2022 (6) TMI 88 - HC - Income Tax

Criminal proceedings under sections 276C and 277 Income Tax Act cannot be quashed despite ITAT setting aside assessment orders on limitation grounds

S.J. Surya Versus The Deputy Commissioner of Income Tax, Central Circle II (4), Chennai – 34.

The HC dismissed petitions seeking to quash criminal proceedings under sections 276C and 277 of the Income Tax Act. While ITAT had set aside assessment ... Assessment u/s 153A - pendency of re-assessment proceedings - Offence punishable u/s 276 CC - unaccounted receipt of money by the petitioner towards remuneration for directing movies - culpable mental state of the accused - Whether assessment order was barred by limitation? - HELD THAT:- ITAT after considering the submission of the counsel appearing for the parties concluded that “We are of the opinion that assessments made by the AO for all these five assessment years, uniformly on 24.09.2008 are bad in law for the reason that direction of the AO for special audit was served on the assessee on 25.01.2008 which must be considered for the purpose of computing the limitation of time making assessment. In that case, direction of the Assessing Officer was subsequent to the expiry of the due date for making assessment. Further without prejudice, even with the date 25.01.2008, considered by the Assessing Officer as the date of service of direction and not on 28.01.2008 as considered by the CIT (A) is taken into account, still the assessments were not made in the period specified under Section 153 B of the Act. Therefore, it was held that the assessments for the five assessment years on 24.09.2008 are bad in law. Essentially, the Income Tax Appellate Tribunal disposed the appeals only on the ground of limitation and not on merits. It is further observed that other grounds relating to merits become an academic exercise, meaning that other issues raised in the complaint, especially the allegations raised in the complaints with regard to non filing of return of income, non payment of advance tax, non payment of the tax demanded, suppression of true and correct income by not filing return of income had not been considered by the Income Tax Appellate Tribunal. When the matter was not decided on merits, but only on technical ground of limitation, this Court is of the considered view, on the basis of the principles settled in Radheshyam Kejriwal Vs. State of West Bengal and another [2011 (2) TMI 154 - SUPREME COURT] that petitioner cannot seek to quash the proceedings in E.O.C.C.Nos.101, 102, 103, 104, 105 of 2015 on the ground that Income Tax Appellate Tribunal had set aside the assessment orders. As seen from the complaint allegation that despite, giving notice, statutory notice as detailed in the complaint, petitioner has not filed return, paid advance tax and tax demanded, suppressed the real and true income by not filing the return in time. These issues have to be necessarily tried before the Court. The assessment order relating to the assessment year 2009-2010 was not challenged before the Income Tax Appellate Tribunal. In this case also there is allegation of non filing of return of income for the assessment year 2009- 2010, concealment of true and correct income by not filing return of income, non payment of income despite issuance of notice. These violations are liable to be prosecuted for the offences under Section 276 C (1), 276 C (2), 276 CC and 277 of the Income Tax Act, 1961. When it comes to quashing a criminal proceedings, it is very well settled that uncontroverted averments in the complaint without any addition or subtraction should be looked into to examine whether an offence can be made out are not. If that yardstick is applied in this case, this Court is of the considered view that respondent/complainant made out prima-facie case to proceed against the petitioner for the offences alleged in the complaint. Section 278E of the Income Tax Act, 1961, empowers the Court to presume culpable mental state of the accused, unless, the accused shows that he had no such mental state with respect to the act charged as an offence in the prosecution. In this view of the matter, this Court finds that petitioner shall necessarily face the trial. Criminal Original Petitions dismissed. The core legal questions considered by the Court in these petitions pertain to the maintainability and validity of criminal prosecution initiated under various provisions of the Income Tax Act, 1961, specifically Sections 276C(1), 276C(2), 276CC, and 277. The principal issues include whether the criminal complaints filed for non-filing of income tax returns, non-payment of advance tax, concealment of true income, and filing of false statements are premature given ongoing departmental proceedings; whether the quashing of assessment orders by the Income Tax Appellate Tribunal (ITAT) on grounds of limitation bars or negates criminal prosecution; the applicability of prosecution where no tax, penalty, or interest is payable; and whether continuation of prosecution amounts to abuse of process of law.Regarding the issue of prematurity of prosecution due to pending assessment or reassessment proceedings, the Court examined whether the pendency of departmental proceedings precludes initiation of criminal prosecution. The petitioner contended that since the assessments were not finalized and the ITAT had set aside the assessment orders, prosecution was premature and unsustainable. The respondent countered that adjudication and criminal proceedings are independent and simultaneous proceedings, and that the ITAT's order was based solely on limitation and did not address the merits of the allegations. The Court relied on authoritative precedents establishing that there is no statutory bar to launching criminal prosecution before completion of adjudication proceedings. It was observed that the standard of proof in criminal cases is higher than in adjudication proceedings, and findings in adjudication are not binding on criminal trials. The Court highlighted that if the exoneration in adjudication is on technical grounds rather than merits, prosecution may continue. The Court referred extensively to a Supreme Court judgment which elucidated that adjudication and criminal proceedings are independent, and exoneration on merits in adjudication is a prerequisite to bar prosecution; mere technical invalidation of assessment orders does not preclude criminal proceedings.On the question of the effect of the ITAT's setting aside of assessment orders on grounds of limitation, the Court noted that the ITAT's decision did not address the substantive allegations of concealment of income, non-filing of returns, and non-payment of taxes. The Court held that since the ITAT did not decide on merits, the petitioner cannot rely on the ITAT's order to quash the criminal complaints. The Court emphasized that the criminal complaints are based on uncontroverted averments of willful failure to file returns, concealment of income, and non-payment of taxes despite statutory notices, which prima facie disclose offences under the relevant provisions of the Income Tax Act.The Court also considered the petitioner's contention that prosecution under Section 276CC cannot be sustained where the tax payable is less than Rs. 3,000/-, and that no tax, penalty, or interest was payable in this case. The Court did not accept this argument, noting that the complaints allege substantial undisclosed income and tax demands running into crores of rupees, supported by assessments and penalty proceedings initiated by the department. The Court found that the allegations disclose cognizable offences and require trial to determine the veracity of the claims.Regarding the allegation of filing false statements and verifications punishable under Section 277, the Court observed that the petitioner had either not filed returns or filed defective returns with false claims, and signed verifications accordingly. These acts, if proved, constitute offences under the said section. The Court found no merit in the petitioner's claim that no false statement was made because no return was filed or no statement was signed.The Court addressed the principle that quashing of criminal proceedings is warranted only where the complaint does not disclose an offence or where continuation of prosecution would amount to abuse of process. Applying this standard, the Court found that the complaints contain sufficient material to prima facie establish the offences alleged, and that the petitioner is entitled to face trial. The Court noted that Section 278E of the Income Tax Act provides for presumption of culpable mental state unless disproved by the accused, further supporting the need for trial.In summary, the Court's analysis established the following core principles and holdings:1. Adjudication proceedings under the Income Tax Act and criminal prosecution for offences under the Act are independent and can be initiated simultaneously.2. An order of assessment being set aside on technical grounds such as limitation does not bar criminal prosecution unless the exoneration is on merits.3. The pendency of reassessment or appeal proceedings does not constitute a bar to institution of criminal prosecution for offences under the Income Tax Act.4. The standard of proof in criminal cases is higher, and findings in adjudication proceedings are not binding on criminal trials.5. Prima facie allegations of willful failure to file returns, concealment of income, non-payment of advance tax and tax demands, and filing false statements disclose cognizable offences punishable under Sections 276C(1), 276C(2), 276CC, and 277 of the Income Tax Act.6. Prosecution cannot be quashed merely because the ITAT has set aside assessment orders on grounds unrelated to the merits of concealment or evasion.7. The Court must look at the uncontroverted averments in the complaint to determine whether an offence is prima facie made out; if so, the accused is entitled to face trial.8. Section 278E of the Income Tax Act permits the Court to presume culpable mental state unless disproved, underscoring the need for trial to adjudicate the allegations.Applying these principles to the facts, the Court concluded that the criminal original petitions seeking quashing of the complaints were not maintainable and dismissed them, thereby allowing the prosecution to proceed.