Madras High Court permits Compounding Of Prosecution In Tax Evasion Case By MRF Chairman & Managing Director

The bench of Justice R. Mahdevan and Justice Mohammed Shaffiq, while upholding the order passed by the single judge, held that since the penalty was reduced from 300% to 100% of the tax sought to be evaded, the assessee is entitled to the benefit of Section 279(1A) of Income Tax. The section deals with non-prosecution for tax offences where the penalty is reduced.

The judgement has been delivered a writ appeal filed by the tax department challenging the order of the single judge who remitted the case back to Director General Income Tax ( Investigation ) with a direction to compound the case under Section 279 (2) of the Income Tax Act, 1961.

The respondent, K M Mammen, aged about 72 years and the Chairman and Managing Director of MRF Limited is the assessee. There have been proceedings in relation to the alleged offences under Sections 276C and 277 of the Income Tax Act before various fora including the Economic Offences Court, Statutory appeals before the Commissioner (Appeals) and Tribunal, Writ Petitions and Contempt Petition/Appeal.

In respect of Assessment and Appellate Proceedings for the assessment year 2002–03, the assessee filed the return of income on July 29, 2002, declaring a total income of Rs. 45,48,850, and it was processed under Section 143(1).

The assessing officer received information that the respondent had transferred through LGT Bank Liechenstein substantial sums of Euro currencies in favor of Webster Foundation, a trust, of which the respondent is stated to be one of the direct beneficiaries, apart from his father and brother.

The assessment was sought to be reopened and notice under Section 148 of the Act for the assessment year 2002-03 was issued proposing to bring to tax income which escaped assessment. The reassessment was made vide order dated 29.12.2009 under Section 147 r/w 143(3) of the Act whereby, a sum of Rs.2.26 Crores lying in the bank account as on 31.12.2001 was assessed as unexplained investment under Section 69 of the Income Tax Act.

The respondent preferred an appeal against the order of reassessment before the Commissioner of Income Tax which was dismissed. It was carried by way of appeal to the Tribunal. The appeal to the Tribunal also stood dismissed on the premise that the foundation was created and duly signed by the respondent, who was found to be a beneficiary of the Trust / Foundation.

In the meanwhile, a maximum penalty at 300% of tax sought to be evaded under Section 271(1)(c) was imposed. Aggrieved by the levy of penalty, an appeal was preferred before the Commissioner (Appeals), who reduced the penalty from 300% to 100% of the tax sought to be evaded. The penalty thus stood reduced from Rs.2,07,82,020 to Rs.69,27,342. The respondent as well as the department preferred appeals against the order of the Commissioner (Appeals). Both the appeals stood dismissed by the Tribunal. In other words, the penalty, which was originally imposed at 300%, stood reduced to 100% of the tax sought to be evaded.

The assessee was prosecuted under Sections 276C and 277 before the Additional Chief Metropolitian Magistrate (Economic Offence – I), Egmore. He preferred a Criminal O.P. No. 9065 of 2011 before the High Court to call for the records in the proceedings and quash it. The criminal original petition was dismissed with a direction to the Additional Chief Metropolitian Magistrate (Economic Offence-I) to expedite the trial and conclude it. Though a clarification was sought to the order it was declined. Importantly, reliance was placed by the assessee on the decision of the Supreme Court in Prem Dass v. ITO to contend that in view of the reduction of penalty from 300% to 100%, no prosecution can be launched or continued, which was however distinguished by the Judge, while disposing of the Criminal Original Petition.

The matter was challenged before the Supreme Court and an order of stay of operation of the order passed by the Judge was granted.

The assessee also filed a Writ Petition challenging the order by which the petition for compounding under Section 279(2) stood rejected. The Court found that in view of the reduction of penalty from 300% of the tax evaded to 100%, the decision in Prem Dass case would apply. It was found that the respondent would be entitled to the benefit of Section 279(1A) and directed to re-examine.

The Director General of Income Tax (Investigation) passed an order dated 06.11.2019 in which it was found to be not a fit case for compounding by Regional Compounding Committee (RCC). DG, Income Tax( Investigation), rejected the compounding application with following reasons

"a. .... b. The Compounding application of Shri K.M. Mammen filed on 9.3.2021 deserves to be rejected for the following reasons:

i. The offence relating to undisclosed foreign bank accounts/asset is normally not to be compounded as specified in Para 8.1(x) of the guidelines dated 14.6.2019 and

ii. The conduct of the assessee, nature and magnitude of offence warrants rejection of compounding petition as per Para 8.1 (xiii) of the guidelines dated 14.6.2019.

c. Without prejudice to the above, the Committee unequivocally decided that even if the assessee's application were to be considered under CBDT compounding guidelines dated 16.05.2008, it still deserved to be rejected on the grounds that the offence involves major fraud and also considering the nature and magnitude of offence as non compoundable in accordance with clauses prescribed in Para 4.4(g) of the guidelines dated 16.05.2008.

d. The Committee rejects the contentions of the assessee that the decision of the Hon'ble Supreme Court in the case of Prem Dass cited supra would be applicable to his case in terms of S. 279(1A) rws 273A of the IT Act.

e. The facts in the case of the assessee are similar to the facts in the case of South India Surgical Co., a decision rendered by the Hon'ble Madras High Court, cited supra, wherein the Hon'ble Supreme Court's judgement in the case of Prem Dass was distinguished. The Committee observed that the case of the assessee was fully covered by the decision of Hon'ble Madras High Court in the case of South India Surgical Co. cited supra. ... " ( Quoted from Judgement as such )

The assessee challenged the Director General of Income Tax's order before the single judge. The single judge bench held that since the penalty was reduced from 300% to 100% of the tax sought to be evaded, the assessee is entitled to the benefit of Section 279(1A).

The appeal was filed by the department challenging the order of the Single Judge insofar as it remitted the case back to the Director General of Income Tax (Investigation) with a direction to compound the case under Section 279 (2) of the Income Tax Act, 1961.

The department's writ appeal against the Single Judge's order directing to compound the offences of tax evasion has been dismissed in writ appeal.

The court held that the assessee has the right to compounding under Section 279(2) for the offences under Sections 276C & 277, as the department had not challenged the Single Judge's earlier judgement, which addressed the matter definitively and concluded that the department is subject to it.

The court stated that the department having failed to challenge the order passed by Single Judge in earlier, cannot challenge the directions given by the Court for compounding of criminal prosecution.

Counsel For Petitioner: AR.L.Sundaresan

Counsel For Respondent: N.L.Rajah

Case Title: The Principal Commissioner of Income Tax Versus K.M.Mammen

Citation: 2024 LiveLaw (Mad) 2

Case No.: W.A. No.1767 of 2022 and C.M.P. No.12970 of 2022

Click Here To Read The Order