Legal Articles

CRIMINAL PROSECUTION UNDER INCOME TAX ACT

Chapter XXII of the Income Tax Act deals with Offences and Prosecutions. The relevant sections are from 275A to 280D. Normally Criminal complaints are filed by the Income Tax Department for offences punishable under Section 276C, 276CC and 276B of the Income Tax Act.

In the case of Prakash Nath Khanna and Anr. Vs. Commissioner of Income Tax and Anr. (2004) 266 ITR 1, (SC) which dealt with Section 276CC of the Income Tax Act 1961, it was held that one of the significant terms used in Section 276CC (offence of failure to furnish return of income) of the Income-tax Act, 1961, is “in due time”. The time within which the return of income is to be furnished is indicated only in sub-section (1) of Section 139 and not in sub-section (4), Even if a return is filed under section 139(4) that would not dilute the infraction in not furnishing the return within the time as prescribed under sub-section (1) of section 139. Also whether there was willful failure to furnish the return is a matter which is to be adjudicated factually by the court which deals with the prosecution case. Section 278E is relevant for this purpose. There is a statutory presumption prescribed in section 278E. The court has to presume the existence of culpable mental state, and absence of such mental state can be pleaded by an accused as a defence in respect of the act charged as an offence in the prosecution. The same was followed in Sasi Enterprises vs. Assistant Commissioner of Income Tax [2014] 361 ITR 163 (SC).

The other relevant sections are 276 B, Section 278 B and Section 2[35] of the Income Tax Act, 1961 which deals with Criminal Prosecution for failure on the part of Company in deducting tax at source and paying to the account of Central Government .
Section 276B deals with failure to deduct tax at source, Section 278B deals with Offences by Companies and Section 2 [35] deals with Principle Officers. It was held by the Hon’ble Supreme Court in the case Madhumilan Syntex Ltd. &Ors. Vs. U01 & Anr. (2007) 290 ITR 199 (SC) that wherever a company is required to deduct tax at source and to pay it to the account of the Central Government, failure on the part of the company in deducting or in paying such amount is an offence under the Act and has been made punishable. It, therefore, cannot be said that the prosecution against a company or its directors in default of deducting or paying tax is not envisaged by the Act.

From the above statutory provisions, it is clear that to hold a person responsible under the Act, it must be shown that he/she is a “principal officer” under section 2(35) of the Act or is “in charge of” and “responsible for” the business of the company or firm. It is also clear from the cases referred to above that where necessary averments have been made in the complaint, initiation of criminal proceedings, issuance of summons or framing of charge, cannot be held illegal and the court would not inquire into or decide the correctness or otherwise of the allegations leveled or averments made by the complainant. It is a matter of evidence and an appropriate order can be passed at the trial. It was further held, that even if TDS was already deposited to the account of Central Government and there was no default and no prosecution could be ordered yet the same was not accepted by the Court and it was held that once a statute requires to pay tax and stipulates the period within which such payment is to be made, the payment must be made within that period. If the payment is not made within that period, there is default and an appropriate action can be taken under the Act.

The same was followed by Delhi High Court in CRL. L.P. 85 OF 2010 in the case of Income Tax Officer Vs. M/s. Delhi Iron works (P) Ltd. &Ors. decided on 11.11.2010 and CRL.L.P. 241 of 2012 in the case of Income Tax Officer Vs. Anil Batra & Anr. decided on 23.09.2014.

Pendency of re-assessment proceedings are not a bar to institution of criminal prosecution for offences punishable under the Income Tax Act.

It was held by the Hon’ble Supreme Court in the case of P. Jayappan vs. S.K. Perumal, First Income-Tax Officer, Tuticorin (1984) 149 ITR 696 (SC) that pendency of the reassessment proceedings cannot act as a bar to the institution of criminal prosecution for the offences punishable under section 276C or 277 of the Act. The same was followed by different High Courts in Assistant Commissioner of Income Tax Vs. S.P. Bansal and Others (2000) 243 ITR 406 Delhi, R.G. Agarwal and Co. &Ors. Vs. Union of India (1994) 210 ITR 617 (MP), Surjit Engineering Works &Ors. Vs. Income Tax Officer (1994) 210 ITR 547 (P&H), Kalyan Rice and General Mills &Anr. Vs. Income Tax Officer (1989) 180 ITR 41 (P&H), Shankar and Company & Ors. Vs. Third Income-Tax Officer (1992) 193 ITR 172 (Kar.),

Sanction of [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner] for proceeding for an offence under the Income Tax Act

As per Section 279 of the Income Tax Act, a person shall not be proceeded for an offence under the Act except with the previous sanction of the [Principal Commissioner or] Commissioner or Commissioner (Appeals) or the appropriate authority.
Compounding of offences punishable under the Act The explanation to Section 279 of the Income Tax Act vests the CBDT with the powers to issue circulars, orders, instructions or directions “for proper composition” of offences. The Supreme Court in the case of Y.P. Chawla vs. M.P. Tiwari (1992) 2 SCC 672 had upheld the validity of guidelines issued by CBDT under Section 119 (1) of the Act and recognized the power of CBDT to issue guidelines for compounding including compounding charges in exercise of powers under section 279(2) of the Act. In M.P. Purusothaman v. Assistant Director of Income Tax (Prosecution) [2001] 252 ITR 603, the High Court of Madras, while considering the power of the CBDT to compound an offence under Chapter XXII of the Act held that compounding of an offence is the exception and not the rule. Compounding fee is of a deterrent nature and is imposed with a view to ensure compliance with the law.

A Writ Petition No. 6268 of 2017 in the case of Vikram Singh Vs. Union of India & Ors. was filed before Hon’ble Delhi High Court challenging the imposition, legality and validity of compounding fee — a fee charges under the Income Tax Act, 1961 (for short, ‘the Act’), to compound offences committed by assessee. Challenge was primarily raised to the legality of the quantum of compounding fee, as prescribed by guidelines issued by the Central Board of Direct Taxes (for short, ‘CBDT’) dated 23rd December 2014 and quashing of the same as being arbitrary and unfair. The writ petition was dismissed by holding that in view of the decision of Y.P. Chawla vs. M.P. Tiwari (1992) 2 SCC 672, the power to issue guidelines is now unquestionable and cannot be challenged.

Interference by High Courts after issuance of summons and framing of charge in Criminal complaints filed under Section 276C, 276CC and 276B

In case of Madhumilan Syntex Ltd. &Ors. Vs. U01 & Anr. (2007) 290 ITR 199 (SC) which dealt with section 276B, 278 B and Section 2[35] of the Act, it was held that where necessary averments have been made in the complaint, initiation of criminal proceedings, issuance of summons or framing of charge, cannot be held illegal and the court would not inquire into or decide the correctness or otherwise of the allegations leveled or averments made by the complainant. It is a matter of evidence and an appropriate order can be passed at the trial. In the case of Prakash Nath Khanna and Anr. Vs. Commissioner of Income Tax and Anr. (2004) 266 ITR 1, which dealt with Section 276CC of the Act it was held by the Hon’ble Supreme Court that whether there was a willful failure to furnish the return is a matter of trial and the High Court had rightly not interfered against the orders issuing summons because as per section 278E of the Income Tax Act, there is a presumption as to culpable mental state. The same view was taken in the case of Sasi Enterprises Vs. Assistant Commissioner of Income-tax reported in [2014] 361 ITR 163 (SC). The Hon’ble Delhi High Court in Crl. M.C. No. 3385 of 2016 in the case of Karan Luthra vs. Income Tax Officer decided on 14.09.2018 refused to interfere against the order framing charges under section 276 CC of the Income Tax Act following the judgment of Supreme Court in Sasi Enterprises.

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