Prosecution for violation u/s 139(1) and 142(1) quashed as penalty u/s 271F was deleted by CIT(A) and no adjudicatory proceedings were initiated u/s 142(1)
ABCAUS Case Law Citation:
ABCAUS 2287 (2018) (04) AC
Important Case Laws Cited/relied upon by the parties
K.C. Builders & Anr. Vs The Assistant Commissioner of Income Tax (2004), 2 SCC 731
Income Tax Officer Vs M/s Rajan & Company
V.P. Punj Vs Assistant Commissioner Income Tax
Prakash Nath Khanna Vs.Commissioner Income Tax (2004) 9 SCC 686
Radhe Shyam Kejriwal vs State of West Bengal (2011) 3 SCC 581
Sasi Enterprises Vs Assistant Commissioner of Income Tax
The instant appeal had been filed by the company its Managing Director (MD) and Director (Collectively called “the appellants”) against the judgment and order on sentence passed by the court of Additional Chief Metropolitan Magistrate (ACCM).
A search u/s 132 of Income Tax Act, 1961 (the Act) was conducted against a company and other companies by the Investigation Wing of the Income Tax Department. The two appellants were alleged to be persons responsible and incharge of day to day affairs of the appellant company.
The appellant company was under obligation to file the return of income under the provisions of Section 139(1) of the Act, but and it failed to fulfill this obligation. A notice u/s 142(1) was issued to the company calling it to file the return of income on or before the specified date. However, no return was filed within the time given. Another notice u/s 142(1) was issued after four months and served upon the appellant company and said principal officers calling to file the return of income but no return was filed by them. Yet again within a span of one month another notice u/s 142(1) was issued and served but it was not complied with either.
Consequently, the Income Tax Department invoked the provisions of section 276CC related to prosecution for failure to furnish return of income, read with section 278B which provides for prosecution of directors/officers of the company. Accordingly a complaint was filed by the Department before the ACCM on the ground that that no return was filed by the appellant in response to various notices willfully despite being granted repeated opportunities/notices.
In the complaint, it was also averred that finally the appellants filed the return of income after declaring the income of Rs. 7 crores approx. The Return and the financial statements were signed digitally by the MD and the said director. Thereafter, appellants filed a revised return declaring income of Rs. 10 crores approx.
It was highlighted in the complaint that the assessment done by the Income Tax Department u/s 143(3) of the Act could assess a total income of the appellants to be Rs. 125 crores approx and the tax demand was determined as Rs. 37 crores approx for which notice was issued u/s 156 of the Act.
The ACMM was pleased to frame charges for the offences u/s 276CC r/w Section 278B & 278E of Income Tax Act. The evidence was led by the parties. The appellants examined the Chartered Accountant (CA) of the company. The CA brought to light before this court the factum regarding imposition of penalty u/s 271F of the Act by the Assessing Officer (AO). It was submitted on oath before the court that against the very order of penalty u/s 271F, the appellants had preferred an appeal before CIT(A) who set aside the penalty order holding that there was no wilful default on the part of accused company and thus there was no contravention.
However, by the impugned judgment, the ACMM convicted the appellants for the offences u/s 276CC r/w Section 278B of the Income Tax Act and sentenced the company to pay fine of Rs. Ten lacs, and the Directors to undergo rigorous imprisonment for three years and further sentenced each to pay fine of Rs. Five lacs each. In default of payment of fine, directors were ordered to undergo simple imprisonment for a period of three months each.
Hence, the present criminal appeal was filed before the learned Special Judge.
The appellant did not rely much on the evidence led by the parties but their arguments were confined to the legal position of law as laid down by Hon’ble Supreme Court of India and Hon’ble High Court of Delhi.
It was argued that the impugned judgment and impugned order on sentence passed by ACMM was not sustainable in the eyes of law. It was submitted that the present complaint was filed by the Department before the court of ACMM and prior to that the AO had already imposed a penalty of Rs. 5000/ on the company for its failure of filing of return of income of the relevant assessment year on the grounds that the assessee filed the return beyond the period prescribed. It was further argued that when the recording of the testimony of witness was in progress, the appellant had preferred an appeal before the Commissioner of Income Tax (Appeals) against the penalty which was quashed by the CIT(A) on the grounds that this was not the case for non filing of return, but it was a case for delay in filing of return of income. The CIT(A) took note of the fact that the delay had occurred due to the reasons that the returns u/s 153A Income Tax Act were also pending and the assessee had adhered to surrender in such proceedings, that in fact had filed the returns of the relevant assessment year on the same day for which returns of remaining assessment years u/s 153A Income Tax Act were filed, hence he ordered for deletion of the penalty imposed by Assessing Officer.
It was further argued that as on the date of filing of complaint, the assessment had not attained finality and hence the complaint became premature and hence no offence had taken place as the provisions of section 276 of the Act was not satisfied. It was pointed out that unless and until it is shown that failure to file the return was ‘willful’ or ‘deliberate’, no prosecution under section 276CC Income Tax Act could be initiated and that whether the appellants had committed an offence or not was to depend upon the final assessment of income.
It was argued that the ACMM jumped to the conclusion by mentioning in the impugned judgment that since the income of the appellant was assessed to be 125 crores (approx) on which tax was determined to be @ Rs. 37 crores (approx) which could have been evaded if the failure would not have been discovered. It was asserted that ACMM had erroneously declared the actions of appellants to be “willful” and it was based on wrongful assumptions, conjectures and surmises. It was also stated that mere fact that a huge gap had come up in the assessment made by the appellants and the income tax
Authorities does not ipso facto leads to presumption that there was wilful defiance on the part of the appellants to file the return in time either u/s 139 or subsequent to notice u/s 142 given the circumstances when the penalty imposed by the AO had already deleted in the adjudicatory proceedings. It was also argued the defiance could not have been be willful when a whooping sum of Rs. 7 crores were already deposited by the appellants as advance tax.
In the other hand, the Department supported the order of ACMM as free from any illegality. It was argued that that the prosecution before the court of ACMM and the proceedings before the AO or Commissioner of Income Tax (Appeals) or the Appellate Tribunal Income Tax are independent, and that simply because the penalty has been deleted by the order of Commissioner of Income Tax (Appeals), it cannot be ipso facto taken to mean that the appellants cannot be asked to face prosecution or convicted if the offences are proved.
However on being asked, the Department clarified that no adjudicatory proceedings were initiated against the appellant for non compliance of the notice u/s 142(1).
The Department referred to section 278(E) Income Tax Act wherein it has been mentioned that the court shall presume the existence of culpable mental state on the part of the accused. It was further stated that ACMM had categorically dealt with the issue regarding distinction with respect to the implications of non filing of return u/s 139 and Section 142 Income Tax Act coupled with Section 278(E) Income Tax Act.
The Department heavily relied upon the three Judges Bench judgment of Hon’ble
Supreme Court saying that the judgment lays down that adjudicatory proceedings and criminal proceedings can be launched simultaneously.
The Department further invited attention towards Section 276CC and its proviso for the interpretation of the word ‘willful’ as contained therein saying that the proviso provides that the person shall not be prosecuted if even after
payment of advance tax his income does not exceed Rs. 3000/. It was highlighted that the proviso couls be taken to mean that in any case if the income of the assessee is assessed for a sum more than Rs. 3000/even after the adjustments of advance tax, he can be prosecuted.
Prosecution only after completion of assessment
The learned Special Judge observed that Hon’ble the Supreme Court had rejected the contention that no prosecution could be initiated till the culmination of assessment proceedings, especially in a case where the appellant had not filed the return u/s 139(1) or following the notices issued under Section 142 or Section 148. The Hon’ble High Court opined that if it was the intention of the legislature to hold up the prosecution proceedings till the assessment proceedings are completed by way of appeal or otherwise the same would have been provided in Section 276CC itself.
Provisions of Section 278E
It was observed that though, Section 278E provides that in an prosecution for an offence under this Act which requires a culpable mental state on the part of accused, the court shall presume the existence of such mental state but it shall be a defence of the accused to prove the fact that he had no such mental state with respect to the act charged in that prosecution. Meaning thereby the presumption as contained in section 278E Income Tax Act is rebuttable and the defence can prove that the appellant had no such culpable mental state, intention, motive, knowledge of a fact or belief or a reason to believe a fact. Therefore, it was obligatory on the part of the defence to rebut the said presumption.
It was noted that Hon’ble the Supreme Court while discussing as to what is the scope of section 278E of the Act and at what stage the presumption can be drawn by the Court had held that Court in a prosecution of offence, like Section 276CC has to presume the existence of mens rea and it is for the accused to prove the contrary and that too beyond reasonable doubt. Resultantly, the appellants have to prove the circumstances which prevented them from filing the returns as per Section 139(1) or in response to notices under Sections 142 and 148 of the Act.
The learned Special Judge opined that to fulfill its obligation to rebut the presumption u/s 278 Income Tax Act, the defence examined its own witness, the chartered accountant who placed on record and proved the order of the Commissioner of Income Tax (Appeals) vide which penalty imposed by AO for defiance of provisions of Section 139 Income Tax Act was deleted.
Order of the CIT(A)
The learned Special Judge observed that the adjudicatory order was based on merits after giving due consideration to the submissions of the appellants and the penalty was not deleted on technical grounds.
Maintainability of Prosecution when related penalty is set aside in Income Tax Proceedings
It was observed that a division bench of Hon’ble the Supreme Court had held that Income Tax Authorities cannot proceed with the prosecution even after the order of concealment has been set aside by the Tribunal. When the Tribunal has set aside the levy of penalty, the criminal proceedings against the appellants cannot survive for further consideration. The Hon’ble Supreme Court categorically held that after the order of the Tribunal and the consequent cancellation of penalty, if the trial is allowed to be proceeded further, the same would be an idle and empty formality require the appellants to have the order of Tribunal exhibited as a defence document in as much as the passing of the order as unsustainable and unquestionable.
With respect to the contention of the Revenue that a three Judge Bench of Hon’ble Supreme Court had laid down that adjudication proceedings and criminal proceedings can be launched simultaneously and that both are independent in nature, the learned Special Judge observed that the said judgment laid down that though adjudicatory proceedings and criminal prosecution can be launched simultaneously and are independent of each other, but it had also been mentioned that if the exoneration in adjudication proceedings is on technical
ground and not on merit, the prosecution may continue but, if the exoneration is on merits where the allegations is found to be not sustainable at all and the person held innocent, the prosecution on the same set of facts and circumstances can’t be allowed to be continued as the underlined principle is that the burden of proof in a criminal prosecution is of higher standard as compared to adjudicatory proceedings. It was also held that in case no contravention of Act could be found in adjudicatory proceedings and the exoneration of the person concerned in the said proceedings is on merit, the trial of the person concerned shall be an abuse of process of law.
Contrary to arguments of the Revenue that the division bench decision was overruled by the three bench judgment, the court found that the verdict of the Division Bench stood as ratified by the subsequent judgment by the three judge bench.
According to the leaned Special Judge, a strict interpretation of both the judgments would warrant that the appellant could not have been prosecuted or convicted for the offence u/s 276CC Income Tax Act for an infraction u/s 139(1)(2) of Income Tax Act.
Offence u/s 276C for infraction u/s 139 and for infraction u/s 142
The Department contended that even if proceedings u/s 276CC for infraction u/s 139(1) could not have been continued for deletion of penalty in the adjudication proceedings in terms of the judgment of Supreme Court, still the appellants were liable for the offences u/s 276CC of Income Tax Act for the infraction under section 142.
The Court observed that as per the charges framed, the company was tried by ACCM for willfully not filing the return of the income as required u/s 139(1) and also for not filing the same in response to notices u/s 142(1) of the Act within the stipulated period. It was also mentioned in the charge that directors being the persons responsible for day to day affairs of the company, were also
guilty for offences u/s 276CC & 278B of the Act. Though, penalty u/s 271F for infractions u/s 139 was imposed but no penalty for infraction u/s 142 was imposed.
The learned Special Judge observed that no penalty proceedings/adjudicatory proceedings etc. were initiated by the Income tax department against the company for the infraction under section 142. The prosecution had been launched directly for the said infraction under section 142 of Income Tax Act without initiating any adjudicatory proceedings under the Income Tax Act.
The Court with the help of a hypothetical situation explained that in case the penalty could not have been imposed by the Assessing Officer or if imposed by him in case the same could have been set aside by the Appellate authorities, the company could have got the benefit of the judgments of Hon’ble Supreme Court as in both the cases the prosecution either could not have been launched or if launched, the appellants could not have been convicted as it would have been an abuse of process of law.
No reasons had been assigned by the Income tax department as to why the adjudicatory proceedings were not initiated by it for infraction under section 142 of Income Tax Act and why it has chosen to prosecute the appellants directly under section 276CC of Income Tax Act for the infraction under section 142 Income Tax Act.
The Court opined that in view of the fact that CIT(A) deleted the penalty u/s 271F, it can very well be assumed that in case penalty could have been imposed by the Assessing Officer for infraction u/s 142, it would have certainly been deleted by the CIT Appeals as the reasons assigned for non filing of return for both the infractions under sections 139 & 142 were almost same. CIT Appeals had already detailed down the reasons for delay and have accepted it to be as genuine, it would be abuse of process of law if the appellants were held guilty for the infraction under section 276CC for the infraction under section 142 in the given circumstances when the penalty was already deleted for infraction u/s 139 Income Tax Act.
The learned Special Judge observed that though the non initiation of adjudicatory proceedings does not in any manner bar prosecution of the appellants for offence u/s 276CC of the Act, but due appreciation could be given to the arguments of the appellants that the basic aim of the income tax authorities is the generation of revenue and not the prosecution which being a secondary one. No cogent reason has been explained as to why further proceedings were not carried on by the Income tax Department for defiance of the provisions of Section 142 with respect to imposition of penalty.
The learned Special Judge quoting that “to perpetuate an error is no virtue and to rectify the same is judicial conscience”, held that the impugned judgment passed by the ACMM Court suffered from illegality and could not be sustained in the eyes of law.
Accordingly he set aside the impugned judgment vide which the appellants were convicted for the offences u/s 276CC r/w 278B of the Income Tax Act.
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