2023 (9) TMI 70 - HC - Income Tax

TDS non deposit prosecution challenged after deposit with interest and absence of penalty; prosecution quashed as abuse of process

Prosecution for alleged wilful failure to deposit TDS was examined where the firm deducted tax but deposited the TDS with interest before sanction and ... Quashing of criminal prosecution for failure to deduct and deposit TDS - deposit of TDS with interest as bar to prosecution - wilful failure to deposit TDS and requirement of mens rea - abuse of process of law - penalty proceedings under the Income Tax ActQuashing of criminal prosecution for failure to deduct and deposit TDS - deposit of TDS with interest as bar to prosecution - wilful failure to deposit TDS and requirement of mens rea - abuse of process of law - Criminal proceedings under provisions relating to failure to deduct/pay TDS were liable to be quashed where the TDS amount along with interest had been deposited before initiation of prosecution and no penalty proceedings were pending. - HELD THAT: - The Court found on record that the petitioner's firm commenced operations in January 2016 and that the TDS in question for the stated period was deposited along with interest on 11.05.2016. The sanction for prosecution was accorded on 14.02.2018 and cognizance taken thereafter, i.e., after a lapse of time. The Court accepted the petitioner's explanation and reply to the Department showing deposit of the TDS with interest and noted absence of any penalty proceedings. Reliance was placed on the established principle that criminal liability for failure to pay TDS requires wilfulness (mens rea) and that penalty and prosecution are intended as deterrents; where the taxpayer has satisfied the liability and shown sufficient cause for the failure, continuing criminal proceedings would amount to an abuse of process. The Court referred to earlier decisions on the requirement of wilfulness and the role of penalty as deterrent in similar contexts (Income Tax Officer v. Autofill and Others ; K.C. Builders and Another v. Assistant Commissioner of Income Tax ) and, applying those principles to the facts, held there was no occasion to continue proceedings under the criminal provisions in the circumstances of this case. [Paras 6, 7, 8]The criminal proceeding including the order taking cognizance dated 02.05.2018 was quashed as an abuse of process in view of deposit of the TDS amount with interest and absence of penalty proceedings.Final Conclusion: Writ petition allowed; entire criminal proceeding arising out of Economic Offence Complaint Case No. 17 of 2018 was quashed and the interim order vacated. Issues Involved:The petition was filed to quash criminal proceedings and order taking cognizance arising from an Economic Offence Complaint Case related to non-deposit of TDS under the Income Tax Act, 1961.Details of the Judgment:1. The complaint alleged that the petitioner's firm failed to deposit TDS as per Income Tax Act provisions. The petitioner, a partner in the firm, was accused of willfully not depositing TDS despite knowledge of the liabilities. The prosecution was launched based on a sanction order by the Commissioner of Income Tax. 2. The petitioner argued that the firm started operations in January 2016 and was unaware of TDS requirements initially. Upon learning, the petitioner promptly consulted a chartered accountant, obtained a TAN number, and deposited the TDS with interest. The petitioner contended that the prosecution was unwarranted as the amount was deposited before the sanction order and no penalty proceedings had commenced.3. The Income Tax Department countered that non-compliance justified the criminal case, citing precedents where courts upheld proceedings for such failures. They argued that the petitioner had been given ample opportunity and expressed readiness to face trial in an anticipatory bail application. 4. The Court noted that the TDS amount with interest was deposited before the prosecution was initiated, and no penalty proceedings were initiated against the petitioner. Citing legal principles, the Court emphasized that penalties should serve as deterrents. Referring to relevant case law, the Court highlighted the need for mens rea in willful failure cases.5. Drawing parallels to a Supreme Court case, the Court held that since penalty proceedings were not initiated and the TDS amount was deposited before prosecution, allowing the case to proceed further would be an abuse of the legal process. Consequently, the Court quashed the criminal proceedings and the order taking cognizance.6. The judgment allowed and disposed of the petition, vacating the interim order in the matter.