The Proposal

Clauses 45 and 46 of the Finance Bill, 2010, seek to amend sections 245A and 245C of the Income-tax Act so as to extend the scope of the Settlement Commission to entertain settlement applications, w.e.f. 1st June, 2010, in search and seizure cases where the income-tax payable for all the years covered by the search exceeds Rs. 50 lakhs. (In non-search cases, the minimum additional amount of income-tax payable is proposed to be increased to Rs. 10 lakhs instead of the present limit of Rs. 3 lakhs). The settlement application can be filed after the commencement of the proceedings for the assessment or reassessment in respect of any of the assessment years referred to in clause (b) of sub-section (1) to section 153A but before the assessments for those years is made by the Assessing Officer. The time limit for completion of the settlement proceedings is also being increased from the present 12 months to 18 months from the end of the month in which the settlement application was made.

Reversal of Policy – Not a case of permanent amnesty

The then Finance Minister, Shri P. Chidambaram, in his budget proposals in 2007, excluded the search and seizure cases from the purview of the Settlement Commission. That was justified to be the continuation of the Government’s policy of levying penalties and prosecuting the tax evaders re-started by abolishing, through the Finance Act, 2003, the block assessment procedure of Chapter XIV B of the Act in search cases. The action of the present Finance Minister, Shri Pranab Mukherjee permitting the assessees in search cases to go to the Settlement Commission and get their cases settled is being criticized as the reversal of the Government’s policy. Some fiscal experts are treating the proposed action as a case of permanent amnesty. In our view, the criticism is unfair. The role of any tax administration is to raise revenues for the Government and not to prosecute every tax evader. Prosecutions need to be resorted to in a few cases of prominent tax evaders to create deterrence for others. The Department is totally at liberty to start criminal prosecution in selected cases after the search and before the application for settlement is made. In such cases, the Commission is divested of its power to grant immunity against prosecution in view of specific prohibition contained in the proviso to section 245H(1) of the Act. Settlement Commission is one of the voluntary alternative dispute resolution mechanisms in India. Similar arrangements of confessional assessments exist in practically every country. Besides, the Commission need not grant immunity from prosecution or penalty to every applicant.

Monetary limits are too high

In our view, there is no reversal of the government policy by the proposed amendments. On the other hand, we are unable to understand the rationale and logic of fixing the high monetary limit of Rs. 50 lakhs. The small and medium tax payers need the benefit of settlement procedure all the more as they can ill afford the high cost of prolonged tax litigation. Besides, at present, the offices of all the four Benches of the Commission have hardly been receiving any fresh settlement applications. Their annual intake has been less than 100 after 1st June, 2007 and onwards. Except for Delhi and Mumbai Benches, with a reasonable number of pre 1st June, 2007 undisposed applications, in other two Benches the applications are too small even to justify their continuance. . We would, therefore, suggest that the limit of Rs. 50 lakhs of income-tax in search cases should be reduced to Rs. 10 lakhs. For non-search cases also, there is very little justification for increasing the monetary limit from Rs. 3 lakhs to Rs. 10 lakhs particularly because the limit of Rs. 1 lakh was raised to Rs. 3 lakhs only three years ago in 2007 and even at this limit of Rs. 3 lakhs, the Commission has hardly been receiving any settlement applications to provide reasonable quantum of work to a high powered judicial body set up for expeditious and final disposal of tax cases way back in 1976.

Modification in the concept of “pendency of a case”

An assessee can approach the Commission during the pendency of assessment proceedings. By omitting clauses (ii) & (iii) in the proviso to clause (b) and omitting clause-(ii) in the Explanation below clause (b) to section 245A and by inserting clause (iiia) in the said Explanation, clause 45 of the Finance Bill, 2010 seeks to define the pendency of assessment proceedings in a search case as from the commencement of the proceedings with the issue of the notice u/s. 153A calling for the tax returns and till the passing of the assessment order by the Assessing Officer. Such a definition of the pendency will have many practical difficulties for the assessees approaching the Commission. Till the assessment order is passed by the Assessing Officer and various issues crystallized, the assessee cannot file a proper application in a search case. It often becomes difficult to ascertain whether the undisclosed income belongs to one person or another. Sometimes, precautionary assessments are made of the same income on two or more assessees. The year to which the income belongs becomes another bone of contention between the assessee and the Revenue. More importantly, the search material would need examination and if this is done in the assessment order of the Assessing Officer, it will become very easy for the Commission to review the same within the time constraints laid down for it and to arrive at a settlement. At the same time, the very purpose of expeditious settlement will be defeated if an unduly long time is given to the assessees to decide as whether he would like to go to the Settlement Commission or fight out his case through normal appeal channels. Meeting both the interests of the assessees and of the Revenue, we suggest that instead of making the settlement application before the passing of the assessment order by the Assessing Officer, the assessee should be permitted to file the settlement application within 90 days of the receipt of the assessment order. This should be made applicable even for non-search cases where similar problems are encountered making it very difficult for the assessees to approach the Commission.

Include cases of first assessment u/s. 147 of the Act to encourage the non-filers

The first assessment u/s. 147, and not re-assessment, should also be covered within the scope of the Settlement Commission. It is no different from the regular assessment proceeding started u/s 142(1) of the Act. If this is done, many non-filers would like to avail of the settlement route with considerable benefit to the revenue.

Settling cross-border transactions

In fact, with the removal of the requirement of complexity of cases, Settlement Commission can become a very useful forum for expeditious settlement of cases involving cross border issues of non-resident tax-payers. Quite often, in international conferences we come across several non-residents, used to the practices of expeditious settlement of their tax liabilities in their home countries, seeking fora, similar to the Settlement Commission with some representation by international tax experts, that would fix their final tax liability in a fair and reasonable manner and within a reasonable time rather than fighting tax litigation which may normally take 10 – 15 years or even more. Internationally, India’s image will improve significantly with consequent benefit in the form of increased flow of capital and technology. Foreigners simply do not understand our constraints of adverse comments by the audit and CBI enquiries faced by even honest tax officers and the need for transparency as being largely responsible for the inflexibility and inconsistency in the Revenue’s stand even on purely legal issues and disinclination to settle an issue in a fair and reasonable manner. In their countries, even in scrutiny cases, determinations are made in very few cases. Most of such cases are settled after access the table discussion between the representatives of the tax payer and those of the Revenue. (In fact, this author had often to face, during his five years of assignments in foreign countries under the IMF/ Commonwealth Fund for Technical Co-operation, the questions relating to the right of a tax-payer to finally know his tax liability within a reasonable time and why in India there are no mediation and settlement procedures within every chief of the taxation office unlike in most other modern tax administrations)

Abatement

The practicability of the proposal to extend the scope of Settlement Commission to search cases, needs an urgent re-examination in view of the provision relating to abatement of settlement proceedings contained in section 245HA(12) (iv) of the Act. If the case is not settled by the Commission within the prescribed period of 12 months (now being extended to 18 months) it reverts back to the Assessing Officer. This is a serious provision and discourages the assessees from going to the Commission. The applicants are required to make a true and full disclosure of their income including the income that is not known to the tax authorities and pay the entire tax and interest there on before even making the settlement application. If after complying with these provisions and after 12 months of examination of their cases, (now proposed to be raised to 18 months), the Commission does not settle the case, it stands abated. The applicant has again to go through the rigours of the normal assessment/appeal proceedings. No reasonable person would, therefore, opt for the Settlement Commission’s route. This is one of the most important reasons why after the introduction of these provisions from 1st June, 2007 the Commission has received so few settlement applications. The provision of abatement and consequent return of the case to the Assessing Officer without any fault on the part of the applicant also appears illegal and is likely to be struck down by the courts.

We would, therefore, suggest for the kind consideration of the Government that it should make amendment, through the present Finance Bill, 2010 itself, at its consideration stage in the Parliament in April, 2010, if possible, to remove the abatement provision. Like, in the case of an assessment proceeding getting time barred, if the Commission is unable to settle a case within 18 months, the amount disclosed in the settlement application should be deemed to be accepted. Where, however, an assessee is not co-operative or the CIT has not been sending the required reports to the Commission, the matter can be disposed of within the time limit on the basis of evidence that is available with the Commission. The applicant (and also the Revenue) can always approach the High Court by filing a writ petition if the Commission’s order is perverse on facts and have it set aside. Revenue’s interests are also safeguarded in the existing legislation. Sub-section (6) of section 245D empowers the Commission, without any time limit, whatsoever to declare the settlement void “if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts”. If the Revenue feels that in any particular case, the Commission made the settlement on the basis of wrong facts, or mis-representation it can always approach the Settlement Commission for declaring the settlement void. In any case, there is very little justification for the existence of the statutory provision in section 245HA for abatement of the settlement proceedings and reverting the case back to the Assessing Officer without any fault on the part of the applicant.

Conclusion

To sum up, we are of the view that the Settlement Commission’s jurisdiction should be extended to search cases of smaller assessees also. They have a stronger case for having their tax liabilities finally determined within a reasonable time. Even on practical considerations, there is no justification, looking to the low institution of settlement applications, to keep the income-tax limit in search cases at Rs. 50 lakhs and in the increasing the limit to Rs. 10 lakhs in non-search cases. The limits should be brought down to Rs. 10 lakhs and Rs. 3 lakhs respectively. The jurisdiction of the Commission should be extended to assessment proceedings started afresh under section 147 of the Act. The tax-payer should be eligible to file the settlement application within 90 days of the receipt of the assessment order since issues would have got crystallized and all the evidence brought on record. The Commission, being a judicial Tribunal, consisting of persons of outstanding merit and long experience in the administration of direct taxes, will then be in a better position to decide the matters in a fair and reasonable manner within the proposed 18 months time limit. The provision regarding abatement of the settlement proceedings should be removed immediately. It makes a mockery of the whole concept of the settlement, seems illegal and is capable of being misused particularly after search and seizure cases come within the purview of the Commission.