2009 (8) TMI 86 - HC - Income Tax

Arbitrary Cut-off Date - Constitutional validity Time Limit for settlement of cases under Income Tax Held that - A Harmonious Interpretation of Section 245D(4A) and Section 245HA(1)(iv) would remove the vice of arbitrariness and save the provisions from being struck down as unconstitutional. - 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 - 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).

Issues Involved:
1. Constitutional validity of Section 245HA(1)(iv) and Section 245HA(3) of the Income Tax Act, 1961.
2. Arbitrary cut-off date for disposal of applications.
3. Arbitrary withdrawal of earlier assurance of confidentiality.

Detailed Analysis:

1. Constitutional Validity of Section 245HA(1)(iv) and Section 245HA(3):

The petitioner, a non-resident company, challenged the constitutional validity of Section 245HA(1)(iv) and Section 245HA(3) of the Income Tax Act, 1961, as inserted by the Finance Act, 2007, arguing that these provisions were ultra vires and violative of Article 14 of the Constitution of India. The petitioner contended that these sections resulted in abatement of applications for no fault of the applicant, leading to the use of confidential information by the Income Tax Authorities, which was prejudicial to the petitioner's interests.

The court noted that the amendments introduced by the Finance Act, 2007, created two classes of applicants based on the date of application: those whose applications were pending before 1st June 2007 and those filed on or after that date. The court found that this classification was not unreasonable per se. However, it resulted in mini-classifications within a homogeneous class of applicants due to the arbitrary cut-off date of 31st March 2008, leading to different treatment of similarly situated applicants.

2. Arbitrary Cut-off Date for Disposal of Applications:

The court observed that the choice of 31st March 2008 as the cut-off date for disposing of applications filed before 1st June 2007 was arbitrary and unrealistic. The court noted that the Settlement Commission had a significant backlog of cases, and it was impossible to dispose of all pending applications within the stipulated period. The court cited data showing the average disposal rate of cases and the number of pending cases, concluding that the cut-off date was illusory and capricious.

The court held that the arbitrary cut-off date resulted in discrimination among applicants based on the fortuitous circumstance of whether their applications were disposed of by the Settlement Commission by the specified date. This arbitrary classification violated Article 14 of the Constitution, as it lacked a rational nexus to the object sought to be achieved by the amendments.

3. Arbitrary Withdrawal of Earlier Assurance of Confidentiality:

The court addressed the issue of confidentiality of information disclosed by applicants to the Settlement Commission. Prior to the Finance Act, 2007, confidential information disclosed to the Settlement Commission was protected and could not be used by the Income Tax Authorities if the application was not admitted. However, the amendments allowed the Income Tax Authorities to use such information if the application abated due to the Settlement Commission's failure to dispose of it by the cut-off date.

The court found that this change severely prejudiced applicants who disclosed confidential information in good faith, expecting settlement orders to be passed. The court held that the amendments, which allowed the use of confidential information by the Income Tax Authorities, were arbitrary and violative of Article 14 of the Constitution.

Conclusion:

The court concluded that Section 245HA(1)(iv) and Section 245HA(3) of the Income Tax Act, 1961, as inserted by the Finance Act, 2007, were arbitrary, unreasonable, and violative of Article 14 of the Constitution. The court read down the provisions to mean that only applications where the delay in disposal was attributable to the applicant would abate. The court directed the Settlement Commission to consider whether the delay was due to reasons attributable to the applicant and proceed with the application if it was not. The court also suggested the appointment of more Benches of the Settlement Commission to expedite the disposal of pending applications.

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