The Supreme Court has held that when the Income Tax Settlement Commission rejects an assessee’s application without proposing any settlement terms, the assessee’s statutory right to contest the assessment order on merits remains fully intact.

Rejecting the Revenue’s contention, a Bench of Justices Pankaj Mithal and Prasanna B. Varale clarified that the department’s stand—requiring the assessee to forgo the right to challenge the assessment once the settlement application is rejected—is “misconceived and untenable.”

The controversy stemmed from the respondent-company’s application before the Settlement Commission concerning alleged accommodation capital entries. Due to subsequent legislative amendments, the pending applications automatically abated under Section 245HA of the Income Tax Act. The provision mandates that once settlement proceedings abate, the matter reverts to the regular assessment and appellate mechanism under the Act.

After abatement, the company attempted to revive its original appeal before the Commissioner of Income Tax (Appeals). This appeal had earlier been dismissed solely because the settlement proceedings were pending. The Income Tax Appellate Tribunal (ITAT), on being approached, condoned a massive delay of more than 4,300 days, restored the appeals, and remanded the case to the CIT(A) for adjudication on merits.

The Revenue challenged the ITAT’s order by first seeking a recall, which was dismissed, and then approaching the Gujarat High Court. When the High Court upheld the ITAT’s view, the department carried the dispute to the Supreme Court.

Declining to interfere, the Supreme Court endorsed the ITAT’s approach, observing that it had rightly excused the delay and revived the appeal. The Court reiterated that the rejection of the settlement application did not extinguish the assessee’s appellate remedies.

Consequently, the Revenue’s appeal was dismissed.

Cause Title: Principal Commissioner of Income Tax-1 Surat v. M.D. Industries Pvt Ltd.