Filling hypothetical income tax payment details in ITR to bypass e-filing portal validation

Filling hypothetical income tax payment details in ITR to bypass erstwhile e-filing portal validation – Prosecution u/s 277 quashed by High Court

ABCAUS Case Law Citation
ABCAUS 3562 (2021) (11) HC

Important case law relied referred:
Rakapalli Raja Rama Gopala Rao vs. Naragani Govinda Sehararao and another [(1989) 4 SCC 255]
Income Tax Officer vs. Chiranjilal Cotton Industries and others [(2001) SCC Online P & H 1615]

One of the significant change in the new Income Tax efiling portal is the facility of filing income tax return without payment of full income tax on the income. The tax may be paid later with due interest else, the assessee will be declared “assessee in default”.

Earlier, the assessee was required to pay the full amount of tax due before filing ITR and the portal did not allow uploading of the return until the particulars of tax paid i.e. BSR code, Challan No. etc. was not filled in the return of income for the full amount of tax payable on total income.

Lately, the Hon’ble High Court had an opportunity to consider merits of prosecution in a case where the assessee filed return without payment of full amount of tax and to bypass the portal validation, filled hypothetical details of the challan in the ITR.

The Hon’ble High Court laid down laws on income tax prosecution/penalty related aspects and held that prosecution u/s 277 initiated by the Income Tax Department against the petitioner was misconceived and not sustainable.

In the instant case, the assessee company had filed return of income by uploading soft copy of the ITR and the balance sheet on the web portal of the Income Tax Department. However, the company did not pay the full amount of tax liability at the time of the filing of the return. Since at that time the Income Tax portal did not accept the return without the full payment of tax, the company, to file the return within the due date, entered in the relevant columns of ITR, the amount of income tax as paid.

The case of the company was that it did not avoid or evaded payment of taxes inasmuch as 50% of the tax amounts had already been paid and the balance would have been paid by in due course as and when it received cash flows irrespective of the proceedings adopted by the Income Tax Department.

The case of the department was that misstatement was as regards the income tax having been paid even though such payment had not been made since the uploaded returns reflected the BSR code, challan number as also the amount paid as income tax. It was alleged that if not for the reconciliation, the company would have got away with non-payment of the taxes.

The Hon’ble High Court observed that the 26AS Statement indicated payment of substantial amount of money due to tax deduction at source (TDS). Apart, there from, the company had also made several payments on account of the income tax dues.  

The Hon’ble High Court opined that if at all the company wanted to default on payment, it could have not even filed its returns and/or filed its return without payment of monies earlier.

The Hon’ble High Court stated that a system that does not provide for acceptance of returns without the complete amount of income tax shown as paid is completely flawed. By not accepting the returns due to non-payment of the complete income tax, the Income Tax Department itself forcing an assessee to default on uploading of its returns.

The Hon’ble High Court held that the assessee had been forced to upload the returns by mentioning that the entire amount had been paid since without doing so the returns would not have been accepted by the software system set up by the Income Tax Department.  Therefore, the said statement made in the form of ITR had been forced upon the assessee by the Income Tax Department and cannot be said to be misstatement within the meaning and definition thereof under Section 277 of the Income Tax Act.

The Hon’ble High Court held that there is no straight-jacket formula which could be laid down as to determine what is a misstatement and what is not.  It would be required for the Court and/or the Assessing Officer or the Appellate Authority to determine the same on the facts of the case liberally in favour   of the assessee.

The Hon’ble High Court further held that for an offence to be   said to be committed under Section 277 of the Income Tax Act, the misstatement is required to be willful made with a malafide   or dishonest intention in order to prosecute the assessee.

The Hon’ble High Court directed the Income Tax Department to consider the provisioning of a facility in its software to upload Income Tax Returns with the actual amount paid and for the system to accept the said returns even though the complete amounts had not been paid.

The relevant questions of law framed in the facts of the case were as under:

Question 1: Whether for an offence to be said to be committed under Section 277 of the Income Tax Act, the misstatement is required to be willful to prosecute the assessee?

Answer: There was no willful misstatement.

Question 2: Whether there is a misstatement or willful misstatement by the petitioners in the present proceedings?

Answer: There was no willful misstatement.

Question 3: Whether the delayed payment of income tax would amount to evasion of tax or not?

Answer: No. So long as there is payment of tax, more so for the reason that in the returns filed there is an acknowledgement of tax due to be paid.

Question 4: Whether all the Directors of the Company can be   prosecuted for any violation of the Income Tax Act by relying on the inclusive definition under Section 2(35) of the Income Tax Act?

Answer: All the Directors of the Company cannot be   automatically prosecuted for any violation of the Income Tax Act. There has to be specific allegations made against each  of  the Directors who is intended to be prosecuted and such  allegation would have to amount to an offence and satisfy the    requirement of that particular provision under which the prosecution is sought to be initiated, more so when the   prosecution is initiated by the Income Tax department  who  has all the requisite material in its possession, and a preliminary investigation has been concluded by the Income     Tax department before filing of the criminal complaint.

Question 5: Whether the order of cognizance by the Economic Offences Court is proper and correct?

Answer: Order of cognisance was not in compliance with the requirement of Section 191(1)(a) of the Cr.P.C and did not indicate the procedure under Section 204 of Cr.P.C having been followed. At the time of taking cognisance and issuance   of process, the Court taking cognisance is required to pass a sufficiently detailed order to support the conclusion to take   cognisance and issue process. The judicious application of mind to the law and facts of the matter, should be apparent on the ex-facie reading of the order of Cognisance.

Question 6: Whether the Magistrate is required to follow the   proceedings under Section 202 even for the offences under the Income Tax Act?

Answer: In the event of accused being an individual, if the said accused has a temporary residence within the jurisdiction   of the Magistrate, again merely because he does not have a permanent residence, there is no enquiry which is required to be conducted under Section 202 of Cr.P.C. It would, however, be required for the Magistrate to in the event of issuance of summons / process record as to why the enquiry under Section 202 of Cr.P.C is not being held.

When the accused has no presence within the jurisdiction of the Magistrate where the offence has been committed, then it would be mandatory for an enquiry under Section 202 of the Cr.P.C to be held.

The Department challenged the order of the High Court before Supreme Court. The Apex Court, in view of the peculiar facts of the case, refused to interfere with the impugned order and dismissed the special leave petition. However, the Supreme Court clarified that the dismissal of the SLP would not be construed as approval of the observations made regarding Section 202 of the Code of Criminal Procedure, 1973. Neither the dismissal nor the findings recorded in the impugned order reflect on other proceedings under the Income Tax Act, 1961.

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