2015 (10) TMI 2866 - HC - Income Tax

Prosecution u/s 276C - whether the petitioner/assessee has conducted himself in the manner which could fall within the ambit of Section 276C of the Act so as to prosecute him in a criminal Court and whether he can be termed as a person who wilfully attempted to evade any tax penalty or interest? - HELD THAT - As decided in K.C.Builders and Anr. 2004 (1) TMI 7 - SUPREME COURT assessee was unsuccessful in his attempts to get the proceedings launched in a criminal Court quashed under the provisions of Sections 397 and 401 Cr.P.C. The trial Court and the High Court rejected the prayer of the assessee and hence the matter went to the Supreme Court as held the matter which has been adjudicated and settled by the Tribunal need not be dragged into the criminal Courts unless and until the act of the appellants could have been described as culpable . Bearing in mind the above principles enunciated by the Supreme Court and in view of the submissions made by petitioner what could be stated is that continuing the criminal prosecution of the petitioner/assessee will be subjecting the assessee to needless haarassment in view of the facts and circumstances noted hereunder - In the instant case for the assessment year 2005-06 as per the Assessment Order dated 18-12-2007 the demand was NIL. The assessee paid the tax and interest of Rs.39, 14, 408/- by 25-11-2005 through challans - Rs.25, 00, 000/- on 24-11-2005 Rs.10, 00, 000/- on 24-11-2005 and Rs.4, 14, 408/- on 25-11-2005. Proof thereof is produced. It is not disputed. In that view of the matter all further proceedings are liable to be quashed. Criminal Petition is allowed quashing all further proceedings in C.C.No.71 of 2007 on the file of the Special Judge for Economic Offences at Hyderabad against the petitioners/accused No.3 and 5.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the petitioners (A.3 and A.5) were in charge of or responsible for the conduct of business of the company, thereby justifying their prosecution under Sections 276C and 278B of the Income-Tax Act, 1961.
• Whether the actions of the company and its directors constituted a "wilful attempt to evade tax" as per Section 276C of the Income-Tax Act.
• Whether the continuation of criminal proceedings against the petitioners constitutes an abuse of the court's process.
• Whether the principles established in prior judgments, such as K.C. Builders v. Assistant Commissioner of Income Tax, apply to the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Responsibility of Petitioners (A.3 and A.5)

• Relevant Legal Framework and Precedents: Section 278B of the Income-Tax Act addresses offenses by companies and holds individuals responsible if they are in charge of or responsible for the conduct of the company's business.
• Court's Interpretation and Reasoning: The petitioners argued that they were not involved in the day-to-day management of the company. The court considered whether there was sufficient evidence to establish their responsibility for the company's tax affairs.
• Key Evidence and Findings: The petitioners provided evidence that they were not involved in the company's daily operations, and there was no specific allegation against them regarding their role in the alleged tax evasion.
• Conclusion: The court found that there was no basis to hold the petitioners accountable under Section 278B, as they were not proven to be responsible for the company's business conduct.

Issue 2: Wilful Attempt to Evade Tax

• Relevant Legal Framework and Precedents: Section 276C pertains to the wilful attempt to evade tax, requiring evidence of intentional tax evasion.
• Court's Interpretation and Reasoning: The court examined whether the actions of the company and its directors amounted to a wilful attempt to evade tax. The explanation under Section 276C outlines acts that constitute such an attempt.
• Key Evidence and Findings: The company had filed its tax returns and paid the due tax and interest before the assessment order was finalized, negating the argument of wilful evasion.
• Conclusion: The court concluded that the actions did not meet the threshold of a wilful attempt to evade tax, as the tax liability was settled before the assessment order.

Issue 3: Abuse of Court's Process

• Relevant Legal Framework and Precedents: The court considered whether the prosecution was justified or constituted harassment, referencing K.C. Builders v. Assistant Commissioner of Income Tax, which established that prosecution should not proceed if penalties are canceled.
• Court's Interpretation and Reasoning: The court assessed whether the continuation of proceedings was warranted given the facts and prior legal precedents.
• Key Evidence and Findings: The penalties under Section 271(1)(c) were canceled, and the tax liabilities were settled, aligning with precedents where prosecution was deemed unnecessary.
• Conclusion: The court determined that continuing the prosecution would be an abuse of process, as the conditions for prosecution were not met.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforced the principle that prosecution under Section 276C requires clear evidence of a wilful attempt to evade tax, and that individuals must be proven to be responsible for the company's conduct to be held liable under Section 278B.
• Final Determinations on Each Issue: The court quashed the proceedings against the petitioners, concluding that there was no evidence of their responsibility for the company's tax affairs or a wilful attempt to evade tax.
• Verbatim Quotes of Crucial Legal Reasoning: The court noted, "In our opinion, the appellants cannot be made to suffer and face the rigorous of criminal trial when the same cannot be sustained in the eyes of law because the entire prosecution in view of a conclusive finding of the Income tax Tribunal that there is no concealment of income becomes devoid of jurisdiction."