AseemChawla(Partner)&Thangadurai

Punithan(Associate),MPCLegal

Analysis of the Budget, 2015 proposals relating to the provisions of Settlement Commission

Date : March 09 2015

Ever since the recommendations of Justice K.N. Wanchoo were incorporated into the Income Tax Act, 1961 (the Act), the provisions with respect to theSettlement Commission have undergone a sea of change.

Earlier, the tax payers were eligible to apply to the settlement commission inalmost all the proceedings, be it an assessment proceeding or an appealproceeding. However, Finance Act, 2007 curbed the purview of the settlementcommission considerably by debarring the proceedings initiated under Section148, search and seizure proceedings as well as the appellate proceedings fromthe jurisdiction of settlement commission, which effectively left only theproceedings which are pending at the assessment level within the scope of thesettlement commission.

The result was evident from the drop in the number of cases being entertained by the settlement commission.As per the 87th Report of Public Accounts Committee 2013-14, the number of cases pending before thesettlement commission in the year 2007-08 was 2064. However, subsequent to the incorporation of FinanceAct, 2007, the cases entertained by the settlement started to decline consistently in the succeeding years. Ason 2008-09, the number of cases pending before the settlement commission dropped to 1310 and it wasfurther reduced to 1235 cases and 1061 cases in the year 2009-10 and 2010-11 respectively.

Sensing the extinction, the government added little more teeth to the settlement commission by bringing backthe search and seizure proceedings within the ambit of settlement commission vide Finance Act, 2010.Finance Act, 2014 further enhanced the scope by including the orders passed under Section 254, 263 and 264for initiation fresh assessments within the boundary of settlement commission.

It is also worthwhile to note that the proposed Direct Tax Code, 2013 attempted to do away with the concept ofsettlement commission for good, on the reasoning that it had not achieved its intended purpose and furtherreduced the efficacy of search and seizure actions.

The most significant proposal made by the Budget 2015 with respect to the settlement commission provisionsis the inclusion term related person in to the Section 245K of the Act. Under the existing provision, a ‘person’could avail the opportunity of approaching the settlement commission only once in its life time.

The budget proposes to include the related person within the ambit of the person who has availed the benefitunder Section 245C. It lists the different kinds of related person who are ineligible to approach the settlementcommission:

In a case of an individual, a related person includes a company or a firm/AOP where he holds morethan 50% of the shares/voting rights or entitled to more than 50% of the profits (in case of a firm or AOP)Vice versa, in case of a company or firm/AOP, a related person includes any person who holds morethan 50% of the shares/voting rights or a person who is entitled to more than 50% of the profits in caseof a firm or AOP.It also proposes to include karta of the HUF as related person to the HUF and HUF as the relatedperson to karta.

Although this particular proposal in the Union Budget 2015 narrows down the scope of settlement commission,one may view that the objective behind this is to prevent the misuse of the provision. The Memorandum to theFinance Bill, 2015 states that this proposal was made considering the fact an individual who has approachedSettlement Commission once can subsequently approach the entity controlled by him, which defeats thepurpose of restricting the opportunity of the approaching the settlement commission only once in a lifetime.

Be that as it may, there were situations where some of the companies which had already availed the benefitPage 1 of 3 1 May 2015

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under Section 245C of the Act, winds up its business completely and would register itself as a freshcorporation, thereby reviving its chances of approaching the settlement commission for the second time. Theproposed amendment, however, did not address such issues.

The next significant proposal made vide budget 2015 is that to include another circumstance under which thesettlement commission proceedings could be abated. It seeks to introduce the clause (iiia) in to the Section245HA through which it would abate the proceedings of settlement commission, if the order passed underSection 245D does not specify the terms of the settlement.

This proposal is definitely a bane to the tax payers as it not only restores the case back to the file of theAssessing Officer but also enables the Assessing Officer to make additions based upon the full and truedisclosures made by the tax payer in its application. This proposal has created ambiguity, inasmuch as, it hasnot stated whether the tax payer would get another chance to reinstate the abated proceedings before thesettlement commission if the proceedings stands abated under the new provision.

Furthermore, the Budget 2015 has made the following two proposals in order to incorporate the legislativeintent provided by certain judicial pronouncements.

i. Limitation period: The Budget 2015 has made a proposal for inclusion of words "or on the expiry of twoyears from the end of relevant assessment year, in a case where no assessment is made" in clause (iv) of theExplanation to Section 245A of the Act. This has been proposed to give effect to the decision of the Hon’bleDelhi High Court in the case of CIT v ITSC [2012] 259 CTR 318 (Delhi) – wherein it was held that theExplanation (iv) to Section 245A(b) cannot be interpreted liberally and should not include the proceedingswhich are left in limbo for eternity. The rule prescribed in Section 153(1) should be given effect andaccordingly, an assessment proceeding would stand concluded two years from the end of relevantassessment year where no assessment order has been passed.

The proposal incorporated the deliberations of the Court.

ii. Interest Computation: This budget proposes to amend Section 234B of the Act to give effect to thedecision of the Hon’ble Calcutta High Court in the case of G.M. Foods and another Vs Income Tax & WealthTax Settlement [W.P. No. 44 of 2005 dated February 2nd, 2015] wherein it was decided that the interestunder Section 234B shall be computed upto to the date of order was passed under Section 245D(1) and not tobe computed until the date of order passed under Section 245D(4).

The rest of proposals, in this Union Budget 2015, were to ensure the efficiency of the settlement commissionas well as to remove some bottlenecks. For instance, under the existing provision of Section 245A(b), theassessee is eligible to approach the settlement commission only with respect to the assessment years wherethe notice under Section 148 was issued. A proposal was made in this budget for obviating the need forissuance of separate notices for proceedings initiated under Section 148, considering the fact that the issuerelating to escapement of income is often involved in more than one assessment year and that the tax payerhas been compelled to wait till the issuance of notice for other assessment years to approach the settlementcommission. This proposal seeks to do away with the necessity of issuing notice for each of the assessmentyears for the tax payer to approach the settlement commission.

Another proposal was made to eliminate the practical difficulties faced by the settlement commission whilepassing the rectification order. The existing provisions allows the settlement commission to rectify the orderwithin a period of six months from the date of the original order was passed as well as allows the taxpayer/department to apply for rectification within a period of six months from the date the original order waspassed.

Under the existing provisions, the settlement commission is put under undue pressure when the taxpayer/department approaches the settlement commission at the fag end of the limitation period. This budgetproposes to provide an additional six month time to the settlement commission to pass the rectification incases where the tax payer/department files an application for rectification, by proposing to amend Section245D(6B). As per the said proposals, the limitation commences from the date on which the application is filed.

This Budget also seeks to amend Section 245H(1) so as to make sure that settlement commission records thePage 2 of 3 1 May 2015

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reasons for granting immunity to the tax payer in the order. The existing provisions are silent on this aspect.This is a welcome proposal and august well with the well settled principles of natural justice.

Conclusion

To sum up, the proposed amendments made in the budget 2015 may not significantly alter the way offunctioning of the settlement commission. Nevertheless, it has intended to remove some bottlenecks (such asprovision of additional six months time for rectification as discussed supra) in the provisions as well as soughtto avoid the abuse of the settlement commission provisions.

That said, only time can tell whether or not the aforesaid proposal would facilitate reduction of tax litigation.Moreover, the efficacy of the Settlement Commission as a forum is also a matter of deliberation, in light of thefact that this forum is often viewed as a double edged sword.

Needless to say, furthering widening the powers of the settlement commission shall not only facilitate theimprovement of tax base, but would also reduce the litigation which, in turn, would restore the faith in theIndian tax administration.

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