Tax deduction prosecution fails when the factual default is negated and later explanatory amendments cannot apply retrospectively.

Criminal prosecution for failure to deduct tax at source cannot stand where the appellate tax authorities have removed the factual basis of the alleged default, making continued prosecution unjustified on the admitted facts. Before the Explanation inserted with effect from 1 June 1987, crediting interest to an "interest payable account" did not attract section 194A, because the provision then applied only on credit to the payee or actual payment. The Explanation operated prospectively, and retrospective use would create an impermissible ex post facto penal burden. The article states that, on these principles, proceedings under section 276B were unsustainable.

---

---

Issues: (i) Whether criminal prosecution under section 276B of the Income-tax Act could continue after the appellate income-tax authorities had found no liability for penalty or default on the same facts; (ii) Whether, prior to the Explanation inserted with effect from 1 June 1987, crediting interest to an "interest payable account" attracted section 194A so as to create criminal liability.

Issue (i): Whether criminal prosecution under section 276B of the Income-tax Act could continue after the appellate income-tax authorities had found no liability for penalty or default on the same facts.

Analysis: The finding recorded in assessment proceedings is not automatically binding on a criminal court on questions of law, but it has material bearing where the factual foundation for prosecution is removed by the final decision of the tax authorities. Where the appellate authority and the Tribunal have concluded that no penalty or default survives on the same facts, and the alleged offence depends entirely on that factual foundation, continuance of prosecution would be unjustified and an abuse of process.

Conclusion: The prosecution could not be sustained once the tax proceedings had negatived the factual basis of the alleged default.

Issue (ii): Whether, prior to the Explanation inserted with effect from 1 June 1987, crediting interest to an "interest payable account" attracted section 194A so as to create criminal liability.

Analysis: Section 194A, as it stood before the Explanation, required deduction of tax at source only at the time of credit of interest to the account of the payee or at the time of payment. The Explanation inserted by the Finance Act, 1987 enlarged the provision by deeming credit to an "interest payable account" or "suspense account" as credit to the payee, but that enlargement was prospective. To apply it retrospectively would create a new penal burden and offend the constitutional prohibition against ex post facto criminal liability. Since the credits in question were made before 1 June 1987, the amended Explanation did not apply.

Conclusion: Credit to the "interest payable account" before 1 June 1987 did not attract section 194A, and no offence under section 276B was made out.

Final Conclusion: The criminal complaints were unsustainable because the alleged tax-deduction default was not covered by the unamended provision, and the revisional court was entitled to quash the prosecution and set aside the magistrate's order.

Ratio Decidendi: A criminal prosecution for failure to deduct tax at source cannot survive where the alleged default was committed before a later Explanation prospectively enlarging the charging provision, and the criminal court may quash proceedings when the statutory ingredients of the offence are absent on the admitted facts.

---