The Jharkhand High Court has recently held that when a penalty order is set aside, it implies the absence of concealment of income, leading to the automatic quashing of criminal proceedings under Section 276C(1) of the Income Tax Act.

Justice Sanjay Kumar Dwivedi added that quashing the penalty order undermines the foundational basis for the criminal case, as criminal intent was deemed absent due to the annulment of the penalty proceedings.

"... the Court comes to the conclusion that once penalty order is set aside, it will be presumed that there is no concealment and quashing of prosecution under Section 276C(1) of the Income Tax Act is automatic. The petitioner cannot be allowed to suffer and to face criminal trial and the same cannot sustain in the eyes of law." 

The petitioner had faced allegations of income concealment, resulting in the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeal) upheld the penalty, prompting the petitioner to approach the court seeking the dismissal of the criminal proceedings.

During the proceedings, the petitioner's counsel argued that the subject matter under assessment in the complaint case was also subject to penalty proceedings. Importantly, the appeal against the penalty order was successful, resulting in its annulment and thereby undermining the foundational basis for the case.

However, the respondents' counsel contended that despite the appellate tribunal's annulment of the penalty order, the concealment of income offence still stood. This argument hinged on the precedent set by the case of Radheshyam Kejriwal v. State of West Bengal & Anr, suggesting that the two proceedings could proceed independently.

The High Court referred to Gopal Ji Shaw v. Income Tax Officer, Calcutta & Ors, emphasizing that criminal prosecution under a special statute should not be initiated without due consideration of the intricate interpretations of the Income Tax Act. The court also cited K.C. Builders & another vs. Assistant Commissioner of Income Tax, which established that the survival of a criminal case depended on the validity of the penalty order.

The court's decision rested on the premise that the setting aside of the penalty order implied a lack of concealment. Consequently, the automatic quashing of the prosecution under Section 276C(1) of the Income Tax Act followed. It was further emphasised that the penalty proceedings and the criminal prosecution could run concurrently. However, in the present scenario, as the penalty proceedings had been nullified following an appellate order, the essential element of mens rea (criminal intent) necessary for a criminal offence was deemed absent.

In light of these considerations, the High Court allowed the petitioner's plea and quashed the entire criminal proceedings against them.

Case Title: Pralay Pal vs. State of Jharkhand and Anr.

Case Citation: 2023 LiveLaw (Jha) 34

Case No.: Cr.M.P. No. 2266 of 2017

Advocate for the Applicant: Mr. Amit Kumar Das

Advocate for the Respondent: Mr. Vishwanath Roy, Mr. Anurag Vijay, Mr. R.N Sahay and Mr. Sharda Kumari

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