2021 (7) TMI 314 - HC - Income Tax

Offence punishable under Section 276C(2) read with Section 278E of Income Tax Act - wilful attempt to evade payment of tax -Non-payment of remaining admitted tax liability - petitioners state that they have resigned way back in the month of November, 2018 and the Certificate of the Chartered Accountant dated 19.11.2019 along with necessary documents shows that the entire tax liability had been paid by the accused Company - assessee deposits/ paid self- assessment tax dues belatedly, after steps taken by the department - HELD THAT - From the facts of the case it appears that Company had voluntarily declared its intention to pay tax and 80% of the tax was paid prior to the complaint. The Income Tax Department was instructed regarding the dues from the GST Department and there is no denial to the fact that the Income Tax Department had issued Notice to GST Department for remitting the refund directly to their Department. Certain tough circumstances were also pleaded by the Company regarding demonetisation and implementation of GST, the Textile Industry facing huge financial crisis, which had affected the recovery of tax liability determined by the accused Company was not controverted by the Income Tax Department and to that payable tax, as per the self-assessed Return of income, the Company had already paid and further amount was to be directly paid by the GST Department and as such amount was to be adjusted against GST refund which constitute the 80% of the total tax liability. The accused Company has stated the reasons for the delay and expressed readiness to pay the balance of ₹ . Delayed payment under the provisions of the Act may call for penalty or interest but by no stretch of imagination in the circumstances as pleaded by the petitioners, could be construed as an attempt to evade the tax so as to entail prosecution of the petitioner for the alleged offence of Section 276C(2) of the Act. Thus, in the considered opinion of this Court, the prosecution initiated against the petitioners is illegal and tantamount to abuse of process of law and required to be quashed. Petition is allowed. The complaint made by the Office of the Assistant Commissioner of Income Tax, Surat which has culminated into Criminal Case pending before the Court of learned Chief Judicial Magistrate, Surat against the petitioners for the offence punishable under Section 276C(2) read with Section 278E of Income Tax Act, as well as the order issuing summons dated 13.6.2019 are quashed and set-aside

Summary

Issues Involved:
1. Whether the petitioners, as independent and non-executive directors, are liable for prosecution under Section 276C(2) read with Section 278E of the Income Tax Act.
2. Whether there was a "wilful attempt" to evade the payment of tax.
3. Whether the prosecution initiated is justified based on the facts and circumstances of the case.

Issue-wise Detailed Analysis:

1. Liability of Independent and Non-Executive Directors:
The petitioners contended that they were independent and non-executive directors of the Company and had no role in the day-to-day affairs. They had resigned in November 2018, and their resignations were reflected in Form DIR-12 maintained with the Ministry of Corporate Affairs. They argued that since they had resigned, they were not aware of the Company's functioning and had no control over the tax payments. The petitioners approached the Court under Section 482 of Cr.P.C. for quashing the proceedings, arguing that they should not be held liable for the Company's tax liabilities.

2. Wilful Attempt to Evade Payment of Tax:
The petitioners argued that the Company had already paid 80% of the tax liability before the complaint was filed and that the remaining amount was delayed due to the GST Department's delay in processing refunds. They contended that there was no "wilful attempt" to evade tax, as the delay was attributable to external factors and not to any intentional act on their part. The petitioners also cited various judgments to support their argument that delayed payment due to genuine reasons does not constitute a wilful attempt to evade tax.

The Income Tax Department, however, argued that the Company had failed to pay the self-assessment tax by the due date and that this constituted a wilful attempt to evade tax. They contended that the petitioners, being directors, were responsible for ensuring compliance with tax laws and that the failure to pay the tax on time indicated a culpable mental state.

3. Justification of Prosecution:
The Court examined whether the prosecution was justified based on the facts and circumstances. It noted that the Company had voluntarily declared its intention to pay the tax and had paid a significant portion before the complaint. The Court also considered the tough business conditions faced by the Company, including the impact of demonetization and GST implementation, which affected its ability to pay the remaining tax on time.

The Court highlighted that delayed payment might call for penalties or interest under the Act but does not necessarily constitute an attempt to evade tax. The Court emphasized that the term "wilful" implies a guilty mind, and in this case, the petitioners had provided valid reasons for the delay. Therefore, the Court concluded that the prosecution initiated against the petitioners was illegal and amounted to an abuse of the process of law.

Conclusion:
The Court allowed the petition and quashed the complaint and the order issuing summons. It held that the prosecution was not justified as there was no wilful attempt to evade tax, and the petitioners, being independent and non-executive directors, were not liable for the Company's tax liabilities under the given circumstances. The rule was made absolute, and the proceedings were set aside.