Is Chapter XIX-A of the Income Tax Act, 1961 a self-contained code to which Section 147 reassessment does not apply?

Paragraph 19In Brij Lal (supra), the Constitution Bench examined the scheme and framework of Chapter XIX-A, the procedure before the Settlement Commission, and the binding nature of the Commission's Orders. It clarified the application of Sections 234A, 234B, and 234C of the Act, 1961, to proceedings before the Settlement Commission under Chapter XIX-A. It held that interest for default in payment of advance tax under Section 234B of the Act, 1961, is chargeable only up to the admission of the Settlement Application under Section 245D(1), not up to the final Order under Section 245D(4). It further held that the Settlement Commission lacks jurisdiction to reopen concluded proceedings under Section 154 to levy such interest. The observations are summarised as follows: A. The special procedure under Chapter XIX-A of the Act, 1961 for settling cases contains an in-built mechanism for computing total income, which forms the basis of the assessment. Therefore, the provisions for levying interest for default in payment of advance tax, specifically Sections 234A, 234B, and 234C of the Act, 1961, are applicable to proceedings before the Settlement Commission up to the stage of the Order passed under Section 245D(1) of the Act, 1961. B. The terminal point for charging interest under Section 234B of the Act, 1961, is the date of the Order under Section 245D(1), i.e., the stage at which the Settlement Commission admits the case for further proceedings. The liability to pay interest does not extend to the date of the final Settlement Order under Section 245D(4). Parliament did not contemplate levying interest between the admission stage and the ITSC’s final disposal. C. The Settlement Commission lacks authority to invoke Section 154 of the Act, 1961, which provides for rectification of mistakes apparent from the record, to reopen its concluded proceedings for levying interest under Section 234B. Under Section 245-I, orders passed by the Settlement Commission are final and conclusive and can be reopened only in specific instances of fraud or misrepresentation. Unlike the Income Tax Appellate Tribunal (ITAT), the Settlement Commission has not been conferred with statutory powers of rectification. D. The procedure for settlement under Chapter XIX-A is a self-contained code, akin to arbitration proceedings. The objective of this Chapter is the “settlement of liability” rather than the “determination of liability”. Consequently, an Order passed by the Settlement Commission under Section 245D(4) is distinct in nature and not equivalent to an Order of regular Assessment under Sections 143(1), 143(3), or 144 of the Act, 1961. E. The AO’s jurisdiction is not automatically fettered the moment an assessee files a Settlement Application. The Settlement Commission assumes exclusive jurisdiction to exercise the powers of an Income Tax Authority only after it passes an Order under Section 245D(1) permitting the Application to proceed.

Paragraph 21The precedents on the point make a few issues canvassed in the Civil Appeal fairly settled. The precedents may not be closer to the circumstances considered by this Court in this Appeal. In one sense, the circumstances are more solid and favourable to the Assessee, and in another, independent sense, the precedents referred to above provided useful guidance to this Court in appreciating the challenge to the Reassessment Notice under Section 148 of the Act, 1961. The question is whether, notwithstanding an Order under Section 245D(4) of the Act, 1961, the AO has jurisdiction under Section 148 of the Act, 1961, to propose reassessment of an aspect covered by the Settlement Order. The Judgment of this Court in Brij Lal (supra) considered whether the Settlement Commission can reopen its concluded proceedings by recourse to Section 154 of the Act, 1961, to levy interest under Section 234B of the Act, 1961, if it was not done in the original proceedings. The answer is that invocation of Section 154 of the Act by the Settlement Commission cannot be justified. The precedent is to the effect that even the scope of reopening by the ITSC is not complete or referable to any other Section in the Act, 1961, except through Chapter XIX-A of the Act, 1961. The circumstances and the reasons for incorporating Chapter XIX-A of the Act, 1961, are considered in the precedents noted supra. The facility of resolution through Chapter XIX-A can be said to be summed up as a purification of accounts from distorted, suppressed and misrepresented entries of income and expenditure by an Assessee. This is not a simple holy shower but an opportunity to purge by paying the tax, penalty, and interest as may be determined by the ITSC. The procedure under Chapter XIX-A of the Act, 1961, is optional and enables voluntary disclosure by the Assessee for the final determination of tax payable for disputes before the ITSC. Once the Assessee makes an Application, the Assessee cannot withdraw it.

Paragraph 22Per contra, the Revenue is afforded an opportunity to file a Report, place material before the ITSC, and request that the ITSC reject the Application under Section 245C of the Act, 1961, and allow the regular procedure for finalisation of the assessment to be undertaken in accordance with the Act, 1961. Let us briefly summarise the roadmap under Chapter XIX-A of the Act, 1961: A. The statutory settlement framework under Chapter XIX-A of the Income Tax Act, 1961, serves as a specialised alternate dispute resolution mechanism that directly intersects with and temporarily overrides the regular assessment machinery under Sections 142 to 156 of the Act, 1961. B. The settlement procedure cannot be invoked in a vacuum. It requires an active, pending proceeding under the regular assessment machinery as a statutory precondition, namely: i. An assessment, reassessment, or search assessment proceeding must be pending against the taxpayer under Sections 142-144 (inquiry and assessment), Sections 147–148 (income escaping assessment/reopening), or Sections 153A–153C (search and requisition assessments) of the Act, 1961. Without a pending proceeding, the ITSC lacks jurisdiction to entertain an Application. ii. The Assessee must have already filed the required Income Tax Return for the assessment year(s) in question before making the Settlement Application. iii. The additional income tax payable on the undisclosed income disclosed in the Settlement Application must exceed the statutory minimum threshold of Rupees Ten Lakhs. iv. The Application must be filed in the prescribed official form and must contain a full and true disclosure of the undisclosed income, the specific manner in which such income was derived, and the detailed computation of additional tax due. (emphasis added) v. The Application must be accompanied by the statutory fee prescribed under the Rules. vi. Once an Application under Section 245C is submitted, it is irrevocable and cannot be withdrawn by the applicant under any circumstances. C. Exclusive Jurisdiction: Upon submission, the ITSC or the Interim Board processes the Application. This stage marks a fork in the road between ordinary assessment and the settlement route. i. Within 7 days of receiving the Application, the Authority issues a Notice to the Applicant, requiring an explanation as to why the Application should be allowed to proceed. ii. Within 14 days of receipt of the Application, the Authority must pass a written Order either rejecting the Application or allowing it to proceed. If no Order is passed within this period, the Application is deemed to be allowed to proceed. iii. If the Application is not allowed to proceed, the regular assessment machinery remains undisturbed, no exclusive jurisdiction vests in the ITSC, and the AO continues proceedings under Sections 142 to 156 of the Act, 1961, as before. iv. If the Application is admitted (or deemed admitted), Section 245F(2) is triggered immediately. The ITSC assumes exclusive jurisdiction over the case. Because two Authorities cannot simultaneously exercise jurisdiction over the same subject matter, the regular assessment machinery, i.e., Sections 142–156, including inquiry, reassessment, search assessments, rectification, and demands, is placed in statutory abeyance. D. Once admitted, the case proceeds towards settlement of the income tax payable on the Application filed by the Assessee and other amounts payable thereon. The ITSC then calls for a comprehensive report from the Principal Commissioner or the Commissioner of Income Tax, which must be submitted within 45 days. The ITSC then reviews the Commissioner's Report, the underlying records, and the case’s complexity. Both the Applicant and the Commissioner are given an opportunity to be heard, and the ITSC may direct further inquiries or investigations, if warranted. E. Proceedings under Section 245D of the Act, 1961, conclude in one of two ways: i. The ITSC passes a conclusive Order settling the terms, including the determination of total income, tax liability, interest, and penalty. The order attains finality and permanently displaces the regular assessment machinery under Sections 142 to 156 for the subject assessment years. Any tax or liability determined must be paid within 35 days of receipt of the Order. Delayed payments attract simple interest at 15% per annum. ii. If the Application abates under Section 245HA, the freeze under Section 245F(2) is lifted. The AO’s jurisdiction revives, and regular assessment or reassessment proceedings resume from the stage at which they were placed in abeyance. The proceedings do not restart from zero; all confidential disclosures, submissions, and materials placed before the Commission remain fully available and admissible for the AO’s use. F. To ensure the Revenue is not prejudiced during the interlude before the ITSC, the statutory limitation period under Sections 153 and 153B is protected. The entire period from the date the Settlement Application is filed until the date it is rejected, disposed of, or abated is excluded from the time limits for completing assessments. If the AO abates the matter under Section 245HA, the law extends or carves out this period, thereby giving the AO the full statutory runway to complete the revived assessment proceedings. G. Section 245H also empowers the ITSC to grant immunity from prosecution for offences under the Income Tax Act or the Indian Penal Code, as well as partial or total immunity from penalties, provided the applicant has cooperated and made a full and true disclosure. H. Under Section 245-I, Orders passed under Section 245D(4) are conclusive on the matters stated therein. No appeal lies against an ITSC Order. It can be challenged only under the extraordinary writ jurisdiction of the High Courts (Article 226) or the Supreme Court (Articles 32/136) on limited grounds, such as procedural violations, lack of jurisdiction, or violation of natural justice. I. A Settlement Order obtained by fraud or misrepresentation of facts is void under Section 245D(6), enabling the regular assessment machinery to reopen and assess the escaped income without any limitation.