The Allahabad High Court at Lucknow has held that the period of 18 months prescribed under Section 245D(4A)(iii) of the Income Tax Act, 1961 for disposal of a settlement application is mandatory and not directory in nature. It quashed an order of the Interim Board for Settlement passed after that period had expired.

Section 245D(4A)(iii) of the Income Tax Act requires an order under Section 245D(4) to be passed within eighteen months from the end of the month in which the application was made, in respect of applications made on or after June 1, 2010.

Quashing an order of the Interim Board for Settlement passed after that period had expired, the bench of Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary held

“the period precribed under Section 245D(4A)(iii) for disposing the settlement application is mandatory and such period commences when the petitioners application first stood allotted to and was acted upon by IBS-III, Delhi.”

A search and seizure was conducted on October 4, 2018 under Section 132 of the Act at the premises of B.L. Agro Industries Limited, followed by notices under Sections 153A and 143(2). The company's settlement application, filed on 23^rd March 2021 pursuant to liberty granted by the High Court after the Income Tax Settlement Commission was abolished by the Finance Act, 2021, was treated as a pending application under Section 245A(eb) and allotted to the Interim Board for Settlement-III, Delhi.

The Central Board of Direct Taxes transferred it to the Interim Board for Settlement-VII, Chennai by order dated June 13, 2022. The Chennai Board rejected the settlement application by order dated 30^th October 2023 under Section 245D(4), and dismissed rectification applications on 15^th December 2023 without adjudicating the objection that the order was barred by limitation. Both orders were challenged before the High Court under Article 226.

It was argued for the petitioner that the eighteen-month period was mandatory and could not be diluted by a subsequent transfer between Interim Boards. It was argued that an order passed beyond the period was without jurisdiction and non est in law, and could not furnish the foundation for the consequences contemplated under Section 245HA(1)(iiia).

The Income Tax Department submitted that the period prescribed under Section 245D(4A)(iii) was directory and not mandatory, and that even if an order were passed beyond it, the proceedings would abate under Section 245HA.

The Court held that the law on the limitation prescribed under Section 245D(4A) stood settled by the judgment of the Karnataka High Court in RNS Infrastructure Ltd. v. Income Tax Settlement Commissioner, in which an order passed beyond limitation had been quashed. It noted that the judgment held that the Settlement Commission must dispose of applications within the prescribed period except where prevented for reasons attributable to the applicant, failing which the proceedings would abate under Section 245HA(1)(iv), and that the period was mandatory and not directory. It further noted that an order passed beyond eighteen months would be time barred and a nullity, that the judgment was affirmed by a Division Bench of that Court, and that the special leave petition filed before to the Supreme Court was dismissed.

Holding that the order passed by the Chennai Board was beyond the mandatory period of eighteen months prescribed under Section 245D(4A)(iii) read with Sections 245D(9)(iii) and 245M(2) of the Act, the Court quashed and set aside the order dated 30^th October 2023 and the consequential order dated 15^th December 2023, and allowed the writ petition.

It clarified, “we have only addressed the issue of limitation for disposing the settlement application and have not ventured into the issue as to whether the proceedings would abate or not as well as consequences of abatement”

The court added that since it had not gone into the consequences of abatement, the principles of res judicata and constructive res judicata would not apply to that issue.

Case Title: M/s B.L. Agro Industries Limited, Bareilly Thru. Mr. Amit Kumar Authorised Signatory v. Union of India Ministry of Finance Deptt. Revenue Govt. of India New Delhi Thru. Secy. and others

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