Supreme Court punished Income Tax Officials with fine for launching prosecution u/s 276C without any order of the ITAT imposing penalty exceeding Rs. 50,000/-
In a recent judgment, Hon’ble Supreme Court punished Income Tax Officials with fine for launching prosecution u/s 276C against the assessee for alleged wilful attempt to evade tax etc. without any order of the ITAT imposing penalty exceeding Rs. 50,000.
ABCAUS Case Law Citation:
4725 (2025) (08) abcaus.in SC
In the instant case, the assessee had challenged the order passed by the High Court quashing petition filed by the appellant against the prosecution proceedings under section 276C of the Income Tax Act, 1961 (the Act).
The appellant invoked the jurisdiction of the High Court for quashing of the income tax prosecution proceedings initiated by the Revenue, before the Additional Chief Metropolitan Magistrate for the offence under section 276C of the Act for wilful attempt to evade tax etc.
In an income tax search u/s 132 of the Act conducted at the residence of the appellant, unaccounted large amount of cash was seized. Subsequently the Principal Director Income Tax (Investigation) accorded sanction to initiate prosecution against the appellant for an offence under Section 276C(1) alleging wilful attempt to evade tax with respect to assessment year 2017-2018 and for not filing the correct return of income.
The appellant filed a Writ before the Hon’ble High Court praying for quashing of the complaint and also filed application before the Settlement Commissioner, disclosing the entire additional income and sought immunity from levy of penalty as well as prosecution in the matter of alleged evasion of proposed tax. The Settlement Commission in exercise of powers under Section 245D(4)6 of Act, partly allowed the said application and granted immunity from levy of penalty, refraining itself to grant immunity from prosecution due to pendency of petition before the High Court.
By the order impugned, the High Court dismissed the quashing petition and referring the averments of the complaint observed that for the relevant assessment year, the cash seized had not been shown in earnings, which may amount to evasion of proposed tax. The defence put forth by the appellant was that the seized amount was an earning of the immediately preceding assessment year and not of the assessment year under question.
The Hon’ble Supreme Court observed that sub-section (1)(a) to section 276C creates a bar that the person shall not be proceeded under Section 276C in relation to the assessment for the assessment year of which penalty imposed or imposable on him, has been reduced or waived.
The Hon’ble Supreme Court further observed that the assessee from whom the recovery of the unaccounted money has been allegedly reported, may apply before the Settlement Commission disclosing full and true income and the manner in which such income was derived. On such application, the Commission as it thinks fit, may grant immunity from penalty and prosecution of any offence under the Act or under the Indian Penal Code or under any other Central Act on such terms and conditions with respect to the subject matter covered under the settlement. The proviso to Section 245H(1) is an exception from granting immunity in case where the complaint has been lodged before the date of receipt of application for settlement. On literal construction of the first proviso, the prosecution initiated before the date of receipt of the application under Section 245C is saved, and the second proviso restrict the Settlement Commission to grant immunity from the prosecution from other Acts.
However, the Hon’ble Supreme Court stated that income tax provisions do not, in any manner, affect the basic principles of criminal law that the prosecution has to prove the case on its own. In the facts, for an offence under Section 276C(1), for which a prosecution was lodged, wilful attempt to evade tax or penalty, which may be imposable or chargeable, mens rea of the assessee is required to be proved. In absence, lodging such prosecution would result into futility.
The Hon’ble Supreme Court further observed that the CBDT has issued guidelines wherein it was specified that when an assessee is making an attempt to evade tax or its payment or penalty, if established, it is incumbent on the officers of the revenue to lodge the prosecution. In this regard, Instruction dated 24.04.2008 was published which mandated that the Department shall proceed to file prosecution/complaint only in those cases wherein penalty exceeding Rs. 50,000/- has been imposed by ITAT, within 60 days from the date of order of ITAT.
The Hon’ble Supreme Court further observed that the Directorate of Income Tax had also published the Prosecution Manual, 2009, prescribing the ‘procedure for launching prosecution’ specifying when the prosecution can be initiated. It states that a case should be processed for launching prosecution immediately after the commission of offence comes to the notice of the authority concerned. However, if some more evidences can be gathered during any proceedings, it would be advisable to complete such proceedings to gather all relevant evidences before initiating the prosecution. The Apex Court has laid down that if penalty for concealment fails then the prosecution initiated on same material/basis must also fail. Therefore, it is advisable to initiate prosecution under section 276C(1) only after confirmation of concealment penalty by the ITAT.
The Hon’ble Supreme Court further noted that in 2019, the CBDT in exercise of power under Section 119 of IT Act issued clarification qua the criteria to be followed for launching prosecution in respect of certain categories of offence under the IT Act, including Section 276C(1). It states that cases where the amount sought to be evaded or tax on under-reported income is Rs. 25 Lakhs or below, shall not be processed for prosecution except with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers. Further, prosecution under this Section shall be launched only after the confirmation of the order imposing penalty by the Income Tax Appellate Tribunal.
The Hon’ble Supreme Court noted that time and again it was held that the circulars issued by the Revenue are binding on the authorities, and can tone down the rigour of the statutory provision.
It was noted by the Hon’ble Supreme Court that on the date of lodging the prosecution, the finding of concealment of income or imposition of the penalty of more than Rs. 50,000/- has not been recorded by the ITAT. No explanation was put forth by Revenue to demonstrate as to why PDIT or DDIT did not comply the procedure while lodging prosecution in this case. Therefore, in our view, the act of the authority in continuing prosecution is in blatant disregard to their own binding circular dated 24.04.2008 and in defiance to the guidelines of the Department.
On the contrary, the Settlement Commission had recorded a finding that overall additional income is not on account of any suppression of any material facts and it does not disclose any variance from the manner in which the said income had been earned. As such the immunity from penalty under Act was granted in exercise of powers under Section 245H. The Hon’ble Supreme Court observed that from a perusal of Section 245-I, it is clear that every order of settlement shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided, be reopened in any proceeding under the Act or under any other law for the time being in force.
The Hon’ble Supreme Court held that the prosecution was lodged with the help of proviso to sub-section (1) to Section 245H which was in defiance to the circular dated 24.04.2008, which was in vogue. It was the duty of the officials granting sanction/launching prosecution to look into the facts that in absence of any findings of imposition of penalty due to concealment of fact, the said prosecution cannot be proved against the assessee.
The Hon’ble Supreme Court further observed that even after passing the order by the Settlement Commission, it was brought to the notice of the High Court, but the authorities were persistent to pursue the prosecution without looking into the procedural lapses on their part. Such an act cannot be construed in right perspective and the Revenue have acted in blatant disregard to binding statutory instructions. Such willful non-compliance of their own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability, which in any manner cannot be treated to be justified or lawful.
The Hon’ble Supreme Court quashed the order passed by the High Court as well as the prosecution. Also, their lordships imposed a fine of Rs, 2 lakhs against the Revenue payable to the appellant.
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