High Court declined to interfere with acquitting the assessee from prosecution u/s 278AA launched by Income Tax Department for non deposit of TDS within due dates.
In a recent judgment, Hon’ble Delhi High Court declined to interfere with Trial Court judgment acquitting the assessee from prosecution under section 278AA for non deposit of TDS due to financial crisis holding that underlying objective of the provision is to shield individuals from criminal prosecution where non-compliance is neither wilful nor mala fide.
ABCAUS Case Law Citation:
4579 (2025) (05) abcaus.in HC
In the instant case, the Income Tax Department had challenged the order passed by the Trial Court acquitting the respondent assessees from the offences under Sections 276B read with Section 278B of the Income Tax Act, 1961 (the Act).
The Department alleged that the respondent company had deducted TDS but failed to deposit the same with the Central Government within the prescribed period.
For the relevant three Assessment Year, the respondent company had made payment to various persons and had made a total deduction of Tax at Source (TDS) of more than Rs. 425 crores but failed to deposit the same to the credit of the Government Treasury, within the stipulated time as required under the Act.
Though the defaults were later remedied by the respondent company by depositing the amount which was deducted with interest in the Government Treasury; however, the department proceeded with prosecution on the ground of initial failure.
The Trial Court framed charges for offence under Sections 276B read with Section 278B and 278E of the Act.
During the criminal proceedings, the Trial Court observed that Section 278AA of the Income Tax Act casts the burden on the accused to prove that there exists a reasonable cause for delayed payment. In statement u/s 313 Cr.P.C., it had been specifically pointed out by the accused representing the company also that there was financial crisis due to non-payment of money by the principal contractors and refund from income tax department. The same was also clarified by the accused in his defence evidence lead by him. It was specifically deposed that assessee i.e. accused was sub sub contractor of public sector contractors and on the account of dues from the sundry debtors for all the three years, accused company had suffered financial hardships. It was deposed that the money was not paid by the companies to the accused company to complete the contract in time, though, accused had to purchase the raw material and made payment to various contractors. The copy of agreement between the various companies and the accused Company was also relied upon.
It was also pointed out that accused company had to receive a large sum from debtors being the ultimate client/debtor for the road construction work executed by the accused company for the project but the said payment had not been released to the accused company. It was also pointed out that main contractor had initiated an Arbitration Proceedings and the Arbitrator had passed an Award in favour of the main contracting Company and against the State Corporation.
It was therefore point out that legally recoverable payments had not been released to the accused company which was the root cause for making the delayed payment of TDS by the accused company. It had also been pointed out that the income tax department itself had failed to refund for the one year to the accused company on time, further for another year, payment was received very late and for the third year, again it was received only in part.
It was submitted that accused company and its directors deposited the TDS alongwith interest thereon, from time to time by borrowing funds from its personal resources.
The Trial Court opined that by going through all the facts it was clear that due to non-payment of the funds by those companies there was financial hardships faced by the company. The Trial Court opined that the financial exigencies beyond the control of the accused company which further got aggravated due to non-refund of the TDS amount leas to an unavoidable delay in payment of TDS, such reasons faced by the accused company may be considered as reasonable cause as found stated in Section 278AA of Income Tax Act.
The Trial Court held that the aforesaid financial constraints could have prevented any other company to fulfill financial obligations in normal circumstances without negligence or inaction or for want of bona fides.
Accordingly, the Trial Court held that the ingredients of Section 278AA of the Income Tax Act stood satisfied and the accused company as well as accused directors were able to prove the existence of reasonable cause for non-payment of tax within the stipulated statutory period and were acquitted for the offences punishable u/s 276B read with Section 278B of the Income Tax Act.
The High Court observed that it is trite law that this Court must exercise caution and should only interfere in an appeal against acquittal where there are substantial and compelling reasons to do so. At the stage of grant of leave to appeal, the High Court has to see whether a prima facie case is made out in favour of the appellant or if such arguable points have been raised which would merit interference.
The High Court observed that the Hon’ble Supreme Court had held that in deciding the question whether requisite leave should or should not be granted, the High Court must apply its mind, consider whether a prima facie case has been made out or arguable points have been raised and not whether the order of acquittal would or would not be set aside. It cannot be laid down as an abstract proposition of law of universal application that each and every petition seeking leave to prefer an appeal against an order of acquittal recorded by a trial court must be allowed by the appellate court and every appeal must be admitted and decided on merits.
The Hon’ble High Court also noted the Hon’ble Supreme Court had discussed the scope of interference by an Appellate Court for reversing the judgment of acquittal. It was held that the scope of interference by an appellate Court for reversing the judgment of acquittal recorded by the trial Court in favour of the accused has to be exercised within the four corners of the following principles:- (a) That the judgment of acquittal suffers from patent perversity; (b) That the same is based on a misreading/omission to consider material evidence on record; (c) That no two reasonable views are possible and only the view consistent with the guilt of the accused is possible from the evidence available on record.
The Hon’ble High Court noted that Trial Court passed a common judgment acquitting the respondents primarily on the ground that the respondents had satisfactorily demonstrated the existence of a ‘reasonable cause’ for the delay in depositing tax deducted at source within the meaning of Section 278AA of the Act. The defence advanced by the respondents was that during the relevant assessment years, the company was undergoing an acute financial crisis, including non-receipt of substantial dues from clients, particularly government agencies, which led to a severe cash flow shortage and hindered timely TDS compliance.
The Hon’ble High Court further observed that Section 278AA of the IT Act begins with a non-obstante clause, which specifically provides the intent of the Legislature that no person shall be punished for failure to comply with Section 276B if it is established that the failure occurred due to a reasonable cause. In effect, the existence of a reasonable cause operates as a statutory defence against prosecution.
The Hon’ble High Court further noted that Hon’ble Patna High Court had interpreted the scope of reasonable cause’ under Section 278AA of the Act and observed that reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides.
The Hon’ble High Court found that the respondents in their detailed reply to the show cause notice issued to them for non-depositing of TDS at the appropriate time had specified the financial crunches faced by them because of non-receiving of payments. The Trial Court meticulously examined the evidence presented, including letters addressed to the Income Tax Department, correspondences with banks, and documents suggesting outstanding payments receivable from government entities. These documents were adduced by the respondents to establish that the delay was not wilful or with an intent to defraud the revenue but was occasioned by bonafide financial hardship. Notably, it was also brought on record that the entire defaulted TDS amount, along with applicable interest and late fee under Sections 201(1A) and 234E of the Act, had been remitted prior to the initiation of prosecution. However, after submission of the reply, order sanctioning prosecution was passed though the sanctioning order itself recorded the submissions of the respondent company that it was facing financial crisis and delay in deposit of TDS was unintentional.
The Hon’ble High Court further noted that the testimony of the Income Tax Officer, during cross-examination was of considerable significance. He candidly admitted that the entire amount constituting the alleged TDS default had been deposited by the assessee even prior to the issuance of the show cause notice under Section 279 of the Act. This admission undermines the prosecution’s narrative of wilful default and supports the respondents’ claim that the delay in deposit was not motivated by any dishonest intent, but arose from circumstantial financial hardship.
The Trial Court, after carefully weighing this material fact, rightly concluded in the impugned judgment that the respondents’ conduct reflected a responsible and remedial disposition. The respondents not only acknowledged the default but also took proactive steps to regularize it before the initiation of prosecution, thereby evidencing the absence of mens rea, a critical ingredient in sustaining criminal liability under Section 276B of the Act.
The Hon’ble High Court opined that the Trial Court’s finding that the default was not deliberate but compelled by external financial constraints was neither perverse nor legally infirm. Rather, it reflected a balanced application of the statutory framework that distinguishes between culpable inaction and excusable delay backed by bona fide efforts at compliance.
The Hon’ble High Court stated that it is well-settled that in a petition seeking leave to appeal against acquittal under Section 378(4) of the CrPC, interference is not warranted merely because the appellate court may have arrived at a different conclusion. The jurisdiction under Section 378(4) of the CrPC is invoked only where the findings of the learned Trial Court are perverse, manifestly illegal, or result in miscarriage of justice. Where two views are possible and the Trial Court has chosen one based on plausible reasoning and appreciation of facts, the appellate court ought not to interfere.
The Hon’ble High Court opined that the Trial Court had adopted a legally tenable interpretation of Section 278AA of the Act and rendered findings which are not only supported by the record but also resonate with the underlying objective of the provision – namely, to shield individuals from criminal prosecution where non-compliance is neither wilful nor mala fide. No perversity or material irregularity has been demonstrated by the petitioner.
Accordingly, the petitions was dismissed.
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