No Wilful Evasion Of Tax - Madras High Court Quashes Prosecution Under Section 276C (2) Of Income Tax Act

The Single Bench of Justice N. Sathish Kumar held that in the absence of mens rea to avoid payment of tax, a "wilful attempt" to evade tax cannot be attributed to assessee in order to prosecute him under Section 276C (2).

The Petioner/Assessee S.P. Velayutham filed his income tax return showing his tax liability but did not pay the full amount of self-assessment tax. An Assessement Order was passed by the authorities confirming his taxable income. Thereafter, an order for attachment of immovable property was passed by the income tax department and a show cause notice was issued to the Assessee as to why prosecution under Section 276C (2) of the Income Tax Act should not be initiated against him for not paying the entire tax due as per his income tax return. The Assessee replied that the entire amount of tax was not paid by him due to loss in business and that after the attachment of immovable property he could not mobilise funds. The Assistant Commissioner of Income Tax (ACIT) filed a complaint before the Additional Chief Metropolitan Magistrate (Economic Offences), Chennai for prosecution of offence under Section 276C (2), stating that the reason given by the Assessee for non-payment of tax was very general in nature and that loss in business could not be an excuse for evading tax. The trial court took cognizance of the offence on the complaint filed by the ACIT. The Assessee filed a petition under Section 482 of the Code of Criminal Procedure, 1973 in the Madras High Court to quash the proceedings pending on the file of the Additional Chief Metropolitan Magistrate.

The Counsel for the Petitioner/Assessee submitted before the High Court that the Assessee had paid instalments of outstanding tax with great difficulty and was yet to pay the entire amount of tax. The Counsel averred that the Assessee had explained in his reply to the show cause notice the circumstances which forced him to delay the payment and that it was not the case that the Assessee had supressed his real income nor was an undisclosed income unearthed by the income tax department under search or inspection. The Counsel also contended that the Assessee's reply to show cause notice was not considered properly by the income tax department and the ACIT had mechanically filed prosecution without applying his mind. The Counsel submitted that mere delay in payment of tax without an intention to evade tax would not constitute an offence under Section 276C (2) of the Income Tax Act. Therefore, he contended that the entire prosecution was an abuse of process of law. The Counsel for the ACIT submitted that though the income tax return filed by the Assessee showed the correct taxable income, the Assessee had not paid the tax fully. The Counsel averred that even after passing the Assessment Order, the amount of tax was not paid. Therefore, the Counsel contended since tax had not been paid by the Assessee prosecution was certainly maintainable against him.

Section 276C (2) of the Income Tax Act, 1961 provides that if a person wilfully attempts to evade the payment of any tax, penalty or interest under the Act, he shall be punishable with imprisonment for a term not less than three months but which may extend to two years and shall, in the discretion of the court, also be liable to fine. The Explanation to Section 276C provides that a wilful attempt to evade any tax, penalty or interest shall include a case where any person has in his possession or control any books of account or other documents containing a false entry or statement, or when he makes any false entry or statement in such books of account or other documents, or wilfully omits any relevant entry or statement therein.

The High Court observed that to prosecute a person under Section 276C (2) there must be a wilful attempt on the part of the assessee to evade payment of any tax, penalty or interest.

The High Court ruled that though the Explanation to Section 276C is inclusive, it was not the case of the income tax department that the Assessee had made any false entry in the statements or documents, or had acted in any other manner to avoid payment of tax. The High Court held that the income tax return of the Assessee was properly accepted and the assessment was also confirmed, therefore mere default in payment of tax could not called a "wilful attempt" to evade payment of tax. The High Court noted that from the inception there was no suppression by the Assessee and even in the reply to the show cause notice the circumstances which forced him to make a default were clearly explained by him.

The High Court held that wilful attempt to evade tax cannot be attributed to Assessee in order to prosecute him under Section 276C (2) for mere default on payment of tax in time. The Court added that to prosecute a person for penal action, the penal provisions have to be strictly construed. Also, the Court ruled that only when the circumstances and the conduct of the accused showed a wilful attempt to evade tax or the payment of tax, prosecution under Section 276C(2) could be launched. The Court added that the word "wilful attempt" could not be inferred merely on failure to pay tax in time in the absence of any intention, deliberate attempt or mens rea to avoid the payment of tax.

The High Court ruled that the explanation offered by the Assessee for failure to pay the tax was very reasonable and the conduct of making payment of tax in instalments towards the outstanding tax liability clearly showed that the Assessee never had an intention to defeat the provisions of law by evading payment of tax.

The High Court thus observed that the prosecution in the case was a shear waste of time and there was no intention or wilful attempt made by the Assessee to evade the payment of tax. The Court noted that the Assessee had expressed his inability to pay tax and ruled that mere failure to pay a portion of the tax could not be construed to mean that he had wilfully attempted to evade the payment of tax.

The High Court thus quashed the proceedings pending on the file of the Additional Chief Metropolitan Magistrate (Economic Offences), Chennai for prosecution of offence under Section 276C (2).

Case Title: S.P. Velayutham Versus The Assistant Commissioner Of Income Tax, Chennai

Dated: 28.01. 2022 (Madras High Court)

Citation: 2022 LiveLaw (Mad) 124

Counsel For The Petitioner: Mr. T. Mohan

Counsel For The Respondent: Mr. L. Muralikrishnan

Click Here To Read/Download Order