Finance Act 2021’s Retrospective Abolition of ITSC Cannot Create Void; Pre-March 31 Settlement Pleas to Be Heard by Interim Board: Delhi High Court
Isabella Mariam
The High Court of Delhi, Division Bench of Justices V. Kameswar Rao and Vinod Kumar, held that the Finance Act 2021, which retrospectively abolished the Income Tax Settlement Commission (ITSC) and introduced the Interim Board for Settlement, could not create a legal void affecting applications filed before its commencement. The Court held that settlement applications submitted by corporate assessees prior to 31 March 2021 must be treated as valid and pending for consideration by the Interim Board. The decision arose from petitions concerning tax proceedings in which the assessees had sought to resolve undisclosed income through the settlement mechanism.
The writ petitions were filed by Megha Engineering and Infrastructure Ltd. and Western UP Power Transmission Co. Ltd. seeking directions to the Income Tax Settlement Commission to receive and process their applications under Section 245-C of the Income Tax Act, 1961, uninfluenced by the Finance Act, 2021. Both petitioners were subject to search and seizure operations conducted by the Income Tax Department on October 11, 2019. Subsequently, notices were issued under Sections 153-A, 153-C, and 143(2) for various assessment years between 2014-15 and 2020-21.
Megha Engineering filed its application before the ITSC on March 22, 2021, after this Court’s interim direction dated March 17, 2021, which ordered the Commission to accept and process the application as per the prevailing law since the Finance Bill, 2021 had not yet become law. Western UP Power Transmission Co. Ltd. also filed its application on March 22, 2021, under similar directions. The Finance Bill, 2021, introduced on February 1, 2021, proposed to abolish the ITSC and replace it with an Interim Board of Settlement. It received presidential assent on April 1, 2021.
The petitioners argued that their right to approach the ITSC was vested as the searches, notices, and applications were initiated prior to the Finance Act, 2021. They contended that retrospective abolition of the ITSC from February 1, 2021, was unconstitutional and arbitrary. They further argued that the ITSC continued to function until March 31, 2021, and that their applications should be deemed pending and eligible for consideration by the Interim Board under Section 245AA.
The Revenue opposed the petitions, asserting that the ITSC ceased to exist with effect from February 1, 2021, as per the Finance Act, 2021. It was argued that the petitioners had no vested right to have their applications considered since the ITSC retained discretion under Section 245D to reject any application. The respondents maintained that the decision to fix February 1, 2021, as the cut-off date was a legislative policy decision and therefore not subject to judicial interference.
The petitioners relied on judgments of the Bombay, Madras, Gujarat, and Calcutta High Courts that had stated in favor of similarly placed assessees, including Sar Senapati Santaji Ghorpade Sugar Factory v. ACIT, Jain Metal Rolling Mills v. Union of India, Vetrivel Infrastructure v. DCIT, and Pradeep Kumar Naredi v. Union of India. The Revenue, however, maintained that these decisions were not binding on this Court as the Supreme Court had left the question of law open in subsequent proceedings.
The Court recorded that “the ITSC was in existence till 31.03.2021. In that sense, the assessees were well within their rights to file applications before it, and the applications filed before 31.03.2021 should be construed to be validly filed.” It further stated that “no such intent can be gathered from the provisions of the Finance Act, 2021, that the legislature intended to take away existing rights of the assessee to file such applications between 01.02.2021 to 31.03.2021.”
The Court noted that the Finance Act, 2021, while abolishing the ITSC and creating an Interim Board, did not expressly invalidate applications filed before April 1, 2021. Referring to similar judicial pronouncements, the Bench quoted the Madras High Court’s reasoning in Jain Metal Rolling Mills that “the retrospective legislation by way of legal fiction attempts to make it as if it is unavailable... fixing the last date for filing the applications alone travels beyond the purpose and results in more retrospectivity than which is needed.” The Delhi High Court concurred with this interpretation.
The Bench also cited the Bombay High Court’s decision in Sar Senapati Santaji Ghorpade Sugar Factory, which held that “the words ‘shall be made’ can only be interpreted as having effect from the date of its notification and cannot apply from an earlier date.” The Court observed that this interpretation preserved the vested right of assessees to file applications before March 31, 2021, and that such rights could not be retrospectively taken away unless the statute expressly so provided.
Addressing the Central Board of Direct Taxes’ (CBDT) order dated September 28, 2021, which extended the time for filing applications until September 30, 2021, but only for those eligible as on January 31, 2021, the Court found the restriction arbitrary. It agreed with earlier judgements that “the order... could not have merely extended the time limit while simultaneously denying the benefit of such extension to a class of assessees.”
The Court observed that “the ITSC (or the Interim Board) being a creation of a statute, the assessees do have a statutory right to approach the same, seeking concession.” It further recorded that while Parliament has power to enact retrospective laws, “if any vested right is to be taken away by the legislature, it should be done by express words or by necessary implication.” The Court concluded that no such express intent appeared in the Finance Act, 2021.
Allowing both writ petitions, the Bench held that “the settlement applications of the petitioners, even if filed after 01.02.2021, on 22.03.2021, shall be treated as pending applications to be considered by the Interim Board.” It further directed that all notices issued under Sections 142(1) and 143(2) of the Income Tax Act against the petitioners be stayed until the Interim Board decides their applications.
The Court ordered that “paragraph 4(i) of the order of the respondents dated 28.09.2021 has to be read down, inasmuch as the date of 31.01.2021 mentioned therein shall be read as 31.03.2021.” It concluded that the petitioners’ applications were validly filed and must be adjudicated by the Interim Board under the amended scheme.
The Bench stated that while Parliament’s power to enact retrospective legislation is not disputed, “such power cannot be exercised to retrospectively extinguish vested rights without express legislative intent.” The judgment clarified that the amendments introduced by the Finance Act, 2021, only sought to replace the ITSC with an Interim Board and did not intend to invalidate applications filed during the transitional period.
The Court rejected the Revenue’s contention that the cut-off date of February 1, 2021, was immune from judicial review. It held that where retrospective amendments affect vested rights, courts are competent to ensure that legislative actions do not operate arbitrarily or beyond the purpose for which they were enacted. Accordingly, the Bench stayed all assessment proceedings initiated under the impugned notices until the Interim Board’s final decision.
Advocates Representing the Parties:
For the Petitioners: Mr. Parag P. Tripathi, Senior Advocate with Ms. Sanam Tripathi, Mr. Srinivasan, Mr. Ramaswamay, Mr. Dheeresh K. Dwivedi, and Mr. Harjeet Singh, Advocates.
For the Respondents: Mr. Sanjay Kumar, Senior Standing Counsel with Ms. Monica Benjamin and Ms. Easha, Junior Standing Counsels.
Case Title: Megha Engineering and Infrastructure Ltd. & Western UP Power Transmission Co. Ltd. v. Income Tax Settlement Commission & Ors.
Neutral Citation: 2025: DHC:8809-DB
Case Number: W.P.(C) 3479/2021 & W.P.(C) 3710/2021
Bench: Justice V. Kameswar Rao, Justice Vinod Kumar
