Criminal Prosecution Under Income Tax Act

Sections 275A to 280D of the Income Tax Act deal with offenses and prosecution...

Chapter XXII of the Income Tax Act deals with Offenses and Prosecutions. The relevant sections are from 275A to 280D. Normally, Criminal complaints are filed by the Income Tax Department for offenses punishable under Sections 276C, 276CC, and 276B of the Income Tax Act.

Section 276CC of the Income Tax Act, 1961 is reproduced below:

“If a person willfully fails to furnish in due time [the return of fringe benefits which he is required to furnish under sub-section (1) of Section 115WD or by notice given under sub-section (2) of the said section or Section 115WH or] the return of income which he is required to furnish under sub-section (1) of Section 139 or by notice given under [clause (i) of sub-section (1) of Section 142] or Section 148 [or Section 153A], he shall be punishable -

(i) In a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds [twenty-five] hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

(ii) In any other case, with imprisonment for a term which shall not be less than three months but which may extend to [two] years and with fine:

Provided that a person shall not be proceeded against under this section for failure to furnish in due time the [return of fringe benefits under sub-section (1) of Section 115WD or] return of income under sub-section (1) of Section 139 –

(i) For any assessment year commencing prior to the 1st day of April 1975; or

(ii) For any assessment year commencing on or after the 1st day of April 1975, if –

(a) The return is furnished by him before the expiry of the assessment year; or

(b) The tax payable by him on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source, does not exceed three thousand rupees.”

Section 278(E) of the Income Tax Act, 1961 is reproduced below:

“(1) In any prosecution for any offense under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defense for the accused to prove the fact that he had no such mental state with respect to the act charged as an offense in that prosecution.

‘Culpable mental state’ includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.

(2) For the purpose of this section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.”

In the case of Prakash Nath Khanna and Anr. Vs. Commissioner of Income Tax and Anr. (2004) 266 ITR 1, (SC) which dealt with Section 276CC of the Income Tax Act, 1961, it was held that one of the significant terms used in Section 276CC (offense of failure to furnish return of income) of the Income Tax Act, 1961 is “in due time”. The time within which the return of income is to be furnished is indicated only in sub-section (1) of Section 139 and not in sub-section (4). Even if a return is filed under Section 139(4), that would not dilute the infraction in not furnishing the return within the time as prescribed under sub-section (1) of Section 139. Also, whether there was willful failure to furnish the return is a matter which is to be adjudicated factually by the court which deals with the prosecution case. Section 278E is relevant for this purpose. There is a statutory presumption prescribed in Section 278E. The court has to presume the existence of culpable mental state, and absence of such mental state can be pleaded by an accused as a defense in respect of the act charged as an offense in the prosecution. The same was followed in Sasi Enterprises vs. Assistant Commissioner of Income Tax [2014] 361 ITR 163 (SC).

The other relevant sections are 276B, 278B, and 2[35] of the Income Tax Act, 1961 which deal with Criminal Prosecution for failure on the part of Company in deducting tax at source and paying to the account of Central Government.

Section 276B of the Income Tax Act, 1961 is reproduced below:

“If a person fails to pay to the credit of the Central Government, -

(a) The tax deducted at source by him as required by or under the provisions of Chapter XVII-B; or

(b) The tax payable by him, as required by or under -
(i) Sub-section (2) of Section 115-O; or
(ii) The second proviso to Section 194B,

he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.”

Section 278B of the Income Tax Act, 1961 is reproduced below:

“(1) Where an offense under this Act has been committed by a company, every person who, at the time the offense was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offense and shall be liable to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offense was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offense.

(2) Notwithstanding anything contained in sub-section (1), where an offense under this Act has been committed by a company and it is proved that the offense has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offense and shall be liable to be proceeded against and punished accordingly.

[(3) Where an offense under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or sub-section (2), such company shall be punished with fine and every person, referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (2), shall be liable to be proceeded against and punished in accordance with the provisions of this Act.]”

Explanation – For the purposes of this section, -
(a) “company” means a body corporate, and includes –
(i) a firm; and
(ii) an association of persons or a body of individuals whether incorporated or not; and

(b) “director”, in relation to –
(i) A firm, means a partner in the firm;
(ii) Any association of persons or a body of individuals, means any member controlling the affairs thereof.

Section 2[35] of the Income Tax Act is reproduced below:

“Principal Officer”, used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means-

(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or

(b) any person connected with the management or administration of the local authority, company, association or body upon whom the [Assessing] Officer has served a notice of his intention of treating him as the principle officer thereof.”

Section 276B deals with failure to deduct tax at source, Section 278B deals with Offences by Companies, and Section 2[35] deals with Principle Officers. It was held by the Hon’ble Supreme Court in the case of Madhumilan Syntex Ltd. & Ors. Vs. UOI & Anr. (2007) 290 ITR 199 (SC) that wherever a company is required to deduct tax at source and to pay it to the account of the Central Government, failure on the part of the company in deducting or in paying such amount is an offense under the Act and has been made punishable. It, therefore, cannot be said that the prosecution against a company or its directors in default of deducting or paying tax is not envisaged by the Act.

From the above statutory provisions, it is clear that to hold a person responsible under the Act, it must be shown that he/she is a “principle officer” under Section 2[35] of the Act or is “in charge of” and “responsible for” the business of the company or firm. It is also clear from the cases referred to above that where necessary averments have been made in the complaint, initiation of criminal proceedings, issuance of summons, or framing of charge cannot be held illegal and the court would not inquire into or decide the correctness or otherwise of the allegations leveled or averments made by the complainant. It is a matter of evidence and an appropriate order can be passed at the trial. It was further held that even if TDS was already deposited to the account of the Central Government and there was no default and no prosecution could be ordered, yet the same was not accepted by the court and it was held that once a statute requires to pay tax and stipulates the period within which such payment is to be made, the payment must be made within that period. If the payment is not made within that period, there is default and an appropriate action can be taken under the Act.

The same was followed by the Hon’ble Delhi High Court in CRL. L.P. 85 OF 2010 in the case of Income Tax Officer Vs. M/s. Delhi Iron Works (P) Ltd. & Ors. decided on 11.11.2010 and CRL. L.P. 241 of 2012 in the case of Income Tax Officer Vs. Anil Batra & Anr. decided on 23.09.2014.

Pendency of reassessment proceedings is not a bar to institution of criminal prosecution for offenses punishable under the Income Tax Act

It was held by the Hon’ble Supreme Court in the case of P. Jayappan vs. S.K. Perumal, First Income-Tax Officer, Tuticorin (1984) 149 ITR 696 (SC) that pendency of the reassessment proceedings cannot act as a bar to the institution of criminal prosecution for the offenses punishable under Section 276C or 277 of the Act. The same was followed by different High Courts in Assistant Commissioner of Income Tax Vs. S.P. Bansal and Others (2000) 243 ITR 406 Delhi, R.G. Agarwal and Co. & Ors. Vs. Union of India (1994) 210 ITR 617 (MP), Surjit Engineering Works & Ors. Vs. Income Tax Officer (1994) 210 ITR 547 (P&H), Kalyan Rice and General Mills & Anr. Vs. Income Tax Officer (1989) 180 ITR 41 (P&H), Shankar and Company & Ors. Vs. Third Income-Tax Officer (1992) 193 ITR 172 (Kar.).

Sanction of [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner] for proceeding for an offense under the Income Tax Act

As per Section 279 of the Income Tax Act, a person shall not be proceeded for an offense under the Act except with the previous sanction of the [Principal Commissioner or] Commissioner or Commissioner (Appeals) or the appropriate authority.

Compounding of offenses punishable under the Act

The explanation to Section 279 of the Income Tax Act vests the CBDT with the powers to issue circulars, orders, instructions, or directions “for proper composition” of offences. The Hon’ble Supreme Court in the case of Y.P. Chawla Vs. M.P. Tiwari (1992) 2 SCC 672 had upheld the validity of guidelines issued by the CBDT under Section 119(1) of the Act and recognized the power of the CBDT to issue guidelines for compounding including compounding charges in exercise of powers under Section 279(2) of the Act. In M.P. Purusothaman v. Assistant Director of Income Tax (Prosecution) [2001] 252 ITR 603, the Hon’ble High Court of Madras, while considering the power of the CBDT to compound an offense under Chapter XXII of the Act held that compounding of an offense is the exception and not the rule. Compounding fee is of a deterrent nature and is imposed with a view to ensure compliance with the law.

Writ Petition No. 6268 of 2017 in the case of Vikram Singh Vs. Union of India & Ors. was filed before the Hon’ble Delhi High Court challenging the imposition, legality, and validity of compounding fee – a fee charged under the Income Tax Act, 1961 (for short, ‘the Act’), to compound offenses committed by assessee. Challenge was primarily raised to the legality of the quantum of compounding fee, as prescribed by guidelines issued by the Central Board of Direct Taxes (for short, ‘CBDT’) dated 23rd December 2014 and quashing of the same as being arbitrary and unfair. The writ petition was dismissed by holding that in view of the decision of Y.P. Chawla vs. M.P. Tiwari (1992) 2 SCC 672, the power to issue guidelines is now unquestionable and cannot be challenged.

Interference by high courts after issuance of summons and framing of charge in Criminal complaints filed under Sections 276C, 276CC, and 276B

In case of Madhumilan Syntex Ltd. & Ors. Vs. UOI & Anr. (2007) 290 ITR 199 (SC), which dealt with Sections 276B, 278B, and 2[35] of the Act, it was held that where necessary averments have been made in the complaint, initiation of criminal proceedings, issuance of summons, or framing of charge, cannot be held illegal and the court would not inquire into or decide the correctness or otherwise of the allegations leveled or averments made by the complainant. It is a matter of evidence and an appropriate order can be passed at the trial. In the case of Prakash Nath Khanna and Anr. Vs. Commissioner of Income Tax and Anr. (2004) 266 ITR 1, which dealt with Section 276CC of the Act, it was held by the Hon’ble Supreme Court that whether there was a willful failure to furnish the return is a matter of trial and the High Court had rightly not interfered against the orders issuing summons because as per Section 278E of the Income Tax Act, there is a presumption as to culpable mental state. The same view was taken in the case of Sasi Enterprises Vs. Assistant Commissioner of Income-Tax reported in [2014] 361 ITR 163 (SC). The Hon’ble Delhi High Court in Crl. M.C. No. 3385 of 2016 in the case of Karan Luthra vs. Income Tax Officer decided on 14.09.2018 refused to interfere against the order framing charges under Section 276CC of the Income Tax Act following the judgment of the Hon’ble Supreme Court in Sasi Enterprises.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.