The Karnataka High Court has held that the absence of a completed tax assessment does not, in the circumstances before it, prevent prosecution for failure to file wealth tax returns or for making false statements about overseas investments to the Income Tax Department.
The bench of Justice H.P. Sandesh has upheld the Special Court’s conclusion that prosecution could proceed even without an assessment order in these circumstances. Whether the conduct involved intentional tax evasion remained a matter of evidence.
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The central issues were whether prosecution for non-filing of wealth tax returns required prior determination of taxable wealth, and whether prosecution for false statements under Section 277 of the Income Tax Act, 1961 could proceed without quantification of the tax allegedly evaded.
The first petition sought quashing of proceedings in C.C. No.184/2019 under Section 35B of the Wealth Tax Act, 1957. The prosecution alleged that Pradeep had wilfully failed to furnish his wealth tax return for assessment year 2012–13 within the prescribed time.
The second petition challenged the Special Court’s November 11, 2020 order rejecting his discharge application in C.C. No.173/2018. Those proceedings concerned allegations under Section 277 of the Income Tax Act and Section 193 of the Indian Penal Code, arising from statements made about his association with foreign companies.
Pradeep invoked the High Court’s inherent jurisdiction under Section 482 of the Code of Criminal Procedure to challenge the proceedings and the refusal to discharge him.
According to the complaint examined by the High Court, during a search on October 13, 2017, Pradeep stated that jewellery found during the proceedings had been reflected in his wealth tax returns. He undertook to produce the returns on October 16, 2017, but allegedly failed to provide proof of their filing.
In a subsequent statement recorded on November 24, 2017, he admitted that the wealth tax returns had not been filed due to oversight. He also claimed that they were filed after the search.
His counsel argued that prosecution could not be initiated without a regular assessment determining net wealth and tax liability. The challenge also raised objections concerning statutory notices, limitation, the handling of seized material and the competence of the sanctioning authority.
The High Court rejected the argument that a completed assessment was a prerequisite to the prosecution in question. It explained that the proceedings under Section 35B concerned failure to furnish the return within the statutory due date.
The Court noted that the complaint specifically alleged deliberate and wilful non-filing, supported by the statements and documents referred to in it. Subsequent filing after detection did not, by itself, provide a basis to quash the prosecution.
The High Court also rejected the contention that notices under Sections 14(2) or 17 of the Wealth Tax Act were mandatory before criminal action could be initiated for the alleged default.
It relied on the Supreme Court’s decision in Sasi Enterprises v. Assistant Commissioner of Income Tax, reported in (2014) 5 SCC 139, concerning prosecution for failure to furnish income tax returns under Section 276CC.
The High Court considered the reasoning applicable to Section 35B of the Wealth Tax Act because of the similarity between the provisions. It emphasised the statutory obligation to furnish returns voluntarily within the prescribed time.
The Court further held that whether the accused possessed the requisite culpable mental state was a matter for trial. Referring to the statutory presumption concerning culpable mental state, it declined to resolve that issue at the preliminary stage.
The limitation objection was also rejected as a ground for quashing, with the Court describing it as a mixed question of fact and law.
The second prosecution arose from statements recorded under Section 131 of the Income Tax Act concerning Pradeep’s association with foreign companies.
The judgment records that he disclosed an association with Pranava International Private Limited, registered in Singapore, but denied being associated with other foreign companies as a director or shareholder.
The department subsequently sought information from the British Virgin Islands through the Foreign Tax and Tax Research Division of the Central Board of Direct Taxes. Information received under the tax information exchange arrangement included corporate documents and shareholder records relating to Smart Idea Group Incorporated and Wide View International Group Limited, along with director records for Smart Idea Group Incorporated.
The prosecution relied on those records to allege that Pradeep had associations and investments that contradicted his statements. The approximate investment value mentioned in the complaint was ₹22 lakh.
After receiving the information, the department recorded another statement on January 19, 2018. According to the prosecution, he again denied association with the two companies.
Pradeep disputed the allegations and contended that his statements had not been correctly recorded. His counsel also argued that an investment was not, by itself, income and that there was no determination of tax evasion.
The High Court held that the accusation had to be examined against the ingredients of Section 277, which addresses statements or accounts that a person knows or believes to be false, or does not believe to be true.
It rejected the contention that the absence of quantified tax evasion necessarily defeated the prosecution under Section 277(ii). In the case before it, the allegation concerned false statements about overseas associations and investments.
The High Court also noted that the Special Court had already recorded pre-charge evidence from one prosecution witness and marked documents as Exhibits P1 to P19. It found no basis to interfere with the refusal to discharge the accused.
Pradeep had argued that the Principal Director of Income Tax (Investigation) lacked authority to sanction the income tax prosecution.
The High Court noted that the Special Court had relied on D.K. Shiva Kumar v. Income Tax Department which recognised the Principal Director’s authority to accord sanction by virtue of a notification dated November 13, 2014.
It therefore declined to accept the challenge to the competence of the sanctioning authority.
The High Court upheld the continuation of the wealth tax prosecution and the order refusing discharge in the false statement case.
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