Prosecution quashed for wilful tax evasion under sections 276C, 277, 278B, 278E after penalty deletion by ITAT

The HC quashed prosecution proceedings under sections 276C, 277, 278B and 278E against petitioners for wilful tax evasion. The court held that prosecution was launched prematurely and in contravention of CBDT Circular No. 24 of 2008, which requires penalty confirmation by ITAT before prosecution. Since ITAT had deleted the penalty on which prosecution was based, and the order attained finality with no appeal filed, the prosecution could not continue. The court emphasized that penalty and prosecution run hand in hand, and when penalty is deleted, prosecution must fail, citing SC precedent that departmental exoneration precludes criminal prosecution.

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Issues Involved
1. Legality and propriety of prosecution under Sections 276C, 277, 278B, and 278E of the Income Tax Act, 1961.
2. Validity of launching prosecution after the deletion of tax liability and penalty by the ITAT.
3. Applicability of CBDT guidelines and instructions on prosecution.
4. The impact of the ITAT's order on the continuation of criminal prosecution.

Detailed Analysis

Issue 1: Legality and Propriety of Prosecution
The petitioners questioned the legality and propriety of their prosecution under Sections 276C, 277, 278B, and 278E of the Income Tax Act, 1961, for "wilful evasion of tax." The original return of income for the year 2009-2010 declared a loss, and a revised return was filed later. The AO passed an order under Section 143(3) of the Act, and the Principal Commissioner of Income Tax sanctioned the prosecution. However, the ITAT set aside the penalty arising from the levy of income tax, and no appeal was preferred against this order. The petitioners argued that since the tax demand and penalty were deleted, the prosecution should not have been initiated.

Issue 2: Validity of Launching Prosecution
The respondent supported the prosecution by stating that it was launched after the addition of Rs. 4.88 Crores was confirmed by CIT (A). However, subsequent to the deletion of the quantum addition and penalty by the ITAT, the prosecution does not survive and should be withdrawn. The court noted that the prosecution was launched prematurely and hastily, without the penalty being confirmed by the ITAT, which is contrary to the binding instructions of the CBDT.

Issue 3: Applicability of CBDT Guidelines
The CBDT had issued guidelines specifying that prosecution under Section 276C(1) should only be processed where the penalty under Section 271(1)(c) exceeds Rs. 50,000 and is confirmed by the Tribunal. The petitioners informed the PCIT that the matter was pending before the ITAT, yet the prosecution was launched in contravention of these guidelines. The court emphasized that the officers of the Revenue are required to strictly abide by the instructions of the 2008 Circular No. 24 of 2019.

Issue 4: Impact of ITAT's Order on Prosecution
The court referred to the Supreme Court's decision in K.C. Builders and another Vs. Assistant Commissioner of Income Tax, which held that once penalties are canceled, the prosecution under Section 276C is automatically quashed. Since the ITAT had set aside the penalty, the prosecution could not be sustained. The court also cited the Supreme Court's decision in Radheshyam Kejriwal Vs. State of West Bengal, which held that if the exoneration in adjudication proceedings is on merits, criminal prosecution on the same set of facts and circumstances cannot continue.

Conclusion
The court concluded that the prosecution against the petitioners was invalid and quashed all orders and complaints. The petitions were allowed, and the rule was made absolute in the specified terms.

Order
- The petitions are allowed in terms of prayer clauses (a)(i), (ii), and (iii).
- All the aforesaid orders and complaints are quashed and set aside.
- Rule is made absolute in the aforesaid terms.

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