EVASION OF TAX v. FAILURE TO PAY TAX

Evasion of tax

Evasion of tax means an unlawful act of not paying taxes owed by a person by means of under reporting income, inflating deductions or hiding money. Evasion of tax is a serious offence under Income Tax Act, 1961 (‘Act’ for short). Tax evasion is illegal. The Act provides penalties for evasion of tax.

Section 276(c)(1) of the Act provides that if a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable, or under reports his income,under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable, -

• in a case where the amount sought to be evaded or tax on under-reported incomeexceeds Rs. 25,00,000/-with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to seven years and with fine;
• in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to 2 years and with fine.

Section 276(c)(2) of the Act provides that if a person wilfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to 2 years and shall, in the discretion of the court, also be liable to fine.

Failure to pay tax

Every assessee is liable to file return of income within the stipulated time as provided in the provisions of the Act. At the time of filing the return itself the assessee is to pay the tax as assessed by him. The tax due to the Department is the property of the Government. Therefore, it is expected that the tax payers are to pay the tax on the due date itself. If the tax is not paid in due date, interest at the prescribed rate is to be paid along with the tax amount. The penalty for late tax payment includes interest under Sections 234A, 234B, and 234C and possible late fees under Section 234F.

The penalty will be levied by the Department from the assessee if he fails to pay the tax within the due date. The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won’t exceed 25% of your unpaid taxes. The failure to pay tax is not with an intention to evade payment of tax.

In ‘Vilas Babanrao Kaolkhe v. Principal Commissioner of Income Tax (Central), Pune and others’ – 2025 (10) TMI 958 – Bombay High Court, the High Court point out differences between ‘evasion of payment’ and ‘failure to make payment’.

In the above said case, the petitioner is running the business of stone crushing on partnership business in the name and style as ‘Shree Ambika Stone Crusher’ and also engaged in the business of manufacturing precast cement pipes in partnership firm basis in the name and style as ‘Kalokhe Pipes & Prodcast Industries’. The petitioner filed its return of income for the impugned assessment year but it did not pay the income tax on the basis of self-assessment. Subsequently on 16.01.2023 the assessee paid the income tax due for it.

The Department, without waiting for the payment of tax by the assessee, considered that the assessee did not pay the tax even after the filing of its return. Further the Department found that the assessee did not pay the tax subsequently. Therefore, the Department got the sanction of the concerned authority to initiate penal proceedings. The Department processed the said return on 15.12.2023 and ascertained the payment of Rs. 1,05,04,470/-, due by the petitioner. The Department issued a demand on the said amount to the petitioner under Section 143(1) of the Act.

On 26.07.2024 the Department proposed to launch prosecution for an offence punishable under Section 276C(2) of the Act. It was endorsed by the Principal Commissioner of Income Tax on 29.07.2024. The Principal Commissioner, Pune, vide their letter dated 12.08.2024 called explanation of the petitioner for not granting sanction to prosecute the petitioner for the offence punishable under Section 276(c) of the Act. The petitioner filed its reply on the notice issued to it, on 16.08.2024 online through e-filing portal. The department was not satisfied with the explanation and Principal Commissioner of Income Tax (Central), Pune granted sanction under Section 279(1) of the Tax Act on 18.09.2024 to prosecute the assessee for violation of the provisions of Section 140A punishable under Section 276C (2) of the Act. A complaint was filed before the Judicial Magistrate, Pune by the Department. The Judicial Magistrate, Pune issued process for the offence punishable under Section 276 C (2) of the Act. This order has been challenged by the assessee in the present writ petition before the High Court.

 The petitioner submitted the following before the High Court-

• There is no wilful default and in fact he has paid the amount of Income Tax due as per self-assessment on 16.01.2023.
• The petitioner submitted its Income Tax Return for the assessment year 2022-2023 on 5.11.2022 with the Department on 05.11.2022.
• The petitioner declared the income of Rs. 2.17 crores for which the tax payable is Rs. 94,22,300/- which is calculated on self-assessment basis. The same was not paid at the time of filing the return.
• The petitioner submitted its reply to the notice issued by the Principal Commissioner. In the said reply the petitioner informed about the financial problems within the organisation and also expressed its inability to pay the tax but the same has not been considered by the Authorities.
•  Though there is default in paying self-assessment tax along with the return, it cannot be said that there is a wilful attempt to evade tax.
• Even though the petitioner did not pay the self-assessed tax at the time of filing the return, the petitioner paid the tax on 16.01.2023 which shows that the petitioner wished to pay the tax and not intend to evade tax.
• What is contemplated for Section 276C(2) is not merely an evasion to pay tax but it should be wilful i.e. intentional. In this case it is absent.
• There is difference between ‘wilful evasion’ and ‘failed to pay tax’.
• In case of ‘wilful evasion’, there must be averment that the assessee deliberately and intentionally attempted to evade the tax and it must be substantiated.

The Revenue submitted the following before the High Court-

• The petitioner has not paid the self-assessed tax along with the filing of return which is sufficient to invoke the provisions of Section 276(c)(2) of the Act and nothing is required to prove the offence.
• The allegations made in the complaint itself proves the ‘wilful evasion’.
• The provisions of 278E ‘relating to presumption as to culpable State’ provides that the burden lies on assessee to establish that failure was not on account of wilful intension.

The High Court considered the submissions of the petitioner and the Revenue. The only issue arisen in this Petition is whether ingredients of Section 276C (2) of Income Tax Act are made out and whether Writ Jurisdiction under Article 227 of the Constitution can be invoked. The High Court observed that the petitioner filed the return of income but not paid the self assessee tax at the time of filing the return. The High Court also analysed the transactions that were taken place from 05.11.2022 to 05.12.2024 when the impugned order was passed. The High Court also analysed the various sections of the Act relevant to this petition.

 The High Court observed that there is a difference in between ‘failure’ and ‘evasion’. The evasion should not only be simple evasion but it should be wilful evasion. Section 276-B will be applicable when the tax deducted at source is not credited to Government. Failure to credit itself is sufficient and it need not be wilful. Once the assessee deducted a tax from the income of another person (who is liable), such person is bound to credit it. That omission itself is an offence without addition of wilfulness / intension; but the legislatures have cautiously used the word wilful evasion in Section 276-C of the Act. It indicates there maybe cases wherein there is a genuine case for not paying tax on or before the due date even though return is submitted. In a given case, such failure cannot be considered as a wilful evasion. Such cases will be outside the clutches of Section 276-C of the Income Tax Act.

 The High Court held that the tax was paid on 16.01.2023. So, this case is not fit for prosecution. It will be abused of process of Court if prosecution is continued. Therefore, the High Court allowed the petition by setting aside the impugned order.