Gujarat High Court Upholds ITAT Decision to Restore Tax Appeals Despite Settlement Commission Proceedings

Background of the Litigation

The Gujarat High Court recently adjudicated petitions brought under Article 227 of the Constitution by the revenue department challenging an order issued by the Income Tax Appellate Tribunal (ITAT). The dispute centered around the Tribunal's rejection of Miscellaneous Applications that sought recall of an earlier directive dated 06.12.2019, wherein the Tribunal had allowed condonation of a substantial delay spanning 4379 days and remanded income tax appeals to the Commissioner (Appeals) for de novo adjudication covering Assessment Years 1999-2000 through 2005-06.

Genesis of the Tax Dispute

Survey Action and Initial Findings

The controversy originated from a survey operation conducted under Section 133A of the Income Tax Act on 11.03.2005. The survey was executed at two locations: the office premises of a chartered accountant named Shri Pankaj Danawala and the business premises of MD Industries. During this investigative action, authorities uncovered evidence suggesting systematic creation of fictitious capital accumulation schemes involving multiple individuals, with subsequent channeling of these funds to various assessees connected with the MD group of entities.

Shri Pankaj Danawala, in his recorded statement during the survey proceedings, admitted his involvement in orchestrating these arrangements. Subsequently, Shri Kirit Patel, holding the position of director at MD Industries Pvt. Ltd., provided a statement under oath pursuant to Section 131 of the Act on 20.05.2005, wherein he acknowledged and confirmed the bank accounts and benamidar arrangements.

Settlement Commission Application

On 09.03.2006, the assessee approached the Settlement Commission by filing an application seeking settlement of the tax dispute. Meanwhile, the Assessing Officer proceeded to complete the assessment and passed orders under Section 143(3) of the Act on 28.12.2006.

Commissioner (Appeals) Proceedings

The assessee subsequently filed appeals before the Commissioner (Appeals) challenging the assessment orders. However, the Commissioner (Appeals) declined to examine the matters on their substantive merits, dismissing the appeals solely on the procedural ground that settlement applications were pending before the Settlement Commission. This decision was premised on the provisions contained in Section 245F(2) of the Act, which addresses jurisdiction during pendency of settlement proceedings.

Settlement Commission Proceedings

Initial Admission and Abatement

The Settlement Commission admitted twenty applications filed by the M.D. Group entities under Section 245(H)(A) of the Act through an order dated 20.02.2008. However, in a subsequent development, the Settlement Commission disposed of all these settlement applications on 31.03.2008, declaring them as abated due to statutory amendments introduced in the Act.

High Court Intervention

Dissatisfied with the Settlement Commission's order, the applicants approached the Hon'ble Bombay High Court on 28.04.2008. The Bombay High Court, through a common order dated 07.08.2009 covering nine out of the twenty applicants, remanded the matters back to the Settlement Commission for fresh consideration.

Subsequent Developments

Following the Bombay High Court's directive, the Commissioner (Appeals) submitted a report under Rule 9 of the Settlement Commissioner Rules before the Settlement Commission. The assessee raised objections to this report through submissions dated 10.09.2018, which were forwarded by the Settlement Commission to the Principal Commissioner of Income Tax-1, Surat.

The Principal Commissioner responded with comments on 18.10.2018, following which multiple hearings were conducted before the Settlement Commission under proceedings governed by Section 245D(4) of the Act.

Tribunal Proceedings

Appeal and Delay Condonation

During the ongoing Settlement Commission proceedings, the assessee filed appeals before the ITAT challenging the order dated 06.09.2007 passed by the Commissioner (Appeals). Along with these appeals, applications were filed seeking condonation of the substantial delay in filing the appeals.

The ITAT, through its order dated 06.12.2019, exercised its discretion to condone the delay of 4379 days and remitted the matters back to the Commissioner (Appeals) for fresh adjudication on merits.

Revenue's Miscellaneous Applications

The revenue department filed Miscellaneous Application nos.37 to 43 of 2020 before the Tribunal seeking recall of the order dated 06.12.2019.

Grounds Raised by Revenue

The revenue's challenge was based on several contentions:

First Ground - Jurisdictional Issue: The revenue argued that since applications were pending before the Settlement Commission, the Tribunal lacked jurisdiction to proceed with the appeals. According to the revenue, jurisdiction vested exclusively with the Settlement Commission under Section 245F(2) of the Act, and consequently, the Tribunal had no authority to adjudicate the appeals.

Second Ground - Nature of Dismissal Order: The revenue contended that the Commissioner (Appeals) had dismissed the appeals merely for statistical purposes due to lack of jurisdiction, and therefore, such dismissal did not constitute an appealable order that could be challenged before the Tribunal.