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2021 (2) TMI 75 - HC - Income TaxOffence under Section 277 - evasion on account of misstatement or a wrong statement - non- payment of any tax before uploading of the returns - petitioners did not have money to make payment of the income tax - prosecution against all the directors of the company - reverse burden of proof - proof of willful evasion of tax or not? - petitioners have categorically mentioned the BSR Code, challan number and the amount which are alleged to have been paid by the petitioners towards the income tax - whether misstatement is required to be willful to prosecute the assessee? - HELD THAT - In the present case, the misstatement is stated to be as regards the income tax having been paid even though such payment had not been made since the uploaded returns reflected the BSR code, challan number as also the amount paid as income tax. It is alleged that if not for the reconciliation, the petitioner-Company would have got away with non-payment of the taxes. We are unable to accept such a submission. It is not that there was non- payment of any tax before uploading of the returns. The 26 AS returns indicated payment of substantial amount of money due to tax deduction at source. Apart there from, the first petitioner-Company has also made several payments on account of the income tax dues. But however on account of non availability of funds, the entire amount could not be paid before the returns were to be uploaded and/or filed The assessee in the present case has been forced to upload the returns by mentioning that the entire amount had been paid since without doing so the returns would not have been accepted by the software system set up by the Income Tax Department. Therefore, the said statement made has been forced upon the assessee by the Income Tax Department and cannot be said to be misstatement within the meaning and definition thereof under Section 277 of the Income Tax Act. For an offence to be said to be committed under Section 277 of the Income Tax Act, the misstatement is required to be willful made with a malafide or dishonest intention in order to prosecute the assessee. There is no willful misstatement by the petitioners in the present proceedings. The Income Tax Department is also directed to consider the provisioning of a facility in its software to upload Income Tax Returns with the actual amount paid and for the system to accept the said returns even though the complete amounts had not been paid. Hence, we answer Point Nos.1 and 2 by holding that there is no straight-jacket formula which could be laid down as to determine what is a misstatement and what is not. It would be required for the Court and/or the Assessing Officer or the Appellate Authority to determine the same on the facts of the case liberally in favour of the assessee. Whether the delayed payment of Income Tax would amount to evasion of tax or not? - This question is no longer res integra inasmuch as this Court in Vyalikaval's case 2019 (7) TMI 184 - KARNATAKA HIGH COURT has held that delayed payment of income tax would not amount to evasion of tax. Applying the same principle to the present fact situation, the delay caused by the petitioner-Company in making payment of the income tax cannot be said to be evasion. We answer Point No.3 by holding that delayed payment of Income Tax would not amount to evasion of tax, so long as there is payment of tax, more so for the reason that in the returns filed there is an acknowledgement of tax due to be paid. Whether all the Directors of the Company can be prosecuted for any violation of the Income Tax Act in terms by relying on the inclusive definition under Section 2(35) of the Income Tax Act? - A perusal of the complaint as filed by respondent-Income Tax Department would indicate that there are only omnibus allegations which had been made against the Directors. The contention and/or the allegation is that the uploading of the income tax returns with false data amounts to misstatement for the purposes of evasion. For this purpose, it would have had to be ascertained as to who has made such a statement for the purpose of initiating action. Since we have answered point Nos.1 and 2 by holding that in the present case there is no misstatement, the question of the Directors being liable for prosecution would not arise. Thus answer Point No.4 by holding that all the Directors of the Company cannot be automatically prosecuted for any violation of the Income Tax Act. There has to be specific allegations made against each of the Directors who is intended to be prosecuted and such allegation would have to amount to an offence and satisfy the requirement of that particular provision under which the prosecution is sought to be initiated, more so when the prosecution is initiated by the Income Tax department who has all the requisite material in its possession, and a preliminary investigation has been concluded by the Income Tax department before filing of the criminal complaint. Whether the order of cognizance by the Economic Offences Court is proper and correct? - When there are multiple accused, the order is required to disclose the application of mind by the Court taking Cognisance as regards each accused. The Court taking Cognisance ought to have referred to and recorded the reasons why the said Court believes that an offence is made out so as to take Cognisance more so on account of the fact that it is on taking Cognisance that the criminal law is set in motion insofar as accused is concerned and there may be several cases and instances where if the Court taking Cognisance were to apply its mind, the Complaint may not even be considered by the said Court taking Cognisance let alone taking Cognisance and issuance of Summons. Order taking Cognisance is not in compliance with applicable law and therefore is set aside. Answer Point No.5 by holding that the order of Cognisance dated 29.03.2016 in both matters is not in compliance with the requirement of Section 191(1)(a) of the Cr.P.C and further does not indicate the procedure under Section 204 of Cr.P.C having been followed. At the time of taking Cognisance and issuance of process, the Court taking Cognisance is required to pass a sufficiently detailed order to support the conclusion to take Cognisance and issue process, in terms of the discussion above. The judicious application of mind to the law and facts of the matter, should be apparent on the ex-facie reading of the order of Cognisance. Whether the Magistrate is required to follow the procedure under Section 202 of the Cr P.C.even for the offences under the Income Tax Act? - In the present case, as could be seen from the extract of the order dated 29.03.2016 in answer to point No.5 above, there is no such postponement made by the Magistrate, but as soon as the Magistrate received a complaint, he has issued process to accused No.6, who is residing outside the jurisdiction of Magistrate. In view of the above, it was required for the Magistrate to conduct a mandatory enquiry as per Section 202 (2) of the Cr.P.C. There being a violation of the requirement under Section 202 of Cr.P.C., the Magistrate could not have issued summons to petitioner No.6 without following the requirement and without conducting an enquiry under Section 202 of Cr.P.C. as held by the Hon'ble Apex Court in Vijay Dhanka vs. Najima Momtaj 2014 (3) TMI 1103 - SUPREME COURT We answer Point No. 6 by holding that in the event of accused being an individual, if the said accused has a temporary residence within the jurisdiction of the Magistrate, again merely because he does not have a permanent residence, there is no enquiry which is required to be conducted under Section 202 of Cr.P.C. It would, however, be required for the Magistrate to in the event of issuance of summons/process record as to why the enquiry under Section 202 of Cr.P.C is not being held. When the accused has no presence within the jurisdiction of the Magistrate where the offence has been committed, then it would be mandatory for an enquiry under Section 202 of the Cr.P.C to be held. Order - The prosecution initiated by the respondent against the petitioners is misconceived and not sustainable and as such, the complaints are hereby quashed.
Issues Involved:
1. Whether for an offence to be said to be committed under Section 277 of the Income Tax Act, the misstatement is required to be willful to prosecute the assessee? 2. Whether there is a misstatement or willful misstatement by the petitioners in the present proceedings? 3. Whether the delayed payment of income tax would amount to evasion of tax or not? 4. Whether all the Directors of the Company can be prosecuted for any violation of the Income Tax Act by relying on the inclusive definition under Section 2(35) of the Income Tax Act? 5. Whether the order of cognizance by the Economic Offences Court is proper and correct? 6. Whether the Magistrate is required to follow the proceedings under Section 202 even for the offences under the Income Tax Act? Detailed Analysis: 1. Willfulness of Misstatement under Section 277 of the Income Tax Act: The court examined whether a misstatement must be willful to prosecute under Section 277. It was held that the misstatement must be made with a malafide or dishonest intention. The Income Tax Department should prove the circumstances indicating a willful misstatement. The court found that the petitioners were forced to upload returns showing full payment due to the flawed system of the Income Tax Department, which does not accept returns without full payment. Therefore, the statements made by the petitioners were not willful misstatements. 2. Misstatement or Willful Misstatement by Petitioners: The court found no willful misstatement by the petitioners. The petitioners had made substantial payments and were forced to upload returns showing full payment due to the Income Tax Department's system. The court directed the Income Tax Department to consider allowing returns to be uploaded with the actual amount paid, even if not complete. 3. Delayed Payment of Income Tax: The court referred to a previous judgment (Vyalikaval’s case) and held that delayed payment does not amount to tax evasion. As long as the tax is eventually paid, delayed payment can attract interest but not criminal prosecution for evasion. The petitioners had acknowledged the tax due in their returns, indicating no intent to evade. 4. Prosecution of All Directors Under Section 2(35) of the Income Tax Act: The court held that all directors cannot be automatically prosecuted. Specific allegations must be made against each director. The complaint contained only omnibus allegations without specifying the role of each director. Since there was no misstatement, the question of prosecuting the directors did not arise. 5. Validity of the Order of Cognizance by the Economic Offences Court: The court found the order of cognizance to be flawed. The order did not reflect judicial application of mind or sufficient grounds for proceeding against the accused. It was a formulaic order without detailed reasoning. The court emphasized the need for a detailed order indicating judicial application of mind. 6. Requirement to Follow Procedure Under Section 202 for Offences Under the Income Tax Act: The court held that the Magistrate must conduct an inquiry under Section 202 of Cr.P.C. before issuing summons to an accused residing outside the jurisdiction. The Magistrate in this case did not conduct such an inquiry, violating the requirement under Section 202. The court emphasized that this safeguard is to prevent inconvenience to the accused and ensure proper application of mind before issuing summons. Conclusion: The court quashed the complaints in C.C.No.85/2016 and C.C.No.86/2016, finding the prosecution misconceived and not sustainable. The court directed the Income Tax Department to consider allowing returns to be uploaded with the actual amount paid, even if not complete, to prevent forced misstatements by assessees.
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