1
Mgn
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.952 OF 2008
Star Television News Limited )
P.O. Box 71, Craigmuir Chambers, )
Road Town, Tortola, British Virgin Island )
C/o.AZB & Partners, F-40, NDSE-1, )
New Delhi-110 049.
ig )..PETITIONER
Vs.
1.Union of India, through the Secretary )
Department of Revenue, Ministry of )
Finance, North Block, New Delhi-110 001)
2.Income Tax Settlement Commission, )
Mahalakshmi Chambers, Mumbai-400 034)
3.Direector of Income Tax (International )
Taxation), Mumbai having his Office )
at 107, Scindia House, N.M.Road, )
Ballard Pier, Mumbai-400 038. )..RESPONDENTS
Mr. Iqbal Chagla, Senior Counsel with Mr. Poras F. Kaka, Mr. Lyrin . Periera and Mr.
Ajay Bahl, Mr. N. Ganapathy, Dr. Sunil Agarwal, Mr. Abhinav Ashiwin and A.K.
Jasani, for the Petitioners.
Mr. B.M. Chatterji with Mr. Abhay Ahuja, Mr. R. Ashokan, Mr. N.R. Prajapati, Mr.
A.S. Shivsharan, Mrs. Anamica Malhotra and Mr. P.S. Sahadevan, for the Revenue.
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2
CORAM : FERDINO I. REBELLO &
J.H. BHATIA, JJ.
DATED : 7th August, 2009.
JUDGMENT (PER FERDINO I. REBELLO, J.):
1. The petitioner herein is a non-resident company. They filed an application
before the Income Tax Settlement Commission on 5th March, 2007 under Section
246-C of the Income Tax Act, 1961 (hereinafter shall be referred to as the Act) for
settlement of the cases. By the present petition the petitioners seek to challenge the
constitutional validity and legality of the provisions of Section 245HA(1)(iv) and
Section 245HA(3) of the Income Tax Act as inserted by Finance Act, 2007
(hereinafter referred to as F.A. 2007) with effect from 1st June, 2007 as being ultra
vires and violative of Article 14 of the Constitution of India.
2. Chapter XIX-A was inserted in the Act by Taxation Law Amendment Act,
1975 with effect from 1st April, 1976. Since then, there have been several
amendments. Some of the relevant provisions with which we are concerned with
and need to be considered are, Section 245C which provides for making an
application by an assessee before the Settlement Commission at any stage of a case
relating to them by making a full and true disclosure of their income which has not
been disclosed before the Assessing Officer, the manner in which such income has
been derived, the additional amount of income-tax payable on such income and such
other particulars as may be prescribed The other provisions of the Section need not
be adverted to. Section 245D sets out the procedure to be followed by the
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3
Commission on receipt of an application under Section 245C. Before its substitution
by Finance Act 2007 sub-section (1) mandated the Settlement Commission to call for
a report from the Commissioner and on the basis of the material contained in such
report and having regard to the nature and circumstances of the case, the complexity
of the investigation involved therein, the Settlement Commission had to proceed
with within a period of one year from the end of the month in which such application
was made under Section 245C. The Application could not be rejected without giving
a hearing to the applicant in terms of the first proviso and there was a time limit on
the Commission furnishing the report. In terms of the second proviso if the
Commission was of the opinion that the application be allowed to be proceeded
with the Commission if of the opinion that further inquiry/investigation was
necessary, could direct further information. Section 245D(4A) as it stood prior to
Finance Act 2007 is relevant, which we may reproduce and it reads as under:-
“(4A) In every application allowed to be proceeded with under sub-section
(1), the Settlement Commission shall, where it is possible, pass an order under
sub-section (4) within a period of four years from the end of the financial year
in which such application was allowed to be proceeded with.”
3. Several changes were effected in the Chapter by Finance Act, 2007. Time
limits were set for completion of a particular stage of the proceedings.. Under sub-
section (2A) of Section 245 if an application was made under Section 245C before
the first day of June, 2007, but an order under the provisions of sub-section (1) of this
Section, as they stood immediately before their amendment by the Finance Act, 2007
has not been made before the 1st day of June, 2007 such application shall be deemed
to have been allowed to be proceeded with if the additional tax on the income
disclosed in such application and the interest thereon is paid on or before the 31st day
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4of July, 2007. In view of the explanation, 31st day of July, 2007 was deemed to be the
date of the order of rejection or allowing the application to be proceeded with.
Section 245D(2B) as amended provided for calling a report from the Commissioner
in respect of the application within the time frame as set out.
4. The next relevant provision as submitted is Section 245D(4A) which reads as
under:-
“The Settlement Commission shall pass an order under sub-section (4).–
(i) in respect of an application referred to in sub-section (2A) or sub-section
(2D), on or before the 31st day of March, 2008;
(ii) in respect of an application made on or after the 1st day of June, 2007,
within twelve months from the end of the month in which the application was
made.”
5. Under Section 245H there is power in the Settlement Commission to grant
immunity from prosecution and penalty in the manner and circumstances set out
therein.
6. Section 245HA of which some provisions are challenged to the extent
necessary is reproduced and reads as under:-
“245HA. Abatement of proceeding before Settlement Commission.
(1) Where –
(i) an application made under Section 245C on or after the 1st day of June,
2007 has been rejected under sub-section (1) of Section 245D; or
(ii) an application made under section 245C has not been allowed to be
proceeded with under sub-section (2A) or further proceeded with under sub-
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5section (2D) of Section 245D; or
(iii) an application made under section 245C has been declared as invalid
under sub-section (2C) of section 245D; or
(iv) in respect of any other application made under Section 245C, an order
under sub-section (4) of section 245D has not been passed within the time or
period specified under sub-section (4A) of Section 245D,
the proceedings before the Settlement Commissioner shall abate on the
specified date.
Explanation._ For the purposes of this sub-section, “specified date” means–
(a) in respect of an application referred to in clause (i), the day on which the
application was rejected;
(b) in respect of an application referred to in clause (ii), the 31 st day of July,
2007;
(c) in respect of an application referred to in clause (iii), the last day of the
month in which the application was declared invalid;
(d) in respect of an application referred to in clause (iv), on the date on which
the time or period specified in sub-section (4A) of Section 245D expires.
(2) 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 provisions of this
Act as if no application under Section 245C had been made.
(3) For the purposes of sub-section (2), the Assessing Officer, or, as the case
may be, other income-tax authority, shall be entitled to use all the material
and other information produced by the assessee before the Settlement
Commission or the results of the inquiry held or evidence recorded by the
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6Settlement Commission in the course of the proceedings before it, as if such
material, information inquiry and evidence had been produced before the
assessing Officer or other income tax authority or held or recorded by him in
the course of the proceedings before him.”
7. Section 273AA and 278AB which were inserted by Finance Act 2008 with
effect from 1st April, 2008 are also relevant for our discussion. The relevant
portions of Section 273AA(1) and (3) and 278AB(1) and (3) read as under:-
“273AA. Power of Commissioner to grant immunity from penalty.
(1) A person may make an application to the Commissioner for granting
immunity from penalty, if —
(a) he has made an application for settlement under section 245C and the
proceedings for settlement have abated under section 245HA; and
(b) the penalty proceedings have been initiated under this Act.
(2) the application to the Commissioner under sub-section (1) shall not be
made after the imposition of penalty after abatement.”
(3) The Commissioner may, subject to such conditions as he may as he may
think fit to impose, grant to the person immunity from the imposition of any
penalty under this Act, if he is satisfied that the person has, after the
abatement, co-operated with the income-tax authority in the proceedings
before him and has made a full and true disclosure of his income and the
manner in which such income has been derived.”
278AB. (1) A person may make an application to the Commissioner for
granting immunity from prosecution, if he has made an application for
settlement under Section 245C and the proceedings for settlement
have abated under Section 245HA.
(2)………
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7(3) The Commissioner may, subject to such conditions as he may
think fit to impose, grant to the person immunity from prosecution for
any offence under this Act, if he is satisfied that the person has, after
the abatement, co-operated with the income-tax authority in the
proceedings before him and has made a full and true disclosure of his
income and the manner in which such income has been derived:
Provided that where the application for settlement under Section
245C had been made before the 1st day of June, 2007, the
Commissioner may grant immunity from prosecution for any offence
under this Act or under the Indian Penal Code (45 of 1860) or under
any other Central Act for the time being in force.”
8. On a consideration of the above provisions, it would be clear that though
earlier there was no mandatory time limit for the Settlement Commission to dispose
of the application and it could as far as possible do within four years, by the Finance
Act, 2007, a time limit has been set out under Section 245D(4A). Another relevant
aspect of the F.A. 2007 is that if the Settlement Commission is unable to pass final
settlement order on 31st March, 2008 in case of applications which were pending
before 1st June, 2007 it would ipso facto abate and consequence of Section 245HA(3)
would follow. The I.T. Authorities including the Assessing Officer then was entitled
to use all material and other information produced by the petitioner before the
respondent No.2 including that disclosed as confidential. It is also necessary to note
that in so far as the applicant is concerned, once an application is made, the applicant
could not withdraw that application. Similarly, when the Settlement Commission
allowed the application to proceed it could only allow or reject it. If the application
was allowed then that order in terms of Section 245-I would be conclusive and could
not be reopened in any proceedings under the Act or any other law for the time being
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8in force. In the event the application was rejected the confidential material will be
available to the authorities under the Income Tax Act. The effect of the F.A. 2007 is
that if the application which was filed on or before 31 st May, 2007 even for no fault
of the applicant could not be disposed of on or before 31st March, 2008 it would abate
and consequently all the information is available to the A.O. and other authorities
under the Income Tax Act. In the instant petition we are not concerned with the issue
of an application made to the Settlement Officer after 1st June, 2007.
9. The petitioner along with its group companies is engaged in broadcasting of
satellite television channels in 53 countries across Asia including India. The
petitioner along with its group companies was engaged in a large number of
litigations with the Income Tax Department as to the basis and quantum of taxability
of the petitioner in respect of advertisement and subscription revenue being
repatriated from India. According to the petitioner the Income Tax Department had
adopted conflicting basis of assessment in respect of its various group companies
With a view to have a speedy resolution of the various litigations and with a view to
avoid multiplicity of proceedings the petitioners approached the Settlement
Commission. The application of the petitioner was placed before the Special Bench
of Five Members which by order dated September 11, 2007 declared the application
filed by the applicant as valid and allowed the same to be proceeded with for final
settlement. It is the case of the petitioner that for no fault of theirs the Commission
could not proceed to dispose of the application inspite of various dates that were
given. The respondent No.2, it is pointed out, has a huge backlog of cases and was
hearing very old applications of 1990-91 on first come first serve basis. The
petitioner, therefore, was under reasonable apprehension that the application would
not be disposed of and in the light of that approached this Court for the relief as
prayed for. The petition was admitted on 12 th March, 2008 as similar other petitions
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9had been admitted and interim order was passed not to treat the application as having
abated.
10. It is the case of the petitioner that the provisions of Section 245HA(1)(iv) are
ultra vires the Constitution and/or violative of Article 14 of the Constitution.
According to the petitioner on a true and harmonious interpretation, the Section
ought to be read as providing for abatement only in respect of such applications
wherein the applicant has in any manner prevented Respondent No.2 from
discharging its mandatory statutory duty/obligation in passing an order under Section
245HA(1)(iv) on or before 31st March, 2008. Any other interpretation would result in
the section being struck down. The effect clearly wold be prejudicial to the interest
of the petitioner, who like many other applicants were induced to part with the
confidential information based on the bonafide belief and a legitimate expectation
that settlement orders would be passed and confidential information disclosed by
the petitioner would not be made available to the Income Tax Authorities for use
against the petitioner in assessment proceedings, penalty and other proceedings,
launched by I.T. Authorities. Thus the provisions which stipulates abatement of the
application for no fault of the applicant would be violative of Article 14 of the
Constitution of India.
10. The petitioners in this Petition and other companion petitions which have
been heard today, point out their apprehensions which may be listed as under:-
Apprehensions of the Assessee:
(i) Apprehension of not getting a fair and just hearing or treatment from the
Assessing Officer who, is in a sense, an adversary of the applicant before the
Commission.
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10(ii) Personal and institutional bias against the applicant for his approaching
the Commission and disclosing the material not disclosed to the Assessing
Officer.
(iii) Confidential material/Information disclosed in strict confidence to the
Commission being made available to the Assessing Officer to be used not
only for making assessments but also for levying penalty and criminal
prosecution. The power of immunity vested in the CIT is largely illusory.
Being a party before the Commission, and subject to the jurisdiction of the
internal audit as also the audit by the Comptroller General of India, he is not
likely to exercise the power objectively and fearlessly.
(iv) Income of the applicant being determined by the Assessing Officer or
CIT (A) not having wide knowledge and experience of the scale that the
members of the Commission have, being equivalent in status to the members
of the Central Board of Direct Taxes.
(v) Proceedings before the Assessing Officer are conducted by one person and
are quasi-judicial. Those before the Commission are by a Bench of three
independent persons and the proceedings are judicial in nature.
(vi) Commission’s order is final and conclusive and application is decided on
one-stop basis. Regular assessments after abatement would have to go
through a plethora of appeals before a final decision gets arrived at.
(vii) Commission’s jurisdiction was exclusive and plenary while the income
tax authority, after abatement, will have no such exclusive jurisdiction or
plenary power.
(viii) Settlements, unlike regular assessments, are through adjudication. The
issues by the Commission are thus viewed in an entirely different way from
those by the Assessing Officer.
(ix) The Assessing Officer being a litigant himself before the Commission
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11may not be realistic and provide fair and even-handed treatment to the
applicant.
(x) The criteria for abatement, being the inability of the Commission to
dispose of the applications, is not a valid and reasonable one in the eyes of
law and suffers from the vice of inequality violative of Article 14 of the
Constitution.
(xi) The choice of the applicants where applications abated was totally
arbitrary. The applications were not taken up for disposal by the Commission
chronologically and there was an element of pick and choose.
(xii) The fixing of time limit of less than one year for disposal of all pending
applications was totally unrealistic and impractical.
(xiii) Alternate methods of solving the problem of pendency like the creation
of additional Benches and/or having a single member Bench for disposal of
small cases were neither explored not made known to the public.
(xiv) No reasons, whatsoever, were given to the Parliament explaining the
object of the abatement provisions.
11. Reply has been filed on behalf of the respondents. It is set out that the
amended provisions relating to the settlement of cases have become effective from 1st
June, 2007 and in respect of all pending proceedings before the settlement
commission. It has been provided that tax and interest on the admitted income has to
be paid. The criterion adopted in this case is in respect of all pending proceedings
and no exceptions have been provided. There is no unequal or discriminatory
treatment for any class of assessees under the amended provisions. Therefore, it
cannot be construed that the amended provisions are arbitrary and violative of Article
14 of the Constitution of India. The object of the amended provisions are essentially
to ensure expeditious disposal of the case pending before the Commission and
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12realization of taxes thereon. The amendment in the present case was brought into
effect with a view to avoid delay in determining tax liability of an assessee because
of factors like duplication of proceedings, absence of statutory time frame for setting
the case and also with a view to streamline the proceedings before the Settlement
Commission. The classification in the present case cannot be assailed on the ground
of being arbitrary or evasive, but it is based on some real and substantial distinction
bearing a just and reasonable relation to the object sought to be achieved without
violating the equal protection clause of Article 14. There is always a presumption in
favour of the constitutionality of a statute and the burden in this regard is upon the
person who alleges transgression of the constitutional principles. According to the
respondents from experience they have found that in many cases the assessee found
it convenient to move the Settlement Commission and postpone their tax liability
perpetually by a deliberate act of non-cooperation with the proceedings. It is
submitted that there was no fundamental right in the petitioner to approach the
Settlement Commission. The right to file an application before the Settlement
Commission is a statutory right and as such, can be taken away by the statute. Also
no prejudice will be occasioned as the law has been amended to empower the
Commissioner of Income Tax to grant impunity from penalty and prosecution in
cases which abate. For all the aforesaid reasons it is set out that the petition should
be dismissed.
13. Before answering the issue we may briefly set out the historical background
of the Settlement Commission. The Settlement Commission was established
pursuant to the introduction of Chapter XIX-A in the Act and Chapter V-A in
the Wealth-tax Act (w.e.f. 1st April 1976 vide the Taxation Law Amendment
Act, 1975). The said provisions were introduced on the basis of the
recommendations in the Final Report (submitted in December 1971) of the
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13Direct Taxes Enquiry Committee. The said Committee was popularly known
as the Wanchoo Committee after its Chairman Justice K.N. Wanchoo. Some
of the recommendations contained in Chapter 2 (titled “Black money and tax
evasion”) of the said Report are as under:
“Settlement machinery
2.32 This, however, does not mean that the door for compromise
with an errant taxpayer should for ever remain closed. 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 U.S.
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
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14continued 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 settlements 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 work-load. 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.
… The terms of the award will be set down in writing and it will
be open to the Tribunal to determine not only the amount of tax,
penalty or interest but also to fix date or dates of payment. The
quantum of penalty and interest will be in the discretion of the
Tribunal. Similarly, the Tribunal may also in its discretion grant
immunity from criminal prosecution in suitable cases. The
award will be binding both on the petitioner and on the
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15Department. The application of its decisions on questions of
law will, however, be confined to the case under settlement and
will not in any way interfere with the interpretation of law in
general. No appeal will lie against the decision of the Tribunal
by the petitioner or the Department, whether on questions of
fact or of law.
2.34 The success of this measure will, to a very large extent,
depend on the confidence which this Tribunal can inspire in the
minds of the taxpayers as to its fairness and impartiality. For
this reason, we consider it to be of paramount importance that
only persons who are known for their integrity and high sense of
justice and fairness are selected for appointment on the
Tribunal.” (emphasis supplied)
14. With regard to the Settlement Commission, the National
Website of the Income Tax Department of India
[https://www.incometaxindia.gov.in/HISTORY/1975-1985.ASP as on
17th April 2009] states as under:-
“Settlement Commission
Wanchoo Committee in its report had made certain very
important recommendations which were to have a far-reaching
effect on the growth and functioning of the Income-tax
Department. One suggestion resulted in the creation of
‘Settlement Commission’.
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16While condemning the Voluntary Disclosure Schemes, the Committee
had recommended that the door for compromising with an errant
taxpayer should not, for ever, be closed. “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
investigational resources of the Department in cases of doubtful
benefit to revenue, while needlessly proliferating litigation and holding
up collections”. They recommended that settlements may be entrusted
to a separate body within the department to be called the Direct Taxes
Settlement Tribunal. This body should be a permanent body with three
members. The members should be given the same status as the
members of the Central Board of Direct Taxes. They should be
persons of known integrity and high sense of justice and fairness.
The Taxation Law Amendment Act, 1975 inserted a new Chapter XIX A
in the Income-tax Act and Chapter V-A in the Wealth-tax Act whereby
the Government constituted a Settlement Commission w.e.f. 1.4.76 as
a statutory body for the settlement of the cases. This institution has
helped the Department to get over long and continued litigation in
complicated cases. During the period 1976 to 1983, the Settlement
Commission has settled 1213 cases of which only one case was
admitted by the Supreme Court. The Direct Tax Laws Committee in its
final report submitted in September, 1978 further recommended that
all restrictions on the powers of the Settlement Commission to
entertain cases should be removed. As a result of this
recommendation w.e.f. 1.4.79, the powers of the Settlement
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17Commission were further widened. Earlier, if the Commissioner
objected to the application of an assessee from being proceeded with,
the Commission could not proceed with it. The proviso to section 245D
(1A) inserted w.e.f. 1.4.79 gave the Commission power to proceed
with it, inspite of the objection but only after giving the Commissioner,
opportunity of being heard.
Besides the gain to revenue, the Department’s manpower increased
significantly, as a result of the creation of Settlement Commission.
Several new posts were created. In 1976, 14 posts (2 D.Is., 1 Secy.,
10DDs. & 1 A.O.) became available. There has been no increase in
the strength of personnel, since then.”.
15. While considering the scheme of Chapter XIX-A of the Act, the
Supreme Court [in C.I.T. v B.N. Bhattacharjee – (1979) 4 SCC 121
observed:
“It is not inappropriate to state that the policy of the law as disclosed in
Chapter XIXA is not to provide a rescue shelter for big tax-dodgers
who indulge in criminal activities by approaching the Settlement
Commission. The Settlement Commission will certainly take due note
of the gravity of the economic offences on the wealth of the nation
which the Wanchoo Committee had emphasised and will exercise its
power of immunisation against criminal prosecutions by using its
power only sparingly and in deserving cases; otherwise such orders
may become vulnerable if properly challenged.”
A Constitution Bench of the Supreme Court [in C.I.T. v Anjum
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18M.H. Ghaswala – (2002) 1 SCC 633 inter alia, held that:
“Chapter XIX-A was included for the purpose of quick settlement of the
cases before it so that the tax due to the Revenue is collected at the
earliest. The object of Chapter XIX-A is not to give amnesty to a tax-
evader from paying the tax due.” and that “The object of the legislature
in introducing this section [section 245C] is to see that the protracted
proceedings before the authorities or in courts are avoided by
resorting to settlement of cases. In this process, an assessee cannot
expect any reduction in amounts statutorily payable under the Act.”
16. According to the petitioner the main benefits of the Settlement
Commission to both Government and the Assessee were –
(i) Department to get over long and continued litigation in complicated
cases with doubtful benefit to Revenue.
(ii) Final Settlement for settling liabilities across the board in
complicated cases with doubtful benefit to Revenue, avoiding
endless and prolonged litigation and subsequent strain on
investigational resources of the Department.
(iii) Provided its disclosure was “full and true”, the Assessee had a
forum wherein complicated matters could be decided by one forum.
(iv) Time consuming litigation in the regular Appellate procedure was
avoided by the Department and the Assessee.
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19
(v) Provided its disclosure was full and true, benefits of waiver of
penalties and prosecution were available to the Assessee.
(vi) Confidentiality of the Assessee’s disclosure was maintained, as the
same could be used only in the Settlement Commission.
17. Scheme of the Act and Relevant Changes in Chapter XIX-A of the Act
by the Finance Act, 2007.
Prior Scheme
(i) An application to the Settlement Commission was
submitted in accordance with Form 34B in Appendix II to the
Income-tax Rules.The Annexure to Form 34B required the
applicant, inter alia, to state – (a) amount of income which has
not been disclosed before the assessing officer; (b) additional
amount of income-tax payable on such income; and (c) the
manner in which the income disclosed before the Settlement
Commission has been derived. The disclosure made by the
applicant to the Settlement Commission in the said Annexure
was to be kept confidential unless the application was admitted
by the Settlement Commission. Once admitted, the disclosure
made to the Commission in the said Annexure and the
accompanying material was conveyed to the income-tax
authorities (hereinafter referred to as “IT Authorities”) and
could be used by IT Authorities only for the limited purpose of
making submissions to the Settlement Commission, and the
Settlement Commission alone was empowered to pass a final
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20
order. Prior to the 2007 Act, if the application filed by the
applicant was rejected as not admitted, the disclosure made by
the applicant in the said Annexure and the accompanying
material would not be available to the IT Authorities.
(ii) Once the Settlement Commission had admitted the application
filed under Section 245C of the Act, the Settlement Commission
alone had the power to pass the final settlement order and
there was no provision for the application to revert back to the
IT Authorities for any reason whatsoever.
(iii) While there was no mandatory time limit provided by the Act
within which the Settlement Commission was obliged to pass a
final order of settlement under section 245D(4), under the then
existing section 245D(4A), the period of four years provided
therein was only recommendatory.
(iv) Further, taxes on the declared income were to be paid only
when the application was ‘admitted’ by the Settlement
Commission. Even on such admission, no interest was
required to be paid.
Post Amendment
(v) While the Notes on Clauses of the Finance Bill, 2007 provide no
reason whatsoever for the amendments proposed by Clauses 53 to 61
of the said Bill, the Memorandum explaining the provisions of the said
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21
Bill purports to provide the reason for the said amendments stating
that:
“Chapter XIX-A of the Income-tax Act contains provisions relating to
settlement of cases by the Settlement Commission. With a view to
avoid delay in determining the tax liability of an assessee which is
caused because of factors like duplication of proceedings, absence of
a statutory time frame for settling the case, and also with a view to
streamline the proceedings before the Settlement Commission, it is
proposed to amend the provisions of said Chapter XIX-A of the
Income-tax Act.”.
CBDT Circular No. 3/2008 dated 12th March 2008 titled “Finance Act,
2007 – Explanatory Notes on provisions relating to Direct Taxes”
purports to provide the identical reason for the said amendments to
Chapter XIX-A of the Act. In the Affidavit dated 10 th November 2008
filed on behalf of the Director on Income-tax (International Taxation)
Mumbai by one I.C.S. Kaushik in reply to Writ Petition No. 952 of 2008
filed by Star Television News Ltd. in this Hon’ble Court, it is, inter alia,
alleged that “The object of the amended provisions was essentially to
ensure expeditious disposal of cases pending before the commission
and realization of taxes thereon.” It is important to note that the
selection of members to the Commission, and filling of vacancies is
completely within the control of the Government of India.
(vi) (a) The 2007 Act substituted the definition of “case” in sub-
section (b) of section 245A of the Act, providing a more
restrictive definition, thereby limiting the proceedings in which
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an application could be made to the Settlement Commission
after the amendment of the law w.e.f. 1st June, 2007.
(b) By virtue of sub-sections 245D(2A) and 245D(2D) as
substituted by the 2007 Act, in the case of an application filed
before 1st June 2007 where no order of admission/rejection had
been passed under the erstwhile sub-section 245D(1), or where
an order of admission had been passed but no final order under
the erstwhile sub-section 245D(4) had been passed, such
application could not be proceeded with further unless the
additional tax on the income disclosed in such application and
the interest thereon was paid on or before 31 st July 2007.
Failure to pay such additional tax or interest thereon by the
aforesaid date would result in abatement of such application,
with the attendant consequences set out hereunder.
(c)By virtue of section 245D(4A) as substituted by the 2007 Act,
in respect of an application filed before 1st June 2007 a
mandatory statutory duty was cast on the Settlement
Commission to pass a final settlement order under sub-section
(4) of section 245D on or before 31st March 2008. As inserted
by the 2007 Act, Section 245HA(1)(iv) of the Act provides that
in the case of such an application, in the event that the
Settlement Commission has not passed a final settlement order
on or before 31st March 2008 as mandated by section
245D(4A), the said application would abate on the aforesaid
date. An application which abates would, under section
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245HA(2) as inserted by the 2007 Act, revert back to the IT
Authorities as if no application had, in the first place, been
made under section 245C to the Settlement Commission. As
inserted by the 2007 Act, Section 245HA(3) of the Act further
provides that where an application so reverts to the IT
Authorities upon abatement, the IT Authorities, including the
assessing officer, will be entitled to use all material and other
information produced by the applicant before the Settlement
Commission, including that disclosed in confidence based on
the protection provided by law when the application was filed.
(D) No provision has been made permitting an applicant to
withdraw the settlement application filed by him prior to the
2007 Act, to avoid the aforesaid prejudice that may be caused
by the amendments made to the Act by virtue of the 2007 Act.
On the contrary, the existing section 245C(3), which prohibited
withdrawal of an application once filed before the Settlement
Commission, remained on the statute book despite the
amendments introduced by the 2007 Act.
(e) By Finance Act, 2008 Section 273AA was introduced
conferring power on the Commissioner to grant immunity from
penalty, if the Commissioner was satisfied that the person has, after the
abatement, co-operated with the Income-tax Authority, in the
proceedings before him and has made a full and true disclosure of his
income and the matter in which such income has been derived.
Similarly, Section 278AB has been introduced conferring power on the
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Commissioner to grant immunity from prosecution for any offence
under this Act, if he is satisfied that after the abatement such person
has cooperated with the Income-tax Authority in the proceedings
before such Authority and has made a full and true disclosure of his
income and the manner in which such income has been derived. In
other words the decision to grant immunity is by an authority which
would normally in the ordinary course not be the authority before
whom the proceedings were but another authority. The Commissioner
then will have to address himself to the issue whether there was a true
and full disclosure. A party may be aggrieved by the order of the
Income Tax Authority in which event the party may prefer an appeal.
Would the Commissioner still then consider the information disclosed
as a true and full disclosure. On the other hand under Section 245H
power was in the Settlement Commission to grant immunity from
prosecution for any offence under this Act or under the Indian Penal
Code or any other Central Act for the time being in force. Thus the
very body which considers the application under Section 245C has
been conferred the powers unlike Sections 273AA and 278AB.
17. Before further dealing with the issue we may consider some data and the
stand of the Respondents.
Bench wise institution and disposal of settlement applications during the F.Y.
2007-08.
(i) Applications received on or before 31-5-2007 and pending on 31-3-2008:
Particulars Delhi Mumbai Kalkata Chennai Total ::: Downloaded on - 09/06/2013 13:40:09 ::: 25 Applications received as 1103 738 311 286 2438 on 1-4-2007 Add: Applications 685 266 265 55 1271 received from 30-6-2007 to 31-3-2008 Total for disposal 1788 1004 576 341 3709 Less Disposal between 563 340 446 326 1675 30-6-2007 and 31-3-2008 Balance as on 31-3-2008 1225 664 130 15 2034
(ii) Applications received on or after 1-6-2007 and till 31-3-2008:
Particulars
ig Delhi Mumbai Kalkata Chennai Total
Pendency as on 31-3-2007 - -- -- -- --
Addition during 2007-08 15 8 3 - 26
Less: Disposal during F.Y. 2 - - - 2
Balance as on 31-3-2008 13 8 3 - 24
[Data furnished by the Income Tax Settlement Commission on 8-05-2008 under
Right to Information Act and sourced from “All India Federation of Tax Practitioners
Journal, June, 2009, Vol. 12 No.3 Page 10.]
18. In an Appeal filed in the Supreme Court bearing C.C.No.17498 of 2009,
arising from an interim order in this very petition, the stand of the State in the
Supreme Court was as under:-
“On age-wise classification of pendency of cases, it will be noticed that
1.175 out of 3,090 cases are pending for more than six years. Even these cases
will take another four to five years to be disposed of at the rate of disposal of
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about 200 cases a year. In this view of the matter, legislature can not be
compelled to continue with a machinery whereby the basic purpose of having
initiated it is being defeated. The statement of Age-wise pendency of cases
under Section 245D(4) as on 31.12.2007 before the Income Tax Settlement
Commissioner is given herein below:-
Age of Principal Kolkatta Mumbai Chennai Total
Application Bench, Bench Bench Bench
Delhi
More than 6 62 86 365 62 1175 (575)
years
Between 5-6 148 ig 20 59 14 241
years
Between 4-5 111 13 55 25 204
years
Between 3-4 90 43 47 35 215
years
Between 2-3 43 41 73 37 194
years
Between 1-2 49 44 56 21 170
years
Less than 1
year
Filed 543 162 147 18 870
between
01.04.2007
to
01.06.2007
Filed after 11 4 6 0 21
01.06.2007
Total *1657 413 808 212 *3090
(1057) (2490)
*(Seems to be calculation error)
19. In the reply filed in the Delhi High Court in Vatika Farms Pvt. Ltd., the
learned Bench of the Delhi High Court noted that in Writ Petition No.245 of 2008
(Vardhman Properties Ltd. vs. Union of India), the Secretary to the Settlement
Commission filed an affidavit dated January 29, 2008 in which it is candidly
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admitted that it is not possible for the Settlement Commission to dispose of all the
pending cases before March 31, 2008. It is also mentioned in the affidavit the
disposal of cases for the last five years from 2003-03 to 2006-07 as 100, 88, 75, 85
and 101 respectively (See Vatika Farms Pvt. Ltd. vs. Union of India (Delhi)
(2008) 302 ITR 98 (Delhi).”
20. Considering the provisions pursuant to the F.A. 2007 it would be clear that
the Legislation has created only two classes of applicants. Those applicants whose
applications were pending before 1st June, 2007 and others whose applications
were filed on or after 1st June, 2007. The Legislature, therefore, identified only two
classes based on the date of the application. It would be difficult to accept the
contention that this classification by itself is unreasonable, considering the object of
the Legislature in making the classification is based on the date of application, with
the object of disposal of the applications within a time frame.
21. The real controversy, however, arises on account of fixing 31 st March,
2008 as the date for disposal of those applications which were filed and pending as
on 1st June, 2007. Such of these applications which could not be disposed of on or
before 31st March, 2008 stand abated. Therefore, in one homogeneous class of
applicants who had filed and whose applications were pending as of 31st June, 2007
on account of the cut-off date, two mini-classes have been created. One class of
applicants who by a fortuitous circumstance of their application was pending before a
Bench where there was less work load and/or by the fact that the Tribunal heard the
applications before applications filed earlier and/or by the fact that the machinery
created by the Legislature on the admitted figures earlier disclosed could not dispose
of the application before 31st March, 2008 and the others similarly situated whose
applications resulted in an order of settlement. This has resulted in mini-
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classification of a homogeneous class. The consequences apart from abatement of
the application for no fault of the applicant has also resulted in the confidential
information being available to the A.O. and other authorities under the Act. It is this
which has resulted in the challenge in the present petition.
22. The law on the scope and meaning of Article 14 is now well settled. We may
gainfully refer to D.S. Nakara & Ors. vs. Union of India, (1983) 1 S.C.C. 305,
wherein the Supreme Court observed as under:-
“10. The scope, content and meaning of Article 14 of the Constitution has
been
the subject-matter of intensive examination by this Court in a catena of
decisions. It would, therefore, be merely adding to the length of this judgment
to recapitulate all those decisions and it is better to avoid that exercise save
and except referring to the latest decision on the subject in Maneka Gandhi v.
Union of India from which the following observation may be extracted:
“…what is the content and reach of the great equalising principle enunciated i
in this article? There can be no doubt that it is a founding faith of the
Constitution. It is indeed the pillar on which rests securely the foundation of
our democratic republic. And, therefore, it must not be subjected to a narrow,
pedantic or lexicographic approach. No attempt should be made to truncate its
all-embracing scope and meaning for, to do so would be to violate its activist
magnitude. Equality is a dynamic concept with many aspects and dimensions
and it cannot be imprisoned within traditional and doctrinaire limits…. Article
14 strikes at arbitrariness in State action and ensures fairness and equality of
treatment. The principle of reasonableness, which legally as well as
philosophically, is an essential element of equality or non-arbitrariness
pervades Article 14 like a brooding omnipresence.”
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11. The decisions clearly lay down that though Article 14 forbids class
legislation, it does not forbid reasonable classification for the purpose of
legislation. In order, however, to pass the test of permissible classification,
two conditions must be fulfilled, viz., (i) that the classification must be
founded on an intelligible differentia which distinguishes persons or things
that are grouped together from those that are left out of the group; and (ii) that
that differentia must have a rational relation to the objects sought to be
achieved by the statute in question, (see Shri Ram Krishna Dalmia v. Shri
Justice S.R. Tendolkar and Ors). The classification may be founded on
differential basis according to objects sought to be achieved but what is
implicit in it is that there ought to be a nexus i.e., causal connection
between the basis of classification and object of the statute under
consideration. It is equally well settled by the decisions of this Court that
Article 14 condemns discrimination not only by a substantive law but also by
a law of procedure.
12. After an exhaustive review of almost all decisions bearing on the question
of Article 14, this Court speaking through Chandrachud, C.J. in Re. Special
Courts Bill. 1978 restated the settled propositions which emerged from the
judgments of this Court undoubtedly insofar as they were relevant to the
decision on the points arising for consideration in that matter. Four of them
are apt and relevant for the present purpose and may be extracted. They are:
(3). The constitutional command to the State to afford equal protection of its
laws sets a goal not attainable by the invention and application of a precise
formula. Therefore, classification need not be constituted by an exact or
scientific exclusion or inclusion of persons or things. The Courts should not
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insist on delusive exactness or apply doctrinaire tests for determining the
validity of classification in any given case. Classification is justified if it is not
palpably arbitrary.
(4). The principle underlying the guarantee of Article 14 is not that the same
rules of law should be applicable to all persons within the Indian territory or
that the same remedies should be made available to them irrespective of
differences of circumstances. It only means that all persons similarly
circumstanced shall be treated alike both in privileges conferred and liabilities
imposed. Equal laws would have to be applied to all in the same situation, and
there should be no discrimination between one person and another if as
regards the subject matter of the legislation their position is substantially the
same.
(6). The law can make and set apart the classes according of the needs and
exigencies of the society and as suggested by experience. It can recognise
even degree of evil, but the classification should never be arbitrary, artificial
or evasive.
(7). The classification must not be arbitrary but must be rational, that is to say,
it must not only be based on some qualities or characteristics which are to be
found in all the persons grouped together and not in others who are left out
but those qualities or characteristics must have a reasonable relation to the
object of the legislation. In order to pass the test, two conditions must be
fulfilled, namely, (1) that the classification must be founded on an intelligible
differentia which distinguishes those that are grouped together from others
and (2) that differentia must have a rational relation to the object sought to be
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achieved by the Act.
13. The other facet of Article 14 which must be remembered is that it eschews
arbitrariness in any form. Article 14 has, therefore, not to be held identical
with the doctrine of classification. As was noticed in Maneka Gandhi’s case in
the earliest stages of evolution of the Constitutional law, Article 14 came to be
identified with the doctrine of classification because the view taken was that
Article 14 forbids discrimination and there will be no discrimination where
the classification making the differentia fulfils the aforementioned two
conditions. However, in EP. Royappa v. State of Tamil Nadu it was held that
the basic principle which informs both Articles 14 and 16 is equality and
inhibition against discrimination. this Court further observed as under:
From a positivistic point of view, equality is antithetic to arbitrariness. In fact,
equality and arbitrariness are sworn enemies; one belongs to the rule of law in
a republic while the other, to the whim and caprice of an absolute monarch.
Where an act is arbitrary it is implicit in it that it is unequal both according to
political logic and constitutional law and is, therefore, violative of Article 14,
and if it affects any matter relating to public employment, it is also violative
of Article 16. Articles 14 and 16 strike at arbitrariness in State action and
ensure fairness and equality of treatment.
15. Thus the fundamental principle is that Article 14 forbids class legislation
but permits reasonable classification for the purpose of legislation which
classification must satisfy the twin tests of classification being founded on an
intelligible differntia which distinguishes persons or things that are grouped
together from those that are left out of the group and that differentia must
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have a rational nexus to the object sought to be achieved by the statute in
question.
16. As a corollary to this well established proposition, the next question is, on
whom the burden lies to affirmatively establish the rational principle on
which the classification is founded correlated to the object sought to be
achieved? The thrust of Article 14 is that the citizen is entitled to equality
before law and equal protection of laws. In the very nature of things the
society being composed of unequals a welfare state will have to strive by both
executive and legislative action to help the less fortunate in the society to
ameliorate their condition so that the social and economic inequality in the
society may be bridged. This would necessitate a legislation applicable to a
group of citizens otherwise unequal and amelioration of whose lot is the
object of state affirmative action. In the absence of doctrine of classification
such legislation is likely to flounder on the bed rock of equality enshrined in
Article 14. The court realistically appraising the social stratification and
economic inequality and keeping in view the guidelines on which the State
action must move as constitutionally laid down in part IV of the Constitution,
evolved the doctrine of classification. The doctrine was evolved to sustain a
legislation or State action designed to help weaker sections of the society or
some such segments of the society in need of succour. Legislative and
executive action may accordingly be sustained if it satisfies the twin tests of
reasonable classification and the rational principle correlated to the object
sought to be achieved. The State, therefore, would have to affirmatively
satisfy the Court that the twin tests have been satisfied. It can only be satisfied
if the State establishes not only the rational principle on which classification
is founded but correlate if to the objects sought to be achieved. This approach
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is noticed in Ramana Dayaram Shetty v. The International Airport Authority
of India and Ors., when at page 1034, the Court observed that a
discriminatory action of the Government is liable to be struck down, unless it
can be shown by the Government that the departure was not arbitrary, but was
based on some valid principle which in itself was not irrational, unreasonable
or discriminatory.”
23. Arbitrary Cut-off Date
The National Website of the Income-tax Department, inter alia, states that
“During the period 1976 to 1983, the Settlement Commission has settled
1213 cases of which only one case was admitted by the Supreme Court.”
This works out to an average disposal rate of around 152 cases a year during
the aforesaid 8 year period. In Special Leave Petition (C) No. 17498 of 2008
filed by the Union of India, the Settlement Commission and the Director of
Income Tax (International Taxation) Mumbai it is stated that the average rate
of disposal of cases until 2006-07 has been about 200 cases a year. In the
table which we have earlier reproduced are set out the age-wise
classification of pendency of cases. The said table shows a total of 3,090
(2490) pending cases as on 31st December, 2007 out of which 1,175 (575)
are pending for more than six years. It is also stated that just these cases
pending for more than six years would take another four to five years at the
rate of disposal of about 200 cases a year. Even if we consider the corrected
figures assuming there was an error in calculation, it would take 12 years for
disposal of all the cases which were pending considering the number of
Benches.
24. It is inconceivable considering these figures that there could be any
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realistic expectation that the Settlement Commission could dispose of within
a period of ten months (June 2007 to March 2008) the 3,069 (2490) cases
which were filed before the Settlement Commission prior to 1 st June 2007.
Even assuming a period of thirteen months (commencing at the end of
February 2007 when the Finance Bill, 2007 was tabled), from what is stated
above, achieving such disposal of cases was clearly impossible. The Delhi
High Court in Vatika Farms Pvt. Ltd., has noted this. It is also pertinent to
note that the amendments introduced did not bar fresh applications, and
further ensured that in respect of pending and fresh applications Government
did not lose out even on the interest on the income disclosed by making it
mandatory to pay interest due thereon. Thus the Government had recovered
both tax and interest on admission itself of the application.
25. In our opinion, the choice of 31st March 2008 as the cut-off date is not
supported by any rationale reasons. From the statistics of the Income-tax
Department itself it is indisputable that the cut-off date of 31 st March 2008 for
disposal of all applications filed prior to 1st June 2007 were known to be
illusory, whimsical, capricious and so wide off the reasonable mark as to
make it palpably arbitrary. The arbitrariness of the choice of 31 st March 2008
as the cut-off date is even more apparent when it is noticed that the
Settlement Commission is not being wound up, but on the contrary even after
the amendments made by the 2007 Act came into effect on 1 st June 2007, the
Act permits the filing of fresh applications before the Settlement Commission
– a clear recognition by Parliament that the assumptions made by the
Wanchoo Committee and the rationale given by it for establishing the
Settlement Commission are still valid and applicable. In the present
circumstances, the choice of 31st March 2008 as the cut-off date cannot but
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be described as a date of imaginative exercise having no basis or rationale
whatsoever.
26. By fixing such an unrealistic and arbitrary cut-off date, into which of the
two abovementioned classes an applicant would fall, depended entirely on
the fortuitous circumstance of the Settlement Commission, entirely at its
whim and fancy, deciding whether or not to dispose of its application by 31st
March 2008. Thus, even two applicants who had filed their applications on
the same date could be classified differently on the basis of aforesaid
fortuitous circumstance.
27. A Constitution Bench of the Supreme Court in Union of India v M.V.
Valliappan – (1999) 6 SCC 259, held that “It is settled law that the choice of
a date as a basis for classification cannot always be dubbed as arbitrary
even if no particular reason is forthcoming for the choice unless it is shown to
be capricious or whimsical in the circumstances; while fixing a line, a point is
necessary and there is no mathematical or logical way of fixing it; precisely,
the decision of the legislature or its delegate must be accepted unless it is
very wide off the reasonable mark.”. In the facts of that case, the Court
upheld the choice of date stating that “The learned Counsel for the
Respondent was not in a position to point out any ground for holding that the
said date is capricious or whimsical in the circumstances of the case.”
28. In D.S. Nakara v Union of India (supra) the Supreme Court held that
“Therefore, the choice of the date cannot be wholly divorced from the objects
sought to be achieved by the impugned action. In other words, if the choice is
shown to be thoroughly arbitrary and introduces discrimination violative of
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Article 14, the date can be struck down.” The Court stated the principle “that
when a certain date or eligibility criteria is selected with reference to
legislative or executive measure which has the pernicious tendency of
dividing an otherwise homogeneous class and the choice of beneficiaries of
the legislative/executive action becomes selective, the division or
classification made by choice of date or eligibility criteria must have some
relation to the objects sought to be achieved.” In the present case, the choice
of the illusory, unreasonable and arbitrary date of 31st March 2008 as the cut-
off date, on which pre-June 2007 applications will abate if not disposed of by
the Settlement Commission, has no rational relation to the purported
objective of the amendments in Chapter XIX-A of the Act introduced by the
2007 Act, viz. “to streamline the proceedings before the Settlement
Commission” and “to ensure expeditious disposal of cases pending before
the commission and realization of taxes thereon”.
29. On this touchstone, the choice of a date is clearly capricious or whimsical as
on failure by the Settlement Commission, even for no fault of the petitioner delaying
the proceedings, the application stood abated by operation of law. In these
circumstances will not reading the cut-off date 31st March, 2008 as mandatory be
unjust, arbitrary and also discriminatory. We have referred to the various material
placed by Union of India itself before the Supreme Court in the petitioner’s own case
as also the stand of the Union of India before the Delhi High Court in Vatika Farms’
case. We have also set out the various figures of pendency of matters and the
disposal by the Commission. In the affidavit filed before this Court it is the stand of
the respondents that the object of the amendment was for early settlement of the
cases. The cut-off date did not take into consideration whether the failure to dispose
of the application is on account of any act on the part of the applicant or not . The
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pendency of matters itself will show that the matters could not be disposed of as the
adjudicating machinery created by the Act (Legislature) was not in a position to
dispose of the applications on or before 31st March, 2008 for no fault of the applicant.
The application before the Commission was dependent on various circumstances like
the matter pending before a particular Bench, a particular matter being taken up by
the Commission earlier to others which were pending before it and/or sheer inability
to dispose of the petitions. In our opinion, considering the material on record the
fixation of date was capricious and/or whimsical. The Legislature having statistics
before it of the inability of the machinery created by it to dispose of the applications,
nevertheless choose to fix the date which was unrealistic and incapable of being
adhered to by the machinery created by it. In our opinion this would be an arbitrary
exercise of power and consequently would attract the mandate of Article 14 of the
Constitution of India if it is read as mandatory.
Learned Counsel for the Revenue has sought to place reliance on the
judgment of the Supreme Court in Government of Andhra Pradesh vs. N.
Subbarayudu & Ors., decided on 26th March, 2008 being Civil Appeal No.3939
– 3941 of 2002. There the issue was pertaining to the age of superannuation. The
Court upheld the cut-off date keeping in view the economic conditions, financial
constraints and many other administrative and other attending circumstances of the
respondents therein. Reliance is also placed on the judgment of this Court in All
India Federation of Tax Practitioners vs. Union of India, (1997) 228 ITR 0068. That
was a case in which tax payer sought to challenge the VDIS scheme. The challenge
was rejected. Large number of authorities were also cited to hold that once the right
is created by statute it is open to the same Legislature to also withdraw or take away
that right (see Kuldip Nayar & Ors. vs. Union of India & Ors., (2006) 7 S.C.C. 1. In
our opinion there can be no quarrel with the proposition. The stand of the
Respondents in justifying the cut-off date is based on no material. The petitioners
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having discharged the burden that the cut-off date is whimsical or arbitrary, the
respondents have failed to discharge the burden cast on them.
30. Arbitrary Withdrawal of Earlier Assurance of Confidentiality.
The disclosure made by the applicant to the Settlement Commission in
Annexure to Form 34B was to be kept confidential unless the application was
admitted by the Settlement Commission. Once admitted, the disclosure made
to the Commission in the said Annexure and the accompanying material was
conveyed to the IT Authorities and could be used by IT Authorities for the
limited purpose of making submissions to the Settlement Commission, and
the Settlement Commission alone was empowered to pass a final order. Prior
to the 2007 Act, if the application filed by the applicant was rejected as not
admitted, the disclosure made by the applicant in the said Annexure and the
accompanying material would not be available to the IT Authorities. It may be
mentioned that once an applicant applies, the applicant could not withdraw
the application. The confidential information could only be used by the
Settlement Commission.
31 As a consequence of the amendments introduced by the 2007 Act, an
application which abates for no fault of the applicant would, under section
245HA(2) revert back to the IT Authorities as if no application had, in the first
place, been made under section 245C to the Settlement Commission. As
inserted by the 2007 Act, Section 245HA(3) of the Act further provides that
where an application so reverts to the IT Authorities upon abatement, the IT
Authorities, including the assessing officer will be entitled to use all material
and other information produced by the applicant before the Settlement
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Commission, including that disclosed in confidence based on the protection
provided by law when the application was filed.
32. Section 245HA(3) thus has the effect of severely prejudicing the
interest of applicants who in good faith that the case would be settled were
induced to part with the confidential information based on the bona fide belief
and a legitimate expectation, on the basis of the law in force when such
applications were filed, that settlement orders would be passed and
confidential information disclosed by such applicants would not be made
available to the IT Authorities for use by them against such applicants in
assessment proceedings, penalty and prosecution proceedings. After 1 st
June, 2007, the application has to be decided within twelve months. The
consequences of the amendment has been that the number of new
applications for settlement have dropped drastically as the applicants are
aware when they make an application the consequences of an application
not being disposed off within the time stipulated. As much as such an
applicant cannot be visited with such great hardship, disadvantage and
prejudice for no fault of its own but solely by reason of the inability of the
Settlement Commission to dispose of such application by the specified date
the provisions of section 245HA(1)(iv) read with Section 245HA(3) of the Act,
so read would have to be held as arbitrary, unreasonable and violative of
Article 14 of the Constitution,.
33 The arbitrariness becomes more palpable when even in cases where
the applicant has paid the additional tax and the interest thereon as required
under the amended provisions of the Act and has fully co-operated with the
Settlement Commission in ensuring expeditious disposal of its application, the
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availability of such confidential information to the IT Authorities is made
dependent solely on a fortuitous circumstance, viz. the inability or failure on
the part of the Settlement Commission to dispose of the application by the
specified date, an event over which the applicant has no control. Thus, even
two applicants who had filed their applications on the same date, equally
fulfilled requirements of payment of tax and interest, and had equally co-
operated with the Settlement Commission, could be classified differently on
the aforesaid fortuitous circumstance. Thus, discrimination is inherent in the
impugned provision itself and the same is violative of Article 14 of the
Constitution.
34. Arbitariness can also be seen in the context of consequences which the
applicant has to suffer. As pointed out earlier on the application being declared as
abated the confidential information which the petitioner had filed before the F.A. of
2007 and which was not available to the I.T. Authorities if the application was
disposed of under Section 245(4) as it earlier stood would now be available. The
answer by the Respondents to this submission is that the Legislature has advisedly
amended the provisions of the Act and introduced Section 273AA. In our opinion
Section 273AA as inserted only confers a power on the Commission for granting
immunity from penalty. It does not prevent the authorities under the I.T. Act from
using the confidential information which was filed including for prosecution and
which was treated as confidential even if the petitioners application was not
allowed to be proceeded with. What would be effect of Section 278AB introduced
by the Finance Act 2008, will be considered separately.
35. Similarly, consequent to the amendment, if the application abates even for the
reasons of the settlement Commission’s inablity or failure to decide the same by the
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specified cut-off date the confidential information becomes available to the
Authorities, including the Assessing Officer. The consequences of therefore,
upholding Section 245HA(3) would be to cause prejudice to the interest of the
applicants, who were induced to part with the confidential information based on the
bona fide belief and a legitimate expectation, on the basis of the law in force when
such applications were filed, that settlement orders would be passed and confidential
information disclosed by such applicants would not be made available to the I.T.
Authorities for use by them against such applicants in assessment proceedings,
penalty and prosecution proceedings. It is true that there can be no estoppel against
law. At the same time a person who voluntarily incriminates himself with the belief
that if he has made a true and full disclosure, an independent body like the
Settlement Commission would consider the case and not impose penalty inspite of
the stand of the Department is now subject to adjudication provisions and penal
consequences.
Under Section 245H on an application being allowed the Settlement
Commission was empowered on an applicant satisfying the the conditions provided
in Section 245H(1) to grant immunity from prosecution. An applicant is now denied
the benefit of consideration from being prosecuted on account of failure by the
Commission to dispose off the application and/or for no fault on the part of the
applicant. This power continues in the Commission even after the amendment if the
Commission disposes of the application within twelve months on or after 1.6.2007.
In other words it becomes dependent on the efficiency of the machinery over which
an applicant has no control.
36. Does Section 278AB introduced by the Finance Act, 2008 w.e.f.
1.4.2008 make any difference. Is the purported remedy completely illusory
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and ineffective as the grant of immunity from penalty/prosecution is
conditional upon the Commissioner after the application has abated in the
proceedings before the I.T. Authority being satisfied that the person “has
made a full and true disclosure of his income and the manner in which such
income has been derived”. The Commissioner according to the petitioner in
most cases takes a stand before the Settlement Commission that the
disclosure by the applicant is not full and true. In proceedings before the
Settlement Commission, the Commission takes an independent view, from
the stand of the Department and often did, overrule such objection of the
Commissioner. Whilst however, introducing Section 273AA and section
278AB, it is the Commissioner who will sit in judgment over an issue which
most cases he has already pre-judged by taking a stand before the
Commission. It is inconceivable that the same Commissioner, who may have
already objected before the Settlement Commission in most pending cases
that the disclosure by an applicant is not full and true, will in purporting to
exercise the aforesaid powers do a volte face and declare such disclosure as
full and true even if now what he considers is full and true disclosure before
the I.T. Authorities the true and full disclosure is before proceedings before
the I.T. Authorities. The Commissioner by the very nature of his post is a
part of taxing machinery. The Commissioner, who may have taken a stand
on the application before the Settlement Commission, has now become the
judge as in the Petitioners own case by filing a Petition challenging the order
to proceed with the application. This would violate the basic principles of
natural justice which is inherent in the said provisions of the Act and the
purported exercise of power thereunder will result in a flood of litigation
impugning such purported exercise. A further anomaly is that in cases where
the Settlement Commission has allowed the application to be proceeded with
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on a decision that the applicant’s disclosure is full and true, the
Commissioner will now sit in effect as an appellate authority over such
decision of the Settlement Commission, which is a superior independent
authority created by the Act with far more extensive powers and authority. It
is true that the language used in Section 278AB(3) is satisfaction after
abatement if the person has cooperated with the Income-tax Authority in the
proceedings before him and has made a full and true disclosure of his income
and the manner in which said income has been derived. If before the
Settlement Commission a stand has already been taken it is impossible to
conceive that the Income Tax Authority will take a view different from the view
taken before the Settlement Commission. .
In our opinion, the amendment made by the Finance Act 2008 in no way
will remedy the unconstitutionality and the arbitrariness of the impugned
provisions and in fact disclose the harshness of the consequences
thereunder by attempting to create an illusory remedy.
37. Section 245HA(1)(iv) will, therefore, in the ordinary course have to be held
to be arbitrary, unreasonable and violative of Article 14 of the Constitution of India
in as such as such an applicant cannot be visited with such great hardship,
disadvantage and prejudice for no fault of its own but solely by reason of the inability
of the Settlement Commission to dispose of such application by the specified date.
Even in cases where the applicant has paid the additional tax and the interest thereon
as required under the amended provisions of the Act and has fully co-operated with
the Settlement Commissioner in ensuring expeditious disposal of its application, the
availability of such confidential information to the Income Tax Authorities is made
dependent solely on this fortuitous circumstance, of the inability or failure on the
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part of the Settlement Commission to dispose of the application within a specified
date an event over which the applicant has no control. Thus even two applicants
who had filed their applications on the same date, equally fulfilled requirements of
payment of tax and interest and had equally co-operated with the Settlement
Commissioner, could be classified differently on the aforesaid fortuitous
circumstance.
38. In Bidhannagar (Salt Lake) Welfare Association v. Central
Valuation Board, AIR 2007 SC 2276 the Court held that where an
independent Authority was conferred with a decision making power which
was unlimited and plenary powers, and taken away from such independent
person and statutorily conferred on persons who are not independent or are
otherwise have an interest in the matter, then such provisions of law are per
se unreasonable and the provisions per se contravene the values attached to
the principles of natural justice. When there is substantive unreasonableness
in a statute, it may have to be declared unconstitutional and the decision
making process may suffer from an institutional bias.”
39. Reading Down the Provisions to Uphold Their Constitutionality:
The choice, therefore, before the Court is whether considering the discussion
above, to strike down Section 245D(4A)(1), Section 245HA(1)(iv) and Section
245HA(3) or read them down to uphold their constitutionality. We may at this stage
note that in the petition the petitioners have not sought a prayer challenging the vires
of Section 245D(4A)(1), on the ground that fixing of 31st March, 2008 for disposal
of applications filed before 1.6.2007 is arbitrary, though the said plea has been taken
and arguments advanced.. This Court in Narang Overseas Pvt. Ltd. vs. ITAT, (2007)
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295 ITR 22 (Bom.) read down the provisions of Section 254(2A) of the Act as
amended by the 2007 Act which purported to curtail the power of the Tribunal to
grant or continue an order of stay beyond the prescribed period period where the
appeal was not disposed of within such period, even in cases where the delay in
disposal of the appeal was in no way attributable to the assessee relying on the
judgment of the Supreme Court Commissioner of Customs & Central Excise vs.
Kumar Cotton Mills (P) Ltd. 2005 13 SCC 296.. This Court had held that where the
plain literal interpretation produces an absurd or manifestly unjust result which could
never have been intended by the legislature, the court might fine tune the language
used by the legislature so as to achieve the intention of the legislature and produce a
rational construction. This Court also held that Courts must construe provisions of
statutes consistent with the constitutional mandate and the principle to avoid a
provision being rendered unconstitutional. Therefore, we held that the purported
object of the amendment was not to protect an assessee who dragged on an appeal
whilst enjoying the benefit of an interim order but correspondingly to impose a duty
on the Tribunal to dispose of an appeal within the prescribed time limit. The Court,
therefore, read the provision as imposing a limitation on the power of the Tribunal to
continue interim relief in a case where the hearing of the Appeal has been delayed for
acts attributable to the assessee. Thus the Court observed that it cannot mean that a
construction be given that the power to grant interim relief is denuded even if the acts
attributable are not of the assessee but of the Revenue or of the Tribunal itself.
40. Considering the discussion and findings, the fixing of cut-off date
under Section 245D(4A)(1), the abatement under section 245HA(1)(iv),
making available the confidential information under and section 245HA(3) of
the Act, as inserted by the 2007 Act, would be clearly ultra vires the
Constitution and are liable to be struck down as null and void ab initio. It is,
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however, open to this Court instead of striking down the impugned provision
in its entirety to read down such provision in such a manner so as to set at
naught the unconstitutional portion.
41. In D.S. Nakara v. Union of India the Supreme Court, while reading
down the provisions of the impugned memoranda, excluded the words “that
in respect of the government servants who were in service on March 31,
1979 and retiring from service on or after that date” and “the new rates of
pension are effective from April 1, 1979 and will be applicable to all service
officers who became/become non-effective on or after that date” occurring
therein, in order to uphold the constitutional validity of the impugned
memoranda. In paragraph 59 of the judgment, the Court observed as follows:
“In reading down the memoranda, is this Court legislating? Of course ‘not’.
When we delete [sic] basis of classification as violative of Article 14, we
merely set at naught the unconstitutional portion retaining the constitutional
portion.”
42. In Ahmedabad Municipal Corpn v. Nilaybhai R. Thakore [(1999) 8
SCC 139 the Supreme Court read the words “and includes a permanent
resident of the Ahmedabad Municipality who acquires the above
qualifications from any of the high schools or colleges situated within the
Ahmedabad Urban Development Area” into the impugned rule in order to
save the same from offending Article 14. The Court did so “with a view to iron
out the creases in the impugned rule which offends Article 14”. The Court
relied on “the famous and oft-quoted principle” relied on by Lord Denning in
the case of Seaford Court Estates Ltd. v. Asher [(1949) 2 All ER 155 (CA)]
wherein Lord Denning held “When a defect appears a Judge cannot simply
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fold his hands and blame the draftsman. He must set to work on the
constructive task of finding the intention of the Parliament, … and then he
must supplement the written word so as to give ‘force and life’ to the intention
of the legislature. … A Judge should ask himself the question how, if the
makers of the Act had themselves come across this ruck in the texture of it,
they would have straightened it out? He must then do as they would have
done. A Judge must not alter the material of which the Act is woven, but he
can and should iron out the creases.”
43.
In Arun Kumar v Union of India [286 ITR 89 (SC)] The Hon’ble
Supreme Court had to consider the validity of Rule 3 of the Income Tax Rule
as amended in 2001. The Court “read down” the provisions of the Rule,
holding the same only to apply in cases where there was “a concession” in
respect of accommodation. Where there is no concession the Court held the
Rule can not apply. The Court also laid down –
“In considering the validity of a statute the presumption is always in
favour of constitutionality and the burden is upon the person who
attacks it to show that there has been transgression of constitutional
principles. For sustaining the constitutionality of an Act, a court may
take into consideration matters of common knowledge, reports,
preamble, history of the times, object of the legislation and all other
facts which are relevant. It must always be presumed that the
Legislature understands and correctly appreciates the need of its own
people and that discrimination, if any, is based on adequate grounds
and considerations. It is also well-settled that courts will be justified in
giving a liberal interpretation in order to avoid constitutional invalidity.
A provision conferring very wide and expansive powers on an
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48authority can be construed in conformity with the legislative intent of
exercise of power within constitutional limitations. Where a statute is
silent or is inarticulate, the court would attempt to transmute the
inarticulate and adopt a construction which would lean towards
constitutionality albeit without departing from the material of which the
law is woven. These principles have given rise to the rule of “reading
down” the provisions if it becomes necessary to uphold the validity of
the law.”
44.
It has been submitted on behalf of the petitioners in this petition and
other companion petitions that to avoid striking down, in their entirety, the
impugned provisions as unconstitutional, this Hon’ble Court ought to read
section 245HA(1)(iv) as under:
“in respect of any other application made under section 245C, where
due to reasons attributable to the assessee an order under sub-
section (4) of section 245D has not been passed within the time or
period specified under sub-section (4A) of section 245D”
45. Just, Equitable and Reasonable Interpretation
It is further submitted that following settled principles of statutory
interpretation, this Hon’ble Court would read the provisions of section
245HA(1)(iv) in the manner suggested by the petitioners. viz. it is only
applications where the applicants have, by some willful act or omission,
prevented the Settlement Commission from fulfilling its statutory mandatory
duty under section 245D(4A) would stand the application abate.
46. Ordinarily the Court assumes that that the entire legislative process is
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influenced by considerations of justice and reason, and avoids a
construction which is inequitable or onerous or operates harshly, ridiculously
or in any other manner contrary to prevailing conceptions of justice and
reason. Where the plain literal interpretation of a statutory provision produces
a discriminatory or incongruous or manifestly absurd or unjust result which
could never have been intended by the Legislature, the court may modify the
language used by the Legislature or even “do some violence” to it, so as to
achieve the obvious intention of the Legislature and produce a rational
construction. [See Bhudan Singh and Ano v Nabi Bux and Ano – (1969) 2
SCC 481, K. P. Varghese v. ITO – (1981) 4 SCC 173, C.W.S. (India) Ltd. v
C.I.T. – 1994 Supp (2) SCC 296,Calcutta Gujarati Education Society v
Calcutta Municipal Corpn. – (2003) 10 SCC 533.
47. In Narang Overseas P. Ltd. v ITAT [supra] the Division Bench
referred to the observation of the Supreme Court in C.I.T. v J.H. Gotla –
(1985) 156 ITR 323] that:
“Though equity and taxation are often strangers, attempts should be
made that these do not remain always so and if a construction results
in equity rather than injustice, then such a construction should be
preferred to the literal construction.”
48. This Court whilst interpreting the third proviso to Section 254(2A) in
Narang Overseas P. Ltd. v ITAT had relied on a decision of the Supreme
Court in Commr. Of Customs & Central Excise v Kumar Cotton Mills (P)
Ltd (supra) which had considered a similar provision as contained in section
35-C(2A) of the Central Excise Act which provided that the stay granted by
the Tribunal shall stand vacated if the appeal is not disposed of within the
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period prescribed thereunder. The Court noted that the provision was made
for the purpose of curbing dilatory tactics of those assesses who had
obtained interim orders and sought to continue such order by delaying the
disposal of the appeal, depriving the Revenue not only of the benefit of the
assessed value but also a decision on points which may have impact on
other pending matters. This Court then held as under:
“The sub-section which was introduced in terrorem cannot be
construed as punishing the assessees for matters which may be
completely beyond their control. For example, many of the Tribunals
are not constituted and it is not possible for such Tribunals to dispose
of the matters. Occasionally, by reason of other administrative
exigencies for which the assessee cannot be held liable, the stay
applications are not disposed of within the time specified. … …
However, we should not be understood as holding that any latitude is
given to the Tribunal to extend the period of stay except on good
cause and only if the Tribunal is satisfied that the matter could not be
heard and disposed of by reason of the fault of the Tribunal for
reasons not attributable to the assessee.”
49. The principles set out above in the abovementioned decisions
squarely apply in the present case where the purported objective of the
amendments introduced in Chapter XIX-A by the 2007 Act is to streamline the
proceedings before the Settlement Commission and to ensure expeditious
disposal of pending cases. The said amendments cannot be construed as
punishing an applicant for the inability or failure of the Settlement
Commission to dispose of its application within the period specified in section
245D(4A) where such delay in disposal is not attributable to the applicant.
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The time limit for disposal of an application under Section 245D(4A)(1) will
have to be read as ‘may’ to the extent that it is not on account of the fault of
the applicant. It does do some violence to the language, but at the same
time the constitutionality of the provision can be upheld. To do otherwise
would be to punish an applicant for the inability of the Settlement
Commission to fulfill its statutory obligation, for matters completely beyond
the applicant’s control. As set out above, the Court will presume that the
legislature enacts laws which are honest, fair and equitable and that the
legislative process is influenced by considerations of justice and reason.
Accordingly, an interpretation leading to such an unjust, inequitable, harsh
and absurd result must be rejected. Consequently section 245HA(1)(iv)
must be read in the manner set out above only to applications where the
applicants have, by some willful act or omission, prevented the Settlement
Commission from fulfilling its statutory mandatory duty under section
245D(4A) only such applications will abate. will abate. To do so will also avoid
the inequitable and unjust result whereby an applicant, who has been
induced to pay the tax on the income disclosed and interest thereon by
reason of a statutory assurance that its application will be settled by the
Settlement Commission on or before 31st March 2008, is penalized for no
fault of its own by the abatement of its application and the attendant
consequences, including disclosure of the confidential information and
material to the IT Authorities for use in proceedings before them as also
possible proceedings for penalty and prosecution. It is for the Settlement
Commission to decide the aspect of the matter.
50. A Harmonious Interpretation of Section 245D(4A) and Section
245HA(1)(iv) would remove the vice of arbitrariness and save the provisions
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from being struck down as unconstitutional. Following settled principles of
statutory interpretation, this Court should read the amended provisions of
Chapter XIX-A of the Act harmoniously and in a manner so as to avoid any
provision being rendered nugatory or redundant or unconstitutional to the
extent possible.
51. Section 245D(4A)(i) provides that the Settlement Commission “shall
pass an order under sub-section (4)” in respect of an application filed prior to
1st June 2007 that has been allowed to be proceeded with “on or before the
31st day of March, 2008”. If “good faith and knowledge of the existing
conditions on the part of a Legislature are to be presumed” See Ram
Krishna Dalmia v Justice Tendolkar , it must also be presumed that the
Settlement Commission (being an instrumentality of the State) would fulfill the
aforesaid mandatory statutory command and dispose of all such applications
by the specified date. In that case there would be no question of any
application abating under section 245HA(1)(iv) by reason of an order under
section 245D(4A)(1) not having been passed within the specified time, and
section 245HA(1)(iv) being rendered otiose and redundant. Accordingly, for
an application to abate under section 245HA(1)(iv) it must mean that
Parliament assumed that the Settlement Commission would disregard the
aforesaid mandatory statutory command to dispose of all such applications
by the specified date – an assumption or intention, it is submitted, that can
never be ascribed to Parliament. However, even if such an intention could be
ascribed to Parliament, the result would necessarily be to render section
245D(4A)(i) redundant and otiose.
52. In Surjit Singh Kalra v. Union of India (1991) 2 SCC 87, the
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Supreme Court relied on Craies’ Statute Law (7th Edn., pg 109). The Court
held “True it is not permissible to read words in a statute which are not there,
but ‘where the alternative lies between either supplying by implication words
which appear to have been accidentally omitted, or adopting a construction
which deprives certain existing words of all meaning, it is permissible to
supply the words'”. The Court also relied on the decision in Siraj-ul-Haq v
S.C. Board of Waqf AIR 1959 SC 198.
53. By reading the words “any other application made under section 245C” in
section 245HA(1)(iv) as “any other application made under section 245C, where
due to reasons attributable to the assessee” this Court would avoid rendering any
part of either section 245D(4A)(i) or section 245HA(1)(iv) otiose, meaningless or
redundant. The two provisions, read in such a harmonious manner, would mean that
the Settlement Commission must fulfill its mandatory statutory duty in disposing of
such applications as are referred to in section 245D(4A)(i) by the date specified
therein except where prevented from doing so due to any reason attributable on the
part of the applicant, and that an application in respect of which the Settlement
Commission has been prevented from fulfilling the aforesaid mandatory statutory
duty due to any reasons attributable on the part of the applicant shall abate on the
specified date under section 245HA(1)(iv). In this manner both section 245D(4A)(i)
and section 245HA(1)(iv) will have applicability, meaning and effect. We may also
clarify that the expression ‘reasons attributable’ should be reasonably construed.
While so dealing, the Settlement Commission also to consider whether in the
petition before this Court the petitioner had averred that the proceedings were
delayed not on account of any reason attributable to him, and whether the State had
denied the same. If there be no denial then to consider that circumstances in favour
of the petitioner.
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54. From the above discussion having arrived at a conclusion that fixing the cut-
off date as 31st March, 2008 was arbitrary the provisions of Section 245HA(1)(iv)
to that extent will be also arbitrary. We have also held that it is possible to read down
the provisions of Section 245HA(1)(iv) in the manner set out earlier. This recourse
has been taken in order to avoid holding the provisions as unconstitutional. Having
so read, we would have to read Section 245HA(1)(iv) to mean that in the event the
application could not be disposed of for any reasons attributable on the part of the
applicant who has made an application under Section 245C. Consequently only such
proceedings would abate under Section 245HA(1)(iv).
Considering the above, the Settlement Commissioner to consider whether the
proceedings had been delayed on account of any reasons attributable on the part of
the Applicant. If it comes to the conclusion that it was not so, then to proceed with
the application as if not abated.
Respondent No.1 if desirous of early disposal of the pending applications, to
consider the appointment of more Benches of the Settlement Commission, more so at
the Benches where there is heavy pendency like Delhi and Mumbai.
55. Rule made absolute accordingly. There shall be no order as to costs.
(J.H. BHATIA,J.) (F.I. REBELLO,J.)
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