Bombay High Court Rules Pre-Enactment Settlement Application Valid Despite Retrospective Finance Act 2021 Amendment

Background and Context

The Bombay High Court recently adjudicated a significant petition filed by Sar Senapati Santaji Ghorpade Sugar Factory Ltd. challenging the rejection of its settlement application covering Assessment Years 2014–15 to 2020–21. The core question before the Court was whether an application filed before the Settlement Commission, after the Finance Bill 2021 was tabled in Parliament but before it received Presidential assent, could be rendered invalid by the retrospective amendment introduced through the Finance Act, 2021.

The decision carries substantial implications for similarly situated assessees whose eligibility to file settlement applications was contingent upon the timing of departmental action, particularly the issuance of notices under Section 153A of the Income Tax Act, 1961.

Factual Matrix

Search Action and Departmental Notices

A search operation was conducted under Section 132 of the Income Tax Act, 1961 on the petitioner's premises on 25 July 2019, which concluded on 29 August 2019. Thereafter, the Income Tax Department issued a notice dated 5 February 2021 under Section 153A of the Act for Assessment Years 2014–15 to 2020–21, directing the petitioner to file returns of income within fifteen days.

Filing of the Settlement Application

On 18 March 2021, the petitioner filed an application before the Settlement Commission under Section 245C of the Income Tax Act, 1961 for the aforementioned assessment years. Crucially, this filing occurred after the Finance Bill, 2021 was introduced in Parliament on 1 February 2021, but before the Finance Act, 2021 received Presidential assent on 28 March 2021.

Position Taken by the Department

Despite the Settlement Commission having accepted the application, the assessing authority issued a notice dated 16 September 2021 under Section 142(1) contending that no valid settlement application was pending in the petitioner's case. The departmental position rested on a Press Release dated 7 September 2021 and a subsequent notification dated 28 September 2021 issued by the Interim Board for Settlement (IBSC), which restricted eligibility to file settlement applications before the IBSC to only those assessees who were eligible to approach the Settlement Commission as on 31 January 2021.

Since the Section 153A notices in the petitioner's case were issued on 5 February 2021 — five days after the cut-off of 31 January 2021 — the Department contended that the petitioner was not an eligible assessee as of that date, rendering its application invalid.

Legislative Framework: Key Amendments by the Finance Act, 2021

The Finance Act, 2021 introduced several significant changes to Chapter XIX-A of the Income Tax Act, 1961:

  • Section 245A(da) defined "Interim Board" to mean a board constituted under Section 245AA.
  • Section 245A(eb) introduced the concept of "pending application" — an application filed under Section 245C that was neither declared invalid under Section 245D(2C) nor covered by an order under Section 245D(4) issued on or before 31 January 2021.
  • Section 245AA mandated the Central Government to constitute one or more Interim Boards for Settlement to deal with pending applications.
  • A proviso to Section 245B provided that the Settlement Commission shall cease to operate on or after 1 February 2021.
  • Section 245C(5) was inserted with retrospective effect from 1 February 2021, providing that "No application shall be made under this section on or after the 1st day of February, 2021."
  • Section 245D(9) extended the procedural provisions of the settlement mechanism to the Interim Board in respect of pending applications.
  • Section 245M(2) provided that where an assessee does not exercise the withdrawal option, the pending application shall be deemed received by the Interim Board on the date of allotment or transfer.

The Interim Board was formally notified vide Notification No. 91 of 2021 dated 10 August 2021.

Issues Before the Bombay High Court

The petition raised the following principal questions:

  1. Whether the petitioner's settlement application filed on 18 March 2021 constituted a valid application under Section 245C of the Income Tax Act, 1961.
  2. Whether the retrospective insertion of Section 245C(5) by the Finance Act, 2021 could invalidate an application already filed and accepted by the Settlement Commission.
  3. Whether the CBDT's notification dated 28 September 2021 — insofar as it imposed an additional eligibility condition (i.e., eligibility as on 31 January 2021) — was within the permissible scope of the Board's powers under Section 119 of the Act.
  4. Whether the Department could deny the petitioner access to the settlement mechanism, given that it was the Department's own delay in issuing the Section 153A notice that precluded the petitioner's eligibility as on 31 January 2021.

Arguments Advanced on Behalf of the Petitioner

Counsel for the petitioner, Mr. Mistri, submitted the following contentions:

  • On 18 March 2021, when the application was filed, Section 245C of the Act fully entitled the petitioner to approach the Settlement Commission. The Finance Bill, 2021 had not yet received Presidential assent and therefore had no force of law as on that date.

  • The Settlement Commission having accepted the application, it was deemed to have been proceeded with under the proviso to Section 245D(1). No order declaring the application invalid under Section 245D(2C) had been passed. Accordingly, the departmental notice treating the application as invalid was legally untenable.