When Concealment penalty is deleted on merits, there will be automatic cancellation of prosecution – SC
Section 276C of the Income Tax Act shows that it provides prosecution for wilful attempt to evade the chargeability or imposition or payment of tax, penalty or interest. The said provision is divided in two parts. Sub-section (1) deals with ‘wilful attempt’ to ‘evade’ tax, penalty or interest, which is “chargeable” or “imposable” or “under-reporting of income” whereas sub-section (2) deals with ‘wilful attempt’ to ‘evade’ ‘payment’ of tax, penalty or interest.
Under sub-section (1), a ‘wilful attempt’ by an assessee to ‘evade’ the chargeability or imposition of tax, penalty or interest of an income either by under-reporting of income or non-reporting of income which is achieved either by falsification of books of accounts or non-recording of income, may lead to prosecution. Sub-section (1) lays emphasis on the evasion of tax, etc., before charging or imposition or under reporting of income. In another words, all the acts done by an assessee whereby the income is not offered to tax either due to falsification of books of accounts or non-reporting of income or under reporting of income, etc, would be a punishable offence u/s. 276C(1) of the Act.
Under sub-section (2), a ‘wilful attempt’ by an assessee to evade the payment of tax either by not paying the due taxes, interest or penalties or claiming excessive relief in the return of income thereby reducing the quantum of taxes payable. In another words, the provisions of sub-section (2) would operate when the payment of tax, penalty or interest is due and an attempt is made to evade such payment.
Let us refer to the case of K. C. Builders v. ACIT (2004), where the issue under consideration was whether prosecution under Section 276C of the IT Act survives after cancellation of penalty under Section 271(1)(c) or not
Facts of the Case:
- The Assessee was a partnership firm engaged in the business of construction and sale of flats.
- The Assessee filed revised Returns of Income (ROI) as per the approved valuer’s report for AY 1983-84 to 1986-87 as the original ROIs were found to be defective with regard to cost of construction.
- The revised ROI were accepted by the Department and assessments were completed.
- The assessing authority treated the difference between the income as per original ROI and revised ROI as concealed income.
- The ACIT levied penalties under section 271(1)(c) of the Income-tax Act, 1961 for all the aforesaid four AYs. Accordingly, penalty proceedings were initiated.
Proceedings of Appellate Authorities
- Commission of Income Tax (Appeals) [CIT(A)] confirmed the Penalty Order under section 271(1)(c) of AO and thereafter prosecution proceedings were initiated for a conspiracy to evade tax under section 276C and 278B of IT Act along with Section 120B, 34, 193, 196 and 420 of the Indian Penal Code, 1860 (IPC) before Addl. Chief Metropolitan Magistrate.
- The appellants had preferred an appeal before the Appellate Tribunal against the consolidated order passed by CIT(A) for AY’s 1983-84 to 1986-87.
- The Appellate Tribunal after verifying the records, found that the additions were on the basis of settlement between the assessee’s and the Department and represented voluntary offer made by the assessee.
- Therefore, in such circumstances the ITAT applying the principles laid down in the case of Sir Shadilal Sugar & General Mills Ltd. & Anr. v. CIT (1987) (SC) held that there was no concealment of income by the assessee and accordingly the penalties were cancelled and allowed the appeals.
Application before Addl. Chief Metropolitan Magistrate
The appellants thereupon moved an application before the Addl. Chief Metropolitan Magistrate, praying the Court for adjourning the proceedings in the above case, however the Magistrate permitted the appellants to mark the order of the Appellate Tribunal in evidence at the appropriate stage of trial for which prosecution had no objection.
Application before the High Court (HC)
- Thereafter the appellants preferred a criminal revision under sections 397 and 401 of the Criminal Procedure Code, 1973, (CrPC) before the High Court for setting aside the order passed by the Addl. Chief Metropolitan Magistrate.
- The High Court rejected the criminal revision vide its impugned order held that the Appellate Tribunal’s order was not applicable since it was not marked as defence document whereas the fact remains that the order was passed at a subsequent date.
- Whereas the fact remained that the defence documents were marked earlier to the order passed by the Appellate Tribunal which was immediately thereafter brought to the notice of the trial Court even by the prosecution in their own application.
Observations of the Supreme Court (SC)
- In the case of G.L. Didwania & Anr. v. ITO (1997), SC had held that the whole question was whether the appellant made a false statement regarding the income which according to the assessing authority had escaped assessment and so far as this issue was concerned, the finding of the ITAT was conclusive and hence the prosecution could not be sustained.
- Accordingly, SC quashed the criminal proceedings and allowed the appeal filed by the assessee.
- The penalties levied under Section 271(1)(c) of the IT Act were cancelled by the respondent by giving effect to the order of the Appellate Tribunal.
- It was settled law that levy of penalties and prosecution under Section 276C of the IT Act were simultaneous.
- Hence, once the penalties were cancelled on the ground that there was no concealment, the quashing of prosecution under Section 276C was automatic.
- In this instant case, the charge of conspiracy was not proved to bring home the charge of conspiracy within the ambit of Section 120B of IPC.
- As there was absence of dishonest and fraudulent intention, the question of committing offence under Section 420 of the IPC did not arise.
In simple words, when Concealment penalty is deleted on merits, there will be automatic cancellation of prosecution.