2025 (12) TMI 680 - HC - Income Tax

Prosecution for tax evasion above Rs 25 lakhs validly sanctioned by PCIT u/ss 276C(1) and 278E

HC interpreted CBDT circulars dated 09.09.2019 and 23.01.2020 in the context of prosecution under Sections 276C(1) and 278E of the Income Tax Act. It held ... Offences u/s 276(C)(1) and 278E - Amount sought to be evaded or taxed on under reported income be more than Rs. 25 lacs - sanctioning authority i.e., the PCIT or CCIT/DGIT rank officers - scope of circular No. 5/20 dated 23.01.2020 HELD THAT:- At the outset, we may state that the circular dated 09.09.2019, more specifically in paragraphs no. 2 & 3 deals with offences under Section 276(C)(1) of the Act with which we are concerned herein. The circular dated 09.09.2019 refers to the fact when the amount sought to be evaded or taxed income is below the sum of Rs. 25 lacs, such cases shall not be processed for prosecution except with the previous administrative approval of collegium of two CCIT/DGIT rank officers. There is no dispute that the amount sought to be evaded or taxed on under reported income is more than Rs. 25 lacs. It may also be stated that the circular also contemplates that further prosecution under the said sanction notices shall be launched only after confirmation of the order imposing penalty by the ITAT. In a case pertaining to Section 276(C)(1) of the Act, where the tax evaded exceeded Rs. 25 lacs, the approving authority in such a case would be the sanctioning authority, i.e. PCIT. By this circular discretion has been given that prosecution can be launched at any stage of the proceedings before the Income Tax Authority. If the said amendment is read in context, it is in cases where the evaded amount is Rs. 25 lacs or below, the prosecution shall be proceeded with after the administrative approval of the collegium of two CCIT/DGIT rank officers. The contention of Respondent needs to be accepted that the appropriate authority for initiating the prosecution proceedings would be the sanctioning authority i.e., the PCIT and not the collegium of two CCIT/DGIT rank officers since the tax to be evaded exceeds Rs. 25 lacs. No merit in this petition and the same is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, on a proper construction of CBDT Circular No. 24/2019 dated 09.09.2019 and Circular No. 5/2020 dated 23.01.2020, prosecution under Section 276C(1) of the Income-tax Act, 1961, where the tax sought to be evaded exceeds Rs. 25 lakhs, can be initiated by the Principal Commissioner of Income Tax without (a) prior administrative approval of a collegium of two CCIT/DGIT rank officers and (b) prior imposition and confirmation of penalty by the Income Tax Appellate Tribunal. 1.2 Whether Circular No. 5/2020 dated 23.01.2020 is manifestly arbitrary and violative of Article 14 of the Constitution of India on the ground that it vests unguided and unbridled discretion in the sanctioning authority for launching prosecution. 1.3 Whether pendency of appeals before the Commissioner of Income Tax (Appeals), and the assessee's challenges to the validity and merits of assessment (including additions under Sections 69 and 69A, the legality of proceedings under Section 153C, ex parte assessments, and alleged lack of DIN on transfer order under Section 127), constitute grounds to quash the sanction for prosecution under Sections 276C and 278E. 1.4 Whether, in the facts, the impugned sanction notices issued under Section 279(1) authorising initiation of prosecution under Sections 276C and 278E suffer from non-application of mind or absence of reasons so as to be liable to be quashed. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Interpretation of CBDT Circulars 24/2019 and 5/2020; requirement of collegium approval and prior ITAT-confirmed penalty for tax evasion above Rs. 25 lakhs 2.1.1 Legal framework as discussed (a) The Court examined CBDT Circular No. 24/2019 dated 09.09.2019, particularly paragraphs 2, 3 and 4 and its Annexure, dealing with offences under Section 276C(1) ('wilful attempt to evade tax, etc.'). (b) Under the Circular of 09.09.2019, for offences under Section 276C(1): - Cases where the amount sought to be evaded or tax on under-reported income is Rs. 25 lakhs or below 'shall not be processed for prosecution except with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers'; and - It further provides that 'prosecution under this section shall be launched only after the confirmation of the order imposing penalty by the Income Tax Appellate Tribunal.' (c) Paragraph 3 of the Circular defines the 'Collegium of two CCIT/DGIT rank officers' and clarifies that the sanctioning authority under Section 279(1) (Principal Commissioner or Commissioner or Commissioner (Appeals) or appropriate authority) shall seek the prior administrative approval of such collegium only for 'cases below the threshold limit as prescribed in Annexure'. (d) Paragraph 4 and the Annexure set out the 'list of prosecutable offences under the Act specifying the approving authority'. For Section 276C(1), the Annexure provides: - Where tax which would have been evaded exceeds Rs. 25 lakhs: approving authority - 'Sanctioning Authority'; - In other cases: 'Sanctioning Authority with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers.' (e) Circular No. 5/2020 dated 23.01.2020 clarifies Circular No. 24/2019 in relation to Section 276C(1), stating that: - Prosecution 'shall be launched ordinarily after the confirmation of the order imposing penalty by the Income Tax Appellate Tribunal'; and - 'Prosecution in other cases, including cases covered u/s 132/132A/133A, may be launched at any stage of the proceedings before an Income-tax Authority, with the previous approval of the Collegium of two CCIT/DGIT rank officers as mentioned in para 3 of the Circular.' - The Circular applies only to cases 'where the prosecution complaint is to be filed after the date of issuance of the Circular, i.e. 09.09.2019'. 2.1.2 Interpretation and reasoning (a) The Court noted that there is no dispute that in the present case the 'amount sought to be evaded or tax on under-reported income is more than Rs. 25 lakhs', in fact, the aggregate demand exceeds Rs. 348 crores. (b) On a conjoint reading of Circular 24/2019 and its Annexure, the Court concluded: - The special requirement of prior administrative approval of a collegium of two CCIT/DGIT rank officers applies only to cases 'where the amount sought to be evaded or tax on under-reported income is Rs. 25 lakhs or below'; - In such below-threshold cases alone, prosecution under Section 276C(1) is to be launched only after confirmation of penalty by the ITAT. (c) The Court held that the Annexure clearly demarcates two categories for Section 276C(1): - Where tax which would have been evaded exceeds Rs. 25 lakhs: the 'approving authority' is only the 'Sanctioning Authority' (PCIT etc.), without any additional pre-condition; and - For other (below-threshold) cases: the sanctioning authority must obtain previous administrative approval of the collegium of two CCIT/DGIT rank officers. (d) As to Circular 5/2020, the Court treated it as a 'clarification' to be read as part of Circular 24/2019, and not as altering the basic scheme of the Annexure. The expression that prosecution 'shall be launched ordinarily after the confirmation of the order imposing penalty by the ITAT' was read as: - Prescribing an ordinary rule of timing, not an absolute or mandatory precondition; and - To be understood in the context of the Circular's primary object of not launching prosecution in small cases and controlling initiation in cases where the amount is Rs. 25 lakhs or below. (e) The clarification that prosecution 'in other cases, including cases covered u/s 132/132A/133A, may be launched at any stage of the proceedings... with the previous approval of the Collegium of two CCIT/DGIT rank officers' was construed as 'primarily relat[ing] to the offences where amount sought to be evaded is less than Rs. 25 lakhs'. The Court held that Circular 5/2020 'does not make any amendment to paragraph No. 4 and the annexure thereof.' (f) The Court held that 'no pre-conditions have been attached while taking action in cases where the evasion is more than Rs. 25 lakhs' and that 'the intent behind Circular No. 24/2019... as amended by Circular No. 5/2020' is essentially to avoid prosecution in small cases and to require collegium approval only in such below-threshold cases. (g) In the present case, since the amount alleged to be evaded is more than Rs. 25 lakhs (indeed, over Rs. 348 crores), 'the approval of the sanctioning authority would be adequate' and 'in other words, the decision of the Sanctioning Authority granting approval would suffice the requirement, which in this case is PCIT.' 2.1.3 Conclusions (a) In cases under Section 276C(1) where the tax sought to be evaded exceeds Rs. 25 lakhs, the only approving authority required under CBDT Circular No. 24/2019 (as clarified by Circular No. 5/2020) is the 'Sanctioning Authority' under Section 279(1), i.e., the Principal Commissioner/Commissioner etc.; prior approval of a collegium of two CCIT/DGIT rank officers is not required. (b) The requirement that prosecution 'shall be launched... after confirmation of penalty by the ITAT' and the requirement of collegium approval apply only to small (below Rs. 25 lakhs) cases and do not constitute preconditions in cases where the amount sought to be evaded exceeds Rs. 25 lakhs. (c) The impugned sanction notices issued by the PCIT under Section 279(1) in the present case, where the alleged evasion far exceeds Rs. 25 lakhs, are in conformity with Circulars 24/2019 and 5/2020 and are not vitiated for want of collegium approval or for want of prior ITAT-confirmed penalty. 2.2 Challenge to constitutional validity of Circular No. 5/2020 under Article 14 2.2.1 Legal framework as discussed (a) The petitioner contended that Circular No. 5/2020 is 'manifestly arbitrary' as it vests the sanctioning authority with 'unbridled and absolute discretion' to decide when prosecution may be launched in cases above Rs. 25 lakhs without any guidelines, and thus offends Article 14. (b) Reliance was placed on Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India for the proposition that delegated legislation can be struck down as manifestly arbitrary, and on State of Punjab v. Khan Chand to emphasise that unguided discretion affecting personal liberty is unconstitutional. 2.2.2 Interpretation and reasoning (a) The Court rejected the submission that Circular No. 5/2020 conferred unguided and unbridled power, holding that there is 'a clear demarcation contemplated in terms of circular dated 09.09.2019 as followed by circular dated 23.01.2020.' (b) The Court characterised Circular 5/2020 as 'a clarification to be read as part of the circular dated 09.09.2019.' When so read, the scheme clearly: - Draws an objective threshold at Rs. 25 lakhs; and - Restricts prosecution in small cases by requiring collegium approval and tying it ordinarily to confirmation of penalty by the ITAT. (c) Since in the present case the alleged evasion is far above the threshold (more than Rs. 348 crores), the Court held that the argument of unguided discretion is inapposite; the scheme clearly entrusts such major-evasion cases to the sanctioning authority alone. (d) The Court observed that 'it is precisely for this reason that an attempt has been made by the petitioner to challenge the very circular dated 23.01.2020', noting that the challenge was driven by the petitioner's inability to derive benefit from the small-amount safeguards in the Circular. (e) The Court distinguished the reliance on Indian Express Newspapers and State of Punjab v. Khan Chand as inapplicable in the factual and statutory context at hand, particularly given the magnitude of tax alleged to be evaded and the structured differentiation embedded in the Circulars. 2.2.3 Conclusions (a) Circular No. 5/2020 dated 23.01.2020, read with Circular No. 24/2019 dated 09.09.2019, is not manifestly arbitrary and does not offend Article 14 of the Constitution. (b) The classification and demarcation between cases where the amount sought to be evaded is Rs. 25 lakhs or below and those where it exceeds that threshold is rational and guided; the power vested in the sanctioning authority in cases above Rs. 25 lakhs is not unguided or unbridled in a constitutional sense. (c) The challenge to the constitutional validity of Circular No. 5/2020 was rejected. 2.3 Effect of pendency of appeals and assessee's objections to assessment on validity of prosecution sanction 2.3.1 Legal and factual contentions as noted (a) The petitioner argued that since appeals against the assessment orders are pending before the CIT(A) under Section 246A, and numerous objections-jurisdictional and on merits-have been raised (including that proceedings ought to have been under Section 153A rather than 153C; that additions under Sections 69 and 69A are based on loose papers/diaries and alleged benami investments; that assessment orders are ex parte and violate principles of natural justice; and that the transfer order under Section 127 is allegedly non est for want of DIN), prosecution should not be initiated. (b) It was also contended that under Section 275, and as per certain decisions referred to, there is an embargo on passing penalty orders during pendency of appeals, and by extension, prosecution should be deferred. 2.3.2 Interpretation and reasoning (a) The Court accepted the respondent's contention that neither Section 275 nor Section 276C(1) imposes any bar on initiation of prosecution proceedings during pendency of assessment appeals, nor any statutory precondition that penalty must first be imposed and confirmed. (b) In relation to the various factual and jurisdictional objections (additions under Sections 69/69A based on loose papers, legality of 153C proceedings as opposed to 153A, ex parte assessments, DIN issues under Section 127, etc.), the Court held: - These are 'questions of fact' to be decided by the competent authority in appropriate appellate/assessment proceedings; and - They do not constitute grounds at this stage to interfere with or quash the sanction for prosecution. (c) The Court specifically stated that: - The challenge to additions under Sections 69 and 69A being based on loose papers is factual and 'needs to be decided by the competent authority', and reliance on CIT v. Ravi Kumar does not assist the petitioner at the sanction stage. - Reliance on Vijay Krishnaswami (quashing prosecution where no attempt to evade tax was made and procedural requirements for criminal prosecution were not followed) is distinguishable; in the present case, the prosecution is premised on large-scale alleged evasion and the sanctioning procedure has been followed. - Reliance on Karnataka High Court decisions in BS Uday Shetty and Anjanadari Fuel Station (relating to validity of appeal in penalty proceedings and timing of penalty orders) and on UCO Bank is distinguishable and does not bar prosecution in the present context. - Reliance on Kamlesh Kumar Jha and Brandix Mauritius Holdings Ltd. to challenge the order under Section 127 for want of DIN raises factual questions not to be decided at this stage. 2.3.3 Conclusions (a) Pendency of appeals before the CIT(A) against assessment orders, and alleged infirmities in assessment (including jurisdiction under Sections 153A/153C, evidentiary basis of additions under Sections 69/69A, ex parte nature of orders, and DIN-related objections), do not create a legal bar to initiation of prosecution under Sections 276C and 278E. (b) Issues concerning merits or legality of assessment orders are to be adjudicated by the appropriate appellate/assessment authorities and cannot be used at the threshold to invalidate prosecution sanction in a case where the amount of alleged evasion exceeds Rs. 25 lakhs. 2.4 Alleged non-application of mind and insufficiency of reasons in sanction orders 2.4.1 Contentions as noted (a) The petitioner contended that the impugned sanction orders under Section 279(1) were passed mechanically, without proper application of mind, and are 'bereft of reasons' as to why the present case is a 'deserving case' for initiation of prosecution despite pendency of appeals and absence of confirmed penalty by the ITAT. 2.4.2 Interpretation and reasoning (a) The Court proceeded on the premise that the sanctioning authority (PCIT) has in fact granted approval and that the requirement of collegium approval or prior ITAT-confirmed penalty does not apply for cases involving evasion exceeding Rs. 25 lakhs. (b) It was noted that the petitioner did not dispute: - That the alleged amount under investigation is above Rs. 25 lakhs (indeed, above Rs. 348 crores); or - That the competent sanctioning authority (PCIT) had granted the sanction. (c) In light of the Court's interpretation of the Circulars and the magnitude of alleged tax evasion, the grievance of absence of detailed reasoning to categorise this as a 'deserving case' for pre-penalty/ pre-ITAT prosecution was rendered untenable, as those preconditions were held inapplicable to such large cases. (d) The Court did not find any established procedural infirmity or legal defect in the grant of sanction sufficient to warrant quashing; instead, it accepted the respondent's position that the PCIT was the appropriate authority and had duly sanctioned prosecution in accordance with the Circulars. 2.4.3 Conclusions (a) The sanction orders issued by the PCIT under Section 279(1) authorising prosecution under Sections 276C and 278E in a case where alleged tax evasion far exceeds Rs. 25 lakhs are not vitiated for want of collegium approval, for lack of ITAT-confirmed penalty, or for alleged non-application of mind. (b) No grounds were made out to quash the impugned sanction notices on the basis of procedural or substantive defects in the sanction. 2.5 Overall disposition 2.5.1 For the reasons recorded on the interpretation of CBDT Circulars 24/2019 and 5/2020, the rejection of the Article 14 challenge to Circular 5/2020, the finding that pendency of appeals and assessment objections do not bar prosecution, and the acceptance that the PCIT was the competent sanctioning authority in a case involving alleged evasion exceeding Rs. 25 lakhs, the Court held that the impugned sanction notices and Circular No. 5/2020 are not unconstitutional, non-est, or otherwise liable to be quashed. 2.5.2 The petition was dismissed and pending applications were dismissed as infructuous.