2025 (6) TMI 1410 - HC - Income Tax

Validity of order passed by the Settlement Commission u/s 245D(4) of the Income Tax Act 1961 and also Section 22D(4) of the Wealth Tax Act - HELD THAT - As is evident from Section 245 of the Act the Central Government has appointed the members of Income Tax Settlement Commission (ITSC) as their representatives to settle the disputes with assessee and it reflects the confidence they had in the members because the persons appointed are of integrity and known for their outstanding ability and expertise and for the special knowledge and experience in problems relating to taxes and business accounts. These members therefore have been authorised to settle the disputes on behalf of the Government and it would not lie in the mouth of the Government to challenge the decision taken by their own representatives without making allegations of bias or fraud or malice. If the ITSC has passed the order the members for the reasons mentioned in the provision knew what exactly they were doing. Admittedly there is also no allegation of bias or fraud or malice. It is not the function of the Court to pronounce a new rule but to maintain and expound the old one . Judges do not make law they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one it (the later decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. Even where an earlier decision of a Court operated for quite some time the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood. Appeal allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Court in these appeals include:

• What is the scope of judicial review of orders passed by the Income Tax Settlement Commission (ITSC) under Chapter XIX-A of the Income Tax Act, 1961, and the corresponding provisions of the Wealth Tax Act?
• Whether the Department (Revenue) can challenge the orders of the ITSC on grounds other than violation of statutory provisions, bias, fraud, or malice?
• Whether the ITSC's interpretation of trust deeds or documents seized during searches can be interfered with by courts?
• What is the extent of the ITSC's discretion in settling disputes, including granting immunity from penalty or prosecution?
• Whether subsequent judicial decisions can be applied retrospectively to orders passed by the ITSC prior to such decisions?
• Whether the Revenue can sit in appeal over the decisions of the ITSC, which acts as a representative of the Central Government?

Issue-wise Detailed Analysis

1. Scope of Judicial Review of ITSC Orders

The Court relied extensively on precedents, notably the Apex Court's judgment in Jyotendrasinhji vs. S. I. Tripathi, which clarified that the ITSC's orders are "in the nature of a package deal" and that the scope of judicial review is limited. The ITSC may examine further evidence and pass orders as it thinks fit, provided it acts within the provisions of the Act.

The Court emphasized that the High Court's jurisdiction under Article 226 and this Court's appellate jurisdiction under Article 136 are confined to examining whether the ITSC acted contrary to the provisions of the Act or whether the order prejudiced the assessee. Grounds such as bias, fraud, and malice form a separate and independent category for challenge. Mere erroneous interpretation of documents or trust deeds by the ITSC does not constitute a violation of the Act warranting interference.

Further, the Court noted that the ITSC is not obliged to give reasons for its orders, and the order's finality is protected by Section 245I of the Income Tax Act, subject only to limited judicial review.

2. Department's Challenge to ITSC Orders

The Court reiterated that the ITSC is a forum for self-surrender and seeking relief, not for challenging the legality of assessment orders or other proceedings. This was supported by the Karnataka High Court's decision in N. Krishnan vs. Settlement Commission, which described the ITSC's function as akin to statutory arbitration with very limited scope for judicial interference.

The Court observed that the Revenue, by challenging the ITSC's orders, is effectively sitting in appeal over the decisions of the ITSC members, who are appointed by the Central Government for their integrity and expertise. Without allegations of bias, fraud, or malice, such challenges are impermissible. The Court underscored the legislative intent behind Chapter XIX-A to encourage settlement of disputes without protracted litigation.

3. ITSC's Discretion and Interpretation of Evidence

The Court referred to the decision in Kanakia Spaces Pvt. Ltd., which held that the ITSC has wide discretion to take any view on questions of law and fact, including granting immunity from penalties or prosecution. The Court noted that documents seized under Section 132 of the Act are presumed to be true under Sections 292C(1)(ii) and 132(4A), and acceptance of such documents by the ITSC cannot be challenged by the Revenue.

The Court emphasized that even if the ITSC's interpretation of documents or trust deeds is incorrect, it does not amount to a violation of the Act warranting judicial interference. The ITSC's role is not to be scrutinized as an appellate authority but reviewed for procedural legality and adherence to statutory provisions.

4. Procedural Legality and Natural Justice

The Court found no violation of mandatory procedures under Chapter XIX-A or principles of natural justice in the ITSC's order. It held that the reasons assigned by the ITSC for granting relief had a nexus with the decision taken, and there was no procedural impropriety or miscarriage of justice.

5. Retrospective Application of Judicial Decisions

The Court addressed the contention that subsequent judicial decisions relied upon by the Revenue were delivered after the ITSC's order. It reaffirmed the Blackstonian theory that judicial decisions operate retrospectively, clarifying the correct legal position even if earlier decisions were contrary. Thus, the Court held that subsequent decisions apply retrospectively and must be considered in reviewing the ITSC's orders.

It relied on a Division Bench judgment of the Bombay High Court, which explained that non-consideration of a jurisdictional court's decision, whether prior or subsequent, can amount to a "mistake apparent from the record" under Section 254(2) of the Act and be rectified accordingly.

6. Appointment and Authority of ITSC Members

The Court highlighted that members of the ITSC are appointed by the Central Government under Section 245B(3) of the Act for their integrity, outstanding ability, and special knowledge in direct taxes and business accounts. This appointment reflects the Government's confidence in their expertise and fairness.

Accordingly, the Court held that it is inappropriate for the Government to challenge the decisions of its own representatives without substantiated allegations of bias, fraud, or malice. The Court emphasized that the ITSC's orders are conclusive and that the Revenue cannot undermine the public policy behind the Settlement Commission by repeatedly challenging its reasoned orders.

Significant Holdings

"The sole limitation upon the ITSC is to act in accordance with the provisions of the Act."

"The order of the ITSC is in the nature of a package deal and that it may not be ordinarily possible to dissect its order and accept what is favourable and reject what is not."

"The scope of enquiry by the High Court under Article 226 should be restricted to i) whether the ITSC has acted in accordance to the provisions of the Act and ii) whether the order passed by it has prejudiced assessee apart from the ground of bias, fraud and malice which constitute a separate and independent category."

"The ITSC is the forum for self surrender and seeking relief and not a forum for challenging the legality of assessment order or orders passed in any other proceedings."

"The power conferred on the settlement commission is so wide that it can take any view on any questions of law, which it considers appropriate having regard to the facts and circumstances of a case including giving immunity against prosecution or imposition of penalty."

"Unsettling reasoned orders of the ITSC may erode the confidence of bonafide assessee thereby leading to multiple litigation where settlement is possible and this larger picture has to be borne in mind."

"The members of the ITSC have been appointed by Central Government in accordance with Section 245B(3) of the Act for their integrity and outstanding ability and for special knowledge and experience in, problems relating to direct taxes and business accounts. The members of the ITSC, therefore, cannot be questioned for their decision or for exercising their discretion."

"It is rather unfortunate that the Central Government questions the findings of the ITSC without explicitly and in detail explaining how the order of the Commission is contrary to the provision of the Act or there was miscarriage of justice or order has been passed without jurisdiction."

"Unless a case of bias or fraud or malice is alleged, not being a bald allegation, but with details, no petition by Revenue impugning an order by the ITSC should be entertained."

"The appellate power under Article 136 was equated to power of judicial review, where the appeal is directed against the orders of the Settlement Commission."

"Judicial review is concerned not with the decision but with the decision making process."

"Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, the later decision does not make new law. It only discovers the correct principle of law which has to be applied retrospectively."

On the final determinations, the Court allowed the appeals filed by the assessee, quashed and set aside the order of the learned Single Judge dated 30.04.2021 which had allowed the Revenue's petitions challenging the ITSC's order. The Court held that there was no violation of mandatory procedures or natural justice by the ITSC, no bias, fraud or malice alleged, and the Revenue could not sit in appeal over the ITSC's reasoned order. The ITSC had exercised its wide discretion within the statutory framework, and its order was not contrary to the provisions of the Act. The Court also confirmed that subsequent judicial decisions apply retrospectively and that the ITSC's interpretation, even if arguably incorrect, does not warrant interference.