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

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 ... Quashing of criminal complaints - prematurity of criminal prosecution pending departmental adjudication - effect of appellate/tribunal order on parallel criminal prosecution - technical upholding of assessment (limitation) versus adjudication on merits - independence of adjudication and criminal proceedings - prima facie case required for trial on complaint - presumption under Section 278E of the Income Tax Act, 1961Prematurity of criminal prosecution pending departmental adjudication - quashing of criminal complaints - Whether complaints are premature and liable to be quashed because departmental assessment/reassessment proceedings had not reached finality. - HELD THAT: - The Court examined whether pendency of departmental adjudication or reassessment proceedings precludes institution or continuation of criminal complaints. Reliance was placed on precedents which establish that there is no bar to launching criminal prosecution merely because adjudication proceedings are pending. The Court noted that prosecutions under the Income Tax Act can be initiated simultaneously with adjudication proceedings and that a mere expectation of success in departmental proceedings does not prevent the institution of criminal proceedings. Applying these principles to the uncontroverted averments in the complaints (non filing of returns, non payment of advance tax and assessed tax, and alleged suppression), the Court found that the complaints were not premature and that the question whether departmental proceedings ultimately succeed is not a ground to quash the complaints at this stage. [Paras 13, 15, 16, 17, 21]Petitions seeking quashment on the ground of prematurity are rejected and the complaints are not quashed on that ground.Effect of appellate/tribunal order on parallel criminal prosecution - technical upholding of assessment (limitation) versus adjudication on merits - independence of adjudication and criminal proceedings - Whether the Income Tax Appellate Tribunal's order setting aside assessments as time barred (limitation) operates as a bar to the criminal prosecutions and supports quashing the complaints. - HELD THAT: - The Court considered the ITAT common order which set aside assessments for assessment years 2002 03 to 2006 07 on the ground of limitation. The Court observed that the ITAT disposed those appeals solely on the technical ground of limitation and did not decide the merits of the substantive allegations (non filing, non payment, suppression). Drawing on settled authority, the Court reiterated that where an adjudicatory authority's exoneration is on technical or procedural grounds and not on merits, criminal prosecution may continue. The Court therefore held that the ITAT order being limited to limitation issues does not provide a basis to quash the criminal complaints which raise distinct, substantive allegations requiring trial. [Paras 18, 19]The ITAT order set aside on limitation does not bar the criminal prosecutions, and quashment cannot be granted on that ground.Prima facie case required for trial on complaint - presumption under Section 278E of the Income Tax Act, 1961 - quashing of criminal complaints - Whether, on the uncontroverted averments in the complaints, a prima facie case is made out to proceed to trial and whether the complaints ought to be quashed. - HELD THAT: - In determining whether to quash criminal proceedings, the Court applied the standard that uncontroverted averments in the complaint must be examined to see if an offence is disclosed. Having reviewed the allegations (failure to file returns within statutory time, failure to pay advance tax and assessed tax, concealment of income, and related statutory notices and proceedings), the Court concluded that the complainant had made out a prima facie case warranting trial. The Court further noted Section 278E of the Income Tax Act which permits the court to presume culpable mental state unless disproved by the accused, reinforcing that the matter should proceed to trial rather than be quashed at the threshold. [Paras 20, 21, 22]On the facts pleaded, a prima facie case exists and the complaints are not liable to be quashed; the petitioner must face trial.Final Conclusion: Criminal Original Petitions for quashing the complaints are dismissed; the criminal complaints shall proceed to trial and the connected miscellaneous petitions are closed. 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.