Settlement of cases - in Income Tax

Settlement of cases

Section 245B: constitution of Settlement Commission –

The Central Govt. has constituted a Commission which is called Income-tax Settlement Commission for the settlement of cases.

1. Consist of a Chairman and many Vice-Chairman and other members as the Central govt. thinks fit.
2. Functions within the department of Central govt. dealing with direct taxes.
3. All the appointment in settlement commission are done by Central Govt. from amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in, problems relating to direct taxes and business accounts.

Section 245C: Application for settlement of cases –

An assessee may make an application for settlement of to Settlement Commission at any stage of a case relating to him which is pending before an Assessing Officer (AO) on the date of making such application.

Application to Settlement commission can be made for following:

1. proceeding for assessment/reassessment/recomputation under section 147
2. proceeding for making fresh assessment u/s 254 or u/s 263 or u/s 564
3. proceeding for assessment / reassessment for any assessment year immediately  preceding the year in which search was conducted in case of person referred u/s 153A or u/s 153C
4. proceeding for the assessment year relevant to previous year in which search was conducted or books were requisitioned u/s 132A in case of person referred u/s 153A or u/s 153C
5. Proceeding for assessment for any assessment year other than the proceeding of assessment or reassessment referred to in above clause 1 to 4.

Note: application can be made if any intimation u/s 143(1) is received as the time limit for issue of notice u/s 143(2) has been expired or not is not material.

Section 245C(1): When application to Settlement Commission can be made –

An assessee may, at any stage of a case relating to him, make an application in such form and in such manner as may be prescribed, to Settlement Commission and have the case settled provided the following conditions are satisfied:

1. Such application should contain inter alia

1. A full and true disclosure of his income which is undisclosed before AO
2. manner in which such income is derived
3. additional amount of income tax payable on such income, and
4. such other particulars as may be prescribed

2. Proviso to Section 245C(1):  no application shall be made unless -

Other important points:

1. The application shall be accompanied by an evidence in support of payment of tax and interest as it is mandatory to pay taxes and interest before the date of making application
2. Application to Settlement Commission to be made in Form 34B
3. Intimation of making such application to AO is required to be done in Form 34BA
4. Application made u/s 245C(1) shall not be allowed to be withdrawn.
5. Application made u/s 245C(1) cannot be revised.

Section 245(1D): treatment where income disclosed relates to more than one year –

1. Treat each of the previous year as separate year
2. Compute additional tax payable separately for each year
3. Aggregate the amount of additional tax payable for each year

Section 245D: procedure on receipt of application u/s 245 –

1. To allow or reject the application:

1. Notice to applicant: within 7 days of receipt of application requiring him to explain as to why the application be allowed to be proceeded.
2. Allow or reject the application: after hearing applicant, within 14 days from date of application, in writing, reject or allow the application.

2. Order of rejection or acceptance shall be sent to applicant and to Principal Commissioner or Commissioner.

Section 245D (2B): procedure after the application has been allowed to proceed -

1. To call for report from Principal Commissioner or Commissioner – with 30 days from the date of application be sending a copy of application which is required to be furnished in 30 days from the date of receipt of communication form Commission.

2. Application can be declared invalid: on the basis of above report, within 15 days from receipt of such report, by an order in writing (after giving opportunity of being heard to applicant) with copy to applicant and Principal Commissioner or Commissioner.

Powers of Settlement Commission:

1. Power to call for record and ask for further report after enquiry or investigation (section 245D (3): may call records from the Principal Commissioner or Commissioner and may direct them to make further enquiry and to make

1. First report – within 30 days
2. Second report – within 9 days

Copy of second report shall be sent to Applicant under rule 9. And on receipt of this report:

1. Applicant may furnish comment on this within 15 days
2. Comment shall be accompanied by a paper book as per rule 7
3. If no comment from applicant, the Commission may proceed without comment

2. Power to order provisional attachment to protect revenue (section 245DD(1): may order attachment of property belonging to assessee, which shall cease to have effect after 6 months, which can be further extended by Commission for the reasons recorded in writing.

3. No power to reopen the completed proceeding where application made on or after 01/06/2007 (Section 245E).

4. Settlement Commission has same powers as conferred by Income tax authority (section 245F).

5. Power to furnish copy of any report given by Income Tax Authority (section 245G).

6. Power to grant immunity from prosecution and penalty (section 245H):

1. No immunity for any such offence has been instituted before the date of receipt of application u/s 245C.
2. No immunity from prosecution under any other law if application is made after 01/06/2007.
3. Immunity granted shall stand withdrawn, if such person:

1. fails to pay any sum prescribed in the order of settlement
2. fails to comply with any other conditions
3. concealed any particular material
4. has given false evidence

Order of Settlement Commission:

1. After examination of the records and report of the Principal Commissioner or Commissioner and after giving an opportunity of being heard to the applicant /  Principal Commissioner or Commissioner, the settlement Commission may pass such order as it think fit (section 245D(4)).

2. Content of final order of Settlement commission (section 245D(6):

1. The terms of settlement including any demand of tax, interest or penalty
2. The manner of payment of sum due
3. All other matters to make settlement effective
4. The order shall be void if it is found subsequently that it was obtained by fraud or misrepresentation

3. Where settlement order becomes void (as above), the proceeding with respect to the matter covered by settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded by Settlement Commission.

The concerned income tax authority shall complete such proceeding at any time before the expiry of two years from the financial year in which the settlement becomes void. (Section 245D(7).

4. Time Limit: The Settlement commission shall pass order within 18 months from the end of the month in which the application is made (Section 245D(4A)).

5. Interest on late payment of tax (section 245D(6A): @1.25 p.m. after the expiry of 35 days from receipt of order copy.

Settlement Commission has no power to reduce / waive tax or interest statutorily payable. CIT vs Hindustan Bulk Carriers … but can waive or reduce interest u/s 220(2A) if prescribed conditions are satisfied.

6. Rectification of order: section 245D(6B):

1. Within a period of 6 months from the end of month in which order was passed
2. Within a period of 6 months from the end of month in which application for rectification has been made by Principal Commissioner or Commissioner or the applicant.

However, no application for rectification shall be made after expiry of 6 months from the end of month in which order u/s 245D(4) was passed.

              Other Important points:

1. Section 245 I:  order passed by Settlement Commission shall be conclusive as to the matter stated there in and cannot be reopened in any proceeding under any other law for the time being in force.

However, High court can review/interfere an order passed by Settlement Commission through writ petition under article 226, only if there is fault in decision making process, not with decision itself.

2. Section 245J:  recovery of dues as per order u/s 245D(4) shall be done in accordance of the provisions of Chapter XVII by AO having jurisdiction over the person who made application u/s 245C.

3. Abatement of proceeding before settlement commission (Section 245HA):

4. Consequences of abatement of Settlement Commission proceedings:

1. The AO (before whom case was pending) shall resume jurisdiction and dispose the case in accordance with the provisions of the Act.
2. The AO is entitled to use all materials and information produced before Settlement commission.
3. Extension of time limit for making assessment: The period commencing on and from the date of the application to the settlement commission u/s 245C and ending with specified date referred in section 245HA shall be excluded.

Further, second proviso to explanation to section 153 has been inserted so as to allow a minimum time period of one year for completion of assessment to the AO before whom the case was pending, when the application was made with the Settlement Commission.

5. Section 245HAA:  AO shall allow the credit of tax and interest paid on or before the date of making application or during the pendency of the case before the settlement commission.
6. Bar on subsequent application:

1. Where application u/s 245C was made prior to 01/06/2007:

1. In settlement order u/s 245D(4) penalty is imposed, on the ground of concealment of facts; or
2. After passing of order u/s 245D(4), such person is convicted of any offence under chapter XXII in relation to that case
3. The case of such person is sent back to AO, on or before the 10/06/2002

Then, he or any person related to such person shall not be entitled to apply for settlement u/s 245C in relation to any other matter.

2. Where application u/s 245C was made after 01/06/2007: not only the applicant but any person related to such applicant shall also not be allowed to make subsequent application.