Prosecution filed without initiation of assessment proceedings upheld. Compounding/Settlement not a natural right

Prosecution filed without initiation of assessment proceedings upheld. Compounding or approaching Settlement Commission not a natural right – Sessions Court 

Faced with the presumption u/s 278E of Income Tax Act,  it  is  for  the accused to lead evidence before the Trial Court and to dispel the presumption  by  proving  no attempt to evade  tax or making any  false  statement or declaration.

ABCAUS Case Law Citation:
ABCAUS 3167 (2019) (10) AC

Important case law relied upon by the parties:
Jayappan Vs. S.K. Perumal 149 ITR 692 (SC) ;  Uttam Chand Vs. ITO (1982) 133 ITR 909 ; Sajjan Kumar v. CBI (2010) 9 SCC 368 ; Universal Supply Corporation Vs. State of Rajasthan and anr. 1994 (206) ITR 222 ; K. C. Builders and Anr. Vs. The Assistant Commissioner of Income Tax, 2004 (2) SCC 731 ; Union of India Vs. W.N. Chadha, AIR 1993 SC 1082; Rajinder Nath Vs. M. L. Khosla, Incometax Officer 134 ITR 0397 (Del),; Commissioner of Income Tax Vs. Bhupen; Champak Lal Dalal, 248 ITR 830 (SC); Easland Combines, Coimbatore Vs. The Collector of Central Excise, Coimbatore AIR 2003 SC 843 ; Dr. Nalini Mahajan Vs. DIT (Inv.) 257 ITR 123 (Del); Ajoy Kumar Ghose Vs State of Jharkhand & Ors. AIR 2009 SC 2282 ; Asstt. Commissioner Vs. Velliappa Textiles Ltd.,(2003) 11 SCC 405; Sasi Enterprises Vs. ACIT, (2014) 5 SCC 139 ; PNB Finance and Industries Ltd. and Ors. Vs. Miss Gita Kripalani (1984) 26 DLT 22 (SN)

Prosecution without initiation of assessment proceedings

In the instant case, a revision petition was filed by the revisionist challenging the order passed by the Addl. Chief Metropolitan Magistrate (ACCM) whereby the Trial Court had dismissed an application filed by the revisionist seeking his discharge in a case arising out of a complaint that had been filed by the respondent (Department  of Income Tax) against the revisionist/accused for the alleged commission of offences under Sections 276C(1) and 277 of the Income Tax Act, 1961 (the Act) and Section 181 of Indian Penal Code (IPC).

The Income Tax Department had filed a complaint before the Trial Court alleging commission of offences under Sections 276C(1) and 277 of the Act and Section 181 of Indian Penal Code against the revisionist as accused person.

As per the said complaint, information was received by the Income Tax Department about the accused being director and shareholder in a British Virgin Island Company. Investigation was carried out in respect of the said information. The revisionist was asked to disclose information of foreign assets and foreign bank accounts but he denied   having   any   foreign   asset   or   bank account;

The investigation revealed that the accused had made investment in the said company and was one of the   authorized signatories for  opening the bank account out of which account a number of payments had been made.

The Income Tax Department issued a show cause notice to the revisionist  calling upon him to explain as to why prosecution should not be initiated against him. After considering the reply sanction for prosecution was accorded by the Principal Director of Income Tax (Investigation)­u/s 279(1) of the Act on the ground that the documents received showed that the revisionist was a shareholder in the said company   and   was beneficial owner   of   its   bank account; that the sources of money by which deposits were made in the bank account and by which shares of the company were purchased as well as income earned thereupon had not been disclosed  by the  revisionist  in  his  tax  returns;  that the revisionist had thereby willfully attempted to evade tax; that the revisionist, in his written submissions and statement, disclosed incorrect facts; that the revisionist thereby committed  offences under Sections  276C(1) and 277 of the Income Tax Act, 1961 and Section 181 of Indian Penal Code.

The revisionist filed an application before the Trial Court under Section 245 of Code of Criminal Procedure. In that application, the revisionist submitted that he cannot be tried for commission of the alleged offences owing to several reasons. However, the   aforesaid   application   was   dismissed   by   the Trial Court which was under challenge before   the Sessions Court.

Contentions of the Revisionist

It was contended that the Trial Court ought to have  allowed the application for discharge and since it had failed to do so, the order was erroneous. The grounds on the basis of which the revisionist was seeking to be discharged were broadly as under:

(a) Before initiation of assessment proceedings, a complaint for commission of offences under the Income Tax Act cannot be filed. It is contended that the respondent has not followed Manual of Office Procedure in initiation of prosecution   according   to which   prosecution   can   be   launched only on collection of evidence at the stage of assessment. It is urged   that   the respondent failed to ascertain the amount of tax evaded. According to the revisionist, it is necessary  to make this determination in view of different punishments being prescribed depending on the sum of tax that has been evaded, under Section 276­C(1) of the Act. It has been further urged that the assessment proceedings have direct bearing on criminal proceedings. Trial Court may not  be  best suited for determination of tax liability, which ought to be done only by the income tax  authorities through assessment proceedings. 

(b) The assessee had been deprived of the liberty of approaching Settlement Commission and of seeking compounding of the offence.

(c) Sanction had been accorded by Principal   Director (Investigation) who  was not competent to grant sanction for prosecution. Only Principal Commissioner, Commissioner or Commissioner (Appeals) is competent to grant sanction under Section 279(1) of the  Act. 

(d) The revisionist was not granted an opportunity of hearing before launch of prosecution by filing of complaint.  

(e) The complaint was not maintainable as it was based on inadmissible evidence.

It is further urged by the revisionist that the Trial Court had erred in holding that  the  application  u/s 245(2) of Code of Criminal Procedure is not maintainable because recording of pre­charge evidence had not concluded. 

Maintainability of the Revision Petition

The first question before the Sessions Court was whether the revision petition was maintainable. The Court observed that a revision   petition  is filed   under Section 397(1)  of  Criminal  Procedure Code which empowers the Sessions Court to examine the correctness of order of a court subordinate to it. Section 397(2) lays down that powers of revision conferred by section 397(1)  shall not be exercised in relation to any interlocutory order passed in a trial or other proceeding.  

The   issue   was whether an order declining to discharge an accused before granting opportunity to the complainant to lead pre­charge evidence is revisable under the aforesaid provision?

The Sessions Court held that in view of the clear pronouncements of Hon’ble Bombay High Court , Hon’ble Madhya Pradesh High Court and Hon’ble Allahabad High Court the order dismissing the application under Section 245(2) of Code of Criminal Procedure is not  an  interlocutory  order. Therefore, the revision petition against the impugned order was maintainable.

Scope of Revision Petition

The Sessions Court opined that in revisional jurisdiction, a Court of Sessions may interfere with the  order of a Metropolitan Magistrate if  the order is found to be manifestly erroneous, illogical or  implausible,  or in the event of a jurisdictional error. The Hon’ble Supreme Court has held that the  revisional court should not interfere with the discretionary jurisdiction  exercised by the Magistrate unless a jurisdictional error or an error of law is noticed.

Maintainability of Application for Discharge & Standard to be met for discharge u/s 245(2) of CrPC

The Sessions Court expressed agreement with contention that the application  u/s 245(2) of Code of Criminal Procedure filed before the Trial Court seeking discharge prior to recording of pre­charge evidence was maintainable.

The Sessions Court observed that the Trial Court had not dismissed the application u/s 245(2) on the ground that it was not maintainable.  It had been dismissed because the Addl. Chief  Metropolitan Magistrate did not agree with the plea of the accused/ revisionist  he was entitled to be discharged. Therefore the Sessions Court had to consider whether the said opinion of Addl. Chief Metropolitan Magistrate was sustainable or not. In other words, whether, on perusal of the bare complaint no prima facie case against the revisionist was made out.

According to the Sessions Court, following the guideline laid down by Hon’ble Supreme Court, as the case before the Trial Court was at an even anterior stage, the scope of inquiry would be more restricted and the accused would have to show that even if the evidence that is proposed to be led by the complainant in pre­charge evidence is accepted at face value, charge cannot be framed and so the case is such that it has to be aborted without recording of such evidence.

Analysis of Contentions

The Sessions Court examined the contentions of the revisionist in depth viz-a-viz relevant provisions of the Income Tax Act, 1961 and Indian Penal Code and found that all the pleas taken by the revisionist were allegedly controverted by documents received from Singapore and British Virgin Islands. It had been demonstrated prima facie that the revisionist made false statements in order to mislead the Tax Department and to conceal his income and evade tax thereon. These allegations, supported by documents, did point out towards commission of offences under Section 277 of Income­ Tax Act, 1961 and Section 181 of Indian Penal Code. The refusal to discharge the accused for the said offence was therefore justified.  It was however open to the accused to plead and prove before the Trial Court that he never intended to conceal his income or assets or to avoid the payment of income tax or that the revisionist did not make any false statement  before the Income Tax authorities.  

The Sessions Court therefore confined itself to the submissions advanced by the parties to assess whether there was an apparent  infirmity or deficiency in the case made out  before  the  Trial  Court owing to which the revisionist should have been discharged even before conclusion of pre­charge evidence.  

The Sessions Court however underlined that once the Income Tax Department asserts  that  there had been attempt to evade tax and there had been misstatements, the case would be fit for recording of pre­charge evidence to allow the Department of Income Tax to prima facie  prove  this accusation with details. The court can not go nitpicking or carry out a roving inquiry to somehow disprove the allegations.  It cannot, in revisional jurisdiction, embark on an exercise of settling disputed questions of fact and to give a finding on whether there was an attempt  to  evade  taxes or misstatements or false declarations.  

The Sessions Court stated that faced with the presumption u/s 278E of Income Tax  Act,  it  is  for  the accused to lead evidence before the Trial Court and to dispel the presumption  by  proving  that  there was  no such attempt to evade  tax or that he did  not make any  false  statement or declaration.

Validity of Sanction for Prosecution

The Sessions Court stated that at this stage, the court could not go into the defence of the accused. It was for the accused  to prove during trial that the relevant documents were not placed before sanctioning authority. The purpose   of   the   law prescribing the requirement of obtaining sanction is to ensure supervision by a senior officer and to eliminate chances of innocent persons being harassed   by   subordinate   officers   of Income­tax Department. This purpose was amply  and  effectively served by the grant of sanction by a Principal Director of Income tax who is at the same level as Principal Commissioner of Income­ tax. The plea of the revisionist finding deficiencies in the grant of sanction, was without merit and rejected.

Prosecution without initiation of assessment proceedings

The learned Sessions Court observed that under the Income­tax Act, different consequences  have been provided for evasion of  tax  or  its  attempt.  A person may face assessment  proceedings  and one can also made to face prosecution. These are provided as separate consequences of breach of the law. Invocation of one of them is not dependent on the other.

The Sessions Court stated that since the statute does not provide that it is necessary to initiate assessment proceedings before launch  of prosecution, it is not permissible for  the  Court  to  insert  this condition on its own.

Further, the standard of proof required to be attained in the two proceedings is also different and there is a presumption of culpable mental state against the accused in criminal proceedings. Therefore, the fate of one proceeding cannot dictate or be said to be inevitable in the other. It is possible that the Department may not succeed in proving the allegations in assessment proceedings but, armed with the presumption u/s 278E of the Act, may be able to prove them in the criminal case. Each case would have to follow the standard and mode of proof prescribed for that proceeding and it cannot borrow the yardsticks or transplant the conclusions arrived at in the other. 

The learned Sessions Court opined that the purpose of assessment proceedings is to recover the tax whereas the objective of criminal prosecution is to punish the offender. Both of these operate in different fields. It is the sole prerogative of the Income­ tax Department to initiate either of these before the other or to not initiate either of them at all. The Court cannot that unless the other proceeding is initiated, the one that has already been set into motion is to be shot down.

The Sessions Court observed that the Hon’ble Delhi High Court had held that the Income­tax Act does not expressly or impliedly bar institution of a complaint in absence of determination of liability in assessment proceedings. The two proceedings are completely different and are independent of each   other.

The Sessions Court opined that the filing of complaint cannot be said to be invalid merely because its filing without prior commencement of assessment proceedings may have deprived the revisionist of the option of approaching the Settlement Commission or of applying for compounding of the  offence. That a person is unable to apply to the Settlement Commission as per provisions of the statute  or to apply for compounding of the offence is not a valid ground to question the correctness or to challenge the initiation of prosecution.

Neither compounding nor settlement before the Settlement Commission is a natural right but creations of statute. The Hon’ble Supreme Court had held that there is no obligation on the part of the Income ­tax Department to provide an opportunity of compounding. The Hon’ble Supreme Court had held that the fact that a law is causing hardship to a person is not a reason to refuse to give effect to it.  

Therefore the Sessions Court found the contention of the revisionist that complaint could not have been filed  without prior initiation of assessment proceedings thereby depriving assessee of the option of approaching Settlement Commission or of compounding, as untenable and was rejected. 

The Sessions Court opined that where the Income­ tax Department is of the opinion that the offence has been committed, it is entitled to file a complaint, for the said allegation to be tested by the Court. The opinion of the Department is sufficient to file the complaint. It is not necessary for the Department to have its view confirmed from the Tribunal. It is sufficient safeguard against harassment of the accused that sanction for prosecution is obtained from a superior officer. After all, mere filing of the complaint will not lead to imposition of punishment.  That will happen only after trial, which will afford adequate opportunity to the assessee to prove his innocence.

The Sessions Court observed that though there were decisions of Hon’ble Supreme Court to hold that a  decision in assessment proceedings may have a bearing on criminal prosecution and that if assessment proceedings are ruled in favour of an assessee, criminal proceedings  may, in certain cases, be quashed. There was no judgment cited by the revisionist which laid down that initiation of assessment proceedings is  a condition precedent to filing of a criminal complaint. 

However, it was noted that a decision of Hon’ble Rajasthan High Court had a striking resemblance to the case in hand. In that case, the primary  ground raised was that penalty proceedings had not been initiated under Act and, therefore, the assessee could not have been prosecuted. However this contention was rejected by the Hon’ble High Court observing that in the Income­tax Act, there are separate provisions for levy of interest, penalty and criminal prosecution and Criminal proceedings have nothing to do either with the levy of interest or penalty. In the absence of these proceedings also, criminal prosecution can be launched if the ingredients of the offence under Section 276B of the Act are made out.

Similar view was expressed by the Hon’ble Delhi High Court observing that there is no correlation between the penalty proceedings u/s 271 and criminal prosecution u/s 277 of the Act and initiation  of penalty proceedings is not a condition precedent to the institution of a complaint  u/s 277.

The learned Sessions Court pointed out that Assessment proceedings would only decide whether tax has been evaded and if so, to what  extent. Assessment proceedings are not initiated with the objective of finding out whether false declarations and statements have been made by an assessee, although this finding may be incidentally returned by the assessing authority.

The Sessions Court also rejected the plea of the  revisionist that prosecution  cannot be launched before initiating assessment proceedings as per  Manual of Office Procedure and  CBDT circular. The Statue ( Income ­tax Act ) does not prohibit filing of criminal complaint before initiation of assessment  proceedings and the said circular cannot override provisions of the statute. Secondly, the said circular does not qualify as “law” and cannot be deemed to create roadblocks in exercise of statutory powers by law enforcement authorities. Thirdly, even if the said circular is deemed to be “subordinate legislation”, it has to be interpreted in a manner that is in sync with the parent statute.

Besides, the said circular had been clarified by a subsequent CBDT circular which has expressed that the previous guidelines and circulars do not “provide the completion of assessment as a precondition for filing a prosecution complaint.” The   Manual   of   Office   Procedure  also  does not partake   the character of legislation. It is intended to only provide broad guidelines  for  facilitating day ­to ­day functioning of the Income Tax Department.

Requirement of grant of opportunity of hearing before filing complaint 

Following the observation made by the Hon’ble Supreme Court, the Sessions Court held that there is no requirement of grant of opportunity of hearing before filing of complaint. 

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