Prosecution: Failure to file return of income and Fringe Benefit Tax. Discussion of provisions and recent Apex court's ruling and some suggestions to avoid unnecessary litigation in alleged crimes.

[DEV KUMAR KOTHARI]

Summary: Willful failure to file return of income (other than new search cases) and return of fringe benefits within one  year from the end of the  relevant assessment year may attract provisions for prosecution. However if tax payable on regular assessment as reduced by advance tax paid and tax deducted at source does not exceed rupees three thousand , then assessee will not be proceeded.

There appears  no such relaxations  in case of new search cases ( notice under section 158BC) .

The limit of Rs. three thousand needs to be revised up ward and benefit of tax collected at source and tax paid otherwise than advance tax  and TDS should also be allowed in the exception. It is suggested that prosecution should not be launched when some proceedings are pending and there is possibility of reduction of tax demand on disposal of such proceedings. Unfortunately many times revenue authorities launches prosecution, prematurely and ultimately the cause of action for such prosecution vanishes on disposal of proceedings. Therefore, it is suggested that revenue should not file criminal complaints when proceedings likely to result reduction of tax liability are pending.

In fact the slow  way in which even cases against hardcore criminals, and large scale public fund siphoning proceeds , it is desirable that for small economic offences  which are only in nature of technical default or lapses in administration only penalty be prescribed and criminal cases should not be launched. This will save lot of un-necessary litigation costs by government and assessee's and work load on  courts dealing with such economic crimes.  

1.Provisions in the Income Tax Act,1961:

The Income Tax Act provides for imprisonment of assesses / taxpayers in several circumstances, one of which is for failure to file return of income if prescribed conditions prevail. Regarding return of income separate provisions are found for normal return of income and return of income in new search cases. The provisions are contained in S. 276CC and 276CCC. From  1^st June, 2003  cases of search  or requisition under section 153A  were also covered by the same provisions of section 276CC.

On introduction of fringe benefit tax, prosecution provisions of S. 276CC  have been extended in respect to FBT return also from assessment year 2006-07.

Provisions relating to failure to file return of income in  new search cases ( return required  vide notice u/s 158BC) are quite different - monetary limit for relaxation is not provided in S. 276CCC.

2. The relevant sections  with highlights reads as follows:

Failure to furnish returns of income.

276CC. If a person willfully fails to furnish in due time the return of fringe benefits which he is required to furnish under sub-section (1) of section 115WD or by notice given under sub-section (2) of the said section or section 115WH or] the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under clause (i) of sub-section (1) of section 142] or section 148 [or section 153A], he shall be punishable,—

   (i)  in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

  (ii)  in any other case, with imprisonment for a term which shall not be less than three months but which may extend to three years and with fine:

Provided that a person shall not be proceeded against under this section for failure to furnish in due time the return of fringe benefits under sub-section (1) of section 115WD or return of income under sub-section (1) of section 139—

(i)  for any assessment year commencing prior to the 1st day of April, 1975; or

(ii)  for any assessment year commencing on or after the 1st day of April 1975, if—

(a)  the return is furnished by him before the expiry of the assessment year; or

(b) the tax payable by him on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source, does not exceed three thousand rupees.

Failure to furnish return of income in search cases:

276CCC. If a person willfully fails to furnish in due time the return of total income which he is required to furnish by notice given under clause (a) of section 158BC, he shall be punishable with imprisonment for a term which shall not be less than three months but which may extend to three years and with fine :

Provided that no person shall be punishable for any failure under this section in respect of search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, after the 30th day of June, 1995 but before the 1st day of January, 1997.

3. Types of returns relevant for the purpose:

A reading of the above provisions shows that, at present  the following type of  cases of failure to file return are covered by the provisions of S. 276CC:-

Voluntary return of income u/s 139(1) or

Return of income  in response to notice u/s 142(1)(a),

Return of income  in response to notice u/s 148,

Return in response to notice u/s 153A ( old search cases),

Voluntary return of fringe benefit tax u/s 115WD(1),

Return of fringe benefit tax in response to notice u/s 115WD(2)

Return of fringe benefit tax in response to notice u/s 115WH.

And the following cases of failure to file return are covered by the provisions of S. 276CCC:-

Return in response to notice u/s 158BC ( new search cases),

4.Will full failure is a must in all cases:

In all cases willful failure to file return of income, return of income in search cases and also return of fringe benefits is a prerequisite for application of these provisions.  If it can be proved that the assessee's failure to file return was willful, then only the prosecution will be maintainable. Therefore, if the failure was due to certain substantial difficulties, bonafide belief, or reasons beyond assessee's control, then prosecution may not succeed. 

There have been several amendments in the section and now almost all situations in which assessee is required to file return of income or fringe benefit are covered.

5.Term of imprisonment:

Under section 276CC  (i) where tax  would have been evaded exceeds one hundred thousand rupees the  minimum rigorous imprisonment is for six months which can extend to seven years with fine.

(ii) in any other case, with imprisonment for minimum three months and maximum three years with fine.

(iii) In case of prosecution under section 276CCC  there is provision of imprisonment of minimum three months and can extend up to three years with fine.

It is note worthy that only in first case there is rigorous imprisonment. In other cases it is simple imprisonment.

6.Monetary limit for exception must be increased:

From the proviso to S. 276CC We find that the provision of prosecution shall not apply if the net tax payable by the assessee after deduction of advance tax paid by him and tax deducted at source does not exceed Rs.3,000/-.

Net tax payable must definitely mean the net tax payable after disposal of all pending proceedings like appeals before the Commissioner (Appeal), Tribunal , High Court and the Supreme Court. Though the language used is tax payable by him on the total income determined on regular assessment, but it cannot mean first assessment or initial assessment when appeals on behalf of the assessee are pending.

7. Deductible  and not deductible sums from tax determined:

For this purpose from liability of tax ( as determined in regular assessment)  only (a)  advance tax paid by assessee and (b)  tax deducted at source are deductible.

Thus, the amount of tax paid otherwise than as advance tax like self assessment tax or tax ( may be described as advance tax) not paid within previous year, and paid after end of previous year will not be considered while determining net tax payable with reference to this proviso / exception. Furthermore, tax deductible, taken in to consideration while paying advance tax, if not actually deducted by the concerned party, will also not be deducted.

8. Limit of Rs.3000 is very low:

The limit was fixed when section 276CC was inserted with effect from lst October, 1975.  Surprisingly, the same limit is continuing though thirty years have lapsed. The limit is not only for the matters covered by the section as initially inserted with effect from l/10/1975 but also in respect of other matters subsequently covered by section 276 CC for example latest being    fringe benefit tax which has been introduced recently with effect from lst April, 2006.

On reasonable basis, considering the inflation since  the year 1975, and increased exemption limit, reduced rate of tax etc. this limit should be raised to at least Rs. fifty thousand. Furthermore, tax paid as self assessment tax within due date or before completion of assessment, and tax deductible at source, which was eligible for consideration while paying advance tax but could not be deducted or not deducted by concerned party should also be considered for applicability of the exception.

9. Other tax payment should also be reduced:

Taxes voluntarily paid should also be reduced - In context of the above provision it is desirable that the taxes paid by the assessee before filing of the return or even after filing of the return should also be considered because in some cases it may happen that tax was paid but for certain reasons return could not be filed or in some cases it may be that tax liability was admitted in the return but tax could not be paid die to certain reasons.  Similarly, when assessee co-operates and pay tax after assessment such payment should also be considered and the assessee should not face risk of prosecution at the instance of the assessing officer on the ground that the return was filed late ( after one year from the relevant assessment year) and excess of tax determined above advance tax and TDS is more than Rs.3000/-

10. Regular assessment:

In the proviso the phrase ` tax on income determined on regular assessment' has been used. As per S. 2(40) 'regular assessment' means the assessment made under subsection (3) of section 143 or section 144.

However, the meaning is subject to the context in which it is used. In the context of provisions like prosecution, this should mean income determined in regular manner and after disposal of all pending proceedings by way of rectification, revision, appeals etc. Therefore, when appeals or other proceedings are pending, and tax is not finally determined, prosecution should not be initiated by filing a complaint. Only after tax is finally determined, this exercise should be started to avoid un-necessary pendency in criminal courts. Specific provisions in this regard can save lot of litigation and costs on behalf of revenue as well as tax payers.  

If regular assessment is considered as first assessment u/s 143(3) / 144, many unrealistic  prosecutions may  have to be filed which will need to be kept in abeyance during pendency of appeals and may have to be ultimately dropped.

11. Filing of return within one year from end of assessment year- an exception:

In case of S. 139(1), 142, 148 and corresponding provisions relating to FBT, prosecution shall not be launched if the assessee files return within one year from the end of the assessment year.

12. Search cases- no such exception:

In new  cases of search (vide notice under S. 158BC) where section 276CCC apply  the  exception  on the basis of  net tax not exceeding rupees three thousand and  on the basis of return having been filed  before end of the relevant assessment year are not available as in case of matters governed by S. 276CC. Therefore, mere  will full failure in filing of return of income as per notice u/s 158BC may make the assessee liable to prosecution even if no tax is payable or small tax is payable.

13.Filing of criminal case- should be delayed during pendency of other  proceedings:

Though  on strict interpretation once first assessment is framed under section 143(3) or 144 and it is found that tax assessed minus advance tax paid and tax deducted at source is an amount of more than rupees three thousand, the Assessing Officer can file a criminal case if other conditions are satisfied. However on a purposive construction, it appears that even filing of criminal case should be kept in abeyance till other proceedings, which may reduce net tax assessed below Rs.3000/- .

If regular assessment is considered as first assessment u/s 143(3) / 144, many unrealistic  prosecutions may  have to be filed which will need to be kept in abeyance during pendency of appeals and may have to be ultimately dropped.

14. Recent judgment of Supreme Court:

In a recently reported case decided by the supreme court similar matter was involved in

GURU NANAK ENTERPRISES AND OTHERS v.INCOME-TAX OFFICER, DISTT. CIRCLE II, JAIPUR[2005] 279 ITR 30(SC) = [2008 -TMI - 6162 - SUPREME Court]

a. In this case for the assessment year 1982-83 the assessee-firm filed its income-tax return disclosing an income on which the tax liability was Rs.644.

b. The Assessing Officer made certain additions to firms income and determined the tax liability at Rs.10,476, thus on first regular assessment income exceeded Rs.3000/-.

c. After disposal of appeal by CIT (A) the tax liability was reduced to  Rs.4450 that is to say it was in excess of Rs.3000/- so S. 276CC was still  applicable.

d. The Assessing Officer lodged a complaint against the firm under section 276CC read with section 278B of the Income-tax Act, 1961. 

e. After disposal of second appeal on behalf of the assessee before the Appellate Tribunal tax liability was reduced to Rs.1,360 that is below Rs.3000/- so the proviso providing exception became applicable.

f. The prosecution case was pending before criminal court. ( It was not withdrawn by the revenue, although preconditions for such a case did no longer exist after reduction of tax liability in appeal before ITAT).

g.  Therefore, the firm filed a Criminal revision petition under section 482 of the Code of Criminal Procedure, 1973, to have the prosecution quashed. 

h. Un fortunately, the High Court also dismissed the petition summarily. Therefore , the firm had to file an  appeal before the Supreme Court. On such appeal the honorable Supreme Court observed and held on the following lines:

(i) that under proviso (ii)(b) of section 276CC a person shall not be proceeded with for failure to furnish in due time the return of income if the tax payable on the total income determined as reduced by advance tax and tax deducted at source did not exceed Rs.3,000.

(ii) Since the tax liability of the firm, on final assessment was determined at Rs.1,360, the prosecution was unwarranted and the proceedings had to be quashed.

Therefore, the prosecution was quashed and the judgment of Rajasthan High Court was reversed.

Thus, it appears that the Supreme Court has also in context of S. 276CC considered "regular assessment" as last assessment after disposal of all appeals.

In this case considering tax on returned income being much below limit of rupees three thousand, and fact of pendency of appeals of assessee, and also reality that about 90% of additions and disallowances made by the A.O. are deleted in appeals, the revenue could wait till disposal of appeals filed by the assessee before the Tribunal. It was not desirable to file a criminal complaint before decision by ITAT. Un-necessary litigation and costs on behalf of revenue and assessee both could  be avoided by not filing complaints prematurely ( before final determination of tax liability).

15. A practical case of large number of prosecution cases:

The author knows that during regime of Shri V.P. Singh as Finance Minister several prosecutions were launched for technical defaults even during pendency of first appeal before the CIT(A). Perhaps, there was a dictate to launch minimum specified number of prosecution in each range. In case of one assessee alone 151 prosecution cases  were launched in one month  and another 150 were kept ready to be filed in next year to full fill prosecution quota of next year. The alleged default of the assessee was failure to deduct tax at source from payments made to daily contractors, although each contract was valued below Rs.20000/- and S. 194C was not at all applicable, and on this issue there was no dispute for many earlier years. However, for mere sake of full filling prosecution quota, the matter was opened and prosecutions were launched. The revenue had to pay substantial amount on this litigation. The assessee also was forced to spent substantial amount to protest the cases over a fairly long period of time.  In fact once the concerned officer sought some information from author ( as he was consultant of concerned assessee) about cases for verifying bills and taking decision on bill of advocate of revenue , which also ran in sum of few lakh of rupees.

In that case the appeal before the CIT(A) must have succeeded as there was no disputable matter - the revenue has not raised objection to non deduction of tax for several earlier years. However, due to prosecutions cases having been launched, may be learned CIT (A) dismissed appeals of assessee. On second appeal the Tribunal has more than seventeen years ago in order dated 19.04.1991 in Rituraj P. Ltd V ACIT 40 TTJ 252 (Cal. Trib.)  held that S. 194C was not applicable, because each contract was valued below Rs.20000, department's  applications  for reference u/s 256(1) before the Tribunal as well as application u/s 256 (2) before the Calcutta high court under section 256 (2)  were dismissed, the revenue has not filed any Special Leave Petition / or appeal before the Supreme Court. Many cases of prosecution have been dismissed in a number of criminal courts. However, many cases are still pending  ( till April ,2008) in various courts. The revenue has not withdrawn the pending cases and may be still paying substantial amount to advocates.

Some time during 1997, the assessee wrote to the concerned authorities that now there is no case of prosecution because the precondition no longer exists and therefore requested to withdraw the pending cases. In reply the concerned officer replied that if assessee so want a compromise petition can be filed by the assessee. And prosecutions are still not withdrawn by the revenue although there is no reason to pursue the same. 

In such a situation how assessee can be advised to file compromise petition, when there is no cause of action? So the matters are still pending and assessee and revenue both have to incur expenses on pending matters.

Such cases must be withdrawn by the revenue.

16. Some suggestions for the revenue:

The above judgment of the supreme court and another practical case as discussed are pointer to wasteful expenditure in term of money and efforts on such cases on behalf of assessee and revenue both. On the one hand our government considers some petty entertainment expenses, advertisement expenses, sale promotion expenses as wasteful expenses and on the other hand revenue itself incur substantial expenses on such unwarranted criminal cases and that too prematurely. The assessee is also forced to incur litigation expenses un-necessarily. To avoid such wasteful expenses here are some suggestions:

a. During pendency of further proceedings which are likely to wash out case of prosecutions, criminal complaints should not be lodged.

b. In case of criminal cases already filed, if after disposal of appeals the cause of prosecution does not remain, the criminal case may be withdrawn by the revenue.

c. In such cases the courts may direct to the revenue to pay not only costs but also damages to the assessee / taxpayers for loss suffered due to such cases because the tax payer is put under un-necessary mental pressure, financial burden which affects his business.

d. Willful failure to file return will be rare cases because in case there is tax liability it is increasing daily by liability of interest and in case of refund, assessee loose interest for the period from last date for filing of return under section 139 (1) and the date of filing of return. Particularly in case of small tax payers, it would be very difficult to establish will full failure to file return. Therefore, limit of Rs. three thousand can be raised to Rs. fifty thousand and for this purpose not only advance tax  paid, tax  deducted at source but also tax collectible at source, tax deductible at source and tax paid voluntarily  and in co-operation with revenue during and immediately after completion of assessment may be considered.

17. Pendency of petty economic offences is a burden on courts:

Pendency of such petty economic offences are heavy burden on courts dealing with criminal matters. In such cases rarely any one is punished by imprisonment.  Many cases ( a large proportion) becomes infructous after out come in appeals. In few cases fine is imposed. Therefore, it appears that meaning full purpose is not served. Rather large pendency of such cases causes lot of burden on courts and  cases related with real crimes take back seat. That's why it took years to pronounce sentence in case of Indira Gandhi assassination or  Murder and many other cases of murders, rape, dacoity, cheating etc.