1990 (9) TMI 18 - HC - Income Tax

Issues Involved:
1. Maintainability of the prosecution under sections 120B, 193, 196, and 420 read with section 34 of the Indian Penal Code.
2. Applicability of sections 276C(1) and 277 read with section 278B of the Income-tax Act, 1961.
3. Interpretation of "funds" versus "income" in the context of the Income-tax Act.
4. Prematurity of the prosecution without following section 69C of the Income-tax Act.
5. Relevance of section 271(1)(c) of the Income-tax Act and the Wanchoo Committee recommendations.
6. Application of inherent powers to quash the prosecution.

Issue-wise Detailed Analysis:

1. Maintainability of the prosecution under sections 120B, 193, 196, and 420 read with section 34 of the Indian Penal Code:
The prosecution case involves allegations that the petitioner engaged in transactions not recorded in the account books, thus attempting to evade income tax. The court noted that the allegations in the complaint, taken as a whole, show that the petitioners had business transactions that were not accounted for in the books. The court emphasized that the evidentiary value of these allegations should be assessed during the trial and not at this preliminary stage. The complaint's averments, if taken at face value, indicate the existence of factual ingredients constituting the offenses alleged, justifying the continuation of the prosecution.

2. Applicability of sections 276C(1) and 277 read with section 278B of the Income-tax Act, 1961:
The respondent argued that the transactions were deliberately concealed to evade income tax, which falls under section 276C's explanation clauses (i) and (iv). These clauses cover possessing false entries or statements in books of account or causing circumstances to exist that enable tax evasion. The court agreed that the allegations in the complaint, which include unrecorded demand drafts and reduced transaction volumes, prima facie attract the ingredients of section 276C(1). Therefore, the prosecution under these sections is maintainable.

3. Interpretation of "funds" versus "income" in the context of the Income-tax Act:
The petitioner contended that the term "funds" used in the complaint does not necessarily equate to "income" and that the Income-tax Officer should have specifically alleged that the transactions were financed out of income. The court found this distinction unnecessary at this stage, as the complaint's allegations, taken as a whole, indicate unaccounted business transactions. The court held that detailed proof of these allegations would be part of the trial's evidence and that the prosecution should be allowed to present its case.

4. Prematurity of the prosecution without following section 69C of the Income-tax Act:
The petitioner argued that the prosecution was premature as the procedure under section 69C, which deals with unexplained expenditure, had not been followed. The court disagreed, stating that section 69C's procedure pertains to assessment proceedings and does not preclude the initiation of prosecution if the complaint's allegations show prima facie commission of the offenses. The court held that the prosecution is not premature and can proceed independently of section 69C's procedures.

5. Relevance of section 271(1)(c) of the Income-tax Act and the Wanchoo Committee recommendations:
The petitioner referred to the Wanchoo Committee's recommendations and section 271(1)(c), which deals with penalties for concealment of income, arguing that these provisions should preclude prosecution. The court found this argument inapplicable, noting that the prosecution was for different offenses, including conspiracy to cheat. The court distinguished the present case from the decision in S. Vaidyanathan, ITO v. Dr. B. Mathuram and Sons, where the reassessment order was set aside and remanded. The court held that section 271(1)(c) does not preclude the current prosecution.

6. Application of inherent powers to quash the prosecution:
The court reiterated that inherent powers to quash a prosecution should not be exercised if the complaint's averments indicate prima facie commission of the offenses alleged. The court found that the allegations in the complaint, taken at face value, do show deliberate concealment of income and reduced transaction volumes, justifying the continuation of the prosecution. The court held that the prosecution must be allowed to present its evidence, and the petitioners will have the opportunity to challenge it during the trial.

Conclusion:
The court dismissed the petitions, holding that no grounds were made out to quash the pending prosecutions. The allegations in the complaint, taken in their entirety, prima facie show the commission of the offenses alleged, and the prosecution should be allowed to proceed.

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