'No Presumption Under Law That Every Unaccounted Transaction Leads To Imposition Of Tax' : Karnataka HC Gives Relief To DK Shivakumar

A single bench of Justice John Michael Cunha while dismissing three petitions filed by the department said "I do not find any justifiable reason to interfere with the impugned orders. As the prosecution initiated against the respondent is bad in law and contrary to the procedure prescribed under the Code of Criminal Procedure and the provisions of the Income Tax Act."

Case Background:

Income Tax Department filed complaints against Shivakumar under section 200 Cr.P.C. alleging commission of offences punishable under section 276C(1) of the Income Tax Act, 1961 read with sections 201 and 204 of IPC. It was alleged that during search action under section 132 of the Income Tax Act in the premises of Eagleton Resort, Bidadi, Bangalore where the respondent was staying for time being, he took out a piece of paper from his wallet and tore it in front of the officers.

The officers immediately reassembled the said piece of paper. The investigation carried out with reference to the said piece of paper which was attempted to be destroyed by the respondent contained certain unaccounted loan transactions with several persons/entities.

During investigation it was revealed that the said persons / entities were having, unaccounted financial transaction with the respondent.

Further, it was found that the respondent had advanced a huge amount of loan to these persons / entities. He did not disclose the said unaccounted financial transaction in his returns of income.

Complaints were filed before the Special Court which took cognizance of the offences and issued summons. The prosecution led its evidence before charge and the matters were posted for hearing before charge. At that stage, Shivakumar filed applications seeking discharge by order dated 28.02.2019, the court allowed the applications and discharged him.

Grounds raised by the Income Tax Department:

Additional Solicitor General M B Nargund made the following submission:

The court below failed to interpret the provision contained in sections 132(5) and 132(9A) of the Income Tax Act in proper perspective.

The court below erred in not considering the mandate of law contemplated in section 280B(b) of Income Tax Act by which a Special Court is empowered to take cognizance of the offence upon a complaint made by the authority authorized in this behalf. The Special Court has also erred in not examining the scheme of the Income Tax Act in proper perspective.

The Court below committed an error in not considering the expression used in section 276C(1) of the Income Tax Act that "willful attempt to evade tax" and "amount sought to be evaded" did not necessarily mean quantification of the exact amount of the tax evaded; rather the said section provided for prosecution for every act of willful attempt to evade tax of an amount sought to be evaded.

The quantification of the amount of tax evaded is not a necessary ingredient of the offence. The language of section 276C(1) of the Income Tax Act specifically refers to an attempt made to evade the tax, penalty or interest chargeable or imposable or under reports is income under the Act. The section is attracted even before the quantification of the tax being evaded.

The Court below has erred in holding that the impugned document attempted to be destroyed (Ex.P3) was not destroyed or obliterated and therefore, the ingredients of sections 201 and 204 of IPC were not made out.

Submissions of respondent:

Senior Advocate M.V.Seshachala appearing for the respondent (Shivakumar) disputed the very authority of the complainant to initiate prosecution. Referring to provision of section 132(9A) of the Income Tax Act, it was emphasized that the authority who conducted search under section 132 of the Income Tax Act and proceeded to lodge the complaints under section 276C(1) of the Income Tax Act namely Sri.T.Sunil Goutam, DDIT (Investigation), Unit-3(i), Bengaluru was not the jurisdictional Assessing Officer. As per section 132(9A) of the Act, the Authorized Search Officer on handing over the search material to the jurisdictional Assessing Officer becomes functus officio. In the instant cases, he handed over the search material to the jurisdictional Assessing Officer on 30.10.2017 and hence, the complaints filed by him are without jurisdiction.

Court findings:

Firstly, the court said "As per section 279 of the Income Tax Act, the prosecution under the Act could be launched at the instance of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner".

Referring to notification issued by the Government of India, Ministry of Finance dated 13.11.2014. The court said "the authorization made in favour of Sri.T.Sunil Goutam, Deputy Director of Income Tax (Investigation), Unit-3(1), Bengaluru, is in consonance with the provisions of the Income Tax Act and does not suffer from any error or illegality as sought to be made out by learned Senior Counsel for respondent."

Secondly, the court noted that a complaint seeking prosecution of the accused for commission of the offences under Chapter XXII of the Act could be initiated only before the jurisdictional Magistrate and not directly before the Special Court. However, in the instant cases, undisputedly, the complaints were lodged by the authorized officer directly before the Special Court and the records of the proceedings indicate that on receiving the complaints, the Special Court straightaway issued summons to the accused without even taking cognizance of any of the offences.

Accordingly, it said "The procedure followed by the Special Court, in my view, cannot be countenanced." It added "In view of the proviso (b) of section 280B of the Income Tax Act, the Special Court is debarred from taking cognizance of the offences under Chapter XXII of the Income Tax Act without the accused being committed to the Special Court for trial.

As regards the case against the respondent the court said "In my view, the allegations made in the complaints and the material produced in support thereof prima facie do not make out the ingredients of the offences under section 276C(1) of the Income Tax Act."

It added "In order to render the accused / respondent guilty of attempt to evade tax, penalty or interest, it must be shown that he has done some positive act with an intention to evade any tax,penalty or interest as held by the Hon'ble Supreme Court in PREM DASS vs. INCOME TAX OFFICER (1999) 5 SCC 241 that a positive act on the part of the accused is required to be established to bring home the charge against the accused for the offence under section 276C(2) of the Act."

The court concluded by saying "There is no presumption under law that every unaccounted transaction would lead to imposition of tax, penalty or interest. Therefore, until and unless it is determined that the unaccounted transactions unearthed during search were liable for payment of tax, penalty or interest, no prosecution could be launched on the ground of attempt to evade such tax, penalty or interest. As a result, the very prosecution launched against the respondent being premature and illegal cannot be allowed to continue".