1995 (9) TMI 6 - HC - Income Tax

Agreement For Avoidance, Attributable To, Business Profits, Double Taxation Avoidance Agreement, Foreign Company, Income Tax Act, Permanent Establishment, Tax At Source

Issues Involved:
1. Challenge to the correctness of the order dated March 1, 1995, by the Chief Judicial Magistrate, Nagpur.
2. Quashing of proceedings in Criminal Case No. 916 of 1988.
3. Relationship between penalty proceedings under section 271(1)(c) of the Income-tax Act and prosecution under sections 276C, 277, and 278 of the Income-tax Act.
4. Impact of appellate decisions on ongoing criminal proceedings.

Issue-wise Detailed Analysis:

1. Challenge to the correctness of the order dated March 1, 1995, by the Chief Judicial Magistrate, Nagpur:
The applicants challenged the order dated March 1, 1995, passed by the Chief Judicial Magistrate, Nagpur, which dismissed their application for discharge in Criminal Case No. 916 of 1988. The basis of the challenge was that the penalty orders under section 271(1)(c) of the Income-tax Act, which formed the foundation of the criminal complaint, had been quashed by the Deputy Commissioner of Income-tax (Appeals) and upheld by the Income-tax Appellate Tribunal.

2. Quashing of proceedings in Criminal Case No. 916 of 1988:
The applicants sought to quash the proceedings in Criminal Case No. 916 of 1988 on the grounds that the penalty orders, which were the basis for the criminal complaint, had been set aside by the appellate authorities. The Income-tax Appellate Tribunal's decision had attained finality, and no further questions of law were referred to the High Court. Consequently, the foundation of the criminal complaint ceased to exist.

3. Relationship between penalty proceedings under section 271(1)(c) of the Income-tax Act and prosecution under sections 276C, 277, and 278 of the Income-tax Act:
The court examined whether the quashing of penalty proceedings under section 271(1)(c) affected the prosecution under sections 276C and 277 read with section 278 of the Income-tax Act. It was noted that while penalty proceedings and prosecution are distinct and separate, the quashing of penalty orders by the final fact-finding authority under the Income-tax Act impacts the basis of the criminal prosecution. The court cited several precedents, including Premier Breweries Ltd. v. Deputy CIT [1994] 207 ITR 871 (Ker), and Banwarilal Satyanarain v. State of Bihar [1989] 179 ITR 387 (Patna), which held that criminal proceedings could not continue if the penalty was quashed on merits.

4. Impact of appellate decisions on ongoing criminal proceedings:
The court observed that the Income-tax Appellate Tribunal had conclusively held that the Department failed to prove that the assessee had concealed income or furnished inaccurate particulars for the assessment years 1983-84 and 1984-85. This finding had attained finality and thus invalidated the basis of the criminal complaint. The court emphasized that the criminal court must give due regard to the result of proceedings under the Income-tax Act, as they have a material bearing on the criminal prosecution. The Delhi High Court's observations in Sequoia Construction Co. P. Ltd. v. P. P. Suri, ITO [1986] 158 ITR 496, were considered, but it was concluded that the findings of the specialized bodies under the Income-tax Act should not be ignored by the criminal court.

Conclusion:
The criminal revision application was allowed, and the order passed by the Chief Judicial Magistrate, Nagpur, dated March 1, 1995, was quashed and set aside. The applicants were discharged, and further proceedings in Criminal Complaint Case No. 916 of 1988 were dropped. The court held that there was no justification for continuing the prosecution after the penalty orders were quashed by the appellate authorities, and the applicants were not guilty of concealment of income or furnishing inaccurate particulars.

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