The Finance Bill, 2007 presented by the Finance Minister as part of the financial proposals of the Central Government for the financial year 2007-08 is of great relevance, inter alia, for the major amendments that are sought to be made to the Chapter relating to the Settlement Commission in the Income-tax Act. The Finance Minister had announced that a consolidated Income-tax Act is on the anvil and is proposed to be introduced during the year. It is hence strange that amendments of very important provisions relating to the Income-tax Act are included in the Finance Bill. It would be more appropriate that these amendments are introduced through the proposed New Income-tax Act when a full scale discussion on the provision is possible.

Two Institutions under the Income-tax Act which are intended to eliminate protracted litigation and settle tax disputes are the Authority for Advance Rulings and the Settlement Commission. While the Authority for Advance Rulings was proposed as an Expert Body to give an advance ruling on disputed issues relating to tax liability, its scope is considerably limited, thanks to the retrospective amendment withdrawing the eligibility of residents to seek Ruling from the Authority for Advance Rulings on issues involving international disputes. It is difficult to understand why a Body which is created with the sole intention of reducing litigation by enabling willing assessees to seek opinion of the Expert Body should not be made available to all assessees. Be that as it may, one fails to understand why the Government expanded the scope of the Authority extending it to residents and withdrew the same retrospectively causing great embarrassment to the Authority itself. The Chapter relating to the Authority for Advance Rulings requires that the Ruling be given within six months, but due to various reasons many of them not attributable to the assessees, this time limit is not complied with. While this is so, by a retrospective amendment, all applications by residents, which were pending on the date the amendment came into force became infructuous.

Yet another Body is the Settlement Commission which was brought in on the recommendation of the Wanchoo Committee which observed: “That the door for compromise with an errant tax-payer should not ever remain closed. The Settlement Commission was modelled on the “White Paper Concession” in England and the Provisions relating to “Closing Agreement” in the US Internal Revenue Code. A settlement arrived at before the Settlement Commission is based on a full and true disclosure which entitles the assessee to immunity from penal consequences. Section 245H of the Act, as it stands, empowers the Settlement Commission to grant immunity from prosecution and penalty. This provision is one of the major inducements for an errant assessee to come forward for settlement of his case. After the decision of the Supreme Court in the Indian Express case and the decision of the Madras High Court in the Ace Investments case, the Settlement Commission can proceed with the case only where the disclosure by the applicant is full and complete and in such cases there does not appear to be any justification for declining immunity from prosecution and penalty. This procedure has been working satisfactorily despite certain hiccups. It is in this context that the Finance Bill has proposed to amend the Chapter on “Settlement” drastically.

Certain minor amendments are proposed with regard to the financial limits for assuming jurisdiction which are not significant since the financial limits are not usually a bar. A major impediment is brought by the proposed amendment to sec. 245H which prohibits the Settlement Commission from granting immunity from prosecution under the Indian Penal Code or under any Central Act other than the Income-tax Act and the Wealth Tax Act. This provision comes into force on the 1st of April, 2007, with the result that all the applications which are pending on 1-4-2007 might be governed by the amended provision. Important issues including issues as to whether the Parliament is competent to retrospectively amend sec. 245H making it applicable to pending applications, are likely to arise.

It cannot be denied that one of the important, if not the sole inducement to approach the Settlement Commission, is the immunity provision, particularly since for the determination of tax, a Settlement Commission is not necessarily a good option since the decision of the Settlement Commission is final and an assessee would not be in a position either to withdraw the application or challenge the order of the Settlement Commission. It is well known that the Settlement Commission has generally been liberal in the matter of granting immunity though “equity varies with the foot of the Chancellor”.

In the above context, it is a matter for consideration whether the withdrawal of the power of the Settlement Commission to grant immunity is a right step, since the purpose of the Tax Enactment is to collect the taxes and the penal provisions are intended only to secure compliance and not in terrorism. This amendment is likely to be counter productive and to make the settlement machinery wholly redundant.