18-month limit for tax settlement applications is mandatory; administrative transfer cannot restart the clock, Allahabad HC rules

A search and seizure under Section 132 of the Income-tax Act, 1961 was conducted at the petitioner’s premises on 4 October 2018, followed by proceedings under Sections 153A and 143(2) for the relevant assessment years.

The petitioner sought settlement under Chapter XIX-A; however, the Settlement Commission was abolished by the Finance Act, 2021.

Pursuant to an order of the High Court dated 19 March 2021, the petitioner filed a settlement application on 23 March 2021, which was subsequently treated as a “pending application” under Section 245A(eb).

The application was allotted to Interim Board for Settlement-III, Delhi under the e-Settlement Scheme, 2021.

On 7 March 2022, that Board invoked Section 245D(3) and directed the Department to furnish a Rule 9 report.

The CBDT thereafter transferred the application from IBS-III, Delhi to IBS-VII, Chennai on 13 June 2022.

IBS-VII passed an order dated 30 October 2023 under Section 245D(4), rejecting the settlement application.

The petitioner’s rectification applications under Section 245D(6B), which raised the objection that the order was barred by the statutory period of limitation, were dismissed on 15 December 2023.

The petitioner challenged both orders under Article 226 of the Constitution.

Whether the period of eighteen months prescribed under Section 245D(4A)(iii), read with Sections 245D(9)(iii) and 245M(2) of the Income-tax Act, commenced from the initial allotment and exercise of jurisdiction by IBS-III, Delhi, or from the subsequent administrative transfer to IBS-VII, Chennai?

Whether the eighteen-month period prescribed under Section 245D(4A)(iii) is mandatory or merely directory?

The Court applied Sections 245D(3), 245D(4), 245D(4A)(iii), 245D(9)(iii), and 245M(2) of the Income-tax Act.

Section 245D(4A)(iii) 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; Sections 245D(9)(iii) and 245M(2) adapt that rule to pending applications before an Interim Board by deeming the relevant date to be the date on which the application was allotted or transferred to the Board.

The Court held, relying principally on RNS Infrastructure Ltd. v. Income-tax Settlement Commission, affirmed by the Karnataka High Court and followed by the Supreme Court, that the eighteen-month period is mandatory and an order passed beyond that period is time-barred and a nullity.

The Court distinguished Star Television News Ltd. v. Union of India, observing that it concerned a different statutory context and proceedings affected by reasons attributable to the applicant.

The Court found that the petitioner’s application had already acquired the status of a pending application and had been allotted to IBS-III, Delhi under the e-Settlement Scheme, 2021.

IBS-III’s order dated 7 March 2022 directing submission of the Rule 9 report demonstrated that it had assumed jurisdiction over the application; under the Scheme, such action could be taken only after allotment or transfer to an Interim Board.

The Department’s own counter-affidavit acknowledged that the application had been allotted to IBS-III through the Gazette notification dated 1 November 2021 and was subsequently transferred to IBS-VII, Chennai.

Accordingly, the later administrative transfer could not restart or extend the statutory eighteen-month period, since such an interpretation would permit repeated extension of limitation through successive transfers and would undermine the time-bound settlement mechanism.

Computed from the initial allotment, the period expired by 30 May 2023; even if computed from the date on which the Rule 9 report was called for, it expired by 30 September 2023.

The order dated 30 October 2023 was therefore beyond limitation.

The subsequent transfer to IBS-VII, Chennai did not revive or extend limitation.

Consequently, the order dated 30 October 2023 under Section 245D(4) and the consequential order dated 15 December 2023 under Section 245D(6B) were quashed and set aside, and the writ petition was allowed.

The Court expressly left open the separate questions concerning abatement and the consequences of abatement under Section 245HA.