DHC on Constitutional validity of Fin Act 2007 amendment
April, 05th 2008
IN THE HIGH COURT OF DELHI AT NEW DELHI
WP (C) No. 5462 of 2007 and other connected cases.
Judgment reserved on: March 20, 2008
28.03.2008 Judgment delivered on: March 28, 2008
1. Vatika Farms Private Limited Through its Director Sh. Anil Bhalla 98, 2nd Floor, Sant Nagar New Delhi.
2. Sh. Anil Bhalla Director of Vatika Farms Private Limited 4, Hyde Park, Bandh Road Prakrati Marg, Village-Sultanpur Delhi. ?Petitioners
Through Mr. Soli J. Sorabjee and Mr. C.S. Agarwal, Sr. Advs. with Mr. Ajay Vohra, Ms. Kavita Jha, Mr. Preetesh Kapoor, Mr. Rahul Yadav, Mr. Sandeep Karhail, Mr. O.S. Bajpai, Mr. Kaanan Kapur, Mr.Rajiv Garg, Mr. Ashish Garg, Dr. Rakesh Gupta, Mr. Prakash Kumar and Mr. S.R. Wadhwa, Advocates
1. Union of India Through its Secretary Ministry of Finance, Department of Revenue Government of India North Block, New Delhi. 2. Income Tax Settlement Commission Principal Bench 4th Floor, Lok Nayak Bhawan Khan Market, New Delhi. ?Respondents
Through Mr. P.P. Malhotra, ASG with Ms. Sonia Mathur and Mr. R.D. Jolly, Advocates
HON'BLE MR. JUSTICE MADAN B. LOKUR HON'BLE MR. JUSTICE V.B. GUPTA
1. Whether the Reporters of local papers may be allowed to see the judgment? Yes
2. To be referred to Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
MADAN B. LOKUR, J.
By this order, we propose to deal with the existing grievances of the Petitioners, at a prima facie and interim stage, in a batch of over a hundred writ petitions. Learned counsel for all the parties were heard on these grievances from 17th to 20th March, 2008 when orders were reserved.
2. In this particular writ petition (along with a few connected writ petitions), we had earlier passed a detailed interim order on 18th December, 2007 and the present order is really a continuation thereof.
3. The Petitioners have challenged the provisions of Sections 245D(2A), 245D(2D), 245D(4A) and 245HA(1) of the Income Tax Act, 1961 (the Act) as being arbitrary and unconstitutional. There is also a challenge to some provisions of the Finance Bill, 2008 but we are presently not concerned with that.
4. The challenge has arisen out of amendments to the Act by the Finance Act, 2007. The effect of the amendments is that where a settlement application has been filed under Section 245-C of the Act in the Settlement Commission, before 1st June, 2007 (as in all the writ petitions before us) the Settlement Commission ?shall pass an order under sub-section (4)? on or before 31st March, 2008 [Section 245-D (4A)]. In the event the Settlement Commission does not pass such an order, effectively deciding the settlement application on or before 31st March, 2008, the settlement application ?shall abate? by operation of law [Section 245-H(1)].
5. On their part, the Petitioners were expected to pay the additional tax on the income disclosed in the settlement application filed before the Settlement Commission and also pay interest thereon on or before 31st July, 2007 failing which the settlement application filed under Section 245-C of the Act? shall abate? by operation of law [Section 245-H(1)].
6. Feeling aggrieved by this, some Petitioners approached this Court before 31st July, 2007 and contended that even though they had paid the additional tax, it was not possible to compute or pay the interest thereon before 31st July, 2007. It was prayed that, therefore, an interim order be passed so that their settlement application does not abate by operation of law.
7. Upon a consideration of the issues raised, this Court passed an ad interim order before 31st July, 2007 to the effect that the settlement application of those Petitioners would not abate on that date only because of their failure to pay interest on the additional tax paid. This Court also directed the Settlement Commission to dispose of the settlement application of those Petitioners on or before 31st March, 2008 so that their settlement application does not abate by operation of law.
8. The Respondents later on filed an application for vacation of the adinterim order passed by this Court but that was declined by the order dated 18th December, 2007 and the interim order granted was simultaneously confirmed.
9. In the interim order dated 18th December, 2007 it was noted that the Respondents had not expressed their inability to decide the settlement applications on or before 31st March, 2008. This Court, therefore, assumed that it was theoretically possible for the Respondents to comply with the mandate of the law, inter alia, by setting up a large number of benches of the Settlement Commission to deal with the pending settlement applications. It was also noted that all the writ petitions would become infructuous if the settlement applications of the Petitioners are decided on or before 31st March, 2008 but that the factual position would be known only quite close to 31st March, 2008. It was noted, in this context, that in fact the submission of the learned Additional Solicitor General was that the present writ petitions may be pre-mature since the crucial date of 31st March, 2008 is still quite far away.
10. Based on the above, while confirming the ad interim order and dismissing the application of the Respondents for vacation thereof, this writ petition (and other connected writ petitions) was listed for directions on 3rd March, 2008 by which time it was expected that the Respondents would take some decision one way or the other, either on the disposal of the settlement applications or some other remedial measure as for example setting up additional benches of the Settlement Commission or extending the cut-off date from 31st March, 2008 to some other date, or some such measure as may be deemed appropriate.
11. Since January, 2008 we have been receiving a very large number of writ petitions filed by several other persons raising the very same challenge as the Petitioners in this writ petition and other connected writ petitions. In fact, over a hundred writ petitions have been filed and following the earlier orders passed by this Court, directions were given to the Settlement Commission to comply with the mandate of the law and dispose of the settlement applications of the Petitioners before 31st March, 2008 so that they do not abate.
12. The main difference between the earlier set of writ petitions and the later writ petitions is that the date of 31st July, 2007 had passed and, therefore, the Petitioners in the later writ petitions are all those persons who had in fact not only paid the additional tax but had also paid interest thereon and their limited concern is that their settlement application should be disposed of on or before 31st March, 2008 so that it does not abate and they are not required to face the consequences of abatement.
13. We are not inclined to go into the interlocutory application filed in each individual petition because the substantive grievance of all the Petitioners is the same, and even if any one of them has not filed an appropriate interlocutory application (as it appears), in our opinion, it would be unjust if those Petitioners are discriminated against for a clerical fault. The additional consideration that we have in mind is that we had directed the Settlement Commission in almost all these cases to dispose of the settlement application of the Petitioners on or before 31st March, 2008 and there was no reason for any one of them or for us to assume that the Settlement Commission would not comply with the orders passed by this Court. Consequently, we are treating all Petitioners equally, whether they have moved a suitable application for interim relief or not, as long as they have made a substantive prayer for quashing the ?offending? provisions of the Finance Act, 2007.
14. We may also mention that in CWP No. 245/2008 (Vardhman Properties Ltd. v. Union of India and another), the Secretary to the Settlement Commission filed an affidavit dated 29th January, 2008 in which it is candidly admitted that it is not possible for the Settlement Commission to dispose of all the pending cases before 31st March, 2008. It is also mentioned in the affidavit that the disposal of cases for the last five years from 2002-2003 to 2006-2007 was 100, 88, 75, 85 and 101 respectively. Therefore, a direction from this Court to the Settlement Commission to decide the settlement application of all the Petitioners on or before 31st March, 2008 would really be a futile direction, incapable of compliance.
15. It is for all these reasons that we took up this batch of more than 100 cases together with the clear and express understanding given to all learned counsel including learned counsel for the Respondents that what we would be deciding is whether the settlement application filed by the Petitioners should abate on 31st March, 2008 by operation of law or not.
16. As a backgrounder, we may recall that the Settlement Commission was constituted as a result of a Report given by a Committee headed by Hon?ble Mr. Justice K.N. Wanchoo, a former Chief Justice of India. The Wanchoo Committee recommended a settlement machinery since, in the administration of fiscal laws, the primary objective is to raise revenue and so 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.? The Committee opined that such a settlement should be fair, prompt and independent.
17. The Wanchoo Committee recommended the setting up of a Direct Taxes Settlement Tribunal which would ensure impartial and quick decisions. That Tribunal would proceed with a settlement petition only if the Income Tax Department raised no objection to its being entertained otherwise that Tribunal might become an escape route for the tax evaders. In other words, the Wanchoo Committee gave adequate protection both to the tax payer in terms of ensuring an impartial and quick decision or settlement in his case and also to the Income Tax Department by enabling it to oppose a settlement application in case the tax evader sought to use the process of the Settlement Tribunal as an escape route for evading tax. Acting on these recommendations, the Act was amended with effect from 1st April, 1975 by introducing Chapter XIX-A for settlement of cases through a Settlement Commission.
18. Learned counsel for the Petitioners submitted that admittedly the purpose of setting up the Settlement Commission is quite laudable. Consequently, several assessees approached the Settlement Commission for a one-stop settlement of their cases. The Income Tax Department has, for valid reasons, opposed several settlement applications from time to time and in many cases they were successful in their opposition.
19. To ensure that the settlement process is not unduly prolonged, the Act was amended with effect from 1st June, 2002 so that 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 [settlement] application was allowed to be proceeded with.? We have been told that the period of four years for final disposal of a settlement application is inadequate, since many settlement applications are pending disposal for a much longer period. Ironically, however, instead of taking remedial steps, the Finance Act, 2007 was introduced whereby the period of four years was reduced to eight months (from 31st July, 2007 to 31st March, 2008) for the disposal of a settlement application, in so far as the Petitioners are concerned.
20. For the present purposes, the sum and substance of the grievances and contentions of learned counsel for the Petitioners is that they had, in good faith, approached the Settlement Commission for a settlement of their disputes in accordance with law. They have always been ready and willing to have the dispute settled at the earliest, and they have not unnecessarily tried to delay the disposal of the settlement application - in any case, no such allegation has been made by the Respondents in this regard. Yet, for reasons that are completely beyond their control, they are being made to confront a situation whereby their settlement application shall abate. On the other hand, and to compound the irony of the situation, the Respondents had (and still do) the power, resources and capacity to ensure that the settlement application is disposed of by 31st March, 2008 but they have not even moved a little finger to do so leaving the Petitioners to their own devices. The Respondents have, through their complete inaction, virtually subverted the mandate of the law to the detriment of the Petitioners. This, according to learned counsel, is hopelessly arbitrary and unconstitutional.
21. Learned counsel for the Petitioners submitted that the consequence of a settlement application not being disposed of by 31st March, 2008 is calamitous. Broadly, the adverse consequences are: The Petitioners would be required to face a regular assessment by the income tax authority (as defined in Section 116 of the Act) before whom the case of the Petitioner was pending when the settlement application was made. In most cases, the authority would be the Assessing Officer whose superior, the Commissioner, may have opposed the admission of the settlement application before the Settlement Commission [Section 245-D(1) before its amendment by the Finance Act, 2007]. Under such circumstances, the Petitioners cannot be expected to get a fair and just hearing or treatment from the Assessing Officer, who is, in a sense, a litigant against the Petitioners before the Settlement Commission.
Additionally, the Assessing Officer would be inherently biased against the Petitioners in such a situation because he would be fully aware of the fact that the Petitioners had approached the Settlement Commission for a settlement on the basis of material not earlier disclosed. In other words, the Assessing Officer would have already pre-judged the ?guilt? of the Petitioners inviting him to go all out to investigate the affairs of the Petitioners so as to completely nail them. The bias would not only be ?personal? but also institutional.
Confidential information disclosed by the Petitioners to the Settlement Commission (which was otherwise not available to the Assessing Officer) would now be made available to him and could be used by him against the Petitioners [Section 245-HA(3)]. The procedure now laid down by the Finance Act, 2007 is neither just, nor fair nor reasonable.
22. It must be appreciated that the assumptions made by the Wanchoo Committee and the rationale given by it for setting up a settlement body are still valid, and the Respondents have not submitted anything to the contrary. The Wanchoo Committee assumed that the primary objective of fiscal laws is to raise revenue ? this is not doubted; it also assumed that a rigid attitude on the part of the State would inhibit a tax-evader from coming forward to make a clean breast of his affairs ? this is also not doubted; if a settlement machinery is not provided for, the investigational machinery of the State would be under a considerable strain and in fact resources may be wasted in pursuing cases where success is doubtful ? this again is not doubted; a rigid attitude would lead to needless litigation and will hold up collections ? again not doubted. Taking all these factors into consideration, it was recommended that there should be a provision for settlement with a taxpayer.
23. Similarly, even the Supreme Court has made certain assumptions in favour of the Revenue and given a justification for having a settlement machinery. In Commissioner of Income Tax v. Express Newspapers Ltd.  206 ITR 443 the Supreme Court noted that there may be certain cases that need to be given a quietus to, once and for all, and they should not be fought through the usual channels. For example, there may be cases that are complex or cases that may require a prolonged investigation or cases that may require a cumbersome investigation etc. and it is these kind of cases that may be entertained by the Settlement Commission.
24. That the assumptions made by the Wanchoo Committee and the Supreme Court are valid even today and that they subsist is clear from the fact that the Wanchoo Committee Report has not been trashed by the Respondents and the fact that the Settlement Commission still exists and has not been wound up. After all, if all the assumptions and reasons were not correct, the Respondents would have wound up the Settlement Commission ? why keep an ineffectual or worthless body in place for no apparent reason? The fact that the Settlement Commission has been allowed to exist, and continues to exist and entertain fresh settlement applications, clearly suggests that it is needed, even if it is for a few cases. And, if it is needed for a few cases, why is it not needed for a greater number of cases? These are a few of the many doubts that the Respondents have not even cared to respond to or clear.
25. In this context, it is also important to note three other facts which suggest that the Settlement Commission is not a redundant appendage. Firstly, the Act provides that the Settlement Commission shall have ?exclusive jurisdiction to exercise the powers and perform the functions of an income-tax authority under this Act in relation to the case? before it [Section 245-F(2)]. Secondly, when a taxpayer (or a tax evader, as the case may be) files a settlement application before the Settlement Commission, he cannot withdraw the application [Section 245-C(3)]. It may either be dismissed by the Settlement Commission (not further proceeded with) or it would have to result in a settlement under Section 245-D(4) of the Act. Thirdly, Section 245-I of the Act makes every order passed by the Settlement Commission conclusive as to the matters stated therein and no matter covered by the final order passed by the Settlement Commission shall be re-opened in any proceeding under the Act or under any other law for the time being in force. All these facts show the enormous power wielded by the Settlement Commission, which still exists and which it still retains. All the assumptions and facts also show that the Settlement Commission is unlikely to be wound up in the near future.
26. For these reasons, we are of the prima facie opinion that even though the Settlement Commission continues to exist, the requirement that the settlement application ?shall abate? if an order under Section 245-D(4) of the Act is not made by 31st March, 2008 is unfair, unjust and arbitrary. This is all the more so since the abatement could have been prevented by the Respondents by taking remedial measures, which they failed to take. The result of the inaction of the Respondents was clear, obvious and foreseeable, but they unfortunately, shut their eyes to realism and pragmatism.
27. The consequences of abatement are calamitous, as submitted by learned counsel for the Petitioners. This can best be appreciated by comparing and contrasting the pre and post 31st March, 2008 situation. Some of these are: The Wanchoo Committee recommended that the constitution of the settlement body should ?encourage officers with integrity and wide knowledge and experience to accept assignments on the Tribunal? and so the status and emoluments of its members should be as of the members of the Central Board of Direct Taxes (the CBDT). The Act requires that the members of the Settlement Commission must be ?persons of integrity and outstanding ability, having special knowledge of, and experience in, problems relating to direct taxes and business accounts. [Section 245-B(3)]. In contrast, once the settlement application abates, the fate of the Petitioners will be in the hands of an Assessing Officer or a Commissioner of Income Tax (Appeals). Both these categories of officers are no doubt persons of integrity, but they certainly do not have the wide knowledge and experience that a member of the CBDT would have. The fate of the Petitioners would, therefore, be placed in the hands of far less experienced and knowledgeable persons, to their detriment and prejudice. This may not be objectionable, per se, but coupled with other factors, it would have an adverse impact on the Petitioners.
Proceedings before the Settlement Commission are conducted by a Bench of independent persons and they are judicial proceedings for all intents and purposes but the proceedings before the Assessing Officer are conducted by only one person and they are only quasi judicial. The Assessing Officer is an officer of the Income Tax Department, having loyalty to his department (not that there is anything wrong in it as such), but in the present circumstances, that officer may not necessarily be independent in a case pertaining to any one of the Petitioners. It is well settled that a hearing by an impartial tribunal is a fundamental requirement of the rule of law and that may be missing in the case of some of the Petitioners.
An order passed by the Settlement Commission is final and conclusive ?as to matters stated therein and no matter covered by such order shall, save as otherwise provided in this Chapter [XIX-A], be reopened in any proceeding under this Act or any other law for the time being in force.? [Section 245-I]. A settlement application is decided on a one-stop basis but an aggrieved Petitioner would still have a constitutional remedy of judicial review in a High Court. However, in the case of a regular assessment after abatement of a settlement application, the Petitioner would have to go through a plethora of appeals and authorities before a final decision is taken in his case and even then the remedy available to him is extremely limited ? only on a substantial question of law in a High Court. This is clearly not an adequate substitute available in law.
The Settlement Commission has exclusive jurisdiction and plenary powers to decide all issues brought before it including, in an appropriate case and where expediency so demands, the power to reopen completed proceedings [Sections 245-E and 245-F]. In other words, the entire gamut of disputes raised by the Petitioners can be settled before the Settlement Commission, impartially and quickly, as postulated by the Wanchoo Committee. As a part of the settlement, the Settlement Commission also has the plenary power to grant immunity from prosecution and penalties to the Petitioners [Section 245-H]. On the other hand, the income tax authority, after abatement of a settlement application has no such exclusive jurisdiction or plenary power. Even in the matter of grant of immunity from prosecution and penalties, there is no provision in the Finance Act, 2007 although the Finance Bill, 2008 has made a provision for it, with power being vested for granting immunity in the Commissioner of Income Tax, through the insertion of Section 273-AA and Section 278-AB in the Act.
There is a fundamental distinction between a settlement under Chapter XIX-A of the Act and a regular assessment through adjudication under the provisions of the Act. As far as the Petitioners are concerned, this has considerable relevance to the way in which the problem is viewed and addressed by the appropriate authority.
The Assessing Officer to whose jurisdiction the Petitioners are relegated on the abatement of the settlement application, is himself a litigant before the Settlement Commission having a right to oppose (and in many cases having opposed) admission of a settlement application. If the assessment of the Petitioners income is to be made by someone who has opposed the case of the Petitioners, it is not possible or realistic for them to expect to get fair or even handed treatment from such an Assessing Officer. The Petitioners ask: how can a litigant expect a fair adjudication from a party opposing its case? In addition to the above, even if a Petitioner succeeds before the Assessing Officer, the Commissioner is entitled to use his powers under Section 263 of the Act to revise an assessment order on the ground that it is prejudicial to the interests of the Revenue. This is pointed out not only in the context of bias and a fair hearing but also in the context of the Petitioners having to go through a multiplicity of proceedings rather than getting a one-stop settlement from the Settlement Commission.
28. Learned counsel for the Petitioners referred to Francis Bennion?s Statutory Interpretation (1984 edition page 237) quoted in Shashikant Laxman Kale v. Union of India,  185 ITR 104 wherein a distinction is made between the purpose and object of a legislation and the legislative intention. It is stated: ?The distinction between the purpose or object of an enactment and the legislative intention governing it is that the former relates to the mischief to which the enactment is directed and its remedy, while the latter relates to the legal meaning of the enactment.?
The question raised by learned counsel was: what is the true purpose or object of the challenged provisions of the Finance Act, 2007? No one really seems to know. It appears to be to ensure expeditious disposal of settlement applications pending before the Settlement Commission. If that is so, is the arbitrary though expeditious abatement of these applications the only solution or the most appropriate solution? When the Petitioners are desirous of having their settlement applications disposed of quickly, can the Respondents be permitted to say that they will not dispose of the applications, but wait for them to abate, because that is the comparatively easier option? Surely, the answer to these questions raised by learned counsel for the Petitioners must be in the negative. The Petitioners cannot be prejudiced for no fault of theirs and entirely on the basis of the whims and fancies of the Respondents who may or may not finally decide a settlement application on or before 31st March, 2008.
29. In this regard, another question of seminal importance was raised by learned counsel ? what is the criterion for deciding which settlement application should be taken up first? With such a large number of pending applications, the Settlement Commission may, at its whims and fancies, take up the application of one Petitioner for disposal and postpone the disposal of the settlement application of another Petitioner. The ?first? Petitioner would have the benefit of disposal of his settlement application by the Settlement Commission, while the settlement application of the ?second? Petitioner would abate and he would be relegated to a regular assessment by the Assessing Officer. Why should one Petitioner benefit or steal a march over another, when all things are equal? This would lead to a hostile discrimination and palpable arbitrariness in the selection criteria, completely violating the equality clause enshrined in Article 14 of the Constitution. ?While dealing with the validity of a classification, the rational nexus of the differentia on which the classification is based has to exist with the purpose or object of the legislation so determined.? [Shashikant Laxman Kale]. In so far as the Petitioners are concerned, there is no basis for a valid classification for disposing of or not disposing of a particular settlement application, and if there is a valid classification, it has no nexus with the object sought to be achieved, namely, expeditious disposal of all settlement applications within a time-bound period. In other words, similarly placed persons are being subjected to hostile discrimination.
30. Learned counsel for the Petitioners also raised the issue of an arbitrary cut-off date for disposal of a settlement application, namely, 31st March, 2008. It was submitted that all the Petitioners are similarly circumstanced and similarly placed. Having grouped all of them together, where is the occasion for giving an expeditious hearing to some Petitioners and not to others? What is the basis for ?benefiting? some and not others? It would have been a different matter altogether, according to learned counsel, if all the Petitioners are given an expeditious disposal before 31st March, 2008 with several benches of the Settlement Commission being set up, or none of them being given a hearing before 31st March, 2008. By placing similar Petitioners in dissimilar situations, many of them disadvantageously, the Respondents have violated Article 14 of the Constitution. Reliance in this respect was placed on M.C. Dhingra v. Union of India, AIR 1996 SC 2963.
31. In University Grants Commission v. Sadhana Chaudhary, (1996) 10 SCC 536 the Supreme Court 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. When it is seen that a line or a point there must be 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 can be said that it is very wide off the reasonable mark.?
32. Similarly, in Ami Lal Bhat (Dr) v. State of Rajasthan, (1997) 6 SCC 614 the Supreme Court said: One must accept that such a cut-off date cannot be fixed with any mathematical precision and in such a manner as would avoid hardship in all conceivable cases. As soon as a cut-off date is fixed there will be some persons who fall on the right side of the cut-off date and some persons who will fall on the wrong side of the cut-off date. That cannot make the cut-off date, per se, arbitrary unless the cut-off date is so wide off the mark as to make it wholly unreasonable. This view was expressed by this Court in Union of India v. Parameswaran Match Works [(1975) 1 SCC 305] and has been reiterated in subsequent cases.?
33. Finally, in Union of India v. M.V. Valliappan, (1999) 6 SCC 259 it was said: ?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.?
34. While it is true that in situations such as the present, some cut-off date has to be fixed, that date cannot be arbitrarily fixed without having any reasonable or real basis. Why the date for disposal of all pending settlement applications on or before 31st March, 2008 is unrealistic (if not illusory) is clear from the affidavit filed by the Settlement Commission on 29th January, 2008 and which we have adverted to above. Even in the order passed by this Court on 18th December, 2007 reference has been made to the Report submitted by the Comptroller and Auditor General of India to illustrate the sheer magnitude of the task of disposal of all pending settlement applications by 31st March, 2008 and the impossibility of achieving the goal without concrete steps being taken by the Respondents on a war footing.
35. The cut-off date of 31st March, 2008 appears to have been fixed without giving a thought to ground realities and it is so wide off the mark and incapable of being adhered to that it is nothing but capricious and whimsical. The unreasonableness can be tested, even today, by the fact that presently a few thousand settlement applications are pending and they will abate in a few days from now. On the other hand, some fortunate Petitioners (or others similarly placed) may yet get the benefit of a settlement by the Settlement Commission. There is no apparent reason for this discriminatory treatment by which some persons are left out in the cold.
36. On the issue of the Petitioners getting a fair hearing in the regular assessment after abatement of the settlement application, reliance was placed on State of West Bengal v. Shivananda Pathak and Ors, AIR 1998 SC 2050. Referring to paragraphs 29 to 34 of the Report, it was submitted that a ?fair hearing? or ?fair play? in quasi judicial matters means that the adjudicating authority must not only be impartial, but he should also be neutral enough to apply his mind objectively to a given set of facts. While it is not possible to have actual proof of bias in a case, there must be a real likelihood of bias and justice must not only be done, but it must visibly be seen to be done. In so far as the Petitioners are concerned, the Assessing Officer or his superior, the Commissioner is actually a litigant against the Petitioners before the Settlement Commission. The Commissioner is entitled to oppose (and in most cases has opposed) the admission of the settlement application for being proceeded with any further. The Petitioners ask: how can they expect to get a fair hearing from someone who opposes their case? It is a bit like asking the plaintiff or defendant in a case to arbitrate the dispute with the opposite party. Since this is one of the direct consequences of abatement of the settlement application, the Petitioners submit that the provision for abatement is arbitrary and unconstitutional.
37. Learned counsel for the Petitioners relied on Bidhannagar (Salt Lake) Welfare Association v. Central Valuation Board, AIR 2007 SC 2276 to contend that where a decision making power is taken away from an independent authority, which has unlimited and plenary powers, and statutorily conferred on persons who are not independent or are otherwise interested 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.
38. Another issue that greatly agitated learned counsel for the Petitioners relates to a breach in the confidentiality of materials made available to the Settlement Commission. To appreciate the prejudice to the Petitioners after abatement of the settlement application, it is necessary to understand the procedure laid down by law that is binding on the Settlement Commission.
39. Rule 44C and Rule 44CA of the Income Tax Rules, 1962 prescribe the form of application (under Section 245-C of the Act) for settlement of cases. The application is required to be submitted in Form 34B in Appendix II to the Income Tax Rules. The annexure to Form 34B is of some importance and this requires the Assessee to state the following: - ?1. Amount of income which has not been disclosed before the Assessing Officer.
2. Additional amount of income-tax payable on the said income.
3. Full and true statement of facts regarding the issues to be settled, including the terms of settlement sought for by the applicant.
4. The manner in which the income referred to in item No.1 has been derived.?
40. Rule 44CA of the Income Tax Rules is important and this reads as follows: - ?44CA. Disclosure of information in the application for settlement of cases.
(1) The Settlement Commission may, while calling for a report from the Commissioner under sub-section (1) of section 245D, forward a copy of the application filed in Form No. 34B (other than the Annexure and the statements and other documents accompanying such Annexure).
(2) Where an order under sub-section (1) of section 245D allowing the application to be proceeded with is made by the Settlement Commission, the information contained in the Annexure to the application in Form No. 34B and in the statements and other documents accompanying such Annexure shall be sent to the Commissioner along with a copy of the said order.? (Emphasis given)
41. A perusal of Rule 44CA (1) of the Income Tax Rules shows that the Settlement Commission may call for a report from the Commissioner under sub- section (1) of Section 245D of the Act and while doing so it shall forward a copy of the application in Form 34B in Appendix II to the Income Tax Rules other than the annexure and the statement and other documents accompanying such annexure. It is only when a settlement application is admitted for final consideration under Section 245D of the Act (and therefore the Settlement Commission has exclusive jurisdiction over the case) that the information contained in the annexure as well as in the statement and other documents accompanying the annexure shall be disclosed to the Commissioner.
42. Under the provisions of Section 245-F(7) of the Act, the Settlement Commission is entitled to regulate its own procedure. In exercise of this power the Income Tax Settlement Commission (Procedure) Rules, 1997 have been framed (for short the Procedure Rules). Rule 6 of the Procedure Rules prescribes that the Settlement Commission shall forward a copy of the settlement application, excluding the annexure to the Commissioner for furnishing a report and Rule 9 of the Procedure Rules prescribes that where the settlement application is allowed to be proceeded with or admitted by the Settlement Commission, only then would the Commissioner be entitled to receipt of the annexure to Form 34B in Appendix II to the Income Tax Rules furnished by the Petitioner. This is in consonance with Rule 44CA of the Income Tax Rules.
43. Rule 6 and Rule 9 of the Procedure Rules read as follows: - ?6. Commissioner?s report, etc., under section 245D(1).
On receipt of a settlement application, a copy of the said application (excluding the Annexure) shall be forwarded by the Commission to the Commissioner with the direction to furnish his report under sub-section (1) of section 245D within 45 days of the receipt of the said copy of the application by him. (Emphasis given)
9. Commissioner?s further report.
Where an order is passed by the Commission under sub-section (1) of section 245D allowing the settlement application to be proceeded with, a copy of the annexure to the said application together with a copy of each of the statements and other documents accompanying such annexure, shall be forwarded to the Commissioner along with a copy of the said order with the direction that the Commissioner shall furnish a further report within ninety days of the receipt of the said annexure (including the statements and other documents accompanying it) or within such further period as the Commission may specify.
If the Commissioner fails to furnish his report on or before the expiry of the specified period of 90 days or such extended period, the Commission may pass the appropriate order without such report.?
44. The proceedings before the Settlement Commission are judicial proceedings (Section 245-L of the Act) and they are not open to the public (Rule 16 of the Procedure Rules). Similarly, under Section 245-G of the Act, no person (other than the applicant) is entitled to inspect or obtain copies of any report made by any income tax authority to the Settlement Commission. In other words, the proceedings before the Settlement Commission are completely confidential and any material adverse to the applicant is kept away from the public eye and cannot be used against the applicant for any purpose whatsoever.
45. Our attention was drawn to Chhotalal S. Ajmera (HUF) v. Commissioner of Income tax,  289 ITR 1 wherein the Supreme Court has considered the annexure to Form 34B in Appendix II to the Income Tax Rules ?as a confidential document, which is not disclosed to the Commissioner of Income Tax until the Settlement Commission admits the application for being proceeded with.? Consequently, there can be no doubt that the information in the annexure is confidential.
46. By virtue of Section 245-HA(3) of the Act, as incorporated by the Finance Act, 2007, the Assessing Officer or any other income tax authority shall be entitled to use all the confidential information produced by the Petitioners before the Settlement Commission and can even use it in proceedings before him against the Petitioners. The result of this is that the confidentiality of the settlement proceedings, earlier guaranteed by the Act and the Rules framed there under, has now been taken away and materials that were strictly within the domain of the Settlement Commission prior to the Finance Act, 2007 can now be used against the Petitioners for all purposes including for assessment proceedings, penalty proceedings and for prosecution purposes also. This appears to us to be clearly arbitrary.
47. For the purposes of grant of interim relief, learned counsel for the Petitioners have also relied upon a very brief order passed by the Bombay High Court on 4th March, 2008 in Writ Petition No. 525/2008 (M/s. Sunita Textiles Ltd. v. Commissioner of Income Tax) wherein it has been directed that the Settlement Commission will not consider the settlement application filed by that Petitioner as having abated under Section 245-HA of the Act for want of compliance with Section 245-D (2D) of the Act, as mandated by the Finance Act, 2007.
48. Reliance is also placed by learned counsel for the Petitioners on an order dated 12th March, 2008 passed by the Allahabad High Court in Writ Petition No. 454 of 2008 (R.B. Society Jewellers v. Union of India and ors), wherein it has been directed as follows: - ?After hearing learned counsel for the petitioner and Sri Bharat J. Agarwal, Senior Advocate assisted by Sri Shambhu Chopra, appearing for respondents no.1, 2, 3 and 4, we dispose of this writ petition with a direction to the respondent no.2 to decide the petitioner?s application under Section 245-C which was moved on (illegible) 31.03.2008.
If despite its best efforts, the Settlement Commission is unable to decide that application for any valid reasons, it would not entitle the petitioner to move an application in contempt but the petitioner?s right to raise other challenges which have been made in this writ petition will revive to the petitioner.
The writ petition is disposed of as above.?
49. Reliance has also been placed upon an order dated 14th March, 2008 passed by the Rajasthan High Court in the batch of writ petitions wherein a direction has been given to the Respondents to settle/decide the cases of the Petitioners on or before 31st March, 2008 positively, if the period is not extended.
50. As things stand today, the Settlement Commission has already filed an affidavit before us saying that it is not possible for it to decide all the pending settlement applications before 31st March, 2008. The Settlement Commission has not indicated what steps it has taken to comply with the mandate of the law. Similarly, the Central Government has also not provided for any remedy to the Petitioners against the abatement of their settlement applications either by urging Parliament to extend the time limit for disposal of the settlement application by the Settlement Commission (as postulated by the Rajasthan High Court) or any other remedial step. The Central Government has also not indicated what steps, if any, have been taken to comply with the mandate of the law. It cannot be that only the Petitioners and other citizens are bound by the law, but the Settlement Commission and the Central Government are not bound by the law. Such a situation would lead to anarchy, and a situation whereby the rule of law is effectively disabled.
51. The learned Additional Solicitor General reiterated his submissions that were made and noted in the order passed on 18th December, 2007. It was submitted that the Settlement Commission is a creature of the statute and only a procedural change has been brought about by the Finance Act, 2007 and the Petitioners have no vested right to have a certain procedure being followed.
Parliament in its wisdom has decided to change the procedure and no fault can be found with this. Moreover, it was submitted that the Petitioners have only a statutory right to have their case processed by the Settlement Commission and not a constitutional right. A statutory right can be taken away by the Legislature and that is what has been done. Reliance was placed upon Dharam Dutt and others v. Union of India and others, (2004) 1 SCC 712, Kuldip Nayar and others v. Union of India and others, (2006) 7 SCC 1, Anukul Chandra Pradhan, Advocate Supreme Court v. Union of India and others, (1997) 6 SCC 1, Jose Da Costa and another v. Bascora Sadasiva Sinai Narcornim and others, (1976) 2 SCC 917 and M/s. Pannalal Binjraj and others v. Union of India and others, 1957 SCR 233.
52. We are of the opinion that it is now too late in the day for the learned Additional Solicitor General to wish away or ignore the concept of procedural unfairness ? this is now ingrained in our Constitutional jurisprudence. Merely because the Petitioners have been conferred a statutory right does not mean that they can be discriminated against and arbitrarily treated in the exercise of that right. Nor can the Respondents be heard to say that they will arbitrarily decide which Petitioner or applicant before the Settlement Commission be given the benefit of that right. Similarly, that statutory right cannot be taken away and the Petitioners placed in a worse position than what they were in before. It may be another question if the status quo ante is restored, but that is not what has been legislated by the Finance Act, 2007 ? the Settlement Commission continues to exist and continues to deal with cases that are similar if not identical in law to those of the Petitioners. In that sense, the right available to the Petitioners has not been taken away, except by fixing the cut-off date of 31st March, 2008.
53. As regards the effect of abatement of the settlement applications, the learned Additional Solicitor General did not make any submissions except to say that since the law mandates the abatement of the settlement applications on 31st March, 2008, the Petitioners cannot challenge the procedure adopted by Parliament in the matter of abatement. The learned Additional Solicitor General did not give any indication about what steps, if at all, have been taken either by the Settlement Commission or the Central Government to comply with the mandate of the law to ensure that the Settlement Commission ?shall? decide all the settlement applications pending before it on or before 31st March, 2008. It appears that no steps have been taken by the Respondents to comply with the mandate of the law prescribed by Parliament and the Petitioners have been simply left to fend for themselves and to face the dire consequences of the inaction of the Settlement Commission as well as the Central Government.
54. On the issue of bias, learned Additional Solicitor General did not make any submissions, while on the question of confidential information being revealed, the learned Additional Solicitor General submitted that as of now the information ceases to be confidential because all the settlement applications have either been admitted or are deemed to have been admitted and, therefore, all the confidential information is already known to the Income Tax Department. Consequently, the information revealed by the Petitioners in the annexure to Form 34B in Appendix II to the Income Tax Rules is no longer confidential and there is no harm if it is used against the Petitioners who are in any case tax evaders.
55. In our opinion, the learned Additional Solicitor General has overlooked that the confidential information was and continues to remain within the exclusive domain of the Settlement Commission during the pendency of the settlement application in the Settlement Commission, even after it is disclosed to the Commissioner. Whatever information is disclosed by the Petitioners before the Settlement Commission can be used and will be used only by persons of integrity and experience and exclusively for the purpose of settling the dispute raised by the Petitioners before the Settlement Commission. The confidential information cannot be used for any purpose other than for the settlement of applications filed under Section 245-C(1) of the Act. The procedure having been set into motion by the Petitioners by filing settlement applications under Section 245-C of the Act, they are precluded from withdrawing that application and the Settlement Commission is obliged to settle or decide the matter one way or the other, as required by law. There is no half way house once the process is set into motion. Moreover, even after the matter is settled, it cannot be reopened by any authority under the Act for any other purpose and the decision of the Settlement Commission is final. In other words, there is a complete termination of all matters that are dealt with by the Settlement Commission as postulated by Section 245-I of the Act.
56. The trust that the Petitioners placed in the Settlement Commission is completely dashed by the amendments brought about by the Finance Act, 2007 and the entire confidential and undisclosed material can be used by any income tax authority for any purpose, prejudicial to the interests of the Petitioners. The confidential information disclosed by the Petitioners will be put into the hands of the Assessing Officer who is likely to have an implicit and inherent bias against them knowing fully that they have approached the Settlement Commission for a settlement in respect of income which they have not disclosed to any income tax authority.
57. We are of the view that under these circumstances, irreparable harm and injury would be caused to the Petitioners if they are relegated to the position which would follow as a result of the abatement of the settlement applications. There is no doubt that the balance of convenience would lie in favour of the prayer of the Petitioners being granted at least until the disposal of these writ petitions which pertain to the constitutional validity of some provisions of the Finance Act, 2007 including those relating to abatement of the settlement applications filed by the Petitioners.
58. Even though we are obliged to presume every statute to be constitutionally valid, the circumstances in the present batch of writ petitions is such that severe harm and prejudice will be caused to the Petitioners if the provisions discussed by us and incorporated in the Act by the Finance Act, 2007 are permitted to operate. This is particularly so since the provisions (despite the presumption) appear to be discriminatory and arbitrary. No rational basis that has been shown to us by the learned Additional Solicitor General for providing for abatement or for fixing the cut-off date of 31st March, 2008 despite knowing full well that it is not possible for the Settlement Commission to dispose of all the pending applications before that date, particularly in the face of an affidavit having been filed by the Settlement Commission on 29th January, 2008. The learned Additional Solicitor General has also not been able to show us any reason whatsoever why the impugned provisions of the Finance Act, 2007 were incorporated ? there is no Statement of Objects and Reasons for the amendment brought about and there is absolutely no reason given whatsoever why the period of four years that was earlier in existence for the disposal of settlement applications by the Settlement Commission in the statute prior to the Finance Act, 2007 has been unreasonably curtailed, in the case of the Petitioners, to a maximum period of eight months.
59. For all these reasons, we are of the view that the appropriate directions to issue in this batch of writ petitions would be as follows:
(a) The application for settlement filed by the Petitioners under Section 245-C of the Act would not abate on 31st March, 2008. (b) In keeping with the mandate of Parliament, the Settlement Commission shall endeavour to dispose of all pending applications as expeditiously as possible. (c) To enable the Settlement Commission to dispose of all pending applications as expeditiously as possible, the Central Government will render all assistance to the Settlement Commission including, if necessary, setting up additional Benches. (d) Any information disclosed by the Petitioners in the annexure to Form 34B in Appendix II to the Income Tax Rules,1962 will not be used against the Petitioners for any purpose whatsoever until the disposal of the settlement application of the Petitioners by the Settlement Commission. (e) All the writ petitions are admitted for final hearing. Since all the writ petitions are still at a preliminary stage and in many of them a counter affidavit has still not been filed by the Respondents, all the amendment applications are allowed. The Respondents will be at liberty to file counter affidavits to the amended writ petitions in accordance with the High Court Rules. (f) The interlocutory applications filed by the Petitioners for interim relief are disposed in terms of the above. Since more than 100 writ petitions have been filed and we have taken them up as a batch and with the clear understanding that we will be deciding the issue of abatement of the pending settlement applications, the directions given by us above will apply in the present batch of writ petitions even where no specific interlocutory application has been made by the Petitioners for grant of interim relief in the terms that we have indicated above.
60. Needless to say, the observations made in this order will not bind the final disposal of the writ petitions.
MADAN B. LOKUR, J
March 28th, 2008 V.B. GUPTA, J
Certified that the corrected copy of the judgment has been transmitted in the main Server.