Wilful tax evasion prosecution under Section 276C needs mens rea, and a cognizance order must show real judicial application of mind.

Prosecution for wilful tax evasion under Section 276C requires a positive attempt to evade tax and mens rea; a merely incorrect or unsustainable claim, especially where revised returns are filed and tax is paid after search, is insufficient on its own. The text also states that a cognizance order must show real judicial application of mind to the complaint and material; a formulaic order that only recites the availability of sufficient material is invalid. On that basis, the criminal proceedings were treated as unsustainable and quashed.

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Issues: (i) Whether prosecution under Section 276C of the Income-tax Act, 1961 could be sustained on the basis of alleged bogus claims and revised returns filed after search, in the absence of wilful attempt and mens rea; (ii) Whether the cognizance order taken by the Magistrate was valid when it did not disclose proper application of judicial mind.

Issue (i): Whether prosecution under Section 276C of the Income-tax Act, 1961 could be sustained on the basis of alleged bogus claims and revised returns filed after search, in the absence of wilful attempt and mens rea.

Analysis: Criminal liability under Section 276C requires a wilful attempt to evade tax and a positive act showing mens rea. A mere incorrect or unsustainable claim in the return does not, by itself, establish wilful evasion. Where the assessees filed revised returns and paid the tax after the search, the situation was treated as one of delayed payment or correction rather than ipso facto evasion. The principles governing prosecution under the penal provision are distinct from civil or penalty consequences under the Act.

Conclusion: The prosecution could not be sustained on the alleged tax claims alone, and this issue was decided in favour of the petitioners.

Issue (ii): Whether the cognizance order taken by the Magistrate was valid when it did not disclose proper application of judicial mind.

Analysis: An order taking cognizance must show that the Magistrate examined the complaint and material and formed a prima facie view that the penal provision was attracted. A formulaic order that merely states that sufficient materials are available, without reflecting the reasoning process, does not satisfy the requirement of judicial application of mind under the criminal procedure framework.

Conclusion: The cognizance order was invalid for non-application of mind, and this issue was decided in favour of the petitioners.

Final Conclusion: The criminal proceedings were quashed because the alleged conduct did not justify prosecution under the income-tax penal provision and the cognizance order was procedurally unsustainable.

Ratio Decidendi: Prosecution for wilful tax evasion under Section 276C lies only when the prosecution establishes a positive, mens rea-driven attempt to evade tax, and a cognizance order must reflect a real judicial application of mind to the complaint and supporting materials.

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