2025 (10) TMI 873 - HC - Income Tax

Quashed prosecution under Section 276C(2): mere delay in paying admitted tax not wilful evasion under Section 220

M/s. G Square Layout Private Limited, represented by its Directors, Shri. Ramajayam – Director Smt. Sreekala – Director, Shri Ramajayam, Director – M/s. G Square Layout Private Limited, Smt Sreekala Versus The Deputy Commissioner of Income Tax, Central Circle-1 (2), Chennai

HC allowed the criminal petition and quashed prosecution under Section 276C(2) of the IT Act. The court held that mere delay in payment of admitted tax ... Offence u/s 276C(2) of the Income Tax Act - Company filed the return of income without paying the admitted tax liability of Rs. 8,72,81,520/- as mandated u/s 140-A of the IT Act - Scope of word “wilful” - It is the case of the complainant that the A1 Company, inspite of having sufficient resources and capability, has exhibited wilful intention to evade payment of tax - HELD THAT:- The explanation to Section 276C(2) of the IT Act makes it very clear that the evasion by way of any false entry or statement in the books of account or other document or omission to make any entry in the books of account or other documents or any other circumstances which will have the effect of enabling the assessee to evade tax or penalty or interest chargeable or imposable under the Act or the payment thereof, alone can be prosecuted. The only allegation is that there is a delay in payment of tax. Therefore, mere default in payment of taxes, unless such default arises out of any circumstances which will have an effect of the assessee to defeat the payment, in the view of this Court, the word employed in the Section, i.e., “wilful attempt” cannot be imported. Though it is true that the assessee did not make the payment of tax while filing its return of income or even after issuance of notices, the fact remains that there is no suppression of real income and the assessee has made the entire payment of the tax liability on 13.01.2025 after issuance of show cause notice on 02.12.2024. If the intention of the assessee to evade the payment of tax was present from the very inception, the assessee would have not made the payments even thereafter. As per Sub-Section (4) of Section 220 of the IT Act, if the tax is not paid within the time limit under Sub-Section (1) or extended under Sub-Section (3), as the case may be, the assessee shall be deemed to be in default. The word “wilful” is conspicuously absent in Section 220 of the IT Act. Therefore, as long as the default is not wilful, mere delay in payment of tax will not attract the penal provisions. There are many other provisions under the Act even to impose fine or penalty for delayed payment. In the present case, the assessee is a mere defaulter and it cannot be construed as a willful attempt made by the assessee to evade the payment of tax, nor is there any presence of mens rea so as to attract the offence under Section 276C(2), particularly, when the assessee has paid the entire tax liability after issuance of show cause notice. Therefore, continuation of prosecution under Section 276C(2) of IT Act as against the petitioners will only be a futile exercise and an abuse of process of law, which will definitely infringe the rights of the petitioners. Criminal Original Petition is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether mere delayed payment of admitted tax, without evidence of false entries, suppression or other active steps to defeat payment, constitutes a 'wilful attempt to evade the payment of any tax' punishable under Section 276C(2) of the Income Tax Act. 2. Whether subsequent payment of the entire admitted tax liability (paid after demand and show-cause notice but before cognizance) negates the inference of mens rea required for prosecution under Section 276C(2). 3. Whether absence of initiation of penalty or recovery proceedings under other provisions of the Act precludes criminal prosecution for alleged wilful default under Section 276C(2). 4. Whether prosecution should be quashed as an abuse of process where the facts disclose only non-payment/delay without circumstances envisaged in the Explanation to Section 276C (false entries/statements, omissions or other circumstances enabling evasion). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether mere delayed payment constitutes a 'wilful attempt to evade' under Section 276C(2) Legal framework: Section 276C(2) penalises a person who 'wilfully attempts in any manner whatsoever to evade the payment of any tax,' with an Explanation listing acts (false entries/statements, omissions or other circumstances) that amount to evasion. Section 140A(3) and Section 220(4) create deeming provisions for default but do not incorporate the element of 'wilful attempt.' Precedent treatment: The Court relied on and followed higher-court authority holding that Section 276C requires proof of a positive, deliberate act or conduct evidencing mens rea (e.g., Prem Dass and subsequent High Court decisions). Conflicting views (e.g., Konark Refrigerator) were considered and expressly disagreed with as inapplicable. Interpretation and reasoning: The Explanation to Section 276C is inclusive but specifies types of conduct amounting to evasion. The statutory scheme distinguishes mere default (deemed default under Sections 140A/220) from criminal 'wilful attempt.' Absence of the word 'wilful' in deeming provisions indicates the Legislature did not intend every default to import criminal mens rea. To attract Section 276C(2) prosecution, the conduct must be more than failure to pay on time; there must be deliberate acts (false entries, concealment, alienation, or other conduct designed to defeat payment). Ratio vs. Obiter: Ratio - A mere delay/default in payment, absent the specific kinds of conduct listed in the Explanation or other evidence of deliberate evasion, does not satisfy the mens rea element of Section 276C(2). Conclusion: Mere delayed payment, without evidence of false entries, concealment or other conduct intended to defeat tax payment, does not constitute a wilful attempt to evade tax under Section 276C(2). Issue 2 - Effect of subsequent payment of entire admitted tax on mens rea for prosecution Legal framework: Criminal liability under Section 276C(2) requires wilful attempt; subsequent remedial acts (payment) bear on the inference of intent. Precedent treatment: The Court applied precedent where later payment and explanatory circumstances were accepted as negating wilful evasion (citing multiple High Court decisions following Prem Dass and reasoning in related authorities). Interpretation and reasoning: If the accused had an intention from inception to evade payment, continued payments made after demand or show-cause would be inconsistent with such intent. The fact that the entire admitted liability was discharged after issuance of notices and before substantive trial undermines an inference of pre-existing mens rea to evadePayment. Moreover, explanations that assets were not readily liquefiable and that there was no suppression of income further weaken any claim of deliberate evasion. Ratio vs. Obiter: Ratio - Subsequent full payment of the admitted tax liability, combined with absence of indicia of evasion, is strong evidence negating the necessary mens rea for prosecution under Section 276C(2). Conclusion: Payment of the full admitted tax after demand/show-cause, together with lack of evidence of deliberate concealment or other evasion conduct, negates the mens rea required for prosecution under Section 276C(2). Issue 3 - Impact of absence of penalty/recovery proceedings on criminal prosecution Legal framework: The Act contains civil/administrative remedies (penalty, recovery, attachment) distinct from criminal prosecution; initiation or non-initiation of such remedies is relevant to assessment of departmental response but not determinative of criminal liability. Precedent treatment: Courts have held that non-initiation of penalty or recovery does not ipso facto preclude prosecution where independent evidence of wilful evasion exists; conversely, absence of any aggressive recovery steps may support the defence that the default was not wilful. Interpretation and reasoning: The Court noted that mere absence of penalty proceedings does not create a bar to criminal prosecution but emphasised that, on facts where no evidence of deliberate evasion exists and where civil remedies remained available/unused, prosecuting criminally would be disproportionate. The record here lacked allegations of false entries, suppression or attempts to alienate assets; attachment/recovery avenues remained but were not relied upon to show wilful evasion. Ratio vs. Obiter: Obiter (in part) - While non-initiation of penalty is not conclusive, it is a relevant contextual factor in evaluating whether the prosecution is a reasonable use of criminal process when the conduct complained of amounts only to delay/default. Conclusion: Absence of penalty/recovery proceedings does not automatically bar prosecution, but where facts show only delay/default and no evidence of deliberate evasion, criminal prosecution is inappropriate and may amount to abuse of process. Issue 4 - Whether complaint should be quashed as abuse of process where only non-payment/delay is shown Legal framework: Courts may quash criminal complaints where the allegations do not disclose a prima facie case or where continuation would be futile/abusive; penal provisions must be strictly construed. Precedent treatment: The Court relied on established decisions quashing prosecutions under Section 276C(2) where only non-payment was shown and no mens rea or Explanation-type conduct was alleged. Interpretation and reasoning: Given the admitted facts-belated return, demand/show-cause notices, later full payment, absence of false entries/suppression or steps to defeat payment-the complaint lacks necessary ingredients for Section 276C(2). Continuing prosecution would be a futile exercise and an abuse of process, infringing rights of the accused. Strict construction of penal provisions mandates that criminal process not be used where civil remedies suffice and mens rea is absent. Ratio vs. Obiter: Ratio - Where the material before the Court discloses only a default/delay in payment without any of the acts enumerated in the Explanation or other evidence of deliberate evasion, continuation of criminal proceedings under Section 276C(2) is an abuse of process and may be quashed. Conclusion: The complaint is to be quashed as continuation of prosecution under Section 276C(2) on these facts would be disproportionate, futile and an abuse of process of law.