Incorrect claim or erroneous claim not willful evasion, in certain circumstances can be erroneous interpretation of law.
In a recent judgment/order Hon’ble Supreme Court dismissed the SLP of the Revenue against the order of Karnataka High Court quashing proceedings u/s 276C of the Income Tax Act, 1961 holding that incorrect claim or erroneous claim would not amount to willful evasion. Erroneous claim in certain circumstances can be erroneous interpretation of law.
ABCAUS Case Law Citation:
4362 (2024) (12) abcaus.in SC
In the instant case, proceedings were initiated against the assessee(s) invoking Section 200 of the CrPC for offence punishable under Section 276C of the Income Tax Act, 1961 (the Act) for alleged bogus claims made under the head Long Term Capital Gain/Short Term Capital Loss.
The allegation was that the petitioner had made a bogus long term capital gain from trading in scripts of few companies. The claims were accepted by the Income-Tax Department. At a later point in time, it was found that these claims had some suspicion. Based thereon assessment proceedings were instituted under the Act for levy of penalty and simultaneously search was conducted under Section 132 of the Act. Statements of assessees were recorded under sub-section (4) of Section 132 of the Act and premises were also searched and later on, crimes come to be registered for prosecution under Section 276-C of the Act.
Aggrieved by the registering of crime, the assessee approached the Hon’ble High Court by way of filing Criminal Petition.
Before the Hon’ble High Court, the Petitioners contended that there is no element of mens rea involved in any of the transactions. It was stated that claim was based on documents. The claim was not accepted by the revenue. Mere non-acceptance of the claim by the revenue would not mean that evasion was willful. It was at best an incorrect claim which would not amount to willful evasion of tax. It was contended that the moment search was conducted and the petitioners have been advised, they had waived all the claims and paid the tax that was necessary to be paid by filing their revised returns.
It was thus contended that there was no willful evasion of tax. It was submitted that criminal proceedings ought to have awaited conclusion of assessment proceedings under the Act as evasion itself is yet to be determined in the assessment proceedings. Therefore, criminal prosecution was initiated in a hurry.
Lastly it was contended that the order of the Magistrate in taking cognizance of the offences suffered from blatant non-application of mind and, therefore vitiated and all proceedings taken thereto are to be treated as a nullity in law.
On the other hand, the Revenue contended that the petitioners did not file revise return at their own. Search conducted on the premises of the petitioners revealed that they had made certain alleged bogus claims. It is only after that the petitioners came out and filed their revised returns. It was submitted that it did amount to willful evasion of tax as, if it would have been undetected, but for the search.
The Hon’ble High Court observed that the Apex Court held that Section 276-C of the Act can be invoked only if a person willfully fails to furnish in due time the return of income required under Section 139(1) of the Act. It should be willful and should establish element of mens rea which would be sufficient to prove default in complying with the statute. It was held that willful attempt to evade tax, penalty or interest chargeable should be a positive act on the part of the accused which is required to be proved to bring home the charge against the accused. The Apex Court, repeatedly held that mens rea is an element that is to be present in a proceeding under Section 271 of the Act. The mere fact of not accurate tax, not exact tax or erroneous tax would not lead to the proceedings under Section 276 of the Act.
The Hon’ble High Court further observed that following all the judgments of the Hon’ble Supreme Court, a co-ordinate Bench of the High Court held that the act of the assessee to evade tax should be palpable and demonstrable. The intention should be clearly to evade tax. It was held that there was no mens rea, as tax was immediately paid. It was a erroneous calculation of tax which cannot be attracted in a case of the kind.
In another case, the Co-ordinate Bench categorically held that delayed payment of Income Tax would not amount to evasion of tax, so long as there is payment of tax, more so for the reason that in the returns is a filed acknowledgement of tax due to be paid.
The Hon’ble High Court observed that it emerges unmistakably from a coalesce of the judgments rendered by the Apex Court and that of High Court is that, in such cases what is necessary to be present is mens rea. Incorrect claim or erroneous claim would not amount to willful evasion. Erroneous claim in certain circumstances can be erroneous interpretation of law.
The Hon’ble High Court opined that the moment it is brought to the notice of all these petitioners, retracing of steps immediately happened by filing of revised returns. Therefore, it was not a case where ipso facto evasion of tax can be laid against the petitioners. The facts in the case are akin to what is considered by the Apex Court and co-ordinate Benches of the High Court. The judgments rendered by the co-ordinate Benches were tossed by the revenue before the Apex Court which had been dismissed. Therefore, in the light of all the issues standing answered by plethora of judgments, the proceedings instituted against the petitioners cannot but be termed to be an error in law.
Further, the Hon’ble High Court noted that in the light of the law laid down by the co-ordinate Bench, an identical order of taking cognizance by the Trial Court was rendered illegal. Therefore, even with regard to the order of taking cognizance suffering from nonapplication of mind, the judgment of the co-ordinate Bench would cover the issue.
Accordingly, proceedings u/s 276C pending before the Trial Court were quashed.
Not satisfied with the order of the Hon’ble High Court, the Income Tax Department challenged it before the Hon’ble Supreme Court by way of filing a Special Leave Petition (SLP). However the Apex Court dismissed it with following observations,
“we are not satisfied that any case for interference is made out under Article 136 of the Constitution of India. The Special Leave Petitions are, accordingly, dismissed, question of law to be decided, if necessary in some other appropriate case.”
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