1999 (11) TMI 30 - HC - Income Tax

Court quashes criminal prosecutions under Income-tax Act, citing retrospective effect issue and reasonable cause defense.

The court quashed the criminal prosecutions under section 276B of the Income-tax Act, following favorable appellate decisions that nullified the ... Construction of credit to the account of the payee in section 194A - Effect of Explanation to section 194A inserted w.e.f. June 1, 1987 - Retrospective penalisation and protection under Article 20(1) of the Constitution - Relevance of appellate/tribunal findings in subsequent criminal prosecution - Doctrine permitting quashing of criminal proceedings where the foundation is nullified by incometax appellate orders - Discharge under section 245 of the Code of Criminal ProcedureConstruction of credit to the account of the payee in section 194A - Credit in 'interest payable account' versus credit to payee - Credit of interest to an 'interest payable account' prior to insertion of the Explanation (i.e. before June 1, 1987) did not amount to 'credit to the account of the payee' for the purpose of section 194A and therefore section 194A was not attracted. - HELD THAT: - The court accepted that under the law as it stood before the Explanation, liability under section 194A arose only when interest was actually paid or credited to the account of the payee. The Explanation inserted w.e.f. June 1, 1987, widened this scope by deeming amounts credited to 'interest payable account' or 'suspense account' to be credit to the payee's account. That widening did not operate retrospectively to cover credits made before June 1, 1987. Applying principles of strict construction of fiscal and penal statutes, the court held that the preExplanation statutory language did not include crediting to an internal 'interest payable account' as credit to the payee.PreJune 1, 1987 credits to 'interest payable account' do not attract section 194A.Effect of Explanation to section 194A inserted w.e.f. June 1, 1987 - Retrospective penalisation and protection under Article 20(1) of the Constitution - The Explanation to section 194A inserted by the Finance Act, 1987, operates prospectively from June 1, 1987, and cannot be given retrospective effect so as to create a penal liability for acts done before that date. - HELD THAT: - The Explanation materially expanded the scope of liability by deeming certain book entries to be credit to the payee. Imputing retrospective penal effect to that amendment would create an ex post facto offence contrary to Article 20(1) of the Constitution. The Explanatory Note to the Finance Act itself confirms that prior to the amendment liability arose only where interest was actually paid or credited to the payee. Therefore the obligation to deduct tax on interest credited to an 'interest payable account' exists only from the amendment's effective date.Explanation to section 194A is prospective from June 1, 1987; it cannot be applied retrospectively to attract penal liability for earlier credits.Relevance of appellate/tribunal findings in subsequent criminal prosecution - Doctrine permitting quashing of criminal proceedings where the foundation is nullified by incometax appellate orders - Discharge under section 245 of the Code of Criminal Procedure - Where incometax appellate authorities and the Tribunal have held that section 194A did not apply and have set aside penalty/interest, the foundation for criminal prosecution under section 276B is nullified and the criminal complaints are not sustainable; the magistrate's order refusing discharge was quashed and the complaints were ordered quashed. - HELD THAT: - While criminal courts are not strictly bound by departmental adjudications on questions of law or fact, the court recognised settled precedents that findings by authorities under the Incometax Act which remove the factual or legal foundation for prosecution are a material factor and may justify quashing criminal proceedings. Since the Commissioner (Appeals) and subsequently the Tribunal set aside the tax liability on the same facts and held section 194A inapplicable, continuation of criminal prosecution would amount to misuse of process. The magistrate's refusal to discharge the accused at the section 245 stage, in the absence of any new material and while the appellate proceedings had rendered the underlying basis of prosecution unsupportable, was set aside.Appellate and Tribunal findings that section 194A did not apply nullify the basis of prosecution and warrant quashing of the criminal complaints and discharge under section 245 CrPC.Final Conclusion: Both revision petitions were allowed: the ACMM's order refusing discharge was set aside, the petitioners were discharged under section 245 CrPC, and Criminal Complaints No. 808A/1 and 808B/1 of 1987 prosecuting the petitioners under section 276B of the Incometax Act were quashed, on the ground that the preJune 1, 1987 credits to 'interest payable account' did not attract section 194A and the subsequent departmental appellate orders had removed the foundation of the prosecutions. Issues Involved:1. Continuation of prosecution after favorable appellate decisions.2. Applicability of section 194A before the insertion of the Explanation.3. Retrospective effect of the Explanation to section 194A.4. Reasonable cause for not deducting and paying TDS.Summary:1. Continuation of prosecution after favorable appellate decisions:The petitioners argued that since the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal held there was no violation of section 194A, the prosecutions should not continue. The Tribunal's decision, which followed the Punjab and Haryana High Court's judgment in Punjab Business and Supply Co. Pvt. Ltd. v. ITO, set aside the penalty and interest imposed by the Income-tax Officer. The court noted that the prosecution initiated under section 276B of the Income-tax Act should be quashed in light of these favorable findings, as the foundation for prosecution had been nullified.2. Applicability of section 194A before the insertion of the Explanation:The petitioners contended that before the Explanation was inserted, crediting interest to the 'interest payable account' did not amount to payment to the creditors or credit to their accounts. The court agreed, stating that the Explanation inserted by the Finance Act, 1987, effective from June 1, 1987, widened the scope of section 194A and created a new obligation. Therefore, the interest credited before this date did not attract the provisions of section 194A.3. Retrospective effect of the Explanation to section 194A:The court held that the Explanation to section 194A, which was inserted with effect from June 1, 1987, could not be given retrospective effect. Applying it retrospectively would violate Article 20(1) of the Constitution, which prevents ex post facto laws. The court emphasized that fiscal laws must be strictly construed, and penal provisions should be interpreted in a way that avoids penalties if reasonably possible.4. Reasonable cause for not deducting and paying TDS:The petitioners argued that there was a reasonable cause for not deducting and paying TDS as the interest was credited to the 'interest payable account' and not to the creditors' accounts. The court found this explanation valid for the period before June 1, 1987, as the obligation to deduct TDS on such credits was created only after the insertion of the Explanation.Conclusion:The court quashed the criminal prosecutions under section 276B of the Income-tax Act, setting aside the impugned order of the Additional Chief Metropolitan Magistrate and allowing the petitioners' applications u/s 245 of the Code of Criminal Procedure. The criminal complaints No. 808-A/1 and 808-B/1 of 1987 were dismissed.