Income Tax - Assessee's right to contest the assessment on merits cannot be denied even if settlement is rejected.

Supreme Court Upholds Assessee's Right to Contest Assessment Post Settlement Rejection Settlement Commission's Rejection Without Terms Does Not Bar Assessee from Contesting on Merits

In a significant ruling, the Supreme Court of India has affirmed that if a settlement application is rejected by the Settlement Commission without terms of settlement, the assessee retains the right to contest the assessment order on its merits. The judgment came in the case of Principal Commissioner Of Income Tax-1 Surat v. M.D. Industries Pvt Ltd, adjudicated by Justices Pankaj Mithal and Prasanna B. Varale.

The Court clarified that Section 245HA of the Income Tax Act, 1961, is applicable only when a settlement application is rejected without specifying the terms of settlement. Consequently, the appellate proceedings, which had been put on hold, can be revived. This decision underscores the protection of an assessee's right to challenge assessment orders, even when initial attempts at settlement fail.

The Revenue's argument that the assessee should forfeit their right to contest the assessment if the settlement application is rejected without terms was decisively rejected by the Court. This judgment reiterates the principle that an assessee cannot be deprived of their right to seek justice through appeals if a settlement attempt does not materialize as planned.

In a related development, the Income Tax Appellate Tribunal's decision to condone delays and restore the first appeal was upheld, given the unique circumstances of the case. This aspect of the judgment emphasizes the judiciary's flexibility in dealing with procedural delays when the substantive rights of parties are at stake.

Moreover, the Supreme Court instructed that appellate proceedings before the Commissioner of Income Tax (Appeals) should remain in abeyance until the Settlement Commission decides on the application, ensuring that procedural fairness is maintained.

The dismissal of the special leave petition by the Supreme Court, along with the directions provided, brings clarity to the procedural aspects of tax settlements and appeals, safeguarding the rights of taxpayers in complex settlement scenarios.

Bottom Line:

Application for settlement before the Settlement Commission - Section 245HA applicable only if the application is rejected without providing for terms of settlement - Assessee's right to contest the assessment order on merits cannot be denied if settlement application is rejected.

Statutory provision(s): Income Tax Act, 1961 Sections 245D(4), 245HA

Principal Commissioner of Income Tax-1 Surat v. M.D. Industries Pvt Ltd, (SC) : Law Finder Doc Id # 2809223