2025 (5) TMI 2060 - HC - Income Tax

Acquittal for offences u/s 276B r/w Section 278B - failure to deposit Tax Deducted at Source (TDS) within the time prescribed under law - petitioner alleged that the respondent company had deducted TDS but failed to deposit the same with the Central Government within the prescribed period. HELD THAT - The petitioner authority has assailed the acquittal of the respondents on the ground that the documents relied upon by the respondents were unauthenticated or insufficient to discharge the burden u/s 278AA - Trial Court did not accept this argument and instead looked at the totality of circumstances including the company s financial disclosures the pendency of income tax refunds and the absence of any attempt to conceal the default. It is well-settled that in a petition seeking leave to appeal against acquittal u/s 378 (4) of the CrPC interference is not warranted merely because the appellate court may have arrived at a different conclusion. The jurisdiction u/s 378 (4) of the CrPC is invoked only where the findings of the learned Trial Court are perverse manifestly illegal or result in miscarriage of justice. Where two views are possible and the Trial Court has chosen one based on plausible reasoning and appreciation of facts the appellate court ought not to interfere. In the present case Trial Court has adopted a legally tenable interpretation of Section 278AA of the IT Act and rendered findings which are not only supported by the record but also resonate with the underlying objective of the provision namely to shield individuals from criminal prosecution where non-compliance is neither willful nor mala fide. No perversity or material irregularity has been demonstrated by the petitioner. The prosecution s case hinges more on the occurrence of default than on the requisite mental element necessary to sustain conviction u/s 276B r/w Section 278E of the IT Act. However the latter stands neutralized by the substantiated defence u/s 278AA of the IT Act.

Summary

The core legal questions considered by the Court in these petitions concern the criminal liability of a company and its principal officer for failure to deposit Tax Deducted at Source (TDS) within the prescribed statutory period under the Income Tax Act, 1961. Specifically, the issues include:

1. Whether the respondents' failure to deposit TDS amounts deducted from payments made to third parties within the stipulated time constitutes an offence under Section 276B read with Section 278B of the Income Tax Act.

2. Whether the respondents can avail the statutory defence of 'reasonable cause' under Section 278AA of the Income Tax Act to justify the delay in depositing TDS and thereby avoid criminal liability.

3. The evidentiary standard and nature of proof required to establish 'reasonable cause' under Section 278AA.

4. The scope and extent of appellate interference in an appeal against acquittal under Section 378 of the Criminal Procedure Code, particularly when the trial court has acquitted on the ground of reasonable cause.

Issue-wise Detailed Analysis

1. Liability for Failure to Deposit TDS under Sections 276B and 278B of the IT Act

The legal framework mandates that any person who deducts tax at source must deposit the same with the Central Government within the prescribed period. Section 276B prescribes rigorous imprisonment and fine for failure to do so. The prosecution was initiated on the basis that the respondents deducted substantial TDS amounts in three distinct financial years but failed to deposit them timely, thereby attracting penal consequences.

The petitioner contended that once TDS is deducted, it becomes government property, and the deductor acts as a trustee; hence, withholding or delay in deposit is a serious economic offence. The prosecution was sanctioned after due consideration, rejecting the respondents' claim of financial hardship as an untenable excuse.

The respondents admitted the delay but denied any wilful default or mala fide intent. They contended that the delay was due to severe financial constraints arising from non-receipt of payments from principal contractors and government agencies, resulting in acute liquidity shortages.

2. Statutory Defence of 'Reasonable Cause' under Section 278AA

Section 278AA operates as a non-obstante clause, providing a statutory defence that no person shall be punishable under Section 276B if they prove that the failure to deposit TDS was due to 'reasonable cause'. The Court emphasized that 'reasonable cause' means a cause which prevents a reasonable man of ordinary prudence from complying, without negligence or mala fide intent.

The trial court extensively examined documentary evidence including agreements with principal contractors, ledger copies showing outstanding receivables, correspondence with banks and tax authorities, and arbitration awards confirming dues payable to the respondent company. The respondents also demonstrated that the entire TDS amount, along with interest and late fees, was eventually deposited prior to the initiation of prosecution.

The Court noted that the financial hardship was not a mere assertion but substantiated by credible evidence showing that payments due from government entities and contractors were withheld or delayed, which directly impacted the respondents' ability to deposit TDS timely.

The trial court found that these circumstances constituted 'reasonable cause' within the meaning of Section 278AA, thereby negating the mens rea necessary for criminal liability under Section 276B.

3. Evidentiary Standard and Application of Law to Facts

The petitioner challenged the sufficiency and authenticity of the documents relied upon by the respondents, arguing that vague justifications and photocopies could not discharge the burden of proof under Section 278AA. However, the trial court considered the totality of circumstances, including the respondents' proactive steps to regularize the default and the absence of any concealment or fraudulent conduct.

Importantly, the Income Tax Officer (CW-1) in cross-examination conceded that the entire defaulted amount was paid before the show cause notice was issued, undermining the prosecution's claim of wilful default.

The Court reiterated that the statutory defence under Section 278AA is designed to shield those who fail due to bona fide reasons beyond their control, and not due to negligence or mala fide intent. The trial court's findings that the respondents' financial difficulties were genuine and that the delay was unavoidable were held to be a possible and reasonable view based on evidence.

4. Scope of Appellate Interference in Appeal Against Acquittal

The Court relied on established precedents that appellate courts must exercise caution before interfering with acquittals. The principles articulated include:

• The presumption of innocence strengthens acquittal.
• The appellate court may reappreciate evidence but should not overturn acquittal if the trial court's view is a possible one based on the record.
• Interference is warranted only if the acquittal is perverse, based on misreading or ignoring material evidence, or no other reasonable view is possible.

The Court found no perversity or illegality in the trial court's judgment. The acquittal was based on a balanced appreciation of evidence and correct interpretation of Section 278AA. The petitioner failed to demonstrate that the trial court's findings were manifestly erroneous or that the respondents acted with culpable intent.

Treatment of Competing Arguments

The petitioner's argument that financial hardship cannot justify withholding government revenue was acknowledged as a strong policy consideration. However, the Court emphasized that the statutory scheme itself recognizes exceptions where genuine reasonable cause exists. The respondents' detailed evidence of financial distress and subsequent compliance was accepted as satisfying this exception.

The petitioner's reliance on the sanction order rejecting the respondents' justification was noted, but the trial court's independent assessment of evidence was held to be within its jurisdiction and not susceptible to appellate interference at the leave stage.

Significant Holdings

"Section 278AA of the Income Tax Act begins with a non-obstante clause, which specifically provides the intent of the Legislature that no person shall be punished for failure to comply with Section 276B if it is established that the failure occurred due to a reasonable cause. In effect, the existence of a reasonable cause operates as a statutory defence against prosecution."

"Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides."

"The facts shows that the aforesaid financial constraints could have prevented any other company to fulfill financial obligations in normal circumstances without negligence or inaction or for want of bona fides. Accordingly, the ingredients of Section 278 AA of the Income Tax Act stands satisfied."

"The prosecution's case hinges more on the occurrence of default than on the requisite mental element necessary to sustain conviction under Section 276B... However, the latter stands neutralized by the substantiated defence under Section 278AA of the IT Act."

"The appellate court can interfere with the order of acquittal only if it comes to a finding that the only conclusion which can be recorded on the basis of the evidence on record was that the guilt of the accused was proved beyond a reasonable doubt and no other conclusion was possible."

"Where two views are possible and the Trial Court has chosen one based on plausible reasoning and appreciation of facts, the appellate court ought not to interfere."

In conclusion, the Court upheld the acquittal of the respondents on all three complaint cases, holding that the respondents had successfully demonstrated a reasonable cause for delay in depositing TDS under Section 278AA of the Income Tax Act. The Court declined to grant leave to appeal, finding no prima facie case warranting interference with the trial court's judgment.