2018 (10) TMI 1737 - HC - Income Tax

Court quashes criminal proceedings due to lack of valid sanction, inapplicability of penalties, and absence of willful tax evasion.

N.R. Agarwal Industries Ltd. Versus Joint Commissioner of Income Tax Special Range - 2

The court quashed the criminal proceedings against the applicants based on the lack of valid sanction for prosecution, the inapplicability of penalties ... Default or violation committed u/s 279 (1) - undisclosed income on account of excess of stock viz. imported waste worth and also of imported pulp lying in the factory premises and such undisclosed income - complaint being lodged under Section 276 C (1) and 277 read with Section 278B - HELD THAT:- Specific exemption for the block period covering the case of the assessee-company indicated that if there was any intention of the legislature the specific provision for prosecution would have been introduced for such cases but in absence of such provision, it could be easily inferred that the legislature intended to grant immunity for the block period covering the case of the assessee company. Reliance was also placed under Section 158B (i) r.w.s. 158 BC whereby what is assessed is the undisclosed income of the block period and not total income of any previous year and the determination of the undisclosed income is the income, which was not disclosed or determined in the regular assessments. Therefore, what was concealed for regular assessment is taxed as undisclosed income in the block assessment. Even it was pleaded that there was no willful attempt to evade any tax so as to bring provisions under Section 276 (c) (i) of the Act and immunity granted by Section 158 BF from levy of interest and penalty under Section 271 (1) (c), 271 (A), 271-B of the Act. No mention of Section 276-C in Section 158BF of the Act and, as a matter of fact, a careful reading of Section 276-C transpires that if a person willfully admits to evade any tax, penalty or interest chargeable or imposable under the Act, 1961 then only prosecution can be launched. None of the authorities gave clear finding about evading tax willfully and on the contrary deduction was given under Section 80IA by ITAT Bench to the extent of ₹ 99,900/-. A company having past turnover and shown in third annual report 1995-96, C.I.F. value of imports of row-material and capital goods to be considered in quantity, it was 6138.894 for the value of ₹ 7,24,23,783/-. Minor lapse on the part of the assessee of not mentioning such a stock, undisclosed income in the facts of this case do not attract launch of prosecution under Section 276-C (i) and 277 read with Section 278-B of the IT Act, 1961. Validity of sanction of prosecution can be gone into by the trial Court for which powers to quash the complaint may not be exercised and, in a given case, dehors the order setting aside penalty proceedings by the Tribunal, the criminal proceedings can go on, but here in the facts of this case, it cannot be said that with mala fide intention and to evade the tax, stock in the stock book was not shown by the assessee and keeping the above factor in mind, vis-a-vis Sections 143, 158 BC, 158 BF, 271 (1)(c), 271-A, 271- B read with Sections 276-C(i), 277 and 278-Band parameters of Section 482 of Criminal Procedure Code, allowing criminal case to proceed would subject assessee to rigmarole of trial resulting into unavoidable hardships and to secure end of justice - present application is allowed by quashing and setting aside the impugned criminal proceedings launched by respondent no.1 in the Court of Chief Judicial Magistrate, Surat, so far as present applicant is concerned. Issues Involved:1. Validity of the sanction for prosecution under the Income Tax Act, 1961.2. Applicability of penalties and prosecution for undisclosed income during block assessment periods.3. The relevance of previous judicial decisions and their applicability to the present case.4. The impact of the death of one of the petitioners on the proceedings.5. Whether the criminal proceedings should be quashed based on the merits of the case.Issue-wise Detailed Analysis:1. Validity of the Sanction for Prosecution:The court examined whether the sanction for prosecution under Section 279(1) of the Income Tax Act, 1961, was valid. The applicants argued that the sanction was illegal as it was based on a block assessment period where specific provisions for penalties and prosecution were not applicable. The court noted that the prosecution must prove that a valid sanction was granted by the sanctioning authority after being satisfied that a case for sanction had been made out constituting the offense. The court referenced the Supreme Court decision in *Mohd. Iqbal Ahmed v. State of Andhra Pradesh*, which emphasized that the grant of sanction is a solemn act and must be strictly complied with before any prosecution can be launched.2. Applicability of Penalties and Prosecution for Undisclosed Income:The court discussed the introduction of Chapter XVIB in the Act, 1961, which provided special procedures for search cases effective from 1.7.1995 to 1.1.1997. The relevant Section 158-BF provided that no interest or penalties under certain sections would be levied on undisclosed income determined in the block assessment. The court noted that after 1.1.1997, Section 158 BF(A) was introduced, making the previous provisions inapplicable. The applicants argued that if no penalties could be imposed, prosecution could not be sustained either. The court agreed that the sanction for prosecution under Section 279(1) was illegal and, consequently, the criminal proceedings deserved to be quashed.3. Relevance of Previous Judicial Decisions:The court referenced several judicial decisions to support its findings:- *A.C.I.T. v. Velliappa Textile Mills Ltd.*: The Supreme Court quashed prosecution against a company under Sections 276(C) and 277 of the Act, 1961, when imprisonment was compulsory.- *K.C.Builders v. Assistant Commissioner, Income Tax*: The Supreme Court held that once penalties for concealment of income were canceled by the Tribunal, prosecution for willful evasion of tax could not proceed.- *Commissioner of Income Tax, Gujarat-III v. Vijaychand Harilal*: The court held that mere rejection of the assessee's explanation in assessment proceedings was not grounds for levying penalties.4. Impact of the Death of One of the Petitioners:The court acknowledged the death of petitioner no.2 and abated the application concerning him. The death certificate dated 25.1.2011 was produced on record, confirming the death on 7.1.2011.5. Whether Criminal Proceedings Should Be Quashed:The court concluded that the criminal proceedings should be quashed based on the merits of the case. The court found that the prosecution was not justified as the undisclosed income was minor compared to the company's overall turnover and there was no willful attempt to evade tax. The court also noted that the authorities did not provide a clear finding of willful evasion of tax. Therefore, the court allowed the application and quashed the criminal proceedings launched by respondent no.1 in Criminal Case No.2705 of 2000 in the Court of Chief Judicial Magistrate, Surat.Conclusion:The court quashed the criminal proceedings against the applicants, emphasizing the lack of valid sanction for prosecution, the inapplicability of penalties and prosecution for the block assessment period, and the absence of willful evasion of tax. The court relied on various judicial decisions to support its findings and concluded that subjecting the assessee to trial would result in unnecessary hardships.