TaxTMI 
TaxTMI 
TaxTMI 
In view of the various changes in the policy & economic liberalization effected since 1990, the changes in the value of the rupee & need to avoid arrests/prosecutions in relatively petty offence cases under the new environment, the prosecution guidelines were revamped by CBIC in year 1999. Prosecutions are considered and ought to have been launched after very careful consideration of the nature of offence, the role of the person concerned and evidence available to substantiate the guilty mind/ knowledge/mensrea etc. Custom Officers launch prosecution in variety of cases like cases involving unauthorized importation in baggage / under Transfer of Residence Rules; cases relating to importation of trade goods (i.e. appraising cases) involving deliberate mis-declaration/mis-classification with a view to importing banned or highly restricted items or with a view to attempt to defraud revenue or to smuggle goods in the guise of trade consignment; cases of attempted unauthorized exportation/smuggling of currency by outgoing passengers or town seizures etc.
Other than commercial fraud cases/appraising cases, statute enables Customs to file prosecution in myriad of other offences which are not merely economic offence simplictors such as smuggling of sensitive items like narcotic drugs and psychotropic substances, arms, ammunitions and explosives, antiques, art treasures, wild life items and endangered species of flora and fauna . Although Circulars provide for minimum threshold in commercial fraud cases, criterion of minimum threshold/disputed amount doesn’t applies in the cases involving offences relating to very sensitive items like narcotic drugs and psychotropic substances, arms, ammunitions and explosives, antiques, art treasures, wild life items and endangered species of flora and fauna. In such cases, launching of prosecution needs to be considered invariably, irrespective of the value of the offending goods involved. It has been repeatedly been clarified that prosecution in respect of NDPS cases must be launched as per the provisions of the NDPS Act, 1985.These exceptions are not the subject matter of this article. It may be noted that considering the liberalisation in Gold/Silver import policy since 1991, even such items have been taken out of the list of sensitive items as per earlier guidelines where prosecution was considered irrespective of value limit. Prosecution for offences relating to these items is also subjected to Minimum CIF Value/disputed amount.
Subsequently, several significant changes have been effected in the Customs Act and other relevant enactments. Amendments and changes were made in section 135 of Customs Act, 1962 vide Finance Act, 2007 and Finance Act, 2013 relating to threshold limit/categorization of offences. Moreover, section 137 of Customs Act, 1962, has been amended and provisions of compounding of offences had been incorporated through Finance Act, 2004 and Finance Act, 2009. Amendments were made in section 104 of the Customs Act, 1962 through Finance Act, 2012 and Finance Act, 2013 wherein certain offences were made cognizable and non-bailable and certain other offences were kept as non-cognizable and bailable. Keeping in view the above changes, the revised guidelines for prosecution in relation to offences punishable under Customs Act, 1962 were issued in year 2015. As per the provisions of the Customs Act, 1962, prosecution may be launched against any person including legal person in respect of the offences covered under any of the sections namely sections 132,133,134, 135, 135A or 136 of the Customs Act. 1962. The decision for launching prosecution is taken in cases which fulfil the requirement of the provisions of any of the sections 132,133,134, 135, 135A or 136 of the Customs Act,1962 after a careful consideration of the nature of offence, the role of the person concerned and evidence available to substantiate the guilty mind/knowledge/mensrea.
Threshold limit for launching prosecution have been enhanced from time to time and exceptions for sensitive items as discussed above still remain part of Board guidelines. Appraising Cases/ Commercial Frauds etc subjected to threshold limits.It is mentioned that the quantum of punishment under section 135 of the Customs Act, 1962 is linked with the amount of imports duty/market price of offending goods/drawback amounts. However, the quantum of punishment in respect of the offences covered under remaining sections namely 132,133,134, 135A or 136 of the Customs Act, 1962 is not linked with the amount of imports duty/market price of offending goods/ineligible drawback amount.
CBIC Circulars provides for guidelines in respect of Stage for launching of prosecution. Normally, prosecution may be launched immediately on completion of adjudication proceedings* not after confirmation from CESTAT*. However, prosecution in respect of cases involving offences relating to items i.e. Gold, FICN, arms, ammunitions and explosives, antiques, art treasures, wild life items and endangered species of flora and fauna may preferably be launched immediately after issuance of show cause notice.Further, in following cases investigation may be completed in time bound manner preferably within six months and adjudication may be expedited to facilitate launching of prosecution. These cases are
(a) In case where arrest has been made during investigation (for commercial fraud cases as well as outright smuggling cases) or in the case of a habitual offender.
(b) In case where arrest has not been made but it relates to outright smuggling of high value goods such as precious metal, restricted items or prohibited items notified under section 11 or goods notified under section 123 of the Customs Act, 1962 or foreign currency where the value of goods exceeds prescribed threshold.
In the judgement passed by Honble Supreme Court of India in the case of Radheshyam Kejriwal Versus State of West Bengal - 2011 (2) TMI 154 - Supreme Court, the Apex court had, interalia, observed that (i) adjudication proceedings and criminal proceedings can be launched simultaneously ;(ii) decision in adjudication proceedings is not necessary before initiating criminal prosecution, (iii) adjudication proceedings and criminal proceedings are independent of each other in nature and (iv) the findings against the person facing prosecution in the adjudication proceedings is not binding on the proceeding for criminal prosecution. In view of aforesaid observations of Honble Supreme Court, CBIC has reiterated in 2015 guidelines that if the party deliberately delays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings, where offence is grave and qualitative evidences are available. Prosecution need not be kept in abeyance on the ground that the party has gone in appeal/revision.
In some Acts (especially in taxation) specific limitation will be given in all aspects that is to issue show cause notice, filing reply, deciding the adjudication process, filing appeals, disposal of appeals etc. In some Acts no such limitation will be prescribed. In ‘Collector of Central Excise, Jaipur v. Raghuvar (India) Limited’ – 2000 (5) TMI 40 - SUPREME COURT OF INDIA the Supreme Court pointed out that, any law or stipulation, prescribing a period of limitation to do or not to do a thing after the expiry of the period, so stipulated, has the consequence of creation and destruction of rights, and, therefore, must be specifically enacted and prescribed there for. Recently, Madras High Court in the case of M/s. Chemplast Sanmar Ltd. Versus Deputy Commissioner of Customs (Export), Joint Director General of Foreign Trade, Chennai - 2025 (7) TMI 499 - MADRAS HIGH COURT has held that in tax proceedings where statute did not provide for any time limit for issuing show cause notices,even in those cases the show cause notice will have to be issued within a reasonable period and has referred to other decisions of the Constitutional Courts holding the reasonable period to be three years in drawback cases. In those decisions as well, there was an inordinate delay in the issuance of show cause notice and the Constitutional Courts quashed the show cause notices / order-in-original on account of the inordinate delay alone.
The problem plaguing a system is that prosecutions are launched at the stage of investigation or immediately after adjudication proceedings. Civil appeals fall flat before CESTAT in majority of cases albeit after delayed adjudication. Prosecution cases fall flat before Criminal Court albeit after decades. The Constitutional Courts have repeatedly held that in the matters which have the potential of casting financial liabilities or penal consequences cannot be kept pending for years and decades together. A statutory authority when faced with such a challenge would be obligated to prove that it was either impracticable to proceed or it was constricted by factors beyond its control which prevented it from moving with reasonable expedition. This principle would apply equally to cases falling either under the Customs Act, the 1994 Act or the CGST Act in commercial/appraising fraud cases. The issue of delay in adjudication proceedings has been resolved by legislature by amending Section 28 and mandating strict time line for adjudication process. But another problem still remains that person are arrested and prosecution are launched mechanically. The learned adjudicating authorities are mechanically confirming the allegations made in SCN without appreciating evidences and in complete disregard to the provisions of statute. More than 90% of these appraising cases fall flat at the level of CESTAT. Threat for arrest and discretion to launch prosecution makes system vulnerable to corruption. Threats for prosecution are used for securing confessionary statements and arrests are recorded. Demands are confirmed placing reliance on untested statements without any examination in chief or cross examination of witnesses. Entire case falls flat when the same is subjected to judicial scrutiny at the level of Criminal Court or CESTAT.
Hon'ble Supreme Court has made it clear that a prolific use of the cut-copy-paste function should not become a substitute for substantive reasoning, which, in the ultimate analysis, is the defining feature of the judicial process as the reasons constitute the soul of a judicial decision. In most of the cases, the adjudicating authorities cut, copy and paste the contents of the SCN in the OIO and the order remains bereft of any independent reasoning for arriving at the conclusion.In the recent decision of Madras HC in the case of Senthil Kumar Versus The Commissioner Of Customs Adjudication Air, Chennai I, The Additional Directior Directorate Of Revenue Intelligence, Chennai And FAYAZUDEEN, Bakker Hussain, Abdul Faris Versus The Commissioner Of Customs (in Situ) - 2025 (8) TMI 1488 - MADRAS HIGH COURT, HC quashed OIO after finding that the adjudicating authority pre-determined liability by reproducing the show-cause notice in the order without independent reasoning. Illustrations can be multiplied on the subject matter. It appears that mindless prosecution based on adjudication orders even before appreciation of evidences by judicially trained mind or in the court of law, merits review. Citizens deserve better treatment given the fact that the standard of proof required in a criminal prosecution is higher as the case has to be established beyond reasonable doubt whereas the standard of proof in adjudication proceedings is decided on the basis of preponderance of probability. Apart from the quality of collected evidences which doesn’t stand CESTAT, another issue is the delay and increased litigation due to the Board guidelines.
The earlier prosecution guidelines of 1999 as well as the new prosecution guidelines issued in 2015 contain various references to avoid any undue delays in the launching of prosecution or completion of prosecution proceedings. Inspite of guidelines and timeframes provided in Circulars, launching of prosecution / completion of prosecution proceedings gets delayed in several cases. The issues of delay in launching of prosecution are vulnerable to CAG audit and Vigilance audits. As a result, officers launch prosecution in mechanical manner. As per decision of Honble Supreme Court in the case of Radheshyam Kejriwal Versus State of West Bengal - 2011 (2) TMI 154 - Supreme Court, in case of exoneration, on merit where allegation is found to be not sustainable at all and person held innocent, criminal prosecution on the same set of circumstances cannot be allowed to continue, underlying principle being the higher standard of proof in criminal cases. Circulars symbolically provide for withdrawal of prosecution complaints but hardly such provisions are given effect.In nut shell, examples can be multiplied where arrests are recorded but prosecution complaints are not filed ; prosecution launched but cases fall flat at CESTAT; person exonerated by CESTAT on merits but prosecution complaints are not withdrawn etc etc.
Lessons from jurisprudence in direct taxes
In this regard, process of launching prosecution in Custom and GST cases, especially those involving commercial frauds/economic offence Simpliciter, merit comparison vis-à-vis similar commercial frauds investigated by Income Tax. IT Act provides for statutory provisions governing the prosecution of offences under the Indian income tax regime. The provisions are designed to ensure that prosecution for tax offences is not undertaken arbitrarily and that there are adequate checks and balances before criminal proceedings are initiated against taxpayers. They address the compounding of offences, evidentiary rules in prosecution, and the powers of higher tax authorities to issue directions or instructions regarding prosecution and compounding. The significance of these provisions lies in their role as gatekeepers to criminal prosecution within the income tax framework.
IT Officials can launch prosecution under Section 276C, 277, 278B, and 278E for tax evasion. A policy is adopted by the CBDT in respect of launching of prosecution under Section 276 (C) (1) of the Act i.e “wilful attempt to evade tax”. CBDT had laid down 2008 guidelines prescribing the time frame to process cases for prosecution. As regards Section 276C (1) is concerned, it has been specified that all cases should be processed for prosecution where penalty under section 271 (1) (c) of the Act exceeding Rs. 50,000/- is imposed and confirmed by the Tribunal.CBDT instructions provides that the case for prosecution shall be processed on the receipt of the ITATs order. Since in a case of prosecution, mensrea is sine qua non and, therefore, the prosecution in direct tax cases are preferably not launched until evidences meet judicial standards. Appreciation of admissibility and relevancy of evidences by judicially trained mind enables checks on unwarranted litigations. The Hon’ble Supreme Court in case of
KC Builders And Another Versus Assistant Commissioner of Income-Tax - 2004 (1) TMI 7 - Supreme Court has in no uncertain terms held that the penalty and prosecution under the Act run hand in hand. When penalty itself is deleted then there is no question of prosecuting the assessee under Sections 276C (1),277 and 278B of the Act. The Supreme Court in case of Radheshyam Kejriwal Vs. State of West Bengal, has held that where the departmental proceeding has resulted in exoneration of the assessee then the criminal prosecution must also fail. The guidelines dated 24.04.2008 have been issued by Ministry of Finance, Government of India, for ‘streamlining the procedure and to identify the cases for processing to lodge prosecution under Direct Tax law – matter reg.’, (in short “2008 circular”). Referring to clause (iii), it is said that in all cases where the penalty under Section 271(1)(C) exceeding Rs. 50,000/- is imposed and confirmed by Income Tax Appellate Tribunal (in short “ITAT”), the complaints may be filed within a period of 60 days of the receipt of the order of ITAT and not prior. As per the ‘Prosecution Manual, 2009’ issued by CBDT, Clause 1.4 of Chapter III clearly stipulates when can prosecution be initiated. As per the Manual, it was advised that the initiation of prosecution under Section 276C(1) shall be only after confirmation of concealment and penalty by the ITAT.
The Supreme Court on 28.08.2025 in the case of VIJAY KRISHNASWAMI vs DD Investigation 2025 INSC 1048 has imposed Rs. 2 Lakhs cost on Income Tax Department for grossly abusing its position to continue a prosecution against an assessee alleging willful tax evasion even after deletion of penalty by ITAT. The relevant extracts finds mention as under : -
“The Directorate of Income Tax, (PR PP & OL) has also published the Prosecution Manual, 2009, prescribing the ‘procedure for launching prosecution’. In Clause 1.4 of Chapter III, specifying when the prosecution can be initiated. The said clause is relevant hence reproduced as under:
“1.4 When can prosecution be initiated? A case should be processed for launching prosecution immediately after the commission of offence comes to the notice of the authority concerned. However, if some more evidences can be gathered during any proceedings, it would be advisable to complete such proceedings to gather all relevant evidences before initiating the prosecution. The Apex Court has laid down that if penalty for concealment fails then the prosecution initiated on same material/basis must also fail (KC Builders And Another Versus Assistant Commissioner of Income-Tax - 2004 (1) TMI 7 - Supreme Court). Therefore, it is advisable to initiate prosecution under section 276C(1)only after confirmation of concealment penalty by the ITAT…..
The said guideline was based on a judgment of ‘KC Builders And Another Versus Assistant Commissioner of Income-Tax - 2004 (1) TMI 7 - Supreme Court, wherein this Court laid down that if penalty for concealment fails, the initiation of the prosecution on the basis of the same material also fails, therefore, it was advised that after confirmation of concealment of penalty by ITAT, the prosecution may be lodged in terms as specified in the above circular dated 24.04.2008.
Similarly, on 09.09.2019, the Central Board of Direct Taxes (in short “CBDT”) in exercise of power under Section 119 of IT Act issued clarification qua the criteria to be followed for launching prosecution in respect of certain categories of offence under the IT Act, including Section 276C(1). The relevant portion is referred as under –
“iii. Offences u/s 276C(1): Wilful attempt to evade tax, etc. Cases where the amount sought to be evaded or tax on under-reported income is Rs. 25 Lakhs or below, shall not be processed for prosecution except with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers as mentioned in Para 3. Further, prosecution under this Section shall be launched only after the confirmation of the order imposing penalty by the Income Tax Appellate Tribunal.”
As such, the departmental circular dated 24.04.2008, Prosecution Manual, 2009, and CBDT’s circular dated 09.09.2019, provide when the prosecution ought to be lodged by Revenue. The said Circulars have been issued to regulate the lodging of prosecution in genuine cases and to weed out the problems of the tax payers, and also to understand when can the prosecution for Section 276 ought to be lodged and continued. The said circular and clarification have been brought after the statutory scheme of Section 245H(1) and the appended proviso.
In this situation, it is imperative for us to understand the binding nature of the departmental circular, Prosecution Manual, 2009, and CBDT’s clarification.
Therefore, the recourse to lodge prosecution was made permissible subject to the department’s circular dated 24.04.2008 which provided for confirmation by ITAT in case the penalty imposed under Section 276C(1) is exceeding Rs. 50,000/-. It is relevant here to note that the said circular was in vogue on the date of the grant of sanction by PDIT to DDIT for lodging the prosecution against the appellant. The said circular has been reaffirmed by the Prosecution Manual, 2009 and the clarification issued by the CBDT in 2019. As such, the circulars discussed above, were binding on the authorities and required to be adhered to while lodging the prosecution by the Revenue.”
Conclusion
Almost every year, thousands of arrests are recorded in Custom/GST Offences. On 27 February 2025, a three-judge bench of the Supreme Court, in RADHIKA AGARWAL Versus UNION OF INDIA AND OTHERS - 2025 (2) TMI 1162 - Supreme Court (LB) unanimously held that the provisions of the Code of Criminal Procedure, 1973 (CrPC), and the Bharatiya Nagarik Suraksha Sanhita, 2023 “are equally applicable” to arrests made under the Central Goods and Services Tax Act, 2017, and the Customs Act, 1962. The decision introduced much needed clarity on the issues of arrests by Custom/GST Officers. The issue of delay in adjudication has also been resolved by legislature vide bringing in strict timeline via Finance Act, 2018. Sticky issue that still remains is power of Custom Officers to launch prosecution without subjecting evidences to judicial standards.
It is imperative that CBIC must think of bringing Circulars on lines of 2008 Circular issued by CBDT in response to the Apex Court judgment of KC Builders And Another Versus Assistant Commissioner of Income-Tax - 2004 (1) TMI 7 - Supreme Court. It is imperative that CBIC must think of coming up with CBIC Prosecution Manual for Customs anfd GST Offences on lines of CBDT Prosecution Manual 2009. The said Circulars and Prosecution Manuals have been issued by CBDT to regulate the lodging of prosecution in genuine cases only and to weed out the problems of the tax payers, and also to understand when can the prosecution for willful evasion of tax ought to be lodged and continued.
The issue of initiation of prosecution proceedings without subjecting collected evidences to judicial scrutiny needs rethinking. Confirmation of mensrea or penalties by CESTAT can be a good yardstick for launching prosecution in commercial fraud cases involving willful evasion of tax/duty. The fact remains that both direct as well as indirect tax statutes focus on prosecution of persons/legal entities involved in willful evasion of tax. Issues of mensrea, Willful attempt, suppression, abetment etc are common to relevant provisions in both indirect as well as direct tax statutes. There is a need to sensitize indirect tax officials/taxpayers about recent decisions of Apex Court, CBDT Circulars and CBDT Prosecution Manuals to prosecute persons who willfully evade taxes and role of Tribunals therein.