Supreme Court holds AO cannot reassess income settled by Income Tax Settlement Commission

A Bhatti-Anjaria bench dismissed the Revenue’s appeal, holding that once an ITSC order under Section 245D(4) attains finality, an Assessing Officer cannot reopen it under Section 148.

The Supreme Court has held that an Assessing Officer has no jurisdiction under Section 148 of the Income Tax Act, 1961 to reassess income covered by a final settlement order of the Income Tax Settlement Commission. A division bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria dismissed the Revenue’s appeal against a Delhi High Court judgment dated 13 July 2012, which had quashed a Show Cause Notice dated 30 June 2010 and a Reassessment Order dated 8 November 2011 issued against OMAXE Limited for Assessment Year 2006-07.

The reassessment sought to disallow a deduction claimed under Section 80IB(10), adding Rs. 65,65,17,999 to the assessee’s income. The Court found that once the ITSC concluded proceedings under Section 245D(4), the order attained finality against both sides, and the Revenue’s only recourse lay under Section 245D(6). The appeal was found to have no merit.

How the dispute reached the Court

OMAXE Limited, a public limited company in real estate, filed its return for AY 2006-07 on 30 November 2006, declaring taxable income of Rs. 89,20,76,630 and claiming a Section 80IB(10) deduction for housing projects. A search under Section 132 had been conducted at its premises on 22 September 2005.

During the regular assessment, the company applied under Section 245C for AY 2000-01 to 2006-07 before the Income Tax Settlement Commission. On 17 March 2008, the ITSC passed a final order under Section 245D(4). For AY 2006-07 it accepted additional income of Rs. 18,00,000 and, after allowing the Section 80IB(10) deduction, determined net taxable income at Rs. 89,38,76,630.

The Revenue then conducted a fresh survey under Section 133A on 17 and 18 December 2009. According to the Revenue, impounded minutes of a meeting attended by senior executives showed a decision to transfer commercial portions of certain projects to wholly owned subsidiaries to strengthen the Section 80IB claim. It said the commercial area in several projects exceeded the limit in Section 80IB(10)(vi), namely 5% of aggregate built-up area or 2,000 sq. ft., whichever is lower.

On 30 June 2010, a notice under Section 148 was issued, proposing to disallow Rs. 55,58,96,486 across four projects — OMAXE City Lucknow, OMAXE City Sonepat, OMAXE Heights Sonepat and OMAXE Heights Faridabad. The Assessing Officer rejected the company’s objections on 3 October 2011 and passed the reassessment order on 8 November 2011, adding Rs. 65,65,17,999.

Separately, the CIT(C)-III, Delhi, moved the ITSC on 29 October 2010 under Section 245D(6), alleging that the 17 March 2008 order was obtained by misrepresentation. By order dated 16 December 2011, the ITSC rejected that application, finding no case of misrepresentation. It held that a difference of opinion on what constitutes a “project” for the deduction was “a legal dispute” and not misrepresentation.

What the Court held on jurisdiction

The central question was whether, despite an order under Section 245D(4), the AO could invoke Section 148 to reassess an aspect covered by the settlement order. The Court answered that it could not.

It held that Chapter XIX-A operates as a self-contained code and a specialised alternate dispute resolution mechanism that temporarily overrides the regular assessment machinery under Sections 142 to 156. Once an application is admitted, Section 245F(2) is triggered and the ITSC assumes exclusive jurisdiction. Because two authorities cannot exercise jurisdiction over the same subject matter, the regular assessment machinery is placed in statutory abeyance.

The Court addressed the Revenue’s reliance on the words in Section 245C requiring “full and true disclosure” of income not disclosed before the AO. It said the Revenue overlooked the accompanying expression on “the manner in which such income has been derived.” On the facts, the assessee had disclosed the revenue in its gross total income and set out the net taxable figure after deductions. Once admitted for settlement, the consideration before the ITSC was the return for the year, including deductions, and the Revenue filed its report on that application.

Reasoning drawn from precedent

The Court reviewed Jyotendrasinhji v. S.I. Tripathi, CIT, Madras v. Express Newspapers Ltd., Brij Lal v. CIT and Kotak Mahindra Bank Ltd. v. CIT.

From Brij Lal, the Constitution Bench had held that Chapter XIX-A is a self-contained code akin to arbitration, aimed at settlement rather than determination of liability, and that even the ITSC cannot invoke Section 154 to reopen its concluded proceedings. The Court read this as establishing that the scope of reopening is referable only to Chapter XIX-A.

From Express Newspapers, once the Commission admits an application, it withdraws the case from the assessing, appellate or revising authority and deals with the entire case for that assessment year exclusively.

The Court described the scheme as a purge of distorted or suppressed entries, achieved by paying tax, penalty and interest as determined by the ITSC. It characterised the bargain as taking “the crust and the crumb” together: the Revenue realises tax on suppressed income through voluntary disclosure, while the assessee avoids penal consequences. Once the crust is avoided and the crumb accepted, the scheme does not contemplate further recovery through fresh assessment.

The Revenue’s remaining recourse

The Court held that the Revenue is not left without a remedy for undisclosed income even in Chapter XIX-A cases. Its recourse is to move under Section 245D(6) on grounds of fraud or misrepresentation. If such a case is made out, the ITSC’s order is reopened and, on being declared void, the normal assessment procedure is restored.

Allowing the AO’s powers under Sections 143(2), 148 and 154 to operate independently after settlement, the Court said, would defeat the finality attached to the ITSC’s order, which Parliament did not envisage. Judicial review by the constitutional courts under Articles 226 and 32/136 remains available, but the AO’s power to reassess a settlement order does not.

Here, the Revenue had in fact invoked Section 245D(6), and its application was rejected by the ITSC on 16 December 2011, an order that has become final.

Outcome

The Court found no merit in the appeal. The Civil Appeal was dismissed, and pending applications were disposed of accordingly. The judgment was delivered by Justice S.V.N. Bhatti for the bench on 16 September 2026.