Income Tax Department's Action 'Grossly Abusive', Supreme Court Imposes Cost

Income Tax Department's Action 'Grossly Abusive', Supreme Court Imposes Cost

Introduction

The Supreme Court has imposed a cost of ₹2 lakhs on the Income Tax Department for "grossly abusing its position" by continuing a prosecution against an assessee alleging willful tax evasion. The court set aside the Madras High Court's decision, which refused to quash the prosecution case initiated by the department.

Factual Background

A search operation was conducted in 2016, and unaccounted cash of nearly ₹5 crore was seized from the appellant's residence. The department initiated prosecution under Section 276C(1) of the Income Tax Act, 1961, accusing the appellant of willfully attempting to evade tax.

Procedural Background

The appellant approached the Income Tax Settlement Commission, which settled the case and granted immunity from penalty. However, the Commission refrained from granting immunity from prosecution as the criminal case was already pending. The Madras High Court refused to quash the prosecution case, and the appellant approached the Supreme Court.

Contentions of Parties

Assessee: The appellant argued that the department's action was arbitrary and an abuse of the process of law, as it flouted its own binding circulars issued by the Central Board of Direct Taxes (CBDT).

Income Tax Department: The department contended that the prosecution was justified, but failed to provide any explanation for not complying with the procedure while lodging the prosecution.

Reasoning and Analysis

The bench comprising Justices JK Maheshwari and Vijay Bishnoi held that the department's action was in blatant disregard of its own binding circulars, which mandate that prosecution under Section 276C(1) should be launched only after the penalty for concealment is confirmed by the Income Tax Appellate Tribunal (ITAT). Since no penalty was confirmed by the ITAT, the court termed the department's action arbitrary and an abuse of the process of law.

Implications

The Supreme Court's decision highlights the importance of following binding circulars and procedures while initiating prosecution under the Income Tax Act. The imposition of costs on the department serves as a reminder to act fairly and consistently in accordance with the law.

In this case the petitioner was represented by Mr. Preetesh Kapur, Sr. Adv. Mr. R. Sivaraman, Mr. B. R. Varshini, Ms. Vandana Vyas, Mr. S. Mohan, Mr. Aditya Sharan, Advocates and Mr. Ravi Raghunath, AOR.

Meanwhile the respondent was represented by Mrs. Nisha Bagchi, Sr. Adv. Mr. Raj Bahadur Yadav, AOR, Mr. V Chandrashekhara Bharathi, Mr. Udai Khanna and Mr. Navanjay Mahapatra, Advocates.