Guide to Offences, Prosecutions and Compounding

under Income Tax Act, 1961

– Law, Procedures and Case laws

AJOY KUMAR SINGH (IRS)

Mobile No. : +91 9477330760, 8240737883
Email : [email protected]
Contents

01
Introduction

02
Evolution of Law relating to Prosecution

03
CrPC & IPC - Important provisions

04
Prosecutions under ITA – Chapter XXII

05
Special Courts

06
Offences liable for Prosecution Substantive Provisions

07
Compounding of Offences
2
IT PROSECUTION ON NEWS

3
IT PROSECUTION ON NEWS

4
IT Prosecution Framework at a Glance

Wanchoo Committee on Tax evasion 1971 LAW

General provisions under ITA, e.g.

Sec. 276B, 276C, 276CC
COMMISSION
etc
C CrPC
Substantive provisions dealing with prosecutions e.g. 276B, 276C, 276CC
&AG
etc

REPORT

REPORT

2012 IPC CBDT Instructions / SOPs

1972
ITA 1922

5
Evolution of Law s
relating to Prosecution

6
 Offences Liable for Prosecutions under
Income Tax Act, 1922
 Two section dealt with the offences in the old Act
 Power of initiation and compounding procedures were with ACIT.

Section 51 Section 52
statements
declarationor
asallow
per the
inspection
specifiedwas
sections
liable shall
for fine
be punishable,
which may extend
on conviction
to ten rupees
before for
a Magistrate,
every day during
with simple
whichimprisonment
the default continues.
which may extend to six m

nts and documents as are referred to in the notice U/s 22

7
Wanchoo Committee on Tax evasion 1971

 The report stressed upon the need to dole out exemplary punishment in the form of
prosecutions to instill fear in the mind of the assessees seeking to traverse that grey area

“… The provisions for imposition of penalty fail to instill adequate fear in the minds
of tax evaders. Prospect of landing in jail on the other hand, is a far more dreaded
consequence – to operate in theorem upon the erring taxpayers. Besides, a conviction in
court of law is attended with several legal and social disqualifications as well. In order,
therefore to make enforcement of tax laws really effective, we consider it
necessary for the Department to evolve a vigorous prosecution policy and to pursue
it unsparingly.

In the fight against tax evasion, monetary penalties are not enough. Many tax dodger
finds it a profitable proposition to carry on evading taxes over the years, if the only risk to
which he is exposed is a monetary penalty in the year in which he happens to be caught.
The public in general also tends to lose faith and confidence in tax administration once it
knows that even when a tax evader is caught, the administration lets him get away lightly
after paying only a monetary penalty- when money is no longer a major consideration with
him if it serves his business interests….”

8
Law Commission Report 1972
 The reports dealt with Trial and Punishment of social and economic offences.

 The broad question that had been referred to the commission that the present trend of
legislation and judicial approach to such offences are treated lightly and the
punishments are not adequate having regard to the gravity of such offences.

 The law commission in its earlier report (29 th Report) had considered whether economic
offences which also includes Evasion of Taxes should be transferred to Penal code.

 The law relating to granting of Bails in relation to economic offences should have stringent
conditions. Presently Income Tax Act does not contain any provisions relating to grant of
Bail. (Page 83 of the report).

 A cognisance of report by Working group on Central Direct Taxes Administration ( January

1968) was also considered in the report which noted that Though direct tax law contains a
provisions of prosecutions, not a single person is convicted of evasion during the last
10 years .
9
 Law Commission Dated 28th February 1972
nces is the fact that ordinarily they do not involve an individual direct victim but are punished because they harm the whole society. This c

10
Cr PC & IPC s
Important provision

11
Code of Criminal Procedure (Cr PC) and Indian
Penal Code (IPC) – Basics
ncept Definitions

Cognizable v/s  “cognizable offence” means an offence for which, and “cognizable case”
Non- cognizable means a case in which, a police officer may, in accordance with the First
offence Schedule or under and other law for the time being in force, arrest
without warrant.

 non-cognizable offence” means an offence for which, and “non-

cognizable case” means a case in which, a police officer has no authority
to arrest without warrant.

Bailable v/s Non-  “bailable offence” means an offence which is shown as bailable in the
bailable offence First Schedule, or which is made bailable by any other law for the time
being in force: and “non-bailable offence” means any other offence.

Complaint  “complaint” means any allegation made orally or in writing to a

Magistrate, with a view to his taking action under this Code, that some
person, whether known or unknown, has committed an offence, but does
not include a police report.
12
 Schedule of CrPC – II – Classification of
Offences Against Other Laws
FENCE COGNIZABLE OR NON- COGNIZABLE
BAILABLE OR NON-BAILABLE
BY WHAT COURT TRIABLE
Cognizable
If punishable with death, imprisonment for life,
or Non - Bailable Court of Session
imprisonment for more than 7 years.

if punishable with imprisonment Cognizable Non - Bailable Magistrate of the first class

for 3 years, and upwards but not more than 7 years

If punishable with imprisonment for Non-CognizableBailable Any Magistrate

less than 3 years or with fine only.

13
Code of Criminal Procedure (Cr PC) and
Indian Penal Code (IPC) – Basics

Pre-ponderance of probability v/s Beyond reasonable doubt

 Under the Evidence Act, section 3, a fact is said to be proved when the court either believes it
to exist or considers its existence so probable that a prudent man ought, under the
circumstances of the particular case, to act upon the supposition that it exists.

 As a prudent man, so the court applies this test for finding whether a fact in issue can be said
to be proved.

 The first step in this process is to fix the probabilities,

 the second to weigh them though the two may often intermingle.

 The impossible is weeded out at the first stage, the improbable at the second.

 The only way to overcome this presumption of innocence in a criminal trial is for the
prosecution to prove beyond a reasonable doubt that the defendant committed the crime
that he or she has been charged with.

14
 Types of punishment –
Sec. 53 of IPC 1860 Trial of Summons case v/s Trial of
Warrant case – Sec. 2(x) of CrPC

 Death
 Imprisonment for life  A warrant-case is defined to mean
a case relating to
 Imprisonment, which is of two
descriptions, namely: -  an offence punishable
(1) Rigorous, that is, with with death,
hard labour 2) Simple
 imprisonment for life or
 Forfeiture of property
 Fine  imprisonment for a
term exceeding two
years.

 A summons-case means a case

relating to an offence, not being
a warrant-case.

15
Quashing of proceedings by High
Court
- Section 482 of CrPC

 In exercise of the powers court would be justified to quash any proceeding if it finds that;
 initiation/continuance of it amounts to abuse of the process of court or
 quashing of these proceedings would otherwise serve the ends of justice

 Sec. 482 of the CRPC provides for saving of Inherent powers of the High Court “to make such orders as may be
necessary to give effect to any order under this Code, or to prevent abuse of the process of any Court or otherwise to
secure the ends of justice”.

 The said Section which provides the High Courts virtually unbridled power in order to make any orders necessary to
prevent abuse of process of any court or to secure ends of justice is so expansive that it is used both with strict judicial
restraint as well as very sparingly.

 The Hon’ble Supreme Court in State of Punjab v. Kasturi Lal and Ors. (2004) 12 SCC 195 has held that quashing of
charge is an exception and not the rule. It observed “Exercise of power under Section 482 of the Code in a case of this
nature is the exception and not the rule.

 The Supreme Court in Som Mittal vs Govt. Of Karnataka AIR 2008 SC 1528, has held that the power under Sec. 482
Cr.P.C. must be exercised sparingly, with circumspection and in rarest of rare cases. Exercise of inherent power under
Sec. 482 of the Code of Criminal Procedure is not the rule but it is an exception. The exception is applied only when it is
brought to the notice of the Court that grave miscarriage of justice would be committed if the trial is allowed to proceed
where the accused would be harassed unnecessarily if the trial is allowed to linger when prima facie it appears to Court
that the trial would likely to be ended in acquittal.

16
Quashing of proceedings by High
Court
 In the case of Central Bureau of Investigation v. Ravi Shankar Srivastava 2006 Cri LJ 4050, the
Supreme Court was of the opinion that, the High Court in exercise of its jurisdiction under Sec. 482 of
the Code does not function either as a court of appeal or revision, and held and envisaged that three
circumstances under which the inherent jurisdiction may be exercised, namely,

1. to give effect to an order under the Code,

2. to prevent abuse of the process of the Court, and
3. to otherwise secure the ends of justice.

 In another case, State of Haryana and others v. Ch. BhajanLal &Ors AIR 1992 SC 604, the
Supreme Court laid down the categories of cases in which the High Court may, in exercise of powers
under Sec. 226 of the Constitution of India or under Sec. 482 Cr.P.C., interfere in proceedings to
prevent abuse of process of the Court or otherwise to secure the ends of justice.

 In the case of Pepsi Foods Ltd. v. Special Judicial Magistrate 1998 Cri LJ 1, wherein it has
been specifically held that though the Magistrate trying a case has jurisdiction to discharge the accused
at any stage of the trial if he considers the charge to be groundless but that does not mean that the
accused cannot approach the High Court under Sec. 482 of the Code or Article 227 of the Constitution
to have the proceeding quashed against them when no offence has been made out against them and
still why must they undergo the agony of a criminal trial.

17
Offences Punishable under IPC

 As per the decision of Delhi HC in Gulabchand Sharma (1974), though offences under
Section 277 (Making False statement in verification or delivering false
account/statement) is somewhat similar to Section 193 of IPC, they are not identical and
there is no bar in launching prosecution both under the ITA as well as IPC.

 Prosecution instituted under the Indian Penal Code, if any, cannot be compounded U/s
279 of ITA. However, section 321 of Criminal Procedure Code, 1973 provides for
withdrawal of such prosecutions.

18
 Relevant Sections of IPC which may be also be applicable at the time of launching of prosecution under
ITA as given below -

Description Punishment Type Bailable?

193 – Imprisonment for 7 Non Yes

Giving or fabricating false evidence in a judicial years and fine. cognisable
proceedings Giving or fabricating false evidence Imprisonment for
in any other case three years and
fine
196 –
Same as above Non Yes
Using in a judicial proceeding evidence known to
cognisable
be false or fabricated
197 –
Same as above Non Yes
Knowingly issuing or signing a false certificate
cognisable
relating to any fact of which such certificate is by law
admissible in evidence.

198 – Using as a true certificate material

one known to be false in a point

19
Same as above Non cognisable
Yes

20
Prosecutions under ITA
I –
Chapter XXI of the Act comprising of 29 Sections.

21
General provisions
 The sections dealing with offences and prosecution proceedings are included in Chapter XXII of the Income-
tax Act, 1961 i.e. S. 275A to S. 280D of the Act (hereinafter referred as “ said Act”). Total number of
sections dealing with offences and prosecutions - 32
 The provisions of CrPC are to be followed relating to all offences under the Income-tax Act, unless the
contrary is specially provided for by the Act. E.g.S.292A of the Act that prescribes that S. 360 of the
Code of Criminal Procedure, 1973 (Order to release on probation of good conduct or after admonition)
and the Probation of Offenders Act, 1958, would not apply to a person convicted of an offence under the
Income–tax Act, unless the accused is under eighteen of age.
 A First Class Magistrate or a Metropolitan Magistrate, should try the prosecution case under the direct
taxes. If a Special Economic Offences Court with specified jurisdiction is notified, the complaint is to be
filed before the respective court.
 16 Offences are liable for prosecutions including payment of fine. Higher punishment in case of certain
offences committed more than once [Sec 278A].
 Maximum punishment up to 7 years of imprisonment plus fine.
 Certain offence are not liable for prosecutions if Assessee proves reasonable cause.
 Certain offence are not liable for prosecution if willful default/ intention is absent.
 The Supreme Court has established that no opportunity of hearing is required to be given by the
Commissioner of Income Tax before the grant of sanction by the Commissioner of Income tax, CIT v.
Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC) (657 to 569).

22
 General provisions

 As per the instructions issued by CBDT (CBDT Instruction No. 5051 of 1991 dated 07/02/1991 Para 4
staates), no prosecution is launched against a person whose age is 70 & more.

 In Pradip Burman S. v. ITO 382 ITR 418 (Delhi) the court laid down that the person should have reached the age
of 70 at the time of commission of offence. The case of the petitioner was that the complainant filed is liable to be
quashed on the ground that at the time of filling of the criminal complaint, the petitioner had attained the age of 70
years and thus no prosecution can be initiated against him. Instruction number 5051 of 1991 dated February 7
1991 mandated that no prosecution could be initiated against a person who is above 70 years, “ at the time of
commission of offence.”

 Further the said instruction do not mandate or make it compulsory since the words “need not normally”
used in para 4 do not provide an absolute bar on initiation of prosecution. Thus the emphasis is on time
of commission of the offence.

 S. 136: Proceedings before income-tax authorities to be judicial proceedings

Sec 136 provides that any proceedings under the Act shall be deemed to be a judicial proceeding within
the meaning of S. 193 and 228 and for the purpose of S. 196 of the Indian Penal Code. However, all
proceedings under the Act do not fall under the definition of judicial proceedings for all purposes. eg.

23
General provisions
penalty proceedings u/s.271(1)(c) do not fall within the ambit of S. 136 of the Act and therefore cannot be
said to be judicial proceedings.

 In KTMS Mohammed v. UOI (1992) 197 ITR 196 (SC), the Court held that Assessing Officer cannot launch
prosecution for perjury in FERA proceedings in a statement recorded under FERA proceedings. However,
if an assessee intentionally gives or fabricates false evidence, the said assessee is liable for prosecution
under S. 193 of the Indian Penal Code.



24
Summary of offences and punishments

ction Nature Bailable or Cognisable or not Summons Reasonabl Maximu RI Limit for Compound
Non Bailable Case or e cause m or fine ing
Warrants argument Imprison SI category
Case ment

275A 132(1)/(2) Bailable Non Cognisable Summons NA 2 years RI No Limit Category B

275B 132(1)(iib) Bailable Non Cognisable Summons NA 2 years RI No Limit Category B

276 Tax Bailable Non Cognisable Summons NA 2 years RI No Limit Category B

recovery
276A 178(1)/(3) Bailable Non Cognisable Summons Available 2 years RI No Limit Category B

276AB 269UC Bailable Non Cognisable Summons Available 2 years RI No Limit Category B

276B TDS Bailable Non Cognisable Warrant Available 7 years RI No Limit Category A

276BB TCS Non Bailable Cognisable Warrant NA 7 years RI No Limit Category A 276C-1a

Tax evade Non Bailable Non Cognisable Warrant NA 7 years RI No Limit Category B 276C-1b Tax

evade Bailable Non Cognisable Summons NA 2 years RI No Limit Category B 276C-2 Tax

25
Summary of offences and punishments
evade Bailable Non Cognisable Summons NA 2 years RI No Limit Category B 276CC1a Tax

return Non Bailable Non Cognisable Warrant NA 7 years RI No Limit Category B

26
 Summary of offences and punishments –
contd…
ction Nature Bailable Cognisable or Summons Reason Maxim RI Limit Compoundi
or not Case or able um or for fine ng category
Non Warrants cause Impris SI
Bailable Case argume onmen
nt t
276CC-1b Tax return Bailable Non Cognisable Summons NA 2 years SI No Limit Category

B 276CCC 158BC Bailable Non Cognisable Warrant NA 3 years RI No Limit Category

276D 142(1) & Bailable Non Cognisable Summons NA 1 year RI No Limit Category B
142(2A)
277-1a False
Non Non Cognisable Warrant NA 7 years RI No Limit Category A
statement
Bailable
2771b False
Bailable Non Cognisable Summons NA 2 years RI No Limit Category
statement
277A Falsification
B Bailable Non Cognisable Summons NA 2 years SI No Limit Category
of books

27
278- 1a Abetment Non Non Cognisable Warrant NA 7 years RI No Limit Category A
Bailable
b Abetment Bailable Non Cognisable Summons NA 2 years RI No Limit Category B

28
Reasonable Cause – Section
278AA
 As per Section 278AA, no person shall be punishable for any failure referred to in the said provisions if
he proves that there was reasonable cause for such failure. The Offences should be in relation to;

 Sec 276A – Failure to comply with the provisions of sub-sections (1) and (3) of section 178

 Sec 276AB – Failure to comply with the provisions of sections 269UC, 269UE and 269UL

 Sec 276B – Failure to pay tax to the credit of Central Government under Chapter XII-D or
XVII-B

 Before the amendment to S. 276A, 276B, 276B, 276D and 276E, the onus was on the prosecution to
prove beyond a reasonable doubt that the accused had no reasonable cause or excuse to commit any
of the offences as envisaged by the aforesaid sections.

 However, in the light of the amendment by the Taxation Laws (Amendment and Misc. Provisions) Act,
1986 to the aforesaid, sections wherein the word “without reasonable cause or excuse” have been
deleted and with the insertion of S. 278AA, the onus of proving the existence of reasonable cause has
shifted on to the accused.

 Calcutta HC in [2004] 136 TAXMAN 346 (CAL.) Shaw Wallace & Co Ltd. Held that it was for appellant to
produce sufficient evidence for non-deposit of tax deducted at source during criminal trial to avail of
benefit of section 278AA and since except for pleading financial hardship, there was no other reason
provided by appellant for such default, Single Judge was justified in not entertaining writ petition of
appellant.
29
Sec. 278E – Presumption of ‘Mens
Rea’
 The rule in general criminal jurisprudence established over the years has evolved into the concept of ‘Innocent until
proven guilty’ which effectively places the burden of proving the guilt of the accused beyond reasonable doubt squarely
on the prosecution.

 However, The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, inserted S. 278E with effect from
10th September, 1986 has carved out an exception to this rule.

 As per Section 278E(1),In any prosecution for any offence 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 defence for the
accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that
prosecution.

 As per Section 278E(2), 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.

 Section 278E of the Act, which is analogous to S. 138A of the Customs, Act, 1962, S.92C of the Central Excise and Salt Act,
1944, S.98B of the Gold (Control) Act, 1968 and S.59 of the Foreign Exchange Regulation Act, 1973 and other Acts relating to
Economic Offences.

 The constitution validity of the above amendment has been upheld by the Supreme Court in various judgments.

 Constitutional validity of the said provision was upheld in Selvi J. Jayalalitha v. UOI and Ors. (2007) 288 ITR 225 (Mad.) (HC),
Selvi J. Jayalalitha. ACIT (2007) 290 ITR 55 (Mad) (HC) which was affirmed by Apex court in sasi Enterprises v. ACIT (2014) 361
ITR 163 (SC).

30
Sec. 278E – Presumption of ‘Mens
Rea’
 In Prakash nath khanna v. CIT (2004) 266 ITR 1 (SC) (12), the court observed that the Court has to presume the existence of culpable
mental state, and the absence of such mental state can be pleaded by an accused as a defense in respect of the Act charged as an offence in the
prosecutions. It is therefore open to the appellant to plead absence of a culpable mental state when the matter is taken up for a trial.

 In Acit v. Nilofar Currimbhoy (2013) 219 Taxman 102 (Mag.) (Delhi) (HC), prosecution was launched u/s 276CC for a failure to file he return of
income, the court held that the onus was on the assessee to prove that delay was not willful and not on the department (SLP of assessee is
admitted in the case of Nilofar Currimbhoy v, ACIT (2015) 228 Taxman 57 (SC).

 In UOI v. Bhavecha Machinery & Ors. (2009) 320 ITR263 (MP) (HC), where the delay in filling the return was explained by the accused firm due
to the illness of the old part time accountant of the accused firm, the cause shown by the accused firm was held to be a reasonable cause for delay
in filling the return of its income.

 Sonali Autos P. Ltd. v. State of Bihar (2017) 396 ITR 636 (Patna )(HC), Section 278AA: offences and prosecutions- Tax deduction at source –
Reasonable cause- No punishment . [S. 201 (IA), 276AB, 276B, 279, Code of Criminal procedure, 1973, S.482]. If assessee deducted TDS
but same was not deposited within specified time due to oversight on part of its accountant, and subsequently the
petitioner immediately after noticing the aforesaid defects by the Statutory Auditors of the petitioner company
deposited the amount deposited with Interest -
Prosecution proceedings against assessee after three years would be contrary to CBDT instruction and,
thus, deserved to be quashed.

 In Shaw Wallace & Co. Ltd. v. CIT (TDS) (No. 2) (2003) 264 ITS 243 (Cal.) (HC), held that it is for appellant to produce sufficient evidence for
non-deposit of tax deducted at source during criminal trial to avail of benefit of section 278AA.

Unitentioanal Default:- not punishable

 In Union of India vs. Pyarelal Tarachand & Anr. (2003) 180 CTR (MP) 551: (2003) 264 ITR 525 (MP): 2004
135 TAXMAN 97.- The hon’ble High Court declined to interfere in the judgment where trial court acquired the
assessee because it was not proved that the assessee has deliberately or intentionally committed the default.
31
Sec. 278E – Presumption of ‘Mens
Rea’
 Hon’ble Punjab and Haryana High Court in the case of ITO vs. Shiv kumar reported in the 282 ITR 406 P&H ,
held that willfull attempt to evade tax, prosecution was not valid.

“Mens rea” must be established”

 The Andhra Pradesh High Court in the case of Krishna Medical Stores vs ITO reported in 206 ITR 76 at page 81
held that : mere possession or control of books and documents containing false entries is not punishable under section
276C, unless the prosecution established a willfull attempt on the part of the accused to evade tax and that it is
essential that mens rea must be established.

 Supreme Court in the cse of Prem Das vs. ITO reported in 103 Taxman 65 has held that “by applying the
presumption under section 132(4A) the ingredients of offence under section 276C and 277 cannot be held to have
been established”.

32
Sec. 278E – Presumption of ‘Mens
Rea’
 Supreme Court in Sasi Enterprises vs. Assistant Commissioner of Income Tax (2014)5 SCC 139: 361
ITR 163 (SC), held that in case of a prosecution of an offence, the Court has to presume the existence
of mens rea and it is for the accused to prove the contrary and that too beyond reasonable doubt.
Similar observations noted by SC in Prakash Nath Khanna v. CIT (2004) 266 ITR 1 (SC) .

 In J. Tewari v. UOI (1997) 225 ITR 858 (Cal.) (HC) (861) the court observed that the rule of evidence
regarding presumptions of culpability on the part of the accused does not differentiate between a natural
person and a juristic person and the court will presume the existence of culpable state of mind unless
the accused proves contrary.

NOTE : S. 278E being penal in nature is not applicable for those offences that have been
committed on or before 09-09-1986 even if the prosecution proceedings are launched after the
said date.

33
 Limitation of proceedings – Not applicable to
ITA offences
 As per Chapter XXXVI of the Code of Criminal Procedure, 1973 specifies the period of limitation beyond
which no Court can take cognisance of an offence which is punishable with fine only or with
imprisonment not exceeding three years.

 For economic offences (in respect of applicability of Limitation Act, 1974) it is provided that nothing in the
aforesaid chapter XXXVI of the Code of Criminal Procedure, 1973, shall apply to any offence punishable
under any of the enactment specified in the Schedule.

 The Schedule referred to includes Income tax, Wealth tax, etc.

 In Friends Oil Mills & Ors. vs. ITO (1977) 106 ITR 571 (Ker.) (HC), dealing with Section 277 of the Act,
the Hon’ble Kerala High Court held that the bar of limitation specified in Section 468 of the Code of
Criminal Procedure, 1973 would not apply to a prosecution, under the Income-tax Act.

 In Gajanand vs. State (1986) 159 ITR 101 (Pat.) (HC)), the Hon’ble High Court held that where the
Criminal Proceedings had proceeded for 12 years and the Income tax department failed to produce the
evidence, the prosecution was to be quashed. In State of Maharashtra vs. Natwarlal Damodardas Soni

34
Limitation of proceedings – Not applicable to
AIR 1980 SC 593, 1980 SCR (2) 340, the Court held that a long delay along with other circumstances
be
taken into consideration in the mitigation of the sentence

35
 Steps in launching prosecutions proceedings
Steps to be followed by the Tax department for launching a prosecutions for the offences

1. The Assessing officer on the basis of the information available, sends a proposal to the CIT U/s
279 of ITA.

2. CIT Sends a show cause notice to the person against whom the proposal to launch prosecution is
received.

3. The accused files a reply for his defence.

4. If the CIT is satisfied with a reply, he may not grant a permission to lodge a complaint. In case he
is not satisfied with the reply, he accords his sanction to launch prosecution.

sh Singh Badal (2007) and few other case laws has held that legality or validity of order granting sanction would be subject matter of review before th

36
 Steps in launching prosecutions proceedings –
Contd…
LAUNCH OF PROSECUTION MODULE (PHASE 1) IN INCOME TAX BUSINESS APPLICATION (IT

ITBA-PROSECUTION INSTRUCTION NO.1 [F.NO.SYSTEM/ITBA/INSTRUCTION/PROSECUTION/2016-17] DATED 8-3-2017

 The Prosecution Module (Phase 1) provides the entire workflow for prosecution starting from initiation of
prosecution proposal, issuing show-cause notice and authorisation u/s 279(1) of the I.T. Act, 1961 and
recording details of proceedings in Court.
 Similar functionality is provided for offences under the W. T. Act, 1957. The process flow for
compounding of offence and grant and withdrawal of immunity u/s 278AB of the I.T. Act, 1961 shall be
provided in the next phase.
 The facility to initiate prosecution proposals relating to TDS provisions has not been provided in
1TBA and shall be provided in CPC – TDS
 Training material including user manual, help content and frequently asked questions (FAQs)
are available on the Prosecution Module Home Page and on ITBA Portal → Online Training on
ITBA.

37
Steps in launching prosecutions proceedings –
Summons Case
Steps to be followed by in the court proceedings [Chapter XX - Sec 251 to 259 of Cr PC]

1. In respect Summons case, Court is not required to frame charges.

2. The court gives substance of the accusation which is called” Notice”.

3. As per Section 251 of CrPC, Court explains the particulars of the offence to the accused.

4. The proceedings can be challenged U/s 482 of CrPC before the HC for quashing the proceeding.
5. In case the trial is not quashed by the HC, the accused to apply for a bail.( Bailable and Non Bailable offence)
6. As per Sec 252, if the accused pleads guilty, the Magistrate shall record his plea as nearly as possible in
the words and may in his discretion , convict him thereon.
7. As per Section 254, if the matter is not decided as per Section 252 or 253, the court shall take all the evidence
and hear the accused.
8. Section 255 deals with conviction or acquittal.
9. Section 259 empowers magistrate to convert the summons case to Warrant Case for the
circumstances specified in that section.
10. Appeal against the same lies with the higher court

The accused has a right to go for compounding of office U/s 279 of ITA
38
St
W
ps to be followed by in the court proceedings
se instituted other than on police report – Chapter XIXSec 244 to 250 of CrPC]
On receipt of the complaint, the court issues summons the accused by sending a copy of the complaint.

If the accused is not present before the court on the designated date, a warrant can be issued against him and produced
before the court by arresting him.
If, upon taking all the evidence referred to in section 244, the Magistrate considers, for reasons to be recorded, that no case
against the accused has been made out which, if unrebutted, would warrant his conviction, the Magistrate shall discharge
him.[Section 245 of CrPC]
If the court feels otherwise, Courts frame the charges U/s 246 of CrPC. The charge shall then be read and explained to the
accused, and he shall be asked whether he pleads guilty or has any defence to make
The proceedings can be challenged U/s 482 of CrPC before the HC for quashing the proceeding.

In case the trial is not quashed by the HC, the accused to apply for a bail.( Bailable and Non Bailable offence)

After the Trial, the accused can either the acquitted or convicted.[Sec 248]

Appeal against the same lies with the higher court.

As per Section 275, in all warrant case, evidence of each witness can be taken down in writing by the magistrate himself or
by dictation on open court.

The accused has a right to go for compounding of office U/s 279 of

ITA 39
 [2018] 99 taxmann.com 299 (Delhi)
Rakshit Jain]

missioner/Commissioner (Illustrations) - Assessment year 201 -12 –

leading to criminal prosecution by issuing show cause notice under section 279 followed by grant of sanction for prosecution for offense under secti

40
 Valid Sanction is a Precondition
 No valid sanction as required under section 279 of the Act has been obtained. In the petition of complaint it has
been mentioned that the sanction has been accorded by the Commissioner of Income-tax, Ranchi, and a copy
thereof was enclosed with the petition of complaint.
The said enclosure is annexure 2 to this application. From annexure 2 it appears that the same is a
show-cause notice given to the assessee requiring him to show cause why a criminal
prosecution be not launched against him. This notice obviously cannot be treated as
an order according sanction. 229 ITR 626 RAJ KUMAR SODERA vs CCIT.

 Writ can be validly filed to challenge the sanction, however in the instant case since
Additional Chief Metropolitan Magistrate had already taken cognizance and issued
summon, writ petition against Sanction was held to be not proper.

 The question of validity of Sanction Order on merits of reasonable cause amount to a

pre trial adjudication. Questions and issues relating to grant and issue of sanction
could be raised and decided during trial. - In case the petitioners are able to make out that
cognizance was not justified and as per law they can challenge and question the summoning order by way of
petition under Section 397 read with Section 401 of the Code of Criminal Procedure, 1973 (Code) or if
permissible, by way of a petition under Section 482 of the Code – Indo Arya Central Transport Limited
& Ors vs CIT (TDS), WPC No. 3964/2017 dated 12.03.2018.

41
The sanction must be in respect of
each of the offences
 Where Assistant Commissioner sanctioned prosecution of applicant under section 52 of 1922 Act for fake
return but Additional Sessions Judge held that applicant could only be prosecuted under section 51 of 1922
Act for failing to furnish return and not under section 52 of 1922 Act, applicant would be prejudiced by
being found guilty on a charge which he was not called upon to meet and, therefore, applicant could not be
convicted under section 51 of 1922 Act when sanction granted by Assistant Commissioner was for
prosecution under section 52 of 1922 Act (Champalal Girdharlal v. Emperior (1933) 1 ITR
384 (Nag) (HC).
 Hon’ble Supreme Court in CCE vs. HMM Ltd, 1995(76) E.L.T 497(SC) has held that unless the
assessee is put to notice as to what is the nature of the default, he would have no opportunity to meet the
case of the department.
 Amrit Foods v Commissioner of Central Excise reported in 190 ELT 433, it has been
held by Their Lordships of the Apex Court in the aforesaid judgement that, a notice must be specific and,
must clearly bring out the exact default and, nature thereof, by referring to clause or sub-clause of provision
and, in absence thereof, any penalty levied is vitiated in law.

42
Sanction Order Quashed –
 No offence u/s 50 of Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015 if foreign assests declared in Revised return u/s
139(5).

Srinidhi Karti Chidambram vs Pr CCIT W . A . Nos . 1125 to 1128, 1130 & 1131 of
2018, Madras High Court, If a person holds certain foreign assets which are fully explained and
acquired out of tax paid income but the assessee did not report said assets in Schedule FA of the ITR in the past.
CBDT in letter dated 06.07.2015 has opined that if the assets are not reported in schedule FA of the ITR for AY
2016-17, then he shall be liable for penalty of Rs. 10Lacs u/s 43 of the Act.

In the instant case assessee have furnished the details of the assets in schedule FA of ITR u/s 139(5), thus even
taking it for granted that assessees have omitted to furnish the details in return u/s 139(1), in the light of
decision of CBDT prosecution cannot be launched but at best there could only be penal proceedings.
When language of scheme 2016 is referable to the whole of section 139 of the Act, it is not open to the
respondents to restrict only to the return filed u/s 139(1) of the Act.
In view of above there was no failure to furnish any information relating to any foreign asset or investment.
Revised return of income obliterates or effaces any earlier return of income. Offence under Section 50
is made out only if, in the return of income u/s 139(1) or 139(5) there has been a
wilful failure to disclose any information relating to foreign asset.

43
The Sanctioning authority has failed to consider the above and has came to an
erroneous conclusion that the case deserve prosecution. Sanction Order deserves to
be set-aside.

44
Prosecution for matters pending in
Appeals
 The provisions of the Law of evidence that do not bind assessment proceedings, are to be
strictly followed in criminal proceedings.
 In P. Jayappan v. ITO (1984) 149 ITR 696 (SC), the court held that the two types of proceedings
could run simultaneously and that one need not wait for the other. However, a wholesome rule will
have to be adopted in matters of this nature where courts have taken the view that when the
conclusions arrived at by the Appellate Authorities have a relevance and bearing upon the
conclusions to be reached in the case necessarily one authority will have to await the outcome of
the other authority.
 In Kalluri Krishan Pushkar v Dy. CIT(2016) 236 Taxman 27 (AP& T) (HC), the court held that,
existence of other mode of recovery cannot act as a bar to the initiation of prosecution proceedings.
 Hon’ble Madras High Court in the case of, Mohammed I. Unjawala vs. CIT [(1995) 213 ITR 190
(Mad.)] held that Criminal Court is bound to accept the findings of Tribunal on questions of fact more
so when such findings are in favour of assessee.

45
 Delhi HC in Pradip Burman [2016] 65 taxmann.com 138 ,Section 276D of the Income-tax Act,
1961 - Offence and prosecution - Failure to produce accounts and documents (Stay of prosecution
proceedings) - Whether pendency of appellate proceedings has no bearing on initiation of
prosecution under Act - Held, yes - Assessee filed instant writ petition seeking staying of criminal
proceedings against him on ground that against assessment order, he had already filed an appeal,
which was pending for adjudication - It was noted that appeal had been filed challenging
assessment order and consequential outcome of imposition of penalty under section 271(1) and
thus, at any count, outcome of appeal filed on behalf of assessee will have no bearing on complaint
at least in respect of offence under section 276D.
 In Vijay Kumar Mallik v. CIT (2017) 397 ITR 130 (Patna) (HC), Held, dismissing the writ petition, that it
was apparent that the assessee had not been exonerated by the Income-tax Department in the
adjudication proceedings till date. According to the assessee, the special leave petition filed by him
was still pending in the Supreme Court. In such circumstances, there was no illegality in the order
passed by the criminal court taking cognizance against the assessee under section 276C (1) and
(2).
 .In V. Sadasiva Chetty (HUF) v. ITO (2003) 264 ITR 527 (Mad.)(High Court) held that because of the
pendency of reassessment, the prosecution cannot be whittled down and original assessment alone
is to be considered for prosecution. (A.Y. 1982-83).
 In Kingfisher Airlines Ltd. .v. ACIT (2014) 265 CTR 240(Karn.) (HC) held that Criminal
proceedings are not dependent on the recovery proceedings. Therefore, the pendency of
proceedings initiated u/s. 201(1) and s. 201(1A) is not a legal impediment to continue the criminal
prosecution against the petitioner.
46
 Penalty and prosecution – Section 271(1)(c) and Section 277

 The Supreme Court, in Uttam Chand v. ITO (1982) 133 ITR 909 (SC), while dealing with prosecution
proceedings u/s. 277, held that the finding given by the Appellate Tribunal is binding on the criminal courts.
Therefore, when there is a finding of the Appellate Tribunal leading to the conclusion that there is no prima
facie case against the assessee for concealment, then that finding would be binding on the court and the
court will have to acquit or discharge the assessee.

 In K. C. Builder v. ACIT (2004) 265 ITR 562 (SC), the court held that when the penalty is cancelled, the
prosecution for an offence u/s 276C for willful evasion of tax cannot be proceeded with thereafter.

 In V. Gopal v. ACIT (2005) 279 ITR 510 (SC), the court held that when the penalty order was set- aside, the
Magistrate should decide the matter accordingly and quash the prosecution.

 Non-initiation of penalty proceedings does not lead to a presumption that the prosecution cannot be initiated
as held in Universal Supply Corporation v. State of Rajasthan (1994) 206 ITR 222 (Raj) (HC) (235), A.Y.
Prabhakar (Kartha) HUF v. ACIT (2003) 262 ITR 287 (Mad.) (288).

 In S.P. Sales Corporation v. S. R. Sikdar (1993) 113 Taxation 203 (SC) and G. L. Didwania v. ITO (1995) 224 ITR
687 (SC), the Hon’ble Apex Court laid down the principle that “The Criminal Court no doubt has to give due
regard to the result of any proceedings under the Act having bearing on the question in issue and in an
appropriate case it may drop the proceedings in the light of an order passed under the Act.”

 In Suresh Chand Gupta v. UOI (1997) 223 ITR 183 (MP), it was held, following smt. Mohini Devi Agarwal v. CIT
(1997) 224 ITR 742 (Pat) and G.L. Didwania v. ITO (1997) 224 ITR 687(SC) that in view of cancellation of penalty
on the same point, prosecution under section 276C and section 277 was liable to be quashed .

47
 In ITO v. Nandlal and Co. (2012) 341 ITR 646 (Bom.) (HC), the court held that, when the order
for levy of penalty is set aside, prosecution for wilful attempt to evade tax does not survive.

 Various courts have held that, when the substantial question of law is admitted by a High
Court, it is not a fit case for the levy of penalty for concealment of Income (CIT v. Nayan
Builders and Developers (2014) 368 ITR 722 (Bom.) (HC), CIT v. Advaita Estate Development Pvt.
Ltd. (ITA No. 1498 of 2014 dt. 17/2/2017) (Bom.)(HC), (www.itatonline.org) CIT v. Dr. Harsha N.
Biliangady (2015) 379 ITR 529 (Karn.) (HC).

 A harmonious reading of the various ratios it can be contended that if penalty cannot be
levied upon the admission of a substantial question of law by the Jurisdictional High Court, it
cannot be a fit case for prosecution.

 In ITO v. Ashoka Biscuit Works 126 Taxation 225(AP), the court found that the Tribunal
had deleted the penalty under section 271(1)(c) levied on the same facts on holding that ITO
had not brought home any concealment of income and there was only postmen of the
payment of tax and no loss of revenue. Following Uttam Chand v. ITO (1982) 133 ITR 909
(SC).

 Non-initiation of penalty proceedings does not lead to a presumption that the

prosecution cannot be initiated as held in Universal Supply Corporation v. State of
Rajasthan (1994) 206 ITR 222 (Raj) (HC) (235), A.Y. Prabhakar (Kartha) HUF v. ACIT (2003)
262 ITR 287 (Mad.) (288).
48
 However, if penalty proceedings are initiated and after considering the reply, the proceedings
are dropped, it will not be a case for initiating prosecution proceedings. CBDT guidelines had
instructed that where quantum additions or penalty have been deleted by the departmental
appellate authorities, then steps must be taken to withdraw prosecution (Guidelines F. No.
285/16/90-IT (Inv) 43 dated 14-5-1996).

 If the penalty is quashed on “ technical grounds such as “ Limitation” or “ Violation of the due
process of law” penalty not quashed on merits as such it does not impact the prosecution
proceedings.

 In Radheshyam Kejriwal v. State of West Bengal (2011) 333 ITR 58 (SC) The following principles
were laid down by the Supreme court:

a) Adjudication proceeding and criminal prosecution can be launched simultaneously.

b) Decision in adjudication proceeding is not necessary before initiating criminal prosecution.

c) Adjudication proceeding and criminal proceeding are independent in nature to each other.

49
 d) The finding against the person facing prosecution in the adjudication proceeding is not
binding on the proceeding for criminal prosecution.

e) The finding in the adjudication proceeding in favour of the person facing trial for identical
violation will depend upon the nature of finding. If the exoneration in adjudication
proceeding is on technical ground and not on merit, prosecution may continue and

 In case of exoneration, however, on merits where allegation is found to be not sustainable at all
and person held innocent, criminal prosecution on the same set of facts and circumstances
cannot be allowed to continue underlying principle being the higher standard of proof in criminal
cases.

 In term of Circular dated February 7 th 1991, if there is evade tax of less than Rs. 25,000/-,
no prosecution could be lunched u/s. 276C(1) and 277.

 In the case of Magdum Dundappa Lokappa v. Income tax Dept. (rep by its Income tax
Officer, Angad Kumar) / Suresh Sholapurmath v. Income tax Dept (rep by its Income tax
Officer, Angad (Kumar) (2017) 397 ITR 145 (SC).

50
 Supreme Court held:
Allowing the appeals; as the amount involved was small, and had been paid with interest long ago,
the Circular dated February 7, 1991 squarely applied and no proceedings should have been filed
as the amount was below Rs. 25,000. Proceedings against the appellants were to be quash

51
Offence by Company– Sec. 278B

S.278B makes certain provisions with regard to offence committed by companies, firms, association
of person and bodies of individuals, whether incorporated or not. Where an offence has been
committed by a company, a firm, association of persons, or body of individuals, the person, who was in
charge of and was responsible for the conduct of its business at the time when the offence was committed
will be deemed to be guilty of the offence, unless he proves that the offence was committed without his
knowledge or that he had exercised all due diligence to prevent the commission of the offence.

Further, if in the case of a company it is proved that the offence bad been committed with the consent or
connivance of or is attributable to any neglect on the part of the company, such director, manager, secretary
or others will be deemed to be guilty of the offence and will be liable to be prosecuted and punished
accordingly. This provision will also apply in relation to mutatis mutandis committed by a firm, association of
persons or body of individuals.

Under sub-section (1) to sec 278B, the essential ingredient for implicating a person is his being “in charge
of” and "responsible to" the company for the conduct of the business of the company. The term responsible
is defined in Blacks Law dictionary to mean accountable

52
Offence by Company– Sec. 278B
 Where an offence has been committed by a company, a firm, association of persons, or body of
individuals, the person, who was in charge of and was responsible for the conduct of its business
at the time when the offence was committed will be deemed to be guilty of the offence, unless he
proves that the offence was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of the offence.

 The term Company includes Firm/BOI/AOP and director includes partners and members of AOP.

 When the offence is punishable is fine and imprisonment, then company will be liable for fine
and person referred in Sub section1 or director referred in sub section 2 shall be liable for
prosecution.

 Where assessee had subscribed her signature in profit and loss account and balance sheet of
company for relevant assessment year which were filed along with returns, Assessing Officer
was justified in naming her as Principal Officer and accordingly she could not be exonerated for
offence under section 277 [[2018] 96 taxmann.com 203 (Madras) HIGH COURT OF MADRAS
Mrs. Sujatha Venkateshwaran].

53
Offence by Company– Sec. 278B
 Section 139, read with section 140, of the Income-tax Act, 1961 - Return of income (General) -
Assessment year 201 -12 - Whether though prime responsibility of furnishing return of income of
company is of managing director of such company, but then, it is not correct to read above provision
so as to conclude that it is always or invariably responsibility of managing director alone and of no
other - Held, yes - Whether thus, directors are also equally responsible for furnishing of return on
behalf of company - Held, yes [2018] 99 taxmann.com 299 (Delhi) Rakshit Jain]

 [2007] 290 ITR 199 (SC) Madhumilan Syntex Ltd. v. Union of India "(35) '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 principal officer thereof."

23. It is no doubt true that Company is not a natural person but 'legal' or 'juristic' person. That, however,
does not mean that Company is not liable to prosecution under the Act. 'Corporate criminal liability' is not
unknown to law. The law is well settled on the point and it is not necessary to discuss it in detail. We may
only refer to a recent decision of the Constitution Bench of this Court in Standard Chartered Bank v.
Directorate of Enforcement [2005] 275 ITR 81. In Standard Chartered Bank's case (supra), it was
contended on behalf of the Company that when a statute fixes criminal liability on corporate bodies and also
provides for imposition of substantive sentence, it could not apply to persons other than natural persons
and Companies and Corporations cannot be covered by the Act. The majority, however, repelled the
contention holding that juristic person is also subject to criminal liability under the relevant law. Only thing
54
 is that in case of substantive sentence, the order is not enforceable and juristic person cannot be ordered to
suffer imprisonment. Other consequences, however, would ensue, e.g., payment of fine, etc.

 From the statutory provisions, it is clear that to hold a person responsible under the Act, it must be shown
that he/she is a 'principal 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 correctness or
otherwise of the allegations levelled 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 on hand, in March 11, 1991 issued under Section
276B read with Section 278B of the Act, it was expressly stated by the Income Tax Officer, TDS, Bhopal that
the Directors were considered to be Principal Officers under Section 2(35) of the Act. In the complaint
dated February 26, 1992 filed by respondent No.2-Commissioner also, it was
stated that appellants were considered as Principal Officers. In the above view of
the matter, in our opinion, contention of the learned counsel for the appellants
cannot be accepted that the complaint filed against the appellants, particularly
against appellant Nos. 2-4 is ill-founded or not maintainable.

 COMMISSIONER OF INCOME TAX vs. DELHI IRON WORKS (P) LTD. & ORS (2011)
331 ITR 5 (Del) : (2010) 195 TAXMAN 372 (Del) Prosecution can’t be initiated against the
company. It has to be initiated in the name of Director or Principal Officer responsible for TDS compliances.
For initiating prosecution proceedings against the director of the company, the assessee officer has to give
notice u/s 2(35) expressing his intention to treat such directors of a company as “principal officers”.
however, it would be sufficient compliance if in the show-cause notice issued to
the company it is mentioned that the directors are to be considered as principal
officers of the company.

55
 A company is not a natural person but legal or juristic person. That would not
mean that it is not liable to prosecution under the Act. In Standard Chartered Bank v.
Directorate of Enforcement [2005] 145 Taxman 154, the Supreme Court held that juristic person
is also subject to criminal liability under the relevant law. Only thing is that in case of
substantive sentence, the order is not enforceable and juristic person cannot be ordered to
suffer imprisonment. Other consequences, however, would ensue, that is, payment of fine,
etc.
Note: In absence of notice u/s 2(35) no person can be treated as ‘Principal Officer’
- ITO vs Shiv Sewak Cotton Co. [2006] 153 TAXMAN 509 (PUNJ. & HAR.)

 Directors cannot be acquitted merely on ground that no separate notices were

issued to them

Where both directors of company had signed Company's balance sheets, their defense that they were not in
charge of affairs of company was untenable and they could not be acquitted merely on ground that no separate
notices were issued to them ITO vs Anil Batra [2018] 409 ITR 428 (Delhi).

Where assessee had subscribed her signature in profit and loss account and balance sheet of company for
relevant assessment year which were filed alongwith returns, Assessing Officer was justified in naming her
as Principal Officer and accordingly she could not be exonerated for offence under section 277 Mrs.
Sujatha Venkateshwaran v. ACIT [2018] 96 taxmann.com 203 (Madras).

 SMS Pharmaceuticals v. Neeta Bhalla & Anr. [2005] 148 Taxman 128 (SC).
 The person accused should be in charge of, and responsible for the conduct of business at the
time the offence was committed.
 Merely being a director of a company is not sufficient.
 Managing and joint director would admittedly in charge.

56
 Kalanithi Maran v.Union of India[2018] 405 ITR 356 (Madras) – No material to establish
that assessee was in-charge of day-to-day affairs, management, and administration of company - could not be
prosecuted under section 276B for TDS default committed by his company see also Homi Phiroze
Ranina v. State of Maharashtra [2003] 131 Taxmann 100 (Bom).

 In the case of a continuing offence - it can, at best, apply to the company in respect of
which the offence is continuing one and not to its directors who may have come on its
board subsequent to the commission of the offence by the company. K.C. Palaniswamy
v. Income-tax Officer [2008] 174 Taxman 259 (Delhi).

 The petitioners were directors of the company but the company had appointed competent officers and
consultant to deal with the company's account. It was therefore, submitted that petitioners were not
responsible for every act and day-to-day conduct of the business of the company. They could not be
prosecuted for company's failure to deposit tax deducted at source Om Prakash
Katyal v. Union of India [2009] 310 ITR 174 (Patna).

 In Onkar Chand & Co. & Ors. v. Income-tax Department (2009) 237 CTR 530 (HP) (High Court) held that
complaints for offences under sections 276C, 277 and 278B was filed against the firm and all the
partners. In absence of any specific allegation against the partners of the firm other than those who had
verified the return of the firm that they were responsible for the conduct of the business of the firm,
prosecution against these partners was held to be not sustainable.

 In Homi Phiroze Ranina v. State of Maharashtra (2003) 131 Taxman 100 / 263 ITR 636 (Bom.)(High Court)
held that Unless complaint disclosed a prima facie case against applicant-directors of their liability and
obligation as principal officers in the day-to-day affairs of company as directors of the company under
section 278B, the applicants could not be prosecuted for offences committed by the company.

 In Dhrupadi Devi (Smt.) v. State of Rajasthan (2001) 106 Comp. Cas 90 (Raj.) (HC)(93), the court held that
criminal liability of partner cannot be thrust upon his legal heirs . In ITO v Kamra Trading Co. (2004) 267

57
 ITR 170 (P&H) (HC) the court held that launching of prosecution against sleeping partner was held to be
bad in law for failure to pay the tax.
 Both the ingredients “in charge of” and "was responsible to" have to be satisfied as the word used is
“and” [Subramanyam vs. ITO (1993) 199 ITR 723 (Mad.)].

 In case of Jamshedpur Engg. & Machine Mfg. Co. Ltd.v.Union of India [1995] 214 ITR 556 (PAT.) it
was held that every director or person associated with the company will not be held liable for the offence. It is
only the person who was entrusted with the business of the company and was responsible to the company for the
conduct of its business who will be liable for the offence alleged.”

 The Supreme Court in the case of Girdharilal Gupta vs. D. N. Mehta, AIR 1971 S.C. 2162, has held
that since the provision makes a person who was in charge of and responsible to the company for the
conduct of its business vicariously liable for an offence committed by the company. The provision should
be strictly construed.

Offence by HUF – Sec. 278C

 S. 278C provides for criminal liability of the Karta, or members of a HUF in respect of offences committed by the
HUF. Under this provision, when an offence has been committed by HUF, will be deemed to be liable to be
prosecuted and punished accordingly, unless he proves that the offence was committed without his knowledge or
that he had exercised all due diligence to prevent the offence.
 If the offence was committed with the consent or cinvienience of or is attributable to any neglect on the part of any
other member of the family, such other member shall be deemed to be guilty of the offence and shall be liable to
58
 be prosecuted and punished accordingly. In Roshan Lal v. Special Chief Magistrate (2010) 322 ITR 353 (All.)
(HC). The court held that a member of HUF cannot be held liable for delay in filling of return of HUF
though he has participated in the assessment proccedings.

Other important Judicial decisions in the recent

past
ar & Court and Court decision
bject matter
2017 Madras Section 276CC, read with section 277, of the Income-tax Act, 1961 - Offences and
prosecutions - Failure to furnish returns of income (Show cause notice) - Whether
where a show cause notice as to why prosecution under sections 277 and 276C(1)
and under provisions of Indian Penal Code for concealment of income and filing
of false statements in return should not be initiated against assessee was issued,
assessee had to respond to it and same could not be questioned in a writ petition
2019 Madras Where during pendency of assessee's appeal before Tribunal, his stay petition was
dismissed and thereupon AO initiated prosecution proceedings under section 276C
for non-payment of determined tax, in view of fact that assessee was agitating his
case before Tribunal, which was final fact-finding body, there was no necessity to
launch prosecution hurriedly because law of limitation under section 468 Cr. P.C. for
59
 criminal prosecution was excluded by Economic Offences (Inapplicability of
Limitation) Act, 1974

Power of Settlement Commission to grant

immunity from prosecution and penalty –
245H
 Application for immunity to be made to Settlement Commission by person who made the application for
settlement u/s 245C
– Full and true disclosure of income and the manner in which such income has been derived.
– Extended complete cooperation during proceedings before Settlement Commission. No immunity where
the proceedings for the prosecution have already been instituted before the date of receipt of the
application under section 245C.
– No immunity from prosecution for any offence under any other Act such as the Indian Penal Code or any
Central Act other than this Act and the Wealth-tax Act, 1957 (27 of
1957) if application u/s 245C is made on or after the 1st day of June, 2007.
• Immunity shall stand withdrawn :
– On failure of payment of sum as specified u/s 245(D)(4)
– Or on failure to comply with conditions subject to which immunity granted.
– Or concealed particulars material to the settlement or have given false evidence.

60
Judicial Pronouncements
 Where application for settlement is filed before prosecution is launched before Special Court and,
subsequently, immunity is granted by Settlement Commission from penalty and prosecution, Subsequent
prosecution proceedings initiated before Special Court are to be quashed - Ashirvad Enterprises
v. State of Bihar [2004] 137 Taxman 455 (SC).

 If income-tax authorities want to prosecute person concerned for his lapse committed after order of
Settlement Commission, they have to get immunity granted by Settlement Commission cancelled under
section 245H(2); they cannot straightaway go for prosecution. Ram Nath vs Special Chief
Judicial Magistrate. [2009] 185 Taxman 381 (Allahabad)

 From a reading of the provisions of section 245H(1A), it is apparent that in case the payments are not made
within the time granted by the Settlement Commission or in case the person fails to comply with any other
conditions, subject to which the immunity was granted, the immunity shall stand withdrawn. However,

61
 the Settlement Commissioner is free to grant further time for payment under
section 245H(1A). Sandeep Singh vs UOI [2017] 393 ITR 77 (SC)

 Settlement Commission can proceed and pass an order granting immunity to applicant from prosecution only
after it records satisfaction that applicant before it: (i) has co-operated with the Income tax Settlement
Commission in proceedings before it, (ii) has made a full and true disclosure of (a) its income, and (b) the
manner in which such income has been derived. CIT vs BDR Builders & Developers Ltd
[2016] 385 ITR 111 (Delhi) see also CIT vs Vysya Bank Ltd. [2012] 344 ITR 658
(Karnataka).

 Commissioner of Income-tax could not direct or authorize the filing of the

complaint against the petitioners during the course of the pendency of the
proceedings before the Settlement Commission.
Section 245F of the Act, the Settlement Commission alone had the exclusive jurisdiction to launch or not
to launch any prosecution of the petitioners. If the Income-tax Commissioner is also held entitled to
initiate these criminal proceedings in exercise of his jurisdiction under section 279 of the Act, then the "
exclusive jurisdiction " of the Settlement Commission hardly has any meaning. To permit the Income-tax
Commissioner to do so would be a complete negation of sub-section (2) of section 245F. 168 ITR 591
R.I. CHADHA & ORS. Vs ITO

62
Special Courts

63
Special Courts and related provisions
Normally, the Magistrate Court in whose territorial jurisdiction an offence is committed tries the offence. For
direct tax cases, the offence is said to committed at the place where a false return of income is submitted,
even though it is completely possible that the return has be prepared elsewhere or that accounts have been
fabricated at some other place.

ction Provision in brief

280A – Summons case

Special court

280B –
Offences Triable 280D –
Application of CrPC code
280C –

64
The Central Notwithstanding anything contained in the Code of Criminal Procedure, 1973
Government, in
(2 of 1974), the Special Court, shall try, an offence under this Chapter punishable with imprisonment
consultation
not exceeding two years or with fine or with both, as a summons case, and the provisions of the Code
with the Chief
of Criminal Procedure, 1973 as applicable in the case of trial of summons case, shall apply
Justice of the
accordingly.
High Court,
may, for trial of The provisions of the Code of Criminal Procedure, 1973 (2 of 1974) (including the provisions as to bails or
offences bonds), shall apply to the proceedings before a Special Court and the person conducting the prosecution
punishable before the Special Court, shall be deemed to be a Public Prosecutor.
under this In J. K. Synthetics Ltd. v. ITO (1987) 168 ITR 467 (Delhi) (HC), the Court held that the offence u/s. 277 of the Act can
Chapter, by be tried only at the place statement is delivered (SLP was rejected (1988) 173 ITR 98 (st). also refer Babita Lila v.
notification, UOI (2016) 387 ITR 305 (SC). A First Class Magistrate or a Metropolitan Magistrate, should try the prosecution case
designate one or under the direct taxes. If a Special Economic Offences Court with specified jurisdiction is notified, the complaint is to
more courts of be filed before the respective court. For ready reference an easy to understand summary of prosecutions provisions
Magistrate of
under Income–tax Act has been reproduced in a chart as per annexure “A”.
the first class as
Special Court
for such area or
areas or for such
cases or class or
group of cases.
Notwithstanding
anything contained
in the Code of
Criminal
Procedure, 1973 ,
the offences
punishable under
this Chapter shall
be triable only by
the Special Court,
if so designated

65
Offences liable for
Prosecution –
Substantive Provisions

66
TDS Defaults – Section 276B
Failure to deduct TDS is liable for penalty U/s 271C of ITA and failure to pay TDS deducted
to the credit of the government is liable for prosecution.

 After the amendment by the Taxation Laws (Amendment and Misc. Provisions) Act, 1986 wherein
the word “without reasonable cause or excuse” have been deleted and with the insertion of S.
278AA, the onus of proving the existence of reasonable cause has shifted on to the accused. Earlier
the onus was on the department to prove beyond a reasonable doubt that the accused had no
reasonable cause.

 Bombay HC in 2018 held that Where assessee filed instant petition contending that Form No. 16
having not been issued by his employer in time, he was suffering at hands of department it was
appropriate to issue direction to Commissioner (TDS) to file a comprehensive affidavit and Department
of Revenue was also to be directed to penalise such defaulters and take other strict measures as
contemplated by law against them.

 PATNA HC in 2017 held that where Assessee had properly deducted tax at source for relevant year
but failed to deposit same with Central Government within specified time limit - Said amount was
deposited along with interest subsequently when mistake was noticed by its Statutory Auditors -
Prosecution proceedings was launched against assessee after three years of default - It was found that
impugned tax could not be deposited within time due to oversight on part of assessee's accountant -
Whether this could be presumed to be a reasonable cause for not depositing tax by assessee within
time and, thus, initiation of proceedings after three years would be in contravention of CBDT instruction
dated 28-5-1980 and, therefore, deserved to be quashed – HC ruled in favour of the assessee.
67
TDS Defaults – Section 276B –
Contd…
 The selection of cases & their processing is further governed by Instruction F.No. 285/90/2008-
IT(Inv-I)/05 dated 24.04.2008 which has been modified by the CBDT [vide F.No.285/90/2013-
IT(Inv.)] dated 07.02.2013. The tax department has issued Standard Operating Procedure ( SOP)
for initiation of prosecution proceeding in this regard.

 The cases where TDS/TCS is not deposited within due date are bifurcated in two classes;
 Cases where amount of TDS not deposited is more than INR 1,00,000 – mandatory
prosecution
 Cases where the amount of TDS not deposited is more than INR 25,000 but less than INR
1,00,000 - may be processed for prosecution depending upon the facts and circumstances of
the case, like where there are instances of repeated defaults and/or tax has not been
deposited till detection.

 CPC-TDS/TRACES will generate a list of prosecutable cases for mandatory processing for
prosecution (List-A) in accordance with the criteria laid down by the CBDT vide it’s instruction
dated 07.02.2013 or any other modified criteria, if the same is done in view of suggestions made in
this regard. Such identification shall be done within one month of the filing of the quarterly TDS
statement.

68
CPC-TDS will generate another list of cases(List-B) involving defaults of delay in payment of Rs. 25,000 to Rs. 1,00,000/- to help AO(TDS
Detailed procedure is given for selection of cases and filing complaint with the court in the said SOP.

69
Wilful Attempt to evade Tax – Sec. 276C(1) &
276C(2)

 Section 276C(1) states that if a person wilfully attempts in any manner to evade any tax, penalty or
interest Chargeable or imposable under this Act and section 276(2) states that if a person wilfully
attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this
Act.

 The difference between the two sub-sections has been explained by the Hon’ble Gujarat High Court in
case of Chandulal Shah vs. State of Gujarat & Anr. (213 ITR 307).
 The Court held that sub-s. (1) contemplates evasion before charging or imposing tax, penalty, or
interest as the section has used the term ‘chargeable or imposable’ whereas sub-s (2), penalises
cases of tax evasion after charging or imposition, that is, evasion after completion of
assessment comes within the purview of sub-section (2).

70
 For the purposes of this section, a wilful attempt shall include a case where any person—
 has in his possession or control any books of account or other documents (being books of
account or other documents relevant to any proceeding under this Act) containing a false
entry or statement; or
 makes or causes to be made any false entry or statement in such books of account or other
documents; or
 wilfully omits or causes to be omitted any relevant entry or statement in such books
of account or other documents; or
 causes any other circumstance to exist which will have the effect of enabling such person to
evade any tax, penalty or interest chargeable or imposable under this Act or the payment
thereof.
 in the cases where the penalty is waived partly u/s. 273A, the Commissioner is precluded from
granting sanction u/s. 279 of the Act.

71
Willful Attempt to evade Tax – Sec. 276C(1)
&
276C(2) – Contd…
Section 270A and Section 276C – Section 270AA

 An assessee may make an application to the Assessing Officer to grant immunity from
imposition of penalty under section 270A and initiation of proceedings under section 276C or
section 276CC, if he fulfils the following conditions, namely:—
 the tax and interest payable as per the order of assessment or reassessment under sub-
section (3) of section 143 or section 147, as the case may be, has been paid within the
period specified in such notice of demand; and
 no appeal against the order referred to in clause (a) has been filed.

 The Assessing Officer shall, within a period of one month from the end of the month in which the
application under sub-section (1) is received, pass an order accepting or rejecting such application:
Provided that no order rejecting the application shall be passed unless the assessee has been
given an opportunity of being heard.

72
 Section 270A and Section 276C – Section 270AA

 The Assessing Officer shall grant immunity from imposition of penalty under section 270A and
initiation of proceedings under section 276C or section 276CC, where the proceedings for
penalty under section 270A has not been initiated under the circumstances referred to in sub-
section (9) of the said section 270A.

 Such immunity is not available where either

 (i) penalty is initiated in respect of misreporting of income, or
 (ii) tax and interest as per demand notice is not paid within the time specified in the
demand notice,
 (iii) application is not made in the prescribed form within one month from the end of
the month in which order of assessment or reassessment is received by the assessee.

73
Non filing of return of income – Sec 276CC

 If a person wilfully fails to furnish in due date ;

 the return of fringe benefits which he is required to furnish under sub-section (1) of section
1 5WD or by notice given under sub-section (2) of the said section or section 1 5WH 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,

 Severe punishment prescribed if the amount of tax evaded is more than INR 25 Lacs.

 No prosecutions if the return is filed before the end of Assessment year.

 For Assessee other than Companies, no prosecutions if the Total Tax as reduced by advance tax
and TDS is less than INR 3,000/-.

 Followed in case of Karan luthra v. luthra (CRL.M.C. 3385/2016 & Crl.M.A.

14338/2016,1336/2017, dtd. 14 september 2018, the high court has held that the taxpayer had
committed an offence under Section 276CC of the Act due to failure to furnish the tax return within
the time limit specified under the Act. Further, the failure to abide by the notices issued byn the tax
officer would also constitute am offence, distinct from the offence that had been earlier committed
by virtue of the breach of Section 139(1) of the Act.
74
Non filing of return of income – Sec 276CC
 Various courts have held that conviction under section 276CC of the Act was warranted only when
willfulness in failure to submit the return is established beyond all reasonable doubts and there should
be present mens rea, a bad movie, and guilty mind in the following cases:

 Union of India v. Bhavecha Machinery [2010] 320 ITR 263 (MP)

 ITO v. Autofill [1990] 184 ITR 47 (AP)

 Gopalji Shaw [1988] 173 ITR 554 (Cal)

 Narayan v. Union of India [1994] 208 ITR 82 (MP)

 The Patna High Court while dealing with this issue in case of Lal Saraf v. State of Bihar [1999] 235
ITR 166 (Pat) held that failure to file a tax return before a due date could not be said to be willful on
the part of the taxpayer and, therefore, prosecution launched against him u/s 276CC was liable to be
quashed.

 The courts in following cases have held that if the proceedings for imposition of penalty could not be
sustained, the prosecution proceedings cannot be launche.

 Gopalji Shaw [1988] 173 ITR 544 (Cal)

 Bhubaneshwar Prasad Bhaskar v. state [1997] 225 ITR 509 (Patna)

 Sureshchand Gupta v. union of India [1988] 233 ITR 783 (MP)

75
Non filing of return of income – Sec 276CC

 As per proviso to Section 276CC of the Act a person shall not be prosecuted for failure to furnish tax return in due
time if the tax return is furnished by him before the expiry of the assessment year or if the tax payab;le by such
person not being a company on total income determined on regular assessment, as reduced by the advance tax, if
any, paid, and any tax deducted at source, does not exceed INR 3,000/-

 While presenting the Finance Bill, 2018 in the Lok Sabha, the finance minister in his speech stated that
“Prosecution shloud lie against companies for non-filling of return irrespective of the fact that whether any tax is
payable or not.

 In the case of P.Jayappan v. ITO [1984] 149 ITR 696 SC, the Supreme Court held that the two types of
proceedings could run simultaneously and that one need not wait for the other.

 In the case of Kalluri Krishan Pushkar v. DCIT [2016] 236 Taxman 27 (AP), the Andhra Pradesh High Court held
that the existence of another mode of recovery could not act as a bar to the initiation of prosecution proceedings.

76
 Supreme Court in Sasi enterprises (2014) ruled that Prosecution for offence u/s 276CC for failure to file ROI can be initiated du

In section 276CC of the Income-tax Act, in the proviso, in clause (ii), for sub-clause (b), the following sub-clause shall be substituted wi
“(b) the tax payable by such person, not being a company, on the total income determined on regular assessment, as reduced by the a

77
Abetment of False Returns- Sec 278
 If a person abets or induces in any manner another person

 to make and deliver an account or

 a statement or
 declaration relating to any income or any fringe benefits chargeable to tax
 which is false and which he either knows to be false or does not believe to be true or
to commit an offence
 The provisions relating to abetment of an offence are dealt with in Chapter V of the Indian
Penal Code. S. 107.
 It is seen that the offence of abetment is committed in three ways, namely –
(a) by instigation;
(b) by conspiracy; or
(c) by intentional aid.

 Severe punishment prescribed if the amount of tax evaded is more than INR 25 Lacs
 For an offence of abetment, it is not necessary that the offence should have been committed.
A man may be guilty as an abettor, whether the offence is committed or not. (Faunga Kanata
Nath v. State of Uttar Pradesh, AIR 1959 SC 673).

 Further, a person can be convicted of abetting an offence, even when the person alleged to
have committed that offence in consequence of abetment, has been acquitted. (Jamuna
Singh v. State of Bihar, AIR 1967 SC 553, 1967 SCR (1) 469.
78
Abetment of False Returns- Sec 278
 In Umayal Ramanathan v. Income Tax Officer (1992) 194 ITR 487 (Mad), it was held that even if it is decided
that the prosecution against an assessee under section 276C is to be dropped, the prosecution against
the person accused of abetment under section 278 of false return can continue.

 In Smt. Sheela Gupta v. IAC (2002) 253 ITR 551 (Delhi) (HC) (552) , the Court held that, when the Tribunal
has set aside the order of the Assessing Officer, the complaint filed for abetment does not survive hence
the complaint was quashed.

79
Abetment of False Returns- Sec 278 – Liability
of Professionals
 In P. D. Patel v. Emperor, (1933) 1 ITR 363 (Rangoon)(HC), an advocate deliberately
omitted in a return submitted by him a certain amount of money and persisted in taking up
false defenses. The Government lost a huge amount because of the exclusion of the said
amount in the return filed by the advocate on behalf of his client. A fine for the said offence
was levied by the trial court on an appeal, the High Court took a serious view, of the offence
and held that in a case like this, the punishment should be deterrent and exemplary and the
assessee was ordered to be kept in simple imprisonment for one month.

 In Navrathna & Co. v. State (1987) 168 ITR 788 (Mad.)(HC)(790). The court held that, merely
preparing returns and statement on the basis of the accounts placed before the Chartered
Accountant, the question of abetment or conspiracy cannot arise.

 In Lalji & Co v. Delhi Administration (1985) 154 ITR 728 (Del), it was held that mere introduction of
certain parties to the assessee in whose names the assessee has created certain fictitious entries of
loans does not amount to abetment or inducement so as to invoke provisions section 278. The court
held that criminal complaint must be independent of the assessment order passed by complaintant.

Compounding of s
Offence
Compounding of Offences – Section
279
 The offences referred to in Chapter XXII are compoundable. The Principal Chief Commissioner or
Chief Commissioner or a Principal Director General or Director General have been empowered by
section 279(2) to compound any offence referred to in section 279(1). The offences can be
compounded either before or after the institution of proceedings.

Guidelines of CBDT – F. No. 285/35/2013 IT(Inv.V)/108 dated 23rd December 2014

Revised
Guidelines of CBDT – F. No. 285/08/2014 IT(Inv.V)/147 dated 14th June 2019

 Compounding of offences is not a matter of right. However, offences may be compounded by the
competent authority on his satisfaction of the eligibility conditions prescribed in these guidelines
keeping in view factors such as conduct of the person, nature and magnitude of the offence and facts
and circumstances of each case [Para 4 of the guidelines]

 Prosecution instituted under the Indian Penal Code, if any, cannot be compounded as per these
guidelines. However, section 321 of Criminal Procedure Code, 1973 provides for withdrawal of such
prosecutions [Para 5 of the guidelines]

66
 Eligibility conditions for compounding are – [Para 7 of the guidelines]

i) An application is made to the Pr. CCIT/CCIT/Pr. DGIT/DGIT having jurisdiction over the case for compounding of the offence(s) in the prescribed format (Annexure-1) in the form
of an affidavit on a stamp paper of Rs.100/-.

ii) The compounding application may be filed swo-moto at any time after the offence(s) is committed irrespective of whether it comes to the notice of the Department or not. However,
no application of compounding can be filed after the end of 12 months from the end of the month in which prosecution complaint, if any, has been filed in the court of law in respect of the
offence for which compounding is sought.

iii) The person has paid the outstanding tax, interest (including interest u/s. 220 of the Act), penalty and any other sum due, relating to the offence for which compounding has
been sought before making the application. However, if any related demand is found outstanding on verification by the Department, the same should be intimated to the applicant
and if such demand including interest u/s 220 is paid within 30 days of the intimation by the Department, then the compounding application would be deemed to be valid.

iv) The person undertakes to pay the compounding charges determined in accordance with these Guidelines by the Pr. CCIT/CCIT/Pr. DGIT/DGIT concerned.

v) The person undertakes to withdraw appeals filed by him, if any, related to the offence(s) sought to be compounded. In case such appeal has mixed grounds, one or more of which may
not be related to the offence(s) under consideration, an undertaking shall be given for withdrawal of such grounds as are related to the offence to be compounded.

vi) Any application for compounding of offence u/s 276B/276BB of the Act by an applicant for any period for a particular TAN should cover all defaults constituting offence u/s
276B/276BB in respect of that TAN for such period.

67
Compounding of Offences – Section
279
..Contd.
Prosecution proceedings are launched with the previous sanction
therefore the compounding powers are given to the higher authorities like PCCIT, CCIT and DGIT
of CIT or CIT(A);

 Notwithstanding anything contained in the guidelines, the Finance Minister may relax restrictions for
compounding of an offence in a deserving case on consideration of a report from the board on the petition
of an appellant.

 These guidelines replace the existing guidelines issued vide F. No 285/90/2008, dated May 10 2008
with effect from January 1, 2015. The applications for compounding received before 01.01.2015 shall be
dealt with as per the guidelines issued in 2008.
 Category A offences include 11 clauses and Category B offences include 9 cases.

 Para 8 of the guidelines includes details of offences generally not to be compounded. It includes;( please
refer guidelines for all exceptions)

69
CCIT/DGIT having a jurisdiction over the person can pass an order for compounding. However in case of category B offence, if the com

Application for compounding to be disposed of within180 days of the filing. Compounding order to be passed within 60 days of paym

69
[2018] 89 taxmann.com
327(Delhi) Vikram Singh
Section 279 of the Income-tax Act, 1961 - Offence and prosecution –

 Prosecution to be at instance of Chief Commissioner/Commissioner (Compounding of offence)

- Whether compounding fee is in nature of a payment made to avoid punishment for a criminal
offence - Held, yes
 Whether amount of compounding charges is not to be merely compared with principal and
interest charged but has to be adjudged from point of view of long duration during which there is
wilful
non-payment of taxes - Held, yes
 Whether only because in a particular case, due to delay attributable purely to petitioner, amount
of compounding charges turn out to be much higher than principal and interest, it does not per se
render compounding charges illegal or arbitrary - Held, yes
 Whether where petitioner voluntarily agrees for compounding of offence and undertakes to
department to pay compounding charges and to withdraw his appeal, he is to be directed to be
bound down by same - Held, yes [Paras 48, 49, 50 and 56]
 Prosecution to be at instance of Commissioner (Compounding of offence) - Whether Explanation
to section 279 clearly vests CBDT with powers to issue circulars, orders, instructions or directions
for proper composition of offences - Held, yes

70
 Whether CBDT Guidelines on Compounding of Offences, 2014, are exhaustive in nature and
provide different compounding charges for different offences and guidelines do not reflect
any exercise of power which is arbitrary or illegal - Held, yes [Para 32]

70
 [2016] 75 taxmann.com 57 (Madras)
V.A. Haseeb & Co. (Firm)
Court assessee had filed an appeal and same was pending, said appeal was also a 'proceeding' as contemplated under section 279(2); Revenue Autho

 The term 'proceedings' is not defined in the Income Tax Act, 1961. The term 'proceedings' is a
term of wide amplitude and comprehensive and generally speaking means a prescribed course of
action for enforcing a legal right. It is not a technical expression with a definite meaning attached
to it, but one the ambit of whose meaning would be governed by statute.

 Supreme Court - Babu Lal v. M/s. Hazari Lal Kishori Lal and others, AIR 1982 SC 818, 824, it
was held thus:-"17.The word 'proceeding' is not defined in the Act. Shorter Oxford Dictionary
defines it as carrying of an action at law, a legal action or process; any act done by authority of a
Court of law; any step taken in a cause by either party. The term 'proceeding' is a very
comprehensive term and generally speaking means a prescribed course of action for enforcing a
legal right. It is not a technical expression with a definite meaning attached to it, but one the ambit
of whose meaning would be governed by statute. It indicates a prescribed mode in which judicial
business is conducted. The word 'proceeding' in S.22 includes execution proceedings also".

 In V.A. Haseeb and Co. (Firm) v. CCIT (2017) 152 DTR 306 (Mad.) (HC), the court held that, application
for compounding cannot be rejected merely because of the conviction of assessee in the Criminal Court.
72
 In Punjab Rice Mills v. CBDT (2011) 337 ITR 251 (P&H) (HC), it was held that the Court will not compel
the commissioner to compound the offence or interfere unless the exercise of discretionary statutory power
was held to be perverse or against the due process of law.

 Section 276C(1), compounding fee has to be computed on basis of 100 per cent of tax sought to be evaded by
assessee not amount of income sought to be evaded- Suppernova System (P.) Ltd. v. CCIT [2019] 260
Taxman 345 (Gujrat).

72
Category of Offences for compounding –
Category ‘A’
Section Nature of Default Compounding fee

276 (Prior to 01/04/1976) – Failure to make payment or deliver

returns statements or allow inspection.

276AA (Prior to 01/10/1986) – Failure to comply with the

provisions of section 269 AB or section 269I .

276B (Prior to 01/04/1989) – Failure to deduct or pay tax 3% per month for first offence.

276B (w.e.f 01/04/1989 and up to 30/05/1997) – 5% per month for subsequent offence.
Failure to pay tax deducted at source under
chapter XVII-B
276B Failure to pay tax deducted at source under Period from TDS to be
chapter XVII-B or tax payable under deducted till the date of
nd
section 115-O or 2 proviso to section actual payment.
194B to the credit of the Central
Government (w.e.f 01/06/1997)
276BB Failure to pay the tax collected at source Same as above
73
Category of Offences for compounding –
Category ‘A’
Section Nature of Default Compounding fee

277 False statement in verification etc. with reference to 10% of compounding fee of main
Category ‘A’ offences offence

278 Abetment of false return etc. with reference to 10% of compounding fee of main
Section Category
Nature of‘A’ offences
Default offence Compounding fee

275A Contravention of order made u/s 132(3) No specific fee,

Section Nature of Default Compounding fee
minimum Rs.25,000
275B Failure to comply with the provisions of section 132(1)(iib) No specific fee,
276C(1) Willful attempt to evade tax etc
minimum Rs.25,000

276 a)Removal,
In the cases involving taxtransfer
concealment, sought toor be evaded of property
delivery i. toWhere such Notaxspecific
sought fee, to be evaded
(wheretax
thwart evasion of interest and penalty may be
recovery exceeds Rs. 25 lakhs, Rs.25,000
minimum 150% of the tax
consequential) sought to be evaded.
Note: Offences u/s 275A, 275B and 276 of the Act will no longer compoundable as per
Govt. Notification F.No. 285/08/2014-IT(Inv.V)/147 ii. dated In any14/06/2019.
other case, 125% of the tax
sought to be evaded.
276A Failure to comply with provisions of section 178(1) and (3) or No specific fee,
b)fails to part
In cases with anyattempt
involving assets to
of evade
the company
only the: company
100%inof penalty sought minimum to be evadedRs.25,000
liquidation
penalty For example, penalties which are not directly related to tax evasion, such as

73
276AB Failure to comply with provisions of sections 269UC, 269UE No specific fee,
and 269UL (restrictions on transfer of properties - purchase of minimum Rs.25,000
properties by Government)
Category of Offences for compounding –
Category ‘A’
penalty u/s 271DA etc .
3% per month or part of the month of the amount of tax, interest and penalty, the
276C(2) Willful attempt to evade payment of any taxes, payment of which was sought to be evaded, for the period of default. The period of
default for calculating the compounding fees shall be as under:
interest and penalty etc.
i. Where tax, interest or penalty as per notice of demand under section 156 of
the Act is not paid, from the date immediately following the due date of
payment till the date of actual payment.

ii. Where the self-assessment tax was not paid as specified in section 140A of the
Act, from the due date of filing of return of income u/s 139(1) of the Act to the
date of actual payment.

* For computing the period of default, any period of stay of demand granted by any
Income Tax Authority, the Appellate Tribunal or Court shall be excluded.

276CC Failure to furnish returns of Income (a) In case of default in furnishing the return of income on or before due date
u/s139(1) of the Act, the default period will be computed from the due date
u/s139(1) to the date of actual filing of return or completion of assessment,
whichever is earlier and compounding fees will be

i. Where tax on returned income as reduced by tax deducted at source

and advance tax, if any exceeds Rs. 25 lakhs, Rs.4000/- per day.

ii. In any other case; Rs. 2000/- per day.

However, in cases where the difference between the aggregate of taxes

paid/payable on the returned income and the aggregate of taxes already
paid under any provision of the Act as enumerated in section 140A(1)
of the Act, is less than Rs.1,00,000/-, the compounding fees will be
restricted to that said difference amount subject to a minimum of Rs.
10,000/-.

(b) In case of offence of non-compliance of notice u/s 142(1)(4) of the Act, the
compounding fees shall be charged at the rate of Rs.4000/- per day where the tax on
returned income as reduced by tax deducted at source and advance tax, if any exceeds

73
Category of Offences for compounding –
Category ‘A’
Rs.25 lakhs and Rs.2,000/- per day in other cases from the due date u/s 139(1) to the
date specified in the notice u/s 142(1), and at the rate of Rs. 5000/- per day where tax
on returned income as reduced by tax deducted at source and advance tax, if any
exceeds Rs.25 lakhs and Rs.3000/- per day in other cases, for the period between date
specified in notice u/s 142(1) to the date of filing of return of income or completion of
assessment, whichever is earlier.

(c ) In case of offence of non-compliance of notice u/s 148 of the Act, the

compounding fees shall be charged at the rate of Rs.5000/- per day where tax on
returned income as reduced by tax deducted at source and advance tax, if any exceeds
Rs.25 lakhs and Rs.3000/- per day in other cases, from the date specified in such
notice till filing of return or assessment whichever is earlier. In case, there was also
default of not filing return of income within due date prescribed u/s 139(1), then for
the period between due date u/s 139(1) to the date specified in the notice u/s 148,
compounding fees at the rate of Rs.4000/- per day where the tax on returned income as
reduced by tax deducted at source and advance tax, if any exceeds Rs.25 lakhs and
Rs.2,000/- per day in other cases from the due date u/s 139(1) to the date specified in
the notice u/s 148 will also be charged.

d) In case of offence of non-compliance of notice u/s 153 A/153C of the Act,

the compounding fees shall be charged at the rate of Rs. 5,000/- per day where tax on
returned income as reduced by tax deducted at source and advance tax, if any exceeds
Rs.25 lakhs and Rs.3,000/- per day in other cases, from the date specified in such
notice till filing of return or assessment whichever is earlier. In case, there was also
default of not filing return of income within due date prescribed u/s 139(1), then for
the period between due date u/s 139(1) to the date specified in the notice u/s
153A/153C, compounding fees at the rate of Rs.4000/- per day where the 17 tax on
returned income as reduced by tax deducted at source and advance tax, if any exceeds
Rs.25 lakhs and Rs.2,000/- per day in other cases from the due date u/s 139(1) to the
date specified in the notice u/s 153A/153C will also be charged.

(e) In case where return of income filed is not only late but Self Assessment
Tax is not paid:

i. These constitute two separate offences which are to be

handled separately under sections 276CC and 276C(2), and

73
Category of Offences for compounding –
Category ‘A’
ii. li. Action u/s 276C(2) is to be undertaken only after the
issue of demand notice u/s 143(1)/143(3) ete.

In cases where no return of income was filed, the compounding fee is computed upto
the date of completion of assessments. In such cases, for computing the slab prescribed
in Para 13.4.1 tax on assessed income (as reduced by tax deducted at source and
advance tax) will be adopted.
In case the income determined u/s 143(1) is more than the returned income, tax on the
same will be applied for computing tax slab prescribed above.

276CCC Failure to furnish return of income as required The fee for this offence shall be calculated in the
under section 158BC same manner as for offences u/s 276CC was
prescribed in the Compounding Guidelines dated
16.05.2008.

276D Failure to produce accounts and documents No specific fee, minimum Rs.25,000

276DD Failure to comply with the provisions of Section 269SS (prior to A sum equal to 20% of the amount of any loan or deposit
01.04.89) accepted in contravention of the provisions of Section 269SS.

276E Failure to comply with the provisions of Section 269T A sum equal to 20% of the amount of deposit
(prior to 01.04.89) repaid in contravention of the provisions of
Section 269T.

277A Falsification of books of accounts or documents No specific fee, minimum Rs.25,000

etc.

73
Category of Offences for compounding –
Category ‘A’
277 False statement in verification etc. with 10% of compounding fee of main offence
reference to
Category ‘B’ offences
278 Abetment of false return etc. with reference to 10% of compounding fee of main offence
Category ‘B’ offences

Power of Central Government to grant

immunity. S. 291

S. 291(1) of the said Act, confers on the Central Government a power, under specified circumstances, to
grant immunity to the assessee, from prosecution for any offence under the Direct taxes, IPC or any
73
Category of Offences for compounding –
Category ‘A’
other Central Act to a person, with a view to obtain evidence. This is subject to condition of him making
a full and true disclosure of the whole circumstances relating to the concealment of income or evasion of
payment of tax on income. However, sub- section (3) of this section, empowers the Central Government
to withdraw the immunity so granted, if such person has not complied with the condition on which such
immunity was granted or is wilfully concealing anything or is giving false evidence.

Limitation for initiation of proceedings

Chapter XXXVI of the Code of Criminal Procedure, 1973 lays down the period of limitation beyond which no
Court can take cognizance of an offence which is punishable with fine only or with imprisonment not
exceeding three years. But, for Economic Offences (In respect of applicability of Limitation Act, 1974) it is
provided that nothing in the aforesaid chapter XXXVI of the Code of Criminal Procedure, 1973, shall apply
to any offence punishable under any of the enactment specified in the Schedule. The Schedule referred to
includes Income tax, Wealth tax, etc.

In Friends Oil Mills & Ors. v. ITO (1977) 106 ITR 571 (Ker.) (HC), dealing with S.277 of the Act, the Hon’ble
Kerala High Court held that the bar of limitation specified in section 468 of the Code of Criminal Procedure,
1973 would not apply to a prosecution, under the Income-tax Act (also refer Nirmal Kapur v. CIT (1980) 122
ITR 473 (P&H) (HC). In view of this, as there is no fixed period of limitation for initiation of proceedings under

73
Category of Offences for compounding –
Category ‘A’
the Act, the sword of prosecution can be said to be perpetually hanging on the head of the assessee for the
offences said to have been committed by him.
It may be noted that this may result in injustice to the assessee because a person who is in a better position
to explain the issue or things in the initial stage, may not be able to do so later, if he is confronted with the
act of commission of an offence under a lapse of time.

In Gajanand v. State (1986) 159 ITR 101 (Pat) (HC)), the Hon’ble High Court held that where the Criminal
Proceedings had proceeded for 12 years and the Income tax department failed to produce the evidence,
the prosecution was to be quashed.

In State of Maharashtra v. Natwarlal Damodardas Soni AIR 1980 SC 593, 1980 SCR (2) 340, the Court held that a
long delay along with other circumstances be taken in to consideration in the mitigation of the sentence.

Where there is inordinate delay in initiating prosecution proceedings, the complaint is liable to be dismissed
as in the case of Rakoor Industries P.Ltd v. R.L. Ball, ITO (2011) 332 ITR 56(Del)
In Narain Dev Dhablania v. ITO (2003) 262 ITR 206 (P&H)(High Court) held that though the cause of action
for initiating prosecution is furnished on the date when income is concealed or on date when concealment
becomes known to the Department, once proceedings are finalised, the prosecution has to be commenced
within a reasonable period. (A.Y. 1975-76).

73
Category of Offences for compounding –
Category ‘A’
In Shravan Gupta v. ACIT (2015) 378 ITR 95 (Delhi)(HC) held that failure to produce accounts or documents-
Accounts had been submitted when criminal complaint was issued-Sanction for prosecution was held to be
not valid [S. 279, Criminal Procedure Code, 1973, S. 482.]

T. D. Gandhi, ITO v. Sudesh Sharma (2015) 230 Taxman 572 (P&H)(HC)

held that Falsification of books –False TDS certificate-Tax practitioner-Refund on the basis of TDS
certificates- Respondent had no role in preparing TDS certificates- [IPC, S. 378 (4), 418, 465, 471]

73
Million Dollar Question ???

Whether to opt for

Compounding

Or
Continue with the Tax/Court proceedings
?
Key Takeaways

 Ensure to make proper submission to the CIT against the show case notice received
U/s 279 of ITA.

 Even CIT(A) during appellate proceedings has a right of enhancement and initiate
Prosecution proceedings.

 Avail option of Compounding judiciously.

 Pleading non guilty and face the trial before the court.

 Discharge the onus by proving “ NO MENS REA” or No Wilful intention or test of

reasonableness as and when relevant.

 Demonstrate to the court that there is no against you and charges can not be framed.

 Use the remedy available U/s 482 of CrPC before the High Court to Quash the
proceedings in the appropriate cases
 Latest Judicial Pronouncements
(Adverse)
 Delhi High Court in CRL.M.C. 3385/2016 & Crl.M.A. 14338/2016, 1336/2017, 11516/2017dated 14
September, 2018 in Karan Luthra vs ITO
 Delhi High Court (HC) held that the prosecution proceeding stands committed upon non- filing of income tax
return within the prescribed due date under section 139(1) of the Income-tax Act, 1961 (Act). By upholding
the Trial Magistrate’s order of framing prosecution charges under section 276CC of the Act, the HC rejected
taxpayer’s reference of the proviso to section 276CC of the Act, and the contention that there was no tax
payable but rather the taxpayer was entitled to a refund.

 High Court relied on Sasi Enterprises v ACIT [2014] 361 ITR 163 (SC) - prosecution proceedings u/s 276CC stands
committed upon failure to file Income-tax return and the proviso to section 276CC of the Act, does not state that
an offence has not been committed by the categories of taxpayers who fall within the proviso. The proviso
cannot control the main section but only provides some benefit to certain
categories of taxpayers.

 Bombay High Court in WPNO.2537 OF 2018 dated 15.10.2018 Ramprakash Biswanath Shroff vs
The Commissioner of Income Tax (TDS) and Ors
 Default by employers in not issuing Form 16 TDS certificates to employees prima facie makes employers liable to
prosecution u/s 405 of the Indian Penal Code (IPC). Dept should provide information of such defaulters so that
those seeking employment etc would know in advance as to how the employers are complying with law.

 Jammu & Kashmir High Court in CRMC No. 205/2015, IA No. 01/2015 in Arun Arya vs
ITO
 The Taxation Laws S. 278E has carved out an exception to this rule. The said Section places the burden of proving
the absence of mens rea upon the accused and also provides that such absence needs to be proved not only to
the basic threshold of „preponderance of probability‟ but „beyond reasonable doubt‟.
 In every prosecution case, the Court shall always presume culpable mental state
and it is for the accused to prove the contrary beyond reasonable doubt.
Nodoubt, this presumption is a rebuttable one.
 The ground taken that there was no wilful default on behalf of petitioner in
concealing the income is not tenable, because it is factual defence, which is to
be proved during course of trial. The criminal court has to judge the case
independently on the evidence placed before it.
THANK YOU!!!

AJOY KUMAR SINGH (IRS)

Mobile No. : +91 9477330760, 8240737883
Email : [email protected]