The Supreme Court (SC), has held that prosecution proceedings under section 276CC of the Income-tax Act, 1961 (the Act) for the failure to file return of income (ROI) could be initiated where return had been filed subsequent to the notice u/s 142 or 148. The Apex Court also ruled that the prosecution proceedings are independent of the pendency of the appellate proceedings.

Details of the Case:
Criminal Appeal No. 61 OF 2007
Sasi Enterprises … Appellant Versus Assistant Commissioner of Income Tax … Respondent
With
Criminal Appeal Nos.62, 63 & 64 of 2007
Coram: K.S. Radhakrishnan, J., A.K. Sikri
Date of the Order: 30-01-2014

Case Law Referred:
Commissioner of Wealth Tax, Gujarat v. Vimlaben Vadilal Mehta (Smt.) (1983) 4 SCC 692 Commissioner of Wealth Tax, Gujarat, Ahmedabad v. Vadilal Lallubhai & Ors. (1983) 4 SCC 697
State of H.P. and others v. Gujarat Ambuja Cement Ltd. and another (2005) 6 SCC 499
Prakash Nath Khanna and another v. Commissioner of Income Tax and another (2004) 9 SCC 686
Maya Rani Punj (Smt.) v. Commissioner of Income Tax, Delhi (1986) 1 SCC 445
P.R. Metrani v. Commissioner of Income Tax, Bangalore (2007) 1 SCC 789
Kumar Exports v. Sharma Carpets (2009) 2 SCC 513;  B. Permanand v. Mohan Koikal (2011) 4 SCC 266

Facts of the Case:
These appeals have their origin in the complaints filed by the Assistant Commissioner of Income Tax, Chennai, before the Additional Chief Metropolitan Magistrate (Egmore), Chennai, for the willful and deliberate failure of the partnership firm M/s Sasi Enterprise to file returns for the assessment years 1991-92, 1992-93.

The firm not only failed to file its returns before the due date as prescribed under section 139(1) or 139(4) but despite the fact that a survey was conducted under section 133A followed by a notice under section 148 to file return of income, neither filed the return with the time granted nor particulars of income were furnished. For AY 1992-93, the best judgment assessment was made under Section 144. Likewise, the partners of the firm did not file returns for the AY 1993-94 either under sections 139(1), 139(4) or in response to notice u/s  142(1)(i) resulting into a best judgment assessment under section 144. However the partners filed their ITRs for AY 1991-92 and 1992-93 belatedly mentioning that the accounts of the firm had not been finalized and no returns of the firm had been filed.

Consequently, the firm and its partners were prosecuted under Section 276 CC of the Act for failure of the firm to file return of Income for AY 1991-92 and 1992-93. Also the partners were prosecuted for AY 1993-94 separately in their individual capacity for failure to file ROI, separately which was later upheld by the High Court.

The main contention of the appellant was that on the date of the complaint, the assessment had not attained finality, thus the complaint was pre-mature and all the ingredients of offence under Section 276 of the Act were not satisfied. It was also argued that unless and until it is shown that failure to file the return was willful or deliberate, no prosecution under Section 276CC could be initiated. counsel for the appellants also submitted that the High Court has wrongly applied the principles laid down by this Court in Prakash Nath Khanna calls for reconsideration.

Question(s) of Law:
(1) Whether an assessee has the liability/duty to file a return under Section 139(1) of the Act within the due date prescribed therein?
(2) What is the effect of best judgment assessment under Section 144 of the Act and will it nullify the liability of the assessee to file its return under Section 139(1) of the Act?
(3) Whether non-filing of return under Section 139(1) of the Act, as well as non-compliance of the time prescribed under Sections 142 and 148 of the Act are grounds for invocation of the provisions of Section 276CC of the Act?
(4) Whether the pendency of the appellate proceedings relating to assessment or non-attaining finality of the assessment proceedings is a bar in initiating prosecution proceedings under Section 276CC due to non-filing of returns?
(5) What is the scope of Section 278E of the Act, and at what stage the presumption can be drawn by the Court?

All the above questions were answered against the appellants.

Excerpts from the Judgment:

“......... penalty provision under Section 271(1) (a) had been deleted w.e.f. 01.04.1989 and a provision for levy of mandatory/compulsory interest under Section 234A of the Act was introduced. But, legislature has never waived or relaxed its prosecuting provisions under Section 276CC of the Act for the infraction or non-furnishing of return of income.”

“The constitutional validity of Section 276CC, was upheld by the Karnataka High Court in Sonarome Chemicals Pvt. Ltd. and others v. Union of India and others (2000) 242 ITR 39 (Kar) holding that it does not violate Article 14 of 21 of the Constitution. Section punishes the person who “willfully fails to furnish the return of income in time”.

“in the present case, not only return was not filed within the due date prescribed under Section 139(1) of the Act, but also the time prescribed under Section 142 and 148 of the Act and the further opportunity given to file the return in the prescribed time was also not availed of.”

“The proviso to Section 276CC gives some relief to genuine assesses. The proviso to Section 276CC gives further time till the end of the assessment year to furnish return to avoid prosecution........ Similarly, the proviso in clause ii(b) to Section 276CC also provides that if the tax payable determined by regular assessment has reduced by advance tax paid and tax deducted at source does not exceed Rs.3,000/-, such an assessee shall not be prosecuted for not furnishing the return under Section 139(1) of the Act. Resultantly, the proviso under Section 276CC takes care of genuine assesses who either file the returns belatedly but within the end of the assessment year or those who have paid substantial amounts of their tax dues by pre-paid taxes, from the rigor of the prosecution under Section 276CC of the Act.”

“Section 276CC, it may be noted, takes in sub-section (1) of Section 139, Section 142(1)(i) and Section 148. But, the proviso to Section 276CC takes in only sub-section (1) of Section 139 of the Act and the provisions of Section 142(1)(i) or 148 are conspicuously absent. Consequently, the benefit of proviso is available only to voluntary filing of return as required under Section 139(1) of the Act. In other words, the proviso would not apply after detection of the failure to file the return and after a notice under Section 142(1)(i) or 148 of the Act is issued calling for filing of the return of income. Proviso, therefore, envisages the filing of even belated return before the detection or discovery of the failure and issuance of notices under Section 142 or 148 of the Act.”

“Proviso to Section 276CC nowhere states that the offence under Section 276CC has not been committed by the categories of assesses who fall within the scope of that proviso, but it is stated that such a person shall not be proceeded against. In other words, it only provides that under specific circumstances subject to the proviso, prosecution may not be initiated.”

“Section 276CC contemplates that an offence is committed on the non-filing of the return and it is totally unrelated to the pendency of assessment proceedings except for second part of the offence for determination of the sentence of the offence, the department may resort to best judgment assessment or otherwise to past years to determine the extent of the breach........ 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.”

“Appellants’ contention that since they had in their individual returns indicated that the firm’s accounts had not been finalized, hence no returns were filed, would mean that failure to file return was not willful, cannot be accepted.”

“Section 278E deals with the presumption as to culpable mental state, which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986. The question is on whom the burden lies, either on the prosecution or the assessee, under Section 278E to prove whether the assessee has or has not committed willful default in filing the returns. 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.”

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