2023 (10) TMI 796 - HC - Income Tax

Prosecution proceeding u/s 276CC - Economic Offences - not filing returns of income without giving any reasonable cause and noncompliance of the notices of the AO - liability of directors for such economic offence as alleged - HELD THAT - As in view of the subsequent orders passed by the competent authority under the said Act, it appears that no additional tax liability was fastened upon the assessing company. Tax was already deposited and thereafter, the prosecution has been initiated. This is not a case that after initiation of the prosecution the tax has been deposited. Further, in view of the subsequent orders passed by the competent authority, there is no tax liability against the petitioners who happened to be Directors of M/s Santpuria Alloys Private Limited. Looking into the averments made in the complaint petition, there is no disclosure of the fact as to how these two petitioners were looking into the day to day affairs of the company and section 278B of the said Act speaks of offences by the company whereas the liability has been fastened upon the person who is looking to day to day affairs of the company. Even the petitioners have not been made accused in the complaint case, however, by way of the information provided along with the letter, learned court has added these petitioners as accused in the complaint and the role how these petitioners are looking into the day to day affairs of the company is not disclosed and the requirement of disclosing the role with regard to day to day affairs of the company is one of the mandatory requirement, in view of the judgment of Sushil Sethi and Another v. State of Arunachal Pradesh and Others 2020 (1) TMI 1445 - SUPREME COURT If the penalty has been struck off, whether a criminal case can survive or not ? - As this aspect of the matter was considered in the case of K.C. Builders and Another 2004 (1) TMI 7 - SUPREME COURT The case of the petitioners is fully covered as against the petitioners there is no penalty or assessment further in view of the subsequent orders passed by the competent authority in the said statute. There is no doubt that the willful failure occur in section 276 CC can attract if the willfulness brings in the element of guilt and thus, the requirement of mens-rea will come into force. In the case in hand, the petitioners have already deposited the tax and thereafter the said prosecution has been initiated. Looking into clause(ii)(b) of section 276 CC, it is crystal clear that if the tax payable determined on regular assessment is reduced by advance tax paid and the tax deducted at source does not exceed Rs.3,000/- such an assessee shall not be prosecuted for not furnishing the return under section 139(1) of the said Act. In the case in hand, in view of subsequent orders passed by the concerned authority under the statute, there is no assessment against the petitioners. Thus, the tax liability is not there even to the tune of Rs.3,000/- in view of the said proviso - There is no doubt that the penal provision is required to be dealt with as it is, and the court is not required to shift the language of penal provision, however, in the case in hand, the facts are otherwise. Thus entire criminal proceeding including order taking cognizance passed by learned Special Judge, Economic Offences hereby cognizance has been taken u/s 276 of CC of the Income Tax Act, 1961 is quashed.

Summary

Issues Involved:
1. Quashing of criminal proceedings under section 276CC of the Income Tax Act, 1961.
2. Liability of Directors under section 278B of the Income Tax Act, 1961.
3. Impact of appellate and tribunal orders on criminal prosecution.

Summary:

Issue 1: Quashing of criminal proceedings under section 276CC of the Income Tax Act, 1961
The petitioners sought to quash the criminal proceedings arising out of Complaint Case No. 08 of 2012, including the order taking cognizance dated 07.09.2012 under section 276CC of the Income Tax Act, 1961. The case was initiated due to the alleged willful failure of M/s Santpuria Alloys Pvt. Ltd. to file returns for the Assessment Years 2005-06 to 2009-10 and 2010-11 within the statutory period. Despite the company eventually filing the returns on 22.08.2011, 02.09.2011, and 20.09.2011, the prosecution was sanctioned on 08.12.2011.

Issue 2: Liability of Directors under section 278B of the Income Tax Act, 1961
The petitioners, who were Directors of the company, argued that they were not initially named as accused in the complaint and were later added without specific allegations of their involvement in the day-to-day affairs of the company. The court emphasized that under section 278B, the complaint must disclose how the Directors were responsible for the company's daily operations, which was lacking in this case.

Issue 3: Impact of appellate and tribunal orders on criminal prosecution
The court noted that the assessment orders for the relevant years were either nullified or partially allowed by appellate authorities, and the Income Tax Appellate Tribunal (ITAT) granted full relief to the petitioners. Consequently, no additional tax liability was imposed on the company. The court referred to the Supreme Court's judgment in K.C. Builders and Another v. Assistant Commissioner of Income Tax, which held that once penalties are canceled, prosecution under section 276CC becomes unsustainable.

Conclusion:
In light of the subsequent orders by the competent authorities nullifying the tax liabilities and the lack of specific allegations against the Directors, the court quashed the entire criminal proceeding, including the order taking cognizance dated 07.09.2012, under section 276CC of the Income Tax Act, 1961. The petition was allowed, and the case was disposed of.