Supreme Court affirms restoration of income tax appeals during pending Settlement Commission proceedings

The Supreme Court of India, in PCIT-1 Vs M D Industries Pvt Ltd, has upheld the approach adopted by the Income Tax Appellate Tribunal (ITAT) and the Gujarat High Court in restoring first appeals before the Commissioner of Income Tax (Appeals), even though the assessee’s applications before the Settlement Commission were still pending. The Court dismissed the Revenue’s special leave petition (SLP), effectively confirming that appellate remedies can be revived and kept in abeyance while settlement proceedings under Chapter XIX-A of the Income Tax Act 1961 continue.

This decision is grounded in an earlier order dated 11.07.2025 passed in a similar SLP by the same Revenue authority, where the Supreme Court had already addressed the core legal issue. Relying on that previous pronouncement, the Court declined to interfere with the Gujarat High Court’s judgment and the ITAT’s order.

Background of the dispute

Survey, assessment, and settlement applications

1. A survey under Section 133A of the Income Tax Act 1961 was conducted in March 2005 in the case of the assessee.
2. Consequent assessment orders were passed under Section 143(3) for multiple Assessment Years 1999–2000 to 2005–06.
3. In March 2006, the assessee approached the Settlement Commission by filing settlement applications under the statutory scheme.

Appeals before Commissioner (Appeals) and reliance on settlement provisions

• While the applications before the Settlement Commission were pending, the assessee had also filed appeals before the Commissioner of Income Tax (Appeals).
• The Commissioner (Appeals), however, dismissed these appeals without entering into the merits of the additions or disallowances, holding that:
  • By virtue of Section 245F(2), once proceedings are before the Settlement Commission, it exercises exclusive jurisdiction, and
  • Therefore, no adjudication on merits was undertaken.
• Effectively, the first appellate authority declined to decide the appeals, solely because the settlement proceedings were in progress.

Abatement and continued proceedings before Settlement Commission

• Subsequently, owing to statutory amendments, certain settlement applications were treated as abated.
• There were further rounds of litigation, including proceedings before the Bombay High Court in connected matters, leading to remand directions and continuation of the hearings under Section 245D(4) of the Income Tax Act 1961.
• At the stage when the matter reached the ITAT, no final order under Section 245D(4) had yet been passed by the Settlement Commission.

ITAT’s decision: condonation of delay and restoration of appeals

Enormous delay in filing appeal before ITAT

• The assessee ultimately preferred appeals before the ITAT challenging the orders of the Commissioner (Appeals).
• There was a delay of 4379 days in filing these appeals.
• The assessee argued that:
  • It had diligently pursued the settlement route.
  • The Commissioner (Appeals) had never dealt with the issues on merits.
  • The delay arose from the peculiar procedural history linked with the settlement proceedings.

ITAT condones delay and remits appeals

The ITAT, by order dated 06.12.2019, took the following steps:

1. Condoned the delay of 4379 days, considering the special facts and the pendency of the settlement mechanism.
2. Set aside the orders of the Commissioner of Income Tax (Appeals), which had dismissed the assessee’s appeals without deciding the merits.
3. Restored the first appeals to the file of the Commissioner (Appeals) with a direction to adjudicate the issues afresh on merits for Assessment Years 1999–2000 to 2005–06.

The Tribunal also took note that no adjudication on the merits of the additions had occurred at any stage before the Commissioner (Appeals), and hence, the assessee’s right to a first appeal could not be effectively curtailed.

Revenue’s challenge through miscellaneous applications under Section 254(2)

Grounds urged by the Revenue before ITAT