Retrospective Abolition of ITSC: Delhi HC Allows Settlement Applications Filed Between Feb 1 and Mar 31, 2021 [Read Order]

The High Court of Delhi, settlement applications filed under Section 245C between February 1 and March 31, 2021, remained valid despite the retrospective abolition of the Income Tax Settlement Commission (ITSC) through the Finance Act, 2021.

Megha Engineering and Infrastructure Ltd.,petitioner-assessee, was a company incorporated under the Companies Act, 1956, engaged in executing large-scale EPC/Turnkey Water Management Projects across India. On 11.10.2019, Income Tax authorities conducted a search and seizure at its office. Following this, the DCIT, Central Circle-19, issued notices under Section 153-A for AYs 2014-15 to 2019-20.

The petitioner prepared an application under Section 245C to be filed before the ITSC, but learned that the ITSC was not accepting such applications due to the Finance Bill, 2021. It then filed a writ petition on 16.03.2021, and the Court directed the ITSC on 17.03.2021 to accept and process the application. This interim order was made absolute on 25.03.2021.

Accordingly, the petitioner filed the application under Section 245C on 22.03.2021 along with ₹30.04 crore for tax and interest. Despite informing the AO, the ITSC did not take action. Subsequently, the petitioner received notices under Sections 143(2) and 142(1) for AYs 2014-15 to 2020-21. After the Finance Bill, 2021 became law as the Finance Act, 2021, the petitioner filed an amended writ petition.

On 1 February 2021, the Finance Bill, 2021, was introduced in Parliament proposing amendments to Sections 245A to 245M. It sought to replace the Income Tax Settlement Commission (ITSC) with a new body called the Interim Board for Settlement. From that date, no new applications could be filed before the ITSC, and its pending cases were to be transferred to the Interim Board as per Clause 65.

The petitioner counsel explained that the ITSC was set up in 1976 to allow taxpayers to disclose liabilities and settle disputes. He challenged Sections 62 to 73 of the Finance Act, 2021, saying they arbitrarily abolished the ITSC from 01.02.2021, while the petitioners had filed applications on 22.03.2021.

He argued that retrospective abolition violated vested rights, citing High Court and Supreme Court judgments, and that the pending applications under Section 245A(eb) should be decided. He said the cutoff date was arbitrary, could cause penalties, and rejecting the applications would harm the petitioners despite full disclosure and compliance.

The respondent counsel, submitted that the ITSC was a statutory forum but Parliament decided to abolish it from 01.02.2021 and created an Interim Board for pending cases. He argued the petitioners had no vested right, the cutoff date was a legislative choice, and the Finance Act, 2021, was valid as a Money Bill. He sought dismissal of the petitions.

Justice V.Kameshwar Rao and Justice Vinod Kumar examined whether the petitioners were entitled to have their settlement applications considered under Section 245-C of the Act. It noted that searches had been conducted in 2019, and notices under Section 153A and Sections 153C and 143(2) had been issued in March 2021.

The petitioner had filed applications for settlement, which were initially not accepted, leading to their challenge before the court. As an interim measure, the court directed the ITSC to accept and process the applications, later confirming this direction on 25.03.2021.

The court referred to judgments from the Madras High Court (Jain Metal Rolling Mills) and Bombay High Court (Sar Senapati Santaji Ghorpade Sugar Factory), which held that retrospective amendments could not invalidate applications filed before 31.03.2021 and that taxpayers had a statutory right to approach the Settlement Commission.

The court stated that settlement, though a concession, was granted through a statutory framework, creating vested rights for taxpayers.

The bench examined the CBDT notification dated 28.09.2021, which extended the deadline for filing applications to 30.09.2021 but imposed a condition requiring eligibility as of 31.01.2021 (later extended to 31.03.2021). It held that this condition exceeded the CBDT’s powers under Section 119(2)(b) and was invalid. Eligibility depended on the issuance of notices under Section 153A, and delays by authorities could not deprive petitioners of their right to apply.

The High court noted that the Finance Act, 2021, abolished the ITSC and constituted the Interim Board only to consider pending applications. Amendments took effect from 01.04.2021, and applications filed between 01.02.2021 and 31.03.2021 remained valid. Assessees who filed settlement applications on 22.03.2021, while having pending notices under Sections 153A/153C, were entitled to have their applications considered.

The court concluded that Parliament’s power to enact retrospective amendments could not curtail statutory rights granted under Section 245C. Retrospective changes in the Finance Act, 2021, did not expressly or impliedly remove vested rights to approach the Settlement Commission.

Consequently, the bench allowed the writ petition, directed the Interim Board to consider the settlement applications, and stayed notices issued under Sections 143(2) and 142(1) until the applications were decided.

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