Sanction of Prosecution u/s 276B quashed due to Covid-19 pandemic & TDS deposit shortly

Sanction of Prosecution u/s 276B set aside due to Covid-19 pandemic and TDS being deposited within three months

In a recent judgment, Hon’ble Rajasthan High Court has set aside sanction of Prosecution u/s 276B as assessee suffered from Covid-19 pandemic and TDS was deposited within three months with interest.

ABCAUS Case Law Citation:
ABCAUS 4033 (2024) (05) HC

Important Case Laws relied upon:
S.G. Kale Vs. Union of India (UOI)

In the instant case, the assessee/Petitioner had filed a Writ Petition challenging the sanction for prosecution under section 276B of the Income Tax Act, 1961 (the Act) for delay in deposit of Tax Deducted at Source (TDS).

It was prayed that a declared be made that the petitioners are entitled to conferred impunity under Section 278AA from prosecution for delayed deposit of TDS to the credit of Central Government for the relevant Assessment Year.

The petitioners were a limited company and its director. The company was engaged in running hotel. It was submitted that hotel activities were suspended due to COVID-19 pandemic lockdown imposed by the Administration from March, 2020 to August, 2020. The activities were resumed in October, 2020 with partial restrictions on traveling and social gatherings.

It was further submitted that the second wave of COVID-19 started in mid months of the year 2021 and there was a feeble start to the activities in July, 2021.

It was submitted that it was a genuine cause and that the petitioners have paid all the necessary dues along with interest and late fee to the Government within three months from default.

It was also submitted that Section 276B of the Act was being invoked against the present petitioners without considering the reasonable cause offered by the petitioners for their failure to pay the TDS amount.

Drawing attention to the judgment of the Hon’ble High Court, it was submitted that the

prospect of imprisonment itself is a harsh prospect in the given facts and circumstances. As held, the validity of the sanction would, therefore depend upon the material placed before the sanctioning authority and the fact that all the relevant facts, material and evidence have been considered by the sanctioning authority. The order of sanction must ex facie disclose that the sanctioning authority had considered the evidence and other material collected during investigation and placed before it. The sanctioning authority has to apply its own mind for generation of genuine satisfaction whether the prosecution has to be sanctioned or not.

The Petitioner submitted that in the instant case, the sanctioning authority, while passing the order of sanction had dealt with the issue of COVID-19 pandemic, but had not considered it as a reasonable cause due to mechanical application of mind.

On the other hand the Income Tax Department contended that the petitioners have a remedy of getting the default compounded. That proper application of mind was there in the impugned order, wherein the COVID-19 pandemic situation had been assessed and the order had been passed, while considering the dates of defaults.

The Revenue further submitted that the collection of tax was made at the instant of the petitioners and thus, it should have been lawfully passed on to the respondents without any default. Aany sympathy towards the defaulter would result into serious issues of recovery of such tax and future prospects of the action against the defaults, which have to be viewed in a strict purview, will stand diminished.

The Hon’ble High Court observed that the in impugned order, the authority while granting the sanction, had considered the defense of COVID-19 pandemic, but the same did not deal with the critical waves, which were in existence in the mid of the year 2020-21. The restrictions on the hotel industry, traveling as well as social gatherings and others were reasonable causes, which could have been deliberated more specifically by the authorities and while looking to the extraordinary situation of pandemic, a proper consideration ought to have been made before considering the harsh consequences of Section 276B of the Act, which warrants punishment of rigorous imprisonment from three months up to seven years with fine.

The Hon’ble High Court further observed that in the peculiar factual matrix, when the petitioners had made complete payment of TDS amount to the credit of the Central Government within three months of the prescribed time frame along with the interest and late fee and suffered intense wave of Covid-19 pandemic in the year 2020-21, then in such circumstances exposing them to the prosecution sanction while contemplating punishment up to seven years rigorous imprisonment, looks ill considered in the perspective of the default commensurating with the consequences of Covid-19 pandemic.

Further the Hon’ble High Court opined that the validity of the sanction has to depend upon the material placed before the sanctioning authority, which includes relevant facts, material and the evidence to be considered to reflect application of mind of the sanctioning authority. It was not that the sanctioning authority had absolutely not deliberated upon the issue, but was lacking in that the sanctioning authority failed to apply its mind for generation of genuine satisfaction, whether the prosecution sanction has to be sanctioned or not.

The Hon’ble High Court observed that the analysis of the impugned creates an impression that the sanction was accorded in a mechanical manner without considering the evil consequences of the tragedy as humongous as COVID-19 pandemic.

The Hon’ble High Court partly allowed the writ petition quashing and setting aside the impugned order alongwith consequential proceedings. The matter was remanded back to the sanctioning authority with direction to apply its mind and consider the reasonable cause all over again, after giving opportunity of hearing to the petitioners and the sanctioning authority shall be completely free to move ahead under Section 278AA of the Act, if the situation so warrants. 

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