Order of prosecution for TDS late deposit open to judicial review but in a limited manner – High Court

Order of prosecution for TDS late deposit open to judicial review but in a limited manner to ensure that the authority has acted fairly and reasonably-High Court

ABCAUS Case Law Citation:
ABCAUS 2274 (2018) (04) HC

The Petitioner company had filed a writ petition against the order passed by the Commissioner of Income tax (TDS) sanctioning for prosecution u/s 279(1) of the Income Tax Act, 1961 (Act) for late deposit of TDS.

The allegation was that the company during the relevant Assessment Year deducted Rs. 3,52,99,059/- but the same was not deposited in the government treasury within the prescribed statutory time. Instead, the TDS was deposited with delay of 2-11 months from the prescribed due date.  These defaults were in respect of salary as well as non salary payments.

Show cause notice was issued to the petitioners asking as to why they should not be prosecuted under Section 276B and Section 278B of the Act. The authorised representative of the petitioners submitted that the petitioner company and his principal officer would opt for compounding. Accordingly, the prosecution proceedings were kept in abeyance subject to the petitioners filing compounding petition. However, when no compounding application was filed, another show cause notice was issued to resume the proceedings.

The company submitted that there were defaults in the deposit of TDS on account of financial crunch due to sluggish business activity. Financial position of the petitioner company was adversely affected by sudden drop in business orders. It was alleged that undisputed income tax refunds constituting 4-5 times the amount of shortfall in TDS had also remained pending.

Not satisfied with the reply the Commissioner sanctioned the prosecution u/s 278B of the Act of the Principal Officers of the company who were responsible for and was in charge of conduct of the business.

The Additional Chief Metropolitan Magistrate (‘ACMM’) had taken cognisance of the criminal complaint and and issued summons to the petitioners i.e.: the company and person in charge for appearance and to face trial.

Before the Hon’ble High Court the Petitioner submitted that the CIT failed to consider the requirements of Section 278AA, which states that no punishment would be imposed for offence committed under Section 276A, 278AB or Section 276B if the person being prosecuted proves that there was reasonable cause for such failure.

Also the Petitioner relied upon the Standard Operating Procedure issued by the CBDT on the ground that the delay in deposit of TDS did not exceed the prescribed period of twelve months.

The Hon’ble High Court opined that the issues raised by the petitioners were ex-facie factual and could constitute defense of the petitioners, as constituting reasonable cause. Onus to prove reasonable cause under Section 278AA of the Act is on the person being prosecuted. Similarly, with regard to the Standard Operating Procedure, the contention that default had continued for less than twelve months and effect thereof are aspects which would be considered and decided in the course of criminal proceedings.

The Hon’ble High Court stated that that grant of sanction could become subject matter of judicial review, albeit in a limited manner to ensure that the authority has acted fairly and reasonably and we do not act as an appellate forum that can substitute the opinion. Necessity of sanction is to filter out frivolous, malafide and vindictive prosecution. It is given on prima facie reaching the result that relevant facts constitute an offence. Technicalities and hyper-technical approach should not be adopted when the sanction order indicates and reflects application of mind.

The Hon’ble High Court opined that at this stage, it will neither be fair nor proper to question and decide the question of validity of Sanction Order on merits of reasonable cause etc. as it would amount to a pre trial adjudication. Questions and issues relating to grant and issue of sanction could be raised and decided during trial. It will be appropriate and proper for the writ Court while examining sanction, examine merits of allegations made in the criminal complaint and act as a fact finding authority.

The Hon’ble High Court dismissed the writ petition