2008 (12) TMI 78 - HC - Income Tax

Assessee indulged in the act of fabricating TDS certificates and collecting refund from the income tax department fraudulent practice adopted by him for preparation of false TDS certificates and returns and obtaining refunds from Department - inclusion in the income of the assessee - income from such refunds is taxable as an income under a residuary head - Income tax Act considers the income earned legally as well as tainted income alike

Summary

Issues Involved:
1. Whether the refunds collected illegally by production of bogus TDS certificates by the assessee could be considered as income.
2. Whether amounts earned fraudulently can be treated as income and taxed.

Issue-wise Detailed Analysis:

1. Legality of Refunds as Income:

The primary issue was whether the refunds collected illegally by the assessee through bogus TDS certificates could be considered as income. The assessee, engaged in tax consultancy and audit work, was found to have claimed and received income tax refunds using fraudulent TDS certificates, even in the names of non-existent persons. The Income Tax Department, after a search and seizure operation, treated these refunds as "professional income" for the assessment years 1987-88 and 1988-89.

The Commissioner (Appeals) reduced the amount considered as income from Rs. 7,29,424 to Rs. 4,37,000 for the year 1987-88 and estimated the income from fraudulent TDS claims at Rs. 14,36,758 for the year 1988-89. The Commissioner also directed that this income be included under the "Residuary" head instead of "Profession".

The Income Tax Appellate Tribunal (ITAT) acknowledged the fraudulent activities but held that the refunds collected illegally could not be assessed as income. The Tribunal opined that treating these refunds as income would be a further wrong by the Department, and thus allowed the assessee's appeal while dismissing the Revenue's appeal.

2. Taxability of Fraudulently Earned Amounts:

The second issue was whether amounts earned fraudulently could be treated as income and taxed. The Revenue argued that income earned, even if through illegal means, is taxable. They cited precedents such as K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. v. CIT and CIT v. S.C. Kothari, which established that income earned unlawfully is still subject to tax.

The Tribunal's decision was challenged on the grounds that it contradicted established legal principles. The High Court noted that the Income Tax Act's definition of "income" is inclusive and broad, encompassing all kinds of income, regardless of legality. The court referenced several cases, including Canadian Minister of Finance v. Smith and Lindsay v. Commissioner of Inland Revenue, which supported the notion that illegal income is taxable.

The court emphasized that the primary function of the Income Tax Act is to tax income, irrespective of the means of acquisition. The court rejected the Tribunal's view that taxing such income would make the Department a party to the illegal act. Instead, the court held that allowing such income to escape taxation would reward illegal activities.

Conclusion:

The High Court found that the Tribunal erred in its judgment by not treating the fraudulent refunds as taxable income. The court reiterated that the Income Tax Act does not distinguish between legal and illegal income for taxation purposes. Consequently, the court set aside the Tribunal's order, restored the Commissioner (Appeals)'s order, and decided in favor of the Revenue, affirming that the fraudulent refunds collected by the assessee constituted taxable income.