Is the Revenue's sole remedy against a Settlement Order, alleged to be obtained by fraud or misrepresentation, an application under Section 245D(6) of the Income Tax Act, 1961?

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 Once an Application under Section 245C is submitted, it is irrevocable and cannot be withdrawn by the applicant under any circumstances.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.

Paragraph 24The Revenue is not without recourse to realise tax on undisclosed income, even in cases filed under Chapter XIX-A of the Act, 1961. The Revenue has the option to move under Section 245D(6) of the Act, 1961 on the grounds of fraud and misrepresentation. The words “fraud and misrepresentation” depend on the circumstances and are to be decided on a case-to-case basis; by making out a case under either head, the ITSC’s Order is reopened, which ultimately leads to the Settlement Order being declared void. The normal assessment procedure is restored or enabled, but not otherwise. If the jurisdiction of the AO under Sections 143(2), 148, 154, etc., is made independent and available for exercise again, the finality attached to the Settlement Commission will be defeated. Parliament did not envisage this course. On the contrary, while reopening the issues before the ITSC is provided for, judicial review by the Constitutional Courts under Articles 226 and 32/136 is available, but the AO’s power to reassess the Settlement Order passed by the ITSC is unavailable.

Paragraph 26The Revenue availed the remedy under Section 245D(6) of the Act, 1961 before the ITSC, resulting in the findings recorded in the Order dated 16.12.2011, which has become final.