This institution was set up in 1976 by the Central Government on the recommendations of the Direct Taxes Enquiry Committee (1971) set up under the Chairmanship of Justice K.N. Wanchoo, the retired Chief Justice of the Supreme Court of India. The Wanchoo Committee had conceived of the Settlement Commission as a mechanism to allow a one-time tax evader or an unintending defaulter to make clean breast of his affairs. At present, there are four benches of the Commission located at New Delhi, Mumbai, Kolkata and Chennai.

The settlement mechanism allows taxpayers to disclose additional Income before it over and above what has been already disclosed before the Income tax Department. The applicant has to pay full amount of tax and interest on the additional income disclosed before the Commission, before filing the application. The Commission then decides upon the admissibility of the application and in case of admitted applications, carries out the process of settlement in a time bound manner by giving opportunity to both parties.

The Commission is required to pass the Settlement order within 18 months of filling of the application. It has wide power of granting immunity from Penalty and prosecution, which are major sources of litigation. The orders passed by the Commission are final and conclusive.

At present the benefit of the settlement mechanism can be availed by a taxpayer only once in life-time, who has made the first application on or after1st June, 2007.