2022 (12) TMI 698 - HC - Income Tax

Continuation of prosecution proceedings when levy of penalty has been deleted - Offence u/s 276C (1), 277 and 278E of the Income Tax Act - alleged that during course of search and seizure operation, it was found that the petitioner had claimed huge Bogus Long Term Capital Gain - petitioner is the Karta of Murari Lal Jalan HUF and search and seizure operation was conducted in the residence of the petitioner under section 132(1) - HELD THAT - It is an admitted fact that the petitionerwas imposed penalty which was affirmed by the First Appellate Authority and the Second Appellate Authority by order has been pleased to set aside penalty imposed upon the petitioner. In the second case the penalty has not been imposed upon the petitioner. The question framed in the case of K.C. Builders 2004 (1) TMI 7 - SUPREME COURT are the identical which is subject matter of these cases. Particularly the law point framed has been clearly held that once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under section 276C is automatic. The case of the petitioners is fully covered with the case of K.C. Builders (supra) In the case in hand the penalty was quashed on merit. Thus the entire criminal proceeding including order taking cognizance passed by the Special Sub-Judge-VII, Economic Offence, Ranchi are hereby quashed.

Issues Involved:
1. Quashing of criminal proceedings.
2. Allegations of bogus Long Term Capital Gain.
3. Examination under oath and false statements.
4. Attempt to evade tax.
5. Issuance of Show Cause Notice and reply.
6. Sanction for prosecution.
7. Penalty imposition and appellate decisions.
8. Legal precedents and their applicability.

Detailed Analysis:

Issue 1: Quashing of Criminal Proceedings
The petitions Cr.M.P. No. 591 of 2017 and Cr.M.P. No. 593 of 2017 were filed to quash the entire criminal proceedings, including the order taking cognizance dated 10.11.2016, for offences under sections 276C(1), 277, and 278E of the Income Tax Act, 1961. The court found that the penalties imposed on the petitioners had either been set aside by the appellate authorities or had not been imposed, leading to the quashing of the criminal proceedings.

Issue 2: Allegations of Bogus Long Term Capital Gain
In both cases, it was alleged that the petitioners, as Kartas of their respective HUFs, claimed huge bogus Long Term Capital Gains during the Financial Year 2013-14. These claims were found to be fraudulent during the search and seizure operations conducted under section 132(1) of the Income Tax Act, 1961.

Issue 3: Examination Under Oath and False Statements
The petitioners were examined on oath under section 131(1A) of the Income Tax Act, where they denied the bogus nature of their Long Term Capital Gain claims. It was further alleged that they made false statements during these examinations.

Issue 4: Attempt to Evade Tax
It was alleged that the petitioners attempted to evade tax, attracting offences under sections 276C(1), 277, and 278E of the Income Tax Act. Proposals for launching prosecution were made by the Deputy Director of Income Tax (Investigation) to the Principal Director of Income Tax (Investigation), Patna.

Issue 5: Issuance of Show Cause Notice and Reply
Show Cause Notices were issued to the petitioners, requiring them to show cause against the intended prosecution. The petitioners replied, stating that their cases were yet to be assessed under section 153A of the Income Tax Act and that the Show Cause Notices were based on presumptions.

Issue 6: Sanction for Prosecution
The replies of the petitioners were considered, and sanction for prosecution was accorded under section 279(1) of the Income Tax Act by the Principal Director of Income Tax (Investigation). The complaints were then filed before the competent court.

Issue 7: Penalty Imposition and Appellate Decisions
In Cr.M.P. No. 591 of 2017, the penalty imposed on the petitioner was set aside by the Second Appellate Authority. In Cr.M.P. No. 593 of 2017, no penalty was imposed. The court referred to the Supreme Court's judgment in "K.C. Builders and Anr. Vs. Assistant Commissioner of Income Tax," which held that once penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under section 276C is automatic.

Issue 8: Legal Precedents and Their Applicability
The court relied on the judgments in "K.C. Builders and Anr. Vs. Assistant Commissioner of Income Tax" and "G.L. Didwania & Another V. Income Tax Officer & Another," which established that if the penalties are set aside, the criminal proceedings cannot be sustained. The court distinguished the case of "S.J. Surya Vs. The Deputy Commissioner of Income Tax Central Circle-II (4), Chennai," noting that in the present cases, the penalties were quashed on merit.

Conclusion:
The entire criminal proceedings, including the orders taking cognizance dated 10.11.2016, were quashed for both Cr.M.P. No. 591 of 2017 and Cr.M.P. No. 593 of 2017. The petitions were allowed, and the interim orders were vacated.

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