The Gauhati High Court has quashed three criminal complaints filed under Sections 276D and 277 of the Income Tax Act, 1961 against a private company and its directors, holding that the prosecution could not continue once the assessment order forming its foundation had been set aside by the Income Tax Appellate Tribunal (ITAT).
The bench of Justice Robin Phukan observed that when an appellate order negates the alleged falsity underlying an assessment and the assessment order is set aside on merits, the related prosecution cannot survive.
The Court also disapproved of the Income Tax Department’s decision to institute one complaint against the company and its two directors and two additional complaints against the directors individually on the basis of the same assessment order.
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“Another disturbing aspect is that apart from making the two Directors of the assessee company as accused…he also filed the other two CR Cases individually…based upon the same Assessment Order,” the Court observed, terming the action an abuse of authority.
The company was engaged in the business of operating an Indian Made Foreign Liquor bonded wholesale warehouse in Assam’s Karbi Anglong district.
For Assessment Year 2016-17, it filed its income-tax return declaring a total income of Rs 8,01,508. The case was subsequently selected for scrutiny.
The Assessing Officer alleged that the company had remained partly non-compliant with statutory notices and show-cause notices. Discrepancies were also noticed between its balance sheet, profit and loss account and the notes forming part of the financial statements.
According to the Department, the company failed to satisfactorily explain the discrepancies and did not produce correct accounts and documents despite being served with notices. Its books of account were consequently rejected.
A best-judgment assessment was completed on December 21, 2018, determining the company’s taxable income at Rs 35,66,191 as against the returned income of Rs 8,01,508.
The Department alleged that the company had wilfully attempted to evade tax by failing to disclose its actual income and had deliberately failed to comply with the statutory notices.
Based on the assessment order, the Income Tax Officer instituted three criminal complaints on March 5, 2019.
One complaint was filed jointly against the company and its two directors, while two separate complaints were instituted individually against Sanju Phangcho and Bijoy Phangcho.
The complaints alleged offences under Section 276D, which deals with wilful failure to produce accounts and documents or comply with certain directions, and Section 277, which penalises the making of false statements in verification or the delivery of false accounts and statements.
A Judicial Magistrate First Class at Kamrup Metropolitan, Guwahati, took cognisance of the alleged offences and issued summons to the accused on July 15, 2022.
The company challenged the assessment before the Commissioner of Income Tax (Appeals), Dibrugarh.
The appellate authority granted partial relief through an order dated February 28, 2020. It found that the Assessing Officer had estimated the company’s net profit at 7% by incorrectly treating it as an IMFL retail outlet.
The company, however, operated an IMFL bonded wholesale warehouse. The CIT(A), therefore, directed the Department to apply a net-profit rate of 2.33% instead of 7% while computing its income.
As the company did not receive complete relief, it approached the ITAT’s Kolkata Bench.
Before the Tribunal, the company contended that it had mistakenly uploaded accounts and documents that were not relevant to the assessment year in question.
It argued that the Assessing Officer had proceeded with the assessment under Section 144 because the proceedings were approaching the limitation deadline, without giving the company an adequate opportunity to reconcile the figures and produce the correct books of account.
The ITAT accepted the request for another opportunity. By an order dated March 18, 2021, it set aside the CIT(A)’s order and restored the matter to the Assessing Officer for fresh adjudication.
The Assessing Officer was directed to permit the company to submit the necessary evidence, books of account and other details and thereafter decide the matter afresh through a speaking order.
Following the remand, a fresh assessment was passed in March 2022, determining the company’s net profit at Rs 11,87,032—substantially lower than the taxable income of Rs 35,66,191 determined in the original assessment.
Separate penalty proceedings were also initiated under Sections 271(1)(b) and 271(1)(c) of the Income Tax Act.
The petitioners approached the High Court under Section 482 of the Code of Criminal Procedure seeking the quashing of all three complaint cases.
They submitted that the original assessment order dated December 21, 2018 was the foundation of the prosecution. Since the ITAT had set that order aside and remanded the matter for fresh adjudication, the criminal complaints no longer had any legal basis.
They relied on the maxim sublato fundamento cadit opus, meaning that once the foundation is removed, the structure built upon it falls.
The petitioners also argued that continuing the prosecution after penalty proceedings had been initiated on the same facts would result in their being proceeded against twice for the same alleged offence.
Reliance was placed on the Supreme Court’s decisions in K.C. Builders v. Assistant Commissioner of Income Tax and Commissioner of Income Tax v. Jai Laxmi Rice Mill.
The Income Tax Department opposed the petitions, contending that the alleged offences survived notwithstanding the ITAT’s order.
It argued that the petitioners had furnished false statements in the verification of their income-tax return and had failed to produce accounts and documents despite statutory notices.
The Department further submitted that penalty proceedings and criminal prosecution were independent and could continue simultaneously.
It relied, among other decisions, on the Supreme Court’s ruling in P. Jayappan v. S.K. Perumal, which recognises that criminal prosecution under the Income Tax Act may be initiated or continued even while assessment or appellate proceedings remain pending.
The High Court acknowledged that assessment and penalty proceedings are civil in nature and are generally independent of criminal prosecution.
It rejected the petitioners’ double-jeopardy argument, observing that penalty proceedings and prosecution could legally proceed simultaneously. Mere pendency of assessment or appellate proceedings, the Court said, would not by itself justify quashing a prosecution.
However, the Court drew a distinction between a case in which tax proceedings are merely pending and one in which the assessment forming the foundation of the criminal complaint has already been set aside by the appellate authority.
Referring to K.C. Builders, the High Court noted that where the ITAT, as the final fact-finding authority, cancels a finding of concealment, the prosecution based on that alleged concealment becomes unsustainable.
The principle similarly applies to an offence under Section 277 where the appellate authority has negated the factual basis of the allegation that a false statement was made.
The Court also referred to G.L. Didwania v. Income Tax Officer, where the Supreme Court quashed a prosecution for making a false statement after the Tribunal set aside the finding on which the complaint was founded.
It further relied on Uttam Chand v. Income Tax Officer and Radheshyam Kejriwal v. State of West Bengal to reiterate that while adjudication and prosecution may proceed simultaneously, a prosecution should not continue where the accused has been exonerated on merits on identical facts.
The Department contended that the ITAT had not decided the case on merits and had merely remanded it to the Assessing Officer.
The High Court rejected this submission. It found that the Tribunal had considered the company’s substantive contention that incorrect accounts had been uploaded and that it was not provided a proper opportunity to reconcile its records.
The ITAT had consequently set aside the impugned order and directed a fresh assessment after allowing the company to submit the relevant books, evidence and documents.
The subsequent determination of net profit at Rs 11.87 lakh, compared with the earlier taxable income of Rs 35.66 lakh, also demonstrated the effect of the Tribunal’s intervention.
The High Court held that if the finding of concealment forming the basis of a complaint is set aside, “there cannot be any concealment in the eyes of law,” and continuation of the prosecution would be illegal and without jurisdiction.
The Court also dealt with the Department’s reliance on Section 278E of the Income Tax Act, which provides for a presumption regarding the existence of a culpable mental state in prosecutions under the Act.
It clarified that the presumption under Section 278E is available to the criminal court during the prosecution or trial. It is not a presumption that may be drawn by the Assessing Officer before the complaint is filed.
The statutory presumption is also rebuttable, and an accused person is entitled to rebut it during the trial, the Court added.
Apart from the effect of the ITAT order, the High Court found a separate legal defect in the complaints filed individually against the two directors.
It observed that the complaint jointly arraigning the company and its directors could be maintained under Section 278B of the Income Tax Act, subject to the specific roles attributed to the directors.
However, separate complaints against the directors for the same alleged offence could not be maintained without making the company an accused.
Relying on the Supreme Court’s decision in Aneeta Hada v. Godfather Travels & Tours Private Limited, the Court reiterated that where liability of directors or officers is vicarious, arraigning the company as an accused is imperative and a condition precedent for prosecuting its officers.
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