The Karnataka High Court has held that prosecution for allegedly making false statements about foreign investments can proceed under Section 277(ii) of the Income Tax Act, 1961, even without an assessment order quantifying the tax allegedly evaded.
The bench of Justice H.P. Sandesh dismissed two criminal petitions challenging proceedings before the Special Court for Economic Offences, Bengaluru and declined to quash a separate prosecution for failure to file a wealth tax return within the prescribed time, rejecting the contention that a completed assessment was necessary before criminal proceedings could begin.
The first petition sought quashing of proceedings under Section 35B of the Wealth Tax Act, 1957. The Income Tax Department alleged that the assessee had deliberately failed to furnish his wealth tax return for assessment year 2012–13 despite having wealth exceeding the applicable exemption threshold.
The second petition challenged the Special Court’s November 11, 2020 order rejecting his application for discharge. That complaint concerned offences under Section 277 of the Income Tax Act and Section 193 of the Indian Penal Code, arising from allegedly false statements about his association with and investments in foreign companies.
Both petitions were filed under Section 482 of the Code of Criminal Procedure.
In the wealth tax case, the assessee argued that the department could not launch prosecution without first determining his net wealth and tax liability through a regular assessment.
He also contended that notices under Sections 14(2) and 17 of the Wealth Tax Act were mandatory before initiating criminal action. Other objections concerned limitation, the handling of seized materials and the competence of the authority granting prosecution sanction.
His case was that, without an assessment, the department had not established whether he possessed taxable wealth or was liable to pay wealth tax. He further argued that prosecution could not survive when assessment proceedings were themselves barred by limitation.
In the income tax case, he similarly maintained that the department had not quantified any tax evasion. He challenged the sanction granted by the Principal Director of Income Tax (Investigation) and argued that an investment did not, by itself, constitute income.
The High Court rejected the argument that a regular assessment was a prerequisite for prosecution under Section 35B.
It explained that the proceedings concerned the alleged failure to furnish a wealth tax return within the time prescribed under Section 14(1). Once a taxpayer committed that default, prosecution could be initiated, and the pendency of other proceedings did not bar criminal action.
The Court noted that the material placed before it recorded an admission that the wealth tax return for assessment year 2012–13 had not been filed. Although a return was subsequently furnished, the allegation related to the failure to file it within the prescribed time.
The judgment also acknowledged that proceedings concerning assessment years 2013–14 and 2014–15 had previously been quashed following the allowance of an appeal. However, the Court examined the present challenge separately because it concerned the return-filing default for assessment year 2012–13.
The High Court relied on the Supreme Court’s decision in Sasi Enterprises v. Assistant Commissioner of Income Tax, reported in (2014) 5 SCC 139. It considered the principles governing prosecution under Section 276CC of the Income Tax Act and held that they were equally applicable to Section 35B of the Wealth Tax Act because of the similarity between the provisions.
The Court rejected the contention that the absence of notices under Sections 14(2) and 17 necessarily prevented prosecution for failure to comply with the obligation to file a return voluntarily within the due date.
It also referred to the statutory presumption concerning a culpable mental state. Whether the taxpayer lacked the requisite intention, or had circumstances explaining the failure to file the return, was a matter to be examined during trial.
The limitation objection, the Court held, involved a mixed question of fact and law and did not warrant quashing the proceedings at the preliminary stage.
The income tax prosecution arose from statements recorded under Section 131 of the Income Tax Act.
The assessee stated that he was associated with Pranava International Private Limited, registered in Singapore, but denied being associated with any other foreign company 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 between India and the British Virgin Islands included corporate documents and registers relating to Smart Idea Group Incorporated and Wide View International Group Limited.
The records relied upon by the department indicated directorship or shareholding links with those companies. The complaint referred to investments with an approximate value of ₹22 lakh.
After receiving the information, the department summoned the assessee again and recorded his statement on January 19, 2018. The prosecution alleged that he again denied association with the two companies.
The assessee disputed the statements, contending that they had not been correctly recorded and that the errors had been pointed out. These competing positions were considered in the context of whether the case should proceed to trial.
The High Court held that the absence of a quantified tax demand did not justify discharge from the prosecution under Section 277(ii).
It explained that Section 277 addresses a statement made in verification, or an account or statement delivered under the Act, which is false and which the person knows or believes to be false, or does not believe to be true.
The Court distinguished the provision’s punishment clauses. While clause (i) refers to the amount of tax that would have been evaded if the false statement had been accepted as true, clause (ii) covers “any other case”.
In the present proceedings, the allegation was that assessee had falsely denied foreign investments and corporate associations. The Court therefore held that prosecution under Section 277(ii) could continue without an assessment order quantifying tax evasion.
It also rejected the argument that the investments were not income as a sufficient ground for discharge. Whether the conduct involved intentional tax evasion required examination of the evidence during trial.
On the objection to the competence of the sanctioning authority in the income tax case, the High Court noted that the Special Court had relied on D.K. Shiva Kumar v. Income Tax Department. The decision recognised the authority of the Principal Director of Income Tax to grant prosecution sanction by virtue of a notification dated November 13, 2014. The High Court found no basis to interfere with the Special Court’s conclusion on that ground.
The Court further noted that pre-charge evidence had already been recorded, with one prosecution witness examined. It found sufficient material for the proceedings to continue.
The High Court dismissed both petitions, allowing the wealth tax prosecution and the income tax false statement case to proceed before the Special Court for Economic Offences.
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