Summary
Prosecution under Section 276C(1) of the Income Tax Act, 1961 launched without any ITAT confirmation of concealment penalty, in disregard of the Department's binding circular of 24.04.2008, and continued even after the Settlement Commission granted immunity from penalty on a finding of full and true disclosure, held to be an abuse of process. The High Court's refusal to quash was set aside, the complaint quashed and costs imposed on the Revenue.
Issues
- Whether continuation of a prosecution under Section 276C(1) of the Income Tax Act after the Settlement Commission's order under Section 245D(4) granting immunity from penalty amounts to abuse of process.
- Whether departmental circulars and the Prosecution Manual prescribing when a prosecution under Section 276C(1) may be launched are binding on income-tax authorities.
- Whether the High Court was justified in dismissing the quashing petition, and what relief should follow.
Provisions considered
- Section 276C(1) and (2), Income Tax Act, 1961Sub-section (1) punishes a wilful attempt to evade any tax, penalty or interest chargeable or imposable, or under-reporting of income; sub-section (2) punishes a wilful attempt to evade payment. The Court held the two operate in separate spheres and at different stages; the gist of sub-section (1) is the wilful attempt to evade the very imposition of liability, and mens rea must be proved. (¶¶ 11, 12, 17, 18)
- Section 279(1), Income Tax Act, 1961No person may be proceeded against for an offence under Section 276C except with the previous sanction of the Principal Commissioner or Commissioner. The prosecution was lodged by the DDIT on sanction of the PDIT; the Court noted that sanction, but found the authorities had not followed the binding circular while exercising it. (¶¶ 3, 13, 14, 32, 33)
- Section 245H(1) with provisos, Income Tax Act, 1961The Settlement Commission may grant immunity from prosecution and penalty to an applicant who co-operates and makes full and true disclosure; the first proviso bars immunity where prosecution was instituted before receipt of the application under Section 245C. The Court read the first proviso as saving an earlier prosecution on a literal construction, but held this does not affect the basic principle that the prosecution must itself prove a wilful attempt to evade. (¶¶ 16, 17, 18, 36)
- Sections 245C and 245D(4), Income Tax Act, 1961The appellant applied for settlement under Section 245C after the complaint was filed; the Settlement Commission, under Section 245D(4), granted immunity from penalty on finding full disclosure and no suppression, while declining immunity from prosecution because the quashing petition was pending. (¶¶ 4, 34, 35)
- Section 245-I, Income Tax Act, 1961Every settlement order under Section 245D(4) is conclusive as to the matters stated in it and such matters cannot be reopened in any proceeding under the Act or any other law. The Court held the Commission's findings of full disclosure and absence of suppression were conclusive, making it incumbent on the authorities to inform the High Court that continuing the prosecution would be an abuse of process. (¶¶ 19, 35, 37)
- Section 119, Income Tax Act, 1961CBDT circulars issued under this provision, including the 2019 clarification requiring Collegium approval where the amount sought to be evaded is Rs. 25 lakhs or below and ITAT confirmation of penalty before launching prosecution under Section 276C(1), were held binding on the authorities administering the Act. (¶¶ 23, 27, 31)
Held
- Section 276C(1) and (2) operate in separate spheres: sub-section (1) targets wilful attempts to evade tax, penalty or interest before they are charged or imposed, or under-reporting of income, while sub-section (2) targets wilful attempts to evade payment. What sub-section (1) punishes is the wilful attempt, not actual evasion; a conscious and intentional effort to evade must be shown, distinguishing it from bona fide errors or differences in interpretation, and mens rea must be proved. (¶¶ 12, 18)
- The first proviso to Section 245H(1) saves a prosecution instituted before receipt of the settlement application, but neither the proviso nor the settlement scheme alters the basic principle of criminal law that the prosecution must prove its case; where no wilful attempt to evade can be shown, continuing such a prosecution is futile. (¶¶ 17, 18)
- Circulars issued by the Revenue are binding on the authorities administering the Act and may tone down the rigour of the statute (Ranadey Micronutrients, Paper Products, UCO Bank, Ratan Melting, J.K. Lakshmi Cement, Merino Panel). The circular dated 24.04.2008, reaffirmed by the Prosecution Manual, 2009 and the CBDT clarification of 09.09.2019, requires that prosecution under Section 276C(1) be processed only where the concealment penalty exceeding Rs. 50,000 has been confirmed by the ITAT, and was in force when sanction was granted; it was therefore binding on the PDIT and DDIT. (¶¶ 20, 21, 22, 23, 24, 31, 32)
- The complaint was filed before any ITAT finding of concealment or imposition of penalty, nothing on record showed a wilful attempt to evade, and the Revenue offered no explanation for not following its own procedure; the prosecution was lodged and continued in blatant disregard of the binding circular and departmental guidelines, which cannot be treated as justified or lawful. (¶¶ 33, 36)
- The Settlement Commission's order recording that the assessee disclosed all material facts, with no suppression and no variance in the manner of earning the additional income, is conclusive under Section 245-I. Once it was passed, the authorities were bound to inform the High Court that continuation of the prosecution would be an abuse of process, particularly as no finding of wilful evasion was recorded, and the High Court itself ought to have examined whether continuing the prosecution would serve any purpose; its approach was entirely misdirected. (¶¶ 35, 37)
Result
Appeals allowed. Impugned order of the High Court set aside; the prosecution lodged by the Revenue against the appellant (EOC No. 242 of 2018) quashed. Costs of Rs. 2,00,000 imposed on the Revenue, payable to the appellant. Pending applications disposed of.