Direct Tax Alert - Madras HC holds that income tax adjudication proceedings are independent from criminal prosecution; confirms prosecution on the belated tax return and wilful concealment of income

BACKGROUND

In terms of section 139 of the Income Tax Act, 1961 (IT Act), taxpayers are required to file their tax return on or before the prescribed due date. In order to deter taxpayers from not complying with this provision, the IT Act has embedded penalty, interest, fees, and prosecution provisions. In this regard, as per section 276CC of the IT Act, where a taxpayer wilfully fails to furnish the tax return (either under section 139(1) of the IT Act or in pursuance to notice issued under section 142(1) or section 148 or section 153A¹ of IT Act) within the prescribed due date, such taxpayer shall be prosecuted as under:

Apart from imprisonment, such taxpayers shall also be liable for a fine.

Prior to amendments, section 139(4) of the IT Act permitted a taxpayer to file a belated tax return within 1 year from the end of the Assessment Year. A question may arise whether prosecution can be attracted where a belated tax return is filed. In this regard, recently, the Madras High Court (HC)² had an occasion to analyse the applicability of section 276CC of the IT Act where the tax return was filed belatedly, and the penalty proceedings were quashed by the Chennai Tax Tribunal. We, at BDO in India, have summarised the ruling of the Madras HC and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• For the fiscal year (FY) 2011-12, the taxpayer (an individual) filed a belated tax return under section 139(4) of the IT Act. Key timelines are tabulated hereunder:

• During search proceedings, it was found that the taxpayer had purchased an immovable property for the value of INR 25mn. However, the actual purchase price of the said property was INR 45mn. Since the taxpayer had disclosed only INR 25mn, the tax officer considered INR 20mn as undisclosed income.
• Apart from initiating penalty proceedings, the tax officer also proposed to initiate prosecution proceedings.
• The taxpayer contended that he had filed the tax return on 18 April 2013 and therefore, the question of non-filing of return does not arise. Further, the additional return filed by the taxpayer was duly accepted and the order was passed under Section 143(3)³ of the IT Act.
• The taxpayer contended that there was no mens rea for non-filing of tax return and the criminal prosecution itself is non est in the eye of the law. The taxpayer further submitted that the complaint was filed after a period of three years from the date of the alleged occurrence and the complaint itself is barred by limitation.
• The tax officer opined that the taxpayer is liable to be punished under Section 276CC of the IT Act for non-filing of the tax return under Section 139(1) of the IT Act and under Section 276C(1)⁴ of the IT Act for wilfully concealing its true and correct income.
• The tax officer also opined that though the Chennai Tax Tribunal has set aside the penalty proceedings on the ground of limitation, it would not prevent the tax officer from initiating the prosecution proceedings under section 276CC of the IT Act.
• Aggrieved, the taxpayer filed a criminal original petition before the Madras HC to quash the prosecution proceedings.

HIGH COURT RULING

The Madras High Court, while upholding prosecution proceedings, made the following observations:

• There is an infraction of Section 139(1) and Section 153 of IT Act. The benefit of voluntary compliance by way of belated returns would have arisen if the taxpayer disclosed the true and real income under Section 139(4) of the IT Act. Therefore, he is liable to be punished under Section 276CC of the IT Act.
• Reliance placed by the tax officer on the decision of the Hon’ble Supreme Court⁵ in the case of Sasi Enterprises and Prakash Nath Khanna was affirmed. Hon’ble Supreme Court in these rulings has held that once there is a failure on account of non-filing or belated filing of tax return, provisions of 276CC of the IT Act would get attracted and the subsequent act of filing returns will not protect the defaulters from prosecution proceedings.
• When the ingredients of the offences are clearly made out in the complaint to establish that the accused had committed an offence, it cannot be quashed on the ground that the penalty proceedings were dropped against the taxpayer. Reference in this regard was made on the judgement of the Hon’ble Supreme Court in the case of Radheshyam Kejriwal⁶, which has laid down the following ratio:
  • Adjudication proceedings and criminal prosecution can be launched simultaneously;
  • Decision in adjudication proceeding is not necessary before initiating criminal prosecution;
  • Adjudication proceedings and criminal proceedings are independent in nature to each other;
  • The finding against the person facing prosecution in the adjudication proceeding is not binding on the proceeding for criminal prosecution;
  • Adjudication proceeding by the Enforcement Directorate is not prosecution by a competent court of law to attract the provisions of Article 20(2) of the Constitution or Section 300 of the Code of Criminal Procedure;
  • The finding in the adjudication proceeding in favour of the person facing trial for identical violation will depend upon the nature of the finding. If the exoneration in the adjudication proceeding is on technical grounds and not on merit, prosecution may continue.

• Reliance placed by the taxpayer on the Hon’ble Supreme Court⁷ in the case of K.C. Builders cannot be applied to the case on hand since the taxpayer failed to file the tax return and concealed the income. The said judgment stating that once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under Section 276C of the IT Act is automatic, is not applicable to the case on hand.
• Mens rea is categorically proved against the taxpayer. It was found that there was concealment of income by the taxpayer. Hence, the judgment of the Hon'ble Supreme Court⁸ in the case of Suresh Kumar Agarwal will not come to the aid of the taxpayer since an element of mens rea was not established in that case.
• The provision makes it punishable under Section 276CC for non-filing of return within the stipulated time and willfully concealing its true and correct income under Section 276C(1) of the IT Act and the petitioner cannot seek indulgence of this Court to quash the entire proceedings. Though the tax tribunal had set aside the penalty on the grounds of limitation, it would not prevent the tax officer from initiating prosecution against the taxpayer for the offence punishable under Section 276CC of the IT Act. Non-filing of returns has nothing to do with the adjudication of assessment proceedings.

BDO COMMENTS

Madras HC has reaffirmed the law laid down by the Supreme Court that the prosecution proceedings shall prevail once the tax return is not filed within the deadline. It may be noted that section 276CC of the IT Act grants exemption from its applicability if the taxpayer falls in any of the following categories:

• Tax return is filed before the expiry of the assessment year; or
• Updated tax return is filed within the prescribed time; or
• the tax payable by such taxpayer, not being a company, on the total income determined on regular assessment, as reduced by the advance tax or self-assessment tax, if any, paid before the expiry of the assessment year, and any tax deducted or collected at source, does not exceed INR 10,0000

With Finance Act, 2021 amending section 139(4) of the IT Act, now the belated tax return can be filed at any time before the three months prior to the end of the relevant assessment year. Hence, the question of the applicability of prosecution proceedings may not arise with respect to belated tax returns (as now belated tax returns will be covered by the exception contained in section 276CC of the IT Act).

Further, recently, the Madras High Court in the case of Manav Menon⁹ applied the proviso of section 276CC of the IT Act (which grants exemption from section 276CC of the IT Act applicability) and held that where the tax return is filed belatedly but there is a net refund due, prosecution proceedings shall not sustain.