Extract of the Act
Section 245D(7) of the Income-tax Act, 1961 states:
“Where a settlement becomes void as provided under sub-section (6) of section 245D, the proceedings with respect to the matters covered by the settlement shall be deemed to have been revived from the stage at which the application was allowed to be proceeded with by the Settlement Commission and the income-tax authority concerned may, notwithstanding anything to the contrary contained in any other provision of this Act, complete such proceedings at any time before the expiry of two years from the end of the financial year in which the settlement became void.”
Purpose of Section 245D(7)
Section 245D(7) ‘s primary purpose is not just to ensure justice, but to serve as a stark reminder of the potential consequences of fraudulent settlements. It is designed to ensure that any settlement obtained through fraud or misrepresentation does not stand. It provides a mechanism for the revival of original proceedings, thus preventing tax evasion and ensuring that justice is served.
Example Scenario
Consider a company that filed an application for settlement of its income-tax liability with the ITSC. The company disclosed certain incomes and sought to settle its tax liability. However, it was later found that the company had concealed substantial income and provided false statements to the ITSC. The Settlement Commission, upon discovering this fraud, declares the settlement void under Section 245D(6). When a settlement becomes void, it means that the settlement is no longer valid or enforceable. Consequently, under Section 245D(7), the original assessment proceedings are revived.
Penalties and Prosecutions
When a settlement becomes void due to fraud or misrepresentation:
- Penalties: The assessee may be liable to pay penalties under various sections of the Income-tax Act, such as Section 271 for concealment of income, which can be up to 300% of the tax sought to be evaded.
- Interest: Interest may be charged on the outstanding tax liability from the date it was initially due.
- Prosecution: The assessee may face prosecution under Section 276C for a wilful attempt to evade tax, which can lead to imprisonment ranging from six months to seven years and a fine.
Legal Recourse
If the Settlement Commission declares a settlement void, the assessee can appeal against this decision. The assessee can:
- File a writ petition in the High Court challenging the decision of the Settlement Commission.
- Seek stay orders to halt the revival of proceedings until the court adjudicates the matter.
Legal Proceedings
Upon receiving a notice under Section 245D(7), the following legal steps are typically taken:
- Revival of Proceedings: The original assessment or reassessment proceedings are resumed from the point they were suspended. This means that the tax authorities will go back to the stage at which the application was allowed to be proceeded with by the Settlement Commission and continue the proceedings from there.
- Opportunity to be Heard: The assessee can present their case before the tax authorities.
- Completion of Proceedings: The income-tax authorities complete the proceedings within the specified time frame, which is two years from the end of the financial year in which the settlement became void.
Steps to Take Upon Receiving a Notice
- Review the Notice: Carefully review the notice to understand the grounds on which the settlement has been declared void.
- Consult a Tax Professional: Seek advice from a tax advisor or legal expert to understand the implications and to prepare a response.
- Gather Documentation: Collect all relevant documents and evidence that support your case and refute the claims of fraud or misrepresentation.
- Respond to the Notice: Submit a detailed response to the notice, addressing each point raised and providing necessary explanations and evidence.
- Prepare for Legal Proceedings: Be prepared to present your case before the tax authorities and, if necessary, in the court.
Conclusion
Section 245D(7) of the Income-tax Act serves as a crucial tool for maintaining the integrity of the tax settlement process. By reviving proceedings when a settlement is declared void due to fraud or misrepresentation, it ensures that justice is served and tax evasion is penalized. Understanding the provisions of this section and the steps to take upon receiving a notice can help assessees navigate the complexities of tax law and protect their interests.
