WILFUL FAILURE TO FURNISH RETURN IS ONLY CRITERION FOR INITIATION OF PROSECUTION UNDER SECTION 276CC OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Failure to file income tax returns

Section 276CC of the Income Tax Act, 1961 provides that If a person willfully fails to furnish in due time the return of fringe benefits which he is required to furnish under section 115WD (1) or by notice given under section 115WD (2) or section 115WH or the return of income which he is required to furnish under section 139(1) or by notice given under  section 142(1)(i) or section 148 or section 153A, he shall be punishable,-

•  in a case where the amount of tax, which would have been evaded if the failure had not been discovered, exceeds   Rs.2.50 lakhs, with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to seven7 years and with fine;
• in any other case, with imprisonment for a term which shall not be less than three months but which may extend to  2 years and with fine.

Culpable mental state

Section 278E of the Act provides that in any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

The expression ‘culpable mental state’ included intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.  a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

Willful intention

To deal with this issue of willful intention, one cannot avoid Section 278E of the Act. This provision brings in a statutory presumption with regard to the existence of a culpable mental state. Therefore, the issue as to whether there was willfulness in not filing the returns on time and not paying the tax on time is only a matter of fact, which can be ascertained only through appreciation of evidence.  What can be presumed is only culpable mental status and the onus is upon the petitioner to prove the contrary and that can be done only at the time of trial.

Case law

In VINAYAGAM SABARISANTHANAKRISHNAN VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX NON-CORPORATE CIRCLE 14, CHENNAI - 2024 (2) TMI 1284 - MADRAS HIGH COURT,  during the Financial year 2013 - 14, the respondent Assistant Commissioner detected that the petitioner failed to file the income tax returns despite having earned substantial income.  The last date to file income tax return by the petitioner for Assessment Year 2014 - 15 is 31.07.2014 under Section 139(1) of the Act.  Therefore show cause notice was issued to the petitioner on 03.08.2017 to show cause as why the prosecution under section 276CC of the Act should not be launched against the petitioner for failing to file the return of income for the Assessment Year 2014-2015.  The petitioner gave a reply to the show cause notice on 11.08.2017.

The Assistant Commissioner was not satisfied with the reply of the petitioner.  He found that non filing of the return is willful.  A prosecution was launched against the petitioner under Section 276CC of the Act before the Additional Chief Metropolitan Magistrate (Economic Offences), Chennai.  The petitioner filed the present petition to quash the proceedings in E.O.C. No. 507 of 2017.

The petitioner submitted the following before the High Court-

• There was no willfulness on the part of the petitioner to file the return.
• The petitioner had deducted tax at source to the tune of Rs.11.34 lakhs, covering the entire income earned by the petitioner.
• The mere delay in filing the return due to ill health should not result in prosecution.
• The respondent issued a show cause notice under Section 148 of the Act after a very long time and assessment order was also passed under Section 147 of the Act.
• The petitioner filed an appeal before the Commissioner of Income Tax (Appeals) against the said order which is pending. 
• Therefore criminal prosecution is not warranted and the same is liable to be quashed.

The Special Public Prosecutor of the Department submitted the following before the High Court-

• The petitioner has committed a willful act of non-filing of the return of income as per Section 139(1) of the Act.
• The notice under Section 148 of the Act is issued to give a chance to the assessee to report any income that has originally escaped from assessment.
• The petitioner filed the return after the issuance of the show cause notice; therefore it cannot be treated as original return.
• Therefore the petitioner cannot defend that the show cause notice was issued belatedly.
• 6 years time is given to the department to issue show cause notice.
• The assessment was made and it was found that the petitioner was liable to pay tax to the tune of Rs.10.11 lakhs and tax demand for the said amount was raised. 
• The Tax Deducted at Source is much less than what the petitioner was expected to pay towards Income Tax for the income earned by him during the relevant period.
• There is a legal presumption under Section 278E which can be rebutted by the petitioner only in the course of trial.

The Special Public Prosecutor, therefore, contended that a prima facie case has been made out against the petitioner for offence under Section 276CC of the Act and sought for the dismissal of the petition.

The High Court considered the submissions placed before it by the parties to the petition.  The High Court observed that the petitioner failed to file the return for AY 2014 - 15 before the due date.  He reacted only after the issuance of notice under section 148 of the Act.  the notice under Section 148 of the Act has nothing to do with the return of income to be filed under Section 139(1) of the Act and it is issued only for the purpose of assessing escaped income.  The petitioner cannot be permitted to take a defence that the Income Tax department issued the notice under section 148 of the Act with delay.  The petitioner filed the return declaring his total income as Rs.29.5 lakhs.  In the assessment proceedings it was found out that Rs.54.10 lakhs is the actual income of the petitioner and liable to pay tax @ Rs.11.12 lakhs.  The petitioner cannot assume that the Tax Deducted at Source will cover the entire tax liability for the relevant Assessment Year even without filing his returns and declaring his total income.

The High Court further observed that the only criterion for initiation of prosecution is that there must be a willful failure to furnish returns as required under Section 139(1) of the Act.   Once that requisite is fulfilled, the statutory presumption under Section 278E starts operating and this provision brings in a statutory presumption with regard to the existence of a culpable mental state.  The onus is upon the petitioner to disprove the culpable mental status of the petitioner.  Even this can be done only at the time of the trial. 

The High Court considered the arguments of the petitioner that an appeal has been filed against the assessment order and the same is pending before the appellate authority and therefore, the prosecution cannot be continued. The High Court observed that there is no basis for this submission and the mere pendency of the appellate proceedings is not a relevant factor for initiating prosecution proceedings under Section 276CC of the Act.  In this case the trial has already been commenced.  It is left to the petitioner to raise all the grounds before the Trial Court.  The same will be considered by the trial court on merits.  The High Court dismissed the petition and directed the Trial Court to complete the proceedings within a period of 3 months from the date of receipt of the order of the High Court.