"If you are not confused, you are not well informed" – Nani Palkhivala
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Income Tax Act, 1961 is incorporated with various mechanisms to deter non- compliance of Income Tax provisions and Tax evasion such as levying of Interests, penalties and even prosecution. Out of this armory, the most frequently used are "levying of interest"which is compensatory in nature and "penalties", which are imposed as a punitive action.However, because of an enormous burden on Income-Tax Authorities, only a minuscule percentage of cases are picked up for scrutiny, which encourages a tax evader to fancy his chances of ever being called up to pay penalties. Moreover, a tax avoider can get away from his felony by simply paying the requisite penalty (at most 300%) without any further consequences. Hence imposing penalties and levying interest may not act as effective discouragement to avoid tax evasion. On the other hand, the fear of landing up in jail vis-à-vis prosecution may act as a conclusive and decisive deterrent in ensuring tax compliance and discourage wilful tax evasions. Based on this theory of deterrence, Income Tax is laden with various provisions for prosecution which are laid in Chapter XXII of Income Tax Act, 1961. Understandably, there has been a spike in prosecution proceedings launched over the years, as a tool of deterrence against non-compliance,
The Covid-19 pandemic has brought an unprecedented liquidity crunch which has left no business untouched irrespective of its size. This crises is likely to result in exponential surge in non-compliance and defaults in statutory payments in accordance with Income Tax Act. Unless the legislature comes to the rescue of such businesses, this surge in defaults may be followed by ever increasing prosecution proceedings launched by Income Tax Authorities. Section 276B, under Chapter XXII, is one of the most frequently invoked provision by Income tax Authorities. It empowers the authorities to launch prosecution against an assessee, who fails to deposit to the credit of Central Government, any TDS deducted by him. The amount that is deducted at source, under various provision of the income tax (chapter XVII-B) is required to be paid to the credit of central government within the prescribed limit in accordance with section 200 of the Act read with rule 30 of the Income-tax Rules, 1962. As per section 201 of the Act, if any person who is required to deduct any sum in accordance with the various provisions of the Act fails to deduct or after deduction fails to pay, the whole or any part of the tax to the credit of the Central Government in the prescribed time, shall be deemed to be an assessee in default in respect of such tax and shall pay interest at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted and at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid. Deductively, in the scheme and the context of the Income Tax Act, it is fair to assume that the legislature must take stringent view in case a person deducts tax but fails to deposit the same to government. Thus, it worthwhile to note that while Act does seek to impose penalty on non-deduction of TDS amount vide section 201, but there is no provision of launching prosecution if the assessee fails to discharge his duty of deducting tax at source. Prosecution as provided for in section 276B can only be launched if TDS has been deducted and is not deposited to the credit of the government. By providing for a limited scope for prosecution, the legislature clearly intends to deter any misappropriation of an amount that is deducted and held under the name and authority of the government.
Defences against Prosecution Launched Under 276B of the Act
In any prosecution proceedings under the Act, the Burden of proof lies on the accused, as the Act presumes the existence of mens reaon part of the accused. This presumption can be rebutted by the assessee by adducing evidence to prove the fact that he did not have the necessary mens rea with respect to the offence. Section 276B punishes a person if he fails to pay TDS deducted to credit of the central government and section 278B loops in every person who, at the time the offence was committed was in charge and was responsible for the conduct of the business of the company. Such person in charge as held by Hon'ble Supreme Court in State of Karnataka v. Pratap Chand1 mean a person having control of the day-to-day business of the firm and section 278B imposes on him the burden to prove his innocence.
In light of the above and various other judicial pronouncements over time, following are the grounds on which the courts have granted relief to the assessee in cases where the accused is prosecuted under section 276B of the Act;
(1) Section 276B imposes liability on the person who fails to pay to the credit of central government TDS or DDT as per section 115-O. Therefore, it is essential to understand who is responsible to pay the above sum to the government. Section 204 of the Act defines "person responsible for paying".Section 2(35) defines "principal officer", used with reference to a company among others to mean—
a. the secretary, treasurer, manager or agent of the authority, company, association or body, or
b. any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof ;
Thus, for a person to be considered as principle officer of the company it is indispensable for the Assessing Officer to serve a notice of his intention of treating him as the principal officer the company provided he is not working in the capacity of secretary, treasurer, manager or agent. Hence a notice under section 2(35)(b) is essential to commence prosecution proceedings and the Assessing Officer should produce credible material to show active involvement of the accused in the management and business of the company. It is the responsibility of the Assessing Officer to make out a prima facie case against the petitioner that the accused is the Principal Officer of the company and in the absence of such show cause notice establishing that the accused is the Principal Officer of the company, the courts have granted relief to the accused.
In ITO Income Tax Officer v. Delhi Iron Works (P.) Ltd., 2010] 195 Taxman 372 (Delhi), Hon'ble Delhi High Court has held that since director is not included within the ambit of Sub-clause (a) of Section 2(35) if the Income Tax Officer seeks to prosecute the director along with the company for an offence punishable under Section 276B of the Act, then it is essential for him to issue a notice under section 2(35)(b) of the Act expressing his intention to treat the director as "principal officer" of the company. Similar references has been made in the following cases;-
M.R. Pratap v. ITO, (1984) 149 ITR 798
- Greatway Pvt. Ltd. v. Asst. CIT, (1993) 199 ITR 391
- ITO v. Roshni Cold Storage (P.) Ltd., (2000) 245 ITR 322 (Madras)
The law in relation to identifying the Principal Officer is well defined by Madras High Court in the case of Kalanithi Maran v Union of India2, wherein the Hon'ble court has held that the main criteria of the Principal Officer of the company is that he should be in charge of the management, administration and day to day affairs of the company. It was also held that though the assessee in this case held directly and indirectly more than 50 per cent shares, in the absence of any material to establish that he was in-charge of the day-to-day affairs, management, and administration of the company, the Assessing Officer should not have named him as the Principal Officer. However, in the case of ITO v. Anil Batra, (2018) 409 ITR 428 (Delhi) it was held by Hon'ble High Court that since the directors have signed the Company's balance sheets, their defence that they were not in charge of the affairs of the company is untenable. It is also pertinent to highlight here that section 278B clearly states that it shall not render any such person liable to any punishment, if he proves that offence was committed without his knowledge.
(2) The Principal officer or directors of a company may have appointed competent officers to deal with the accounts of the company. In such cases, the Directors may take the plea that they were not responsible for day to day conduct of the company. In the case of Om Prakash Katyal vs Union of India3, the petitioner submitted that the directors of the company had appointed special officers and consultants to deal with the company's account and it was their responsibility to deposit TDS within the due date and the accused were not responsible for every act and day-to-day conduct of the business of the company. In view of the above submissions the court quashed the prosecution in the above said case. Hon'ble Patna High Court in Sonali Autos (P.) Ltd. vs State of Bihar4 held that oversight on the part of the Accountant, who was appointed to deal with Accounts and Income-tax matters, can be presumed to be a reasonable cause for not depositing the tax within time. The proceedings was quashed by the court.
(3) It has been held by the Apex court in the case of Madhumilan Syntex Ltd. v. UOI5 that prosecution proceedings are valid if TDS is not paid to Government within stipulated period and there is no merit in contention that TDS has already been deposited to account of Central Government meaning thereby that prosecution proceedings can be initiated even for delayed payment of TDS. However, section 278AA provides that in order to get over the penal consequences that follow on account of non-payment of tax deducted at source, it is open for the accused persons to come clean of the said charge by showing reasonable cause for failure to deposit the said amount. If the amount of TDS deducted is paid to credit of the government, though untimely, the court may grant relief. In the case of Sonali Autos (P.) Ltd. v. State of Bihar6, the court took notice of the fact that the impugned amount though not deposited in the required time was subsequently paid to the government, when a mistake was found in the books of accounts of the assessee. In the above said case the accused was able to rebut the presumption of mens rea as the delay had occurred only due to a mistake. It would be noteworthy to see the position taken by the courts for delay caused in depositing TDS due to outbreak of Covid-19 pandemic in lieu of genuine hardship faced by taxpayer.
(4) The court may grant relief where the delay in depositing the TDS is not substantial and amount involved was not huge. In the case of Vijay Singh v Union of India7, the court took notice of the fact that the delay was only five months and the amount involved in the case was only Rs 28,776, court held that discretion was not properly exercised by the authorities and the compliant cannot be said to be properly filed. In another case of Hanuman Rice & Oil Mills v. State of Bihar8, where the payment of tax was only Rs. 3,427/-, the court held that prosecution in the present case would be the abuse of process of court. Reference may also be taken from CBDT has issued instruction no.1335 of CBDT, dated 28-5-1980 which holds that prosecution under section 276B should not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.
(5) In those cases where the TDS is not deposited due to deficiency of funds, the court may consider such paucity of funds as reasonable causes. In the case M.R. Pratap v. V.M. Muthuramalingam9, the court considered the fact that the accused had incurred colossal losses during the relevant years and held that paucity of funds and financial stringency were reasonable causes. However in the above said case the paucity of funds were considered in addition to the fact that statutory notice contemplated under section 2(35)(b) was not issued. The amount deducted as TDS is not meant for business use and paucity of funds can only be mitigating factor and accused may not be acquitted on this reason alone.
Attention is also invited to the ratio laid out in ITO vs. Firoz Abdul Gafar Nadiadwala (ACCM)10 wherein it was held that financial difficulties, problem of competent staff, accountant's negligence, accused not aware about deducted and payment of tax voluntary payment of TDS and small amount of default etc. cannot be considered as a reasonable cause for failure to deposit TDS.
(6) As per section 279, prosecution for offences under section 276B has to be instituted with the previous sanction of Principal Commissioner or Commissioner or Commissioner (Appeals), The Principal Chief Commissioner or Chief Commissioner or, as the case may be, Principal Director General or Director General may issue such instructions or directions to the aforesaid income-tax authorities as he may deem fit for institution of proceedings under this sub-section. It is a settled law not only in income tax but in all laws that sanction is not a supervisory role rather it is a quasi-judicial function to be performed after proper application of mind and duly recording the reasons for grant of such approval. Thus, mechanical approval from the sanctioning authority and negligence to exercise his objectivity to consider the material on record for satisfying himself as to whether a case fit for launching prosecution exists may also be a plausible ground for courts to quash the prosecution proceedings. Analogy in this regard can be drawn from the following judicial precedents;
♦ German Remedies Ltd. vs. DCIT, 287 ITR 494 (Bom)
♦ Central India Electric Supply Co. Ltd. vs. ITO, (2011) 333 ITR 237 (Del.)
♦ Siemens Engineering & Manufacturing Company of India Limited v. UOI, AIR 1976 SC 1785
(7) Unreasonable delay in initiating a proceedings can be a ground for relief. One of the settled proposition of law, as decided in various decisions of the Hon'ble Apex Court as well as many High Courts is that where no limitation is prescribed for completion of proceedings, such process must be completed within a reasonable time and this proposition would depend on the facts and circumstances of each and every case. Unreasonable delay in initiating prosecution proceedings is contrary to public policy and abuse of process of law.
In State of Punjab v. Bhatinda District Cooperative Milk Producers Union Ltd. [2007] 11 SCC 363, it was held that
"It is true that if no period of limitation has been prescribed, statutory authority must exercise its jurisdiction within a reasonable period. What, however, shall be the reasonable period would depend upon the nature of the statue, rights and liabilities thereunder and other relevant factors."
In State of Orissa v. Debaki Debi AIR 1964 SC 1413, S.B. Gurbaksh Singh v. Union of India [1976] 2 SCC 181and CST v. Halari Store [1997] 7 SCC 715 , it has been observed that if no time-limit has been prescribed, a power of suo moto revision should be exercised within a reasonable time and any unreasonable delay may affect its validity. It was also held, that what a reasonable time would be, depends upon facts of each case.
Also, in the case of Vinar & Co. v Income Tax Officer11, the court held that although the Act did not prescribe any limitation for initiating the proceedings, it is well settled by numerous judicial decisions that such proceedings have to be initiated within a reasonable time and a lapse of 10 to 16 years could not be said to be reasonable and initiation of proceedings after a lapse of such a long time would be contrary to public policy and abuse of process of law. However, the same was overruled by Hon'ble Apex court in the case of Madhumilan Syntex Ltd. v. Union of India12 by holding that there was no failure, negligence or inaction on part of prosecuting agency in not proceeding with matter.
But if there is no reasonable cause for such failure and case of the accused falls bleak on the above arguments, then the concept of compounding comes in the picture. Compounding of offences means that the assessee can, instead of serving imprisonment term, pay a fee to the revenue department and waive his prosecution charges. For this detailed guidelines have been issued by CBDT vide notification F.No. 285/08/2014-IT(Inv.V)/147 dated June 14, 2019.
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1. [1981] 128 ITR 573 (SC)
2. [2018] 405 ITR 356 (Madras)
3. [2009] 310 ITR 174 (Patna)
4. [2017] 396 ITR 636 (Patna)
5. [2007] 290 ITR 199 (SC)
6. [2017] 396 ITR 636 (Patna)
7. [2005] 278 ITR 467 (Madhya Pradesh)
8. [1997] 226 ITR 401 (Pat.)
9. [1984] 149 ITR 798 (Karnataka)
10. Court Case no.95/Sw/2014.
11. [1992] 193 ITR 300 (Calcutta)
12. [2007] 290 ITR 199 (SC)
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