Prosecution By Revenue Department Malicious And Patently Malafide, Madras High Court Quashes Complaint

The Single Bench of Dr. Justice G. Jayachandran ruled that to invoke the deeming provision of Section 140A (3) to hold the assessee as an assessee in default, there should be a default in payment of tax in true sense. The Court added that the income tax department had malafidely supressed material facts regarding payment of tax by the assessee while issuing sanction for prosecution of the offence under Section 276 C (2).

The petitioner/assessee M/s. AMK Solutions Pvt Limited filed a self-assessment return. Thereafter, the income tax department filed a complaint for prosecution of offence under Section 276 C (2) of the Income Tax Act, alleging that the assessee had wilfully attempted to evade payment of income tax for the relevant assessment year. The said complaint was taken on file by the Additional Chief Metropolitan Magistrate. The petitioners, i.e., the assessee company M/s. AMK Solutions Pvt Limited and its Director Noorjahan, filed petitions before the Madras High Court under Section 482 of Cr.P.C. to quash the complaint.

The assessee/petitioners submitted before the Madras High Court that to attract the offence under Section 276 C (2) of the Income Tax Act, the two ingredients of a culpable mental state to evade tax and the attempt to evade tax are necessary. The petitioners averred that they did not have the intention to evade tax and had disclosed their income and tax payable while filing the income tax return.

The petitioners added that the they were not able to pay the tax along with the income tax return due to financial constraints, but had remitted the tax later much before the initiation of any proceedings for prosecution of the offence under Section 276 C (2). Thus, the petitioners averred that there was no evasion of tax or attempt for evasion of tax.

The petitioners contended that the Principal Commissioner of Income Tax (PCIT) had issued sanction to prosecute the assessee without considering the fact that the tax payable by the assessee was remitted much prior to the issuance of show cause notice.

The petitioners submitted that the complaint was filed by suppressing the fact of payment of tax by the assessee and by falsely alleging non-payment of tax by the assessee.

The revenue department submitted that in case of self-assessment, Section 140A mandates the assessee to submit the income tax returns along with the proof of payment of tax. The revenue department contended that under Section 140A (3), any failure on the part of the assessee to pay the tax in whole or in part along with the income tax return, will be deemed to be a default and the assessee shall be liable for prosecution.

The revenue department averred that there is a statutory presumption of presence of a culpable mental state to evade tax under Section 278 E of the Income Tax Act. The department added that the burden was on the assessee to show non-existence of a culpable mental state, which is a factual aspect and a matter for trial.

Section 276 C (2) of Income Tax Act provides that if a person wilfully attempts to evade the payment of any tax, penalty, or interest under the Income Tax Act, he shall be punishable with imprisonment for a term not be less than three months which may extend to two years, and he shall also be liable to fine. Section 278E (1) provides that in any prosecution for any offence under the Income Tax Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state and it shall be a defence for the accused to prove the absence of such culpable mental state with respect to the said offence.

The High Court observed that the Supreme Court in the case of Prem Dass versus Income Tax Officer (1999), while considering the expression 'Wilful attempt to evade any tax', held that there must be concealment of income by the assessee or the assessee must have furnished inaccurate particulars of income to attract Section 276 C.

The Court ruled that there was no concealment of any source of income, or furnishing of inaccurate particulars by the assessee. The Court added that the tax which was not paid on time by the assessee was later paid after 4.5 months along with interest.

The Court added that the assessee had filed its income tax returns in time, disclosing the income and the tax to be paid, and had remitted the tax payable along with interest. Thus, the Court ruled that there was no intention/ culpable mental state on the part of the assessee to evade tax and, therefore, Section 276C was not attracted.

The Court ruled that to invoke the deeming provision of Section 140A (3), there should be a default in payment of tax in true sense. The Court added that by applying the deeming provision, there was a non-application of mind by the income tax authorities over the material records.

The Court held that the presumption regarding existence of a 'culpable mental state' under Section 278E of the Income Tax Act would apply only when the basic ingredients which would constitute any offence under the Act are disclosed.

"Section 278 E of the Act is really a rule of Evidence regarding existence of mens rea by drawing a presumption though rebuttable. That does not mean that, the presumption would stand applied even in a case wherein the basic requirements constituting the offence are not disclosed. More particularly, when the tax is paid much before the process for prosecution is set into motion. The presumption can be applied only when the basic ingredient which would constitute any offence under the Act is disclosed."

The Court ruled that the facts on record disclosed that the tax was already paid and thus there was no evasion of tax by the assessee, therefore, the provisions of Section 278E were not attracted.

The Court added that the PCIT while granting sanction for prosecution did not consider the payment of tax along with interest by the assessee, and had conspicuously omitted to record the payment of tax. The Court noted that the department had falsely stated in the complaint that the assessee had not paid the tax amount due to the department.

Thus, the Court ruled that malicious prosecution was initiated by the income tax authorities by suppressing material facts and on the basis of intentional false allegations. The Court added that the income tax authorities had abused their powers.

"Thus, the suppression of material facts, intentional suggestion of falsehood and non-application of mind goes to show that, this is a malicious prosecution initiated by the Income Tax authorities by abusing the power. When the malafide is patently manifested, the petitioners need not be forced to undergo the ordeal of trial, which has no legs to stand."

The Court thus allowed the petitions and quashed the complaint filed by the income tax department against the petitioners.

Case Title: Mrs. Noorjahan versus Deputy Commissioner of Income Tax

AND M/s. AMK Solutions Private Ltd. & Ors. versus Deputy Commissioner of Income Tax

Dated: 26.04.2022 (Madras High Court)

Counsel for the Petitioners: Mr. K. Chozhan

Counsel for the Respondent: Mr. L. Murali Krishnan, Special Public Prosecutor for Tax

Citation: 2022 LiveLaw (Mad) 204

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