2007 (1) TMI 131 - HC - Income Tax

Summary

Issues Involved:
1. Discharge of respondents from offenses u/s 276C(1) and 277 of the Income-tax Act, 1961.
2. Impact of deletion of penalty by the Income-tax Appellate Tribunal (ITAT) on criminal prosecution.
3. Requirement of mens rea for prosecution under sections 276C(1) and 277.
4. Validity of prosecution when penalty proceedings are terminated on technical grounds.

Summary:

1. Discharge of Respondents from Offenses u/s 276C(1) and 277:
The revision petition challenges the order dated September 25, 2004, by the Additional Sessions Judge discharging the respondents from offenses u/s 276C(1) and 277 of the Income-tax Act, 1961. The discharge was based on the deletion of penalties by the ITAT, which the Income-tax Department contested.

2. Impact of Deletion of Penalty by ITAT on Criminal Prosecution:
The Additional Sessions Judge relied on Supreme Court decisions, particularly K. C. Builders v. Asst. CIT [2004] 265 ITR 562 (SC) and G. L. Didwania v. ITO [1997] 224 ITR 687 (SC), concluding that once the penalty is deleted by the ITAT, criminal prosecution cannot continue. The Judge noted, "once the penalty has been deleted by the orders of the Commissioner of Income-tax (Appeals) and by the Income-tax Appellate Tribunal, it will not be appropriate in the eyes of law to let the criminal prosecution continue in the case."

3. Requirement of Mens Rea for Prosecution under Sections 276C(1) and 277:
The Additional Sessions Judge emphasized that "mens rea is absolutely essential in such like cases and once the penalty has been deleted by the final fact-finding body, the element of mens rea attributable on the part of the accused company is not sustainable in the eyes of law."

4. Validity of Prosecution When Penalty Proceedings are Terminated on Technical Grounds:
Mr. Jolly, representing the petitioner, argued that the ITAT deleted the penalty based on a technicality (lack of recorded satisfaction by the Assessing Officer) and not on merits. He cited K. C. Builders [2004] 265 ITR 562 (SC), which states, "once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under section 276C is automatic." However, the court found that the penalty was deleted on merits, not merely on technical grounds.

Conclusion:
The court upheld the Additional Sessions Judge's order, stating that the case is covered by the Supreme Court's decisions in K. C. Builders [2004] 265 ITR 562 (SC) and Bandhu Machinery. The Division Bench of the High Court had already dismissed the Department's appeal, affirming that the Assessing Officer did not record the necessary satisfaction for penalty initiation. Thus, the revision petition was dismissed, confirming the discharge of the respondents.