Income Tax Settlement Order Passed Beyond Mandatory 18-Month Limitation Period Is Void, Rules Allahabad High Court

"The period prescribed under Section 245D(4A)(iii) for disposing the settlement application is mandatory and such period commences when the petitioner's application first stood allotted to and was acted upon by the Interim Board." Allahabad High Court, in a significant ruling dated August 10, 2026, held that the 18-month statutory limitation period for passing a final order on an income tax settlement application is mandatory in nature and cannot be restarted by the administrative transfer of a case between different Interim Boards.

A division bench comprising Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary observed that accepting the Revenue's contention would result in an impermissible extension of the statutory limitation period upon each subsequent transfer from one Interim Board to another.

The petitioner, M/s B.L. Agro Industries Limited, faced a search and seizure operation under Section 132 of the Income Tax Act, 1961, following which assessment proceedings were initiated. The petitioner sought to settle the dispute under Chapter XIX-A of the Act before the Income Tax Settlement Commission. However, with the abolition of the Settlement Commission by the Finance Act, 2021, the matter was eventually transitioned to the Interim Board for Settlement pursuant to a previous High Court order and subsequent CBDT notifications.

The primary question before the court was whether the 18-month limitation period prescribed under Section 245D(4A)(iii) read with Section 245D(9)(iii) and Section 245M(2) of the Act had expired prior to the passing of the impugned order. The court was also called upon to determine whether this statutory timeline is mandatory or directory in nature.

Statutory Framework of Settlement Mechanism

The court observed that the Income Tax Settlement Commission was originally established in 1976 on the recommendations of the Wanchoo Committee to resolve tax evasion issues through voluntary disclosures. Following its abolition in 2021, the Central Board of Direct Taxes constituted the Interim Board for Settlement to handle pending applications under the e-Settlement Scheme, 2021.

Limitation Period Is Mandatory

The bench relied upon the Karnataka High Court ruling in RNS Infrastructure Ltd., which was affirmed by its division bench and subsequently vindicated by the Supreme Court. The court reiterated that the 18-month timeline specified under Section 245D(4A)(iii) is mandatory, and any final order passed beyond this statutory period is a nullity and without jurisdiction.

Transfer Does Not Restart Limitation

Rejecting the Revenue's plea that limitation should run from the date of the administrative transfer to IBS-VII, Chennai, the court held that such an interpretation would enable an indefinite extension of time. The bench noted that the application had already stood allotted to IBS-III, Delhi, which had previously exercised powers under Section 245D(3) by calling for a Rule 9 report.

Administrative Transfer Distinguished From Initial Allotment

The court emphasized that the statutory fiction created under Section 245M(2) governs the initial receipt of a pending application by an Interim Board. Subsequent administrative transfers between different benches under Section 245M(4) are meant to ensure administrative continuity of records and cannot serve to wipe the slate clean or reset the 18-month clock.

Consequently, the court quashed and set aside the order dated October 30, 2023, passed under Section 245D(4), as well as the consequential order dated December 15, 2023, passed under Section 245D(6B). However, the bench clarified that it restricted its adjudication strictly to the issue of limitation and left open all questions concerning the abatement of proceedings or the consequences thereof under Section 245HA.

Date of Decision: 10 August 2026