlement applications. Cases pending in appeal before CIT (A) are also now excluded from the purview of the Commission. In actual practice, most of the search cases, which in the normal course would involve prolonged litigation, used to come for settlement. No wonder, only one application has been filed before the Commission during the six months in the post –amendment period since 1st June, 2007. We would be surprised if in the remaining four months of the current financial year i.e. till 31st March, 2008, the applications filed would reach even a double digit figure.

Abatement of undisposed settlement applications.

4. While new work is not forthcoming, the Commission is obliged to dispose off, by 31st March, 2008, all settlement applications pending before it as on 1st June 2007. The undisposed of applications will abate because of section 245HA (1) (iv) where an order of settlement “under sub-section (4) of section 245D has not been passed” till that date. Section 245HA (2) provides the consequences of abatement and states that “where a proceeding before the Settlement Commission abates, the Assessing Officer, or, as the case may be, any other income-tax authority before whom the proceeding at the time of making the application was pending, shall dispose of the case in accordance with the provision of this Act as if no application u/s 245C had been made”. In other words, on abatement, instead of the amount of income disclosed therein being accepted and immunity from penalty and prosecution being allowed to the applicants as prayed in their settlement applications, the proceedings shall be restored to the file of the income-tax authority where the proceedings were pending when the settlement application was made. Thus, if in a settlement application involving three years, for one year the proceedings were pending before the AO, for the second year before the CIT(A) and for the third year before the administrative CIT in revision u/s 264 of the Act, there would be three different authorities that would, on abatement, deal with the assessments, After the assessments, the usual process of further appeals, levy of penalty, prosecutions etc would need to be under gone by such an applicant for absolutely no fault on his part in the application getting abated. But more importantly, these authorities will have no power to grant immunity from penalty and prosecution under the Income-tax and other Central laws, unlike the Settlement Commission, though they will use the confession of the applicant in disclosing income not disclosed before the AO, against him contrary to and in  violation of the express constitutional mandate against self-incrimination contained in  Article 20(3)of the Constitution.

5. More than 4000 applications filed before 1st June 2007 have been pending before the Settlement Commission.  The four Benches located at Delhi, Mumbai, Calcutta and Chennai, have, in the past, been disposing of about 500 applications every year.  Assuming that now, without having to spend much time on admissions on new applications, they dispose off 800 applications this year, even then about 3200 applications filed before 1st June 2007, some of them pending for more than 10 years, shall abate.

Legality/ constitutionality of abatement provisions

6.  Is it legally permissible to provide for the abatement of settlement applications pending before the Settlement Commission simply because it could not settle those cases within a reasonable time? This is all the more disquieting when its four Benches will have less than 10 applications filed on or after 1st June 2007 for disposal as at 1st April, 2008. 

7.  The Government’s case is likely to be that the abatement provisions are procedural and the applicants do not have any vested right in a procedure for determining their tax liability.

8.  In our opinion, these provisions are not procedural in nature but adversely affect the substantive rights of the applicants and, therefore, appear to be unconstitutional being violative of Article 14 of the Constitution.  Commission’s inability to dispose of the settlement applications, some of them pending, after admission, for more than 10 years, can be no justifiable reason for their abatement forcing the applicants to suffer, for absolutely no fault of theirs, a prolonged and ruinous tax litigation that they had come before the Commission to avoid.

9.  The main reasons for the settlement provisions being substantive and not merely procedural are the following:-

(i) The Settlement Commission is a statutory Tribunal like the Income Tax Appellate Tribunal with vast powers of giving finality not only to assessments but also to penalty and prosecution at one go for all the years covered by the application. The settlement proceedings are essentially in the nature of statutory arbitration based on the confessions of the applicants. On admission of the application, the applicant gets a vested right to get his tax liability and issues of interest, penalty and prosecution under the Income-tax Act and other Central laws decided by the high powered Commission which assumes exclusive jurisdiction under section 245F(2) over any other tax authority, till the order of settlement is passed. This jurisdiction covers both substantive and procedural powers to compute the income of the applicant.

(ii) Settlement application, once filed cannot be withdrawn by the assessee because of the prohibition to this effect in section 245C (3) of the Act. How can then his application, after admission, be sent back to the income-tax authorities for no fault on his part?

(iii) Settlement Commission has the powers to deviate from the provisions of the Act in the interest of settling the case and resolving the dispute.  There is no such power vested with the AO or the CIT(A),

(iV) U/s 245H (1), the Settlement Commission has the power to grant immunity from penalty and prosecution.  There is no such power given to the AO or the CIT (A) in respect of abated applications.    The power to grant immunity being purely a substantive power, the applicants cannot be deprived of its use for no fault of theirs.

(V) The applicants made confessions by making  true and full disclosure of additional income not disclosed before the AO, in their settlement applications and furnished material in support of such disclosure in the bonafide belief that it will be used by the Commission to settle their tax liabilities and grant them immunities from penalty and prosecution.  This material will, in respect of abated applications, be used by the assessing authorities against the applicants and their confessions would be utilized to levy penalty and to launch prosecutions against them for evasion of tax. This appears to be a gross violation of the doctrine of equality before law vis a vis the applicants whose cases get settled by the Commission even though they filed the settlement applications on the same day or later.

(Vi) There are no intelligible criteria laid down in the law as to what type of cases will abate e.g. where the assessee have not been cooperating or any other criteria.  The criteria that where the settlement applications cannot be disposed off by 31st March 2008 is no good criteria in law to justify abatement of the applications.

(Vii) Even in respect of applications that will abate, the applicants were required to pay all the tax and interest due on the amount disclosed in their  settlement applications by 31st July, 2007 by the Finance Act, 2007. Where such tax and interest have been paid, the doctrine of promissory estoppel could be pleaded in the writ petitions by such applicants.

Remedies

(i) Extend period for abatement by another two years

10. Apart from the abatement provisions being of doubtful constitutional validity, it is not at all necessary to put the unfortunate applicants, whose applications will abate, to unnecessary trouble and expense in moving the High Courts/Supreme Court to seek justice. The problem of pendency of applications can be solved by very simple and inexpensive methods. The Settlement Commission is proposed to continue after 31st March 2008 in the same manner as at present.  The Commission will have hardly any work to do on 1st April 2008 because under the highly restricted scope of settlement applications, from 1st June, 2007, not more than 10 applications may be available for disposal by the Commission. Rather than disbanding the Commission, which is also not the intention, we would earnestly suggest that the Government of India may extend the period for disposal of the settlement applications by another two years. The time can be extended either by the amendment of law or by the Central Government passing a ‘Removal of Difficulties Order’ in exercise of its powers u/s 298 of the Act.

(ii) Constitute four additional fast track benches by withdrawing 12 existing Chief Commissioners or recalling recently retired Members of the Commission

11. Four additional fast track benches of three Chief Commissioners each should be constituted to deal with small settlement applications with total incomes, including undisclosed income of say up to Rs. 25 lacs.  About 60-70% of the pending applications will fall in this category.  There are about 150 CCITs all over the country many of them have a very short span of control of one or two Commissioners to supervise. In the author’s view, there would not be any difficulty to withdraw for two years, 12 Chief Commissioners, to man the proposed four fast track additional Benches to dispose of such small settlement applications.  Every CCIT so selected can be paid a small monthly honorarium of Rs. 5000/- or so during his deputation with the Commission. The infrastructure available with such CCITs’ can be used to provide them the needed secretarial and other assistance. Alternatively, willing and competent but recently retired Members of the Commission can be requested to come back and work in the Commission for another two years.

(iii)  Dispense with the need of examination by Commission’s officers in small cases.

12. With the report of the Commissioner of Income-tax (CIT) on the true and full nature of the Commission being available and opportunity of hearing legally required to be given to him before arriving at the settlement, there is no need to have the applicant’s figures and those by the CIT to be examined by another officer of the Commission at least in small cases. The Commission can itself take a decision, since it is manned by highly competent and experienced persons from the Income-tax Department itself. After all, the Supreme Court or the High Courts or for that matter, the Income tax Appellate Tribunal decide fairly complicated issues of law and/or fact involving huge monetary stakes without any investigational assistance, and there has been a fair degree of satisfaction with the quality of their judgements.

(iv)  Accept settlement applications that remain pending even after two years

13. If some applications remain un-disposed even after two years, for no fault of the applicants, the additional income disclosed in their settlement applications should be accepted and immunity as prayed for be granted. This will be in accordance with the principles of equity, justice and good conscience which should be the hallmark of good governance.

(v) Send back the applications of the non-co-operative applicants to the income-tax authority

14. For applicants, who do not co-operate with the Commission, their applications should be sent back to the AO for completing of regular assessments as if such applications stood abated in the manner stipulated in section 245HA(2) referred to above.  Similar provision existed in section 245HA before its omission by the Finance Act 2002 w.e.f. 01.06.2002.  The same provision can be brought back on the statute book to deal with the recalcitrant and non-co-operative applicants.

Conclusion – Uphold rule of law and save the filing of thousands of writ petitions

15. We hope that the above suggestions will be considered by the Government in the constructive spirit in which they have been made and appropriate action will be taken soon to avoid several writ petitions being filed in the High Courts all over the country and possibly before the Supreme Court of India in March, 2008.  Most of the applicants are waiting to see if the Finance Minister proposes any amendments in the Finance Bill, 2008 to adequately address their concerns.  Some writ petitions have, however, already been filed in the Delhi High Court and other High Courts. Just and fair ways should be found to avoid such litigation- it will neither be in the interest of the applicants nor of Revenue.