The Bombay High Court, while hearing a batch of writ petitions in Hemant Mahipatray Shah v. Anand Upadhyay, passed a verdict that criminal prosecution under Section 276B must be quashed if revenue has chosen not to invoke penalty provision under Section 221, Income Tax Act, 1961 (Hereinafter, “I.T. Act”) for “failure to pay the whole or any part of tax”, since the same substantive act is also categorized as an “offence” under Section 276B.
Facts:
In the present factual matrix, the Bombay High Court addressed petitions challenging criminal prosecutions under Section 276B of the Income Tax Act. The petitions were filed against orders for process issuance related to delays in tax payments by one, M/s Hubtown Ltd. and it’s directors. The Income Tax Officer had initiated prosecutions after the company failed to pay taxes deducted at source within the prescribed time, despite eventually depositing the amounts with interest. The petitioners argued that criminal proceedings were improper because penalties imposed had been cancelled and the taxes were eventually paid. They contended that the complaints lacked necessary details about vicarious liability and proper notice. The Court ruled that since the Revenue had opted not to impose penalties and the tax had been settled, the criminal prosecutions were unjustified and amounted to an abuse of process, leading to the quashing of the charges
Issues:
- Whether criminal prosecution under Section 276B of the I.T. Act can proceed when the Revenue has opted not to impose penalties under Section 221 read with Section 201(1) of the I.T. Act.
- Whether the criminal prosecution is maintainable in light of findings and cancellations of penalties by appellate authorities.
Contentions of Petitioner:
The petitioners argued that the criminal prosecution under Section 276B lacks basis once the penalties imposed under Section 271(1)(c) have been cancelled, asserting that continuing such proceedings constitutes an abuse of legal process. They support their position by referencing the Supreme Court's decision in K.C. Builders and other relevant judgments, which hold that if authority has annulled the penalties and determined there was no concealment, then criminal proceedings should not persist.
Contentions of Respondent:
The Revenue contends that criminal prosecution under Section 276B can proceed despite the cancellation of penalties, as it addresses different aspects of non-compliance. They argue that the scope and intent of criminal prosecution are distinct from penalty proceedings, and thus, the prosecution should not be dismissed merely because the penalties have been cancelled.
Observation of the Court:
The Court decided that the Revenue's decision not to impose penalties under Section 221 and Section 201(1) precludes pursuing criminal prosecution for the same act, as it would constitute an abuse of process. Referring to the K.C. Builders precedent, the Court highlighted that when penalties are cancelled and there is no evidence of concealment or intent to evade tax, the grounds for criminal proceedings are nullified. Supreme Court decisions in G.L. Didwania and K.C. Builders were crucial, illustrating that criminal proceedings cannot proceed if the basis for prosecution, such as concealment or deliberate evasion, has been invalidated by the respective authorities.
Regarding the above, the Bombay High Court observed:
It is needless to reiterate the ratio laid down by the Supreme Court in the case of Dayle De’Souza Vs. Union of India through Deputy Chief Labour Commissioner (C) and another (supra) since it is incumbent upon the Revenue to prove that the offence in question has been committed with the consent or connivance or is attributable to any neglect on the part of, any Director, Manager, Secretary or other officer of the company, such Director, Manager, Secretary or other officer of the Company shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. This is also in pari materia with the vicarious liability under section 141 of the Negotiable Instruments Act, 1881, as has been observed in paragraph 12 (supra).
In the present case, the Revenue has chosen not to invoke the provisions of Section 221 r/w Section 201 (1) of the I.T Act to impose penalty against the company or the principal officer of the company for ‘failure to pay the whole or any part of tax, as required by or under this Act’. The Revenue cannot now be permitted to prosecute the petitioners for the same substantive act which is also categorized as an ‘offence’ under Section 276B of the I.T. Act. As such, further trial of the petitioners by the criminal Court cannot be permissible which would tantamount to abuse of process of the Court. The Counsel has, therefore, rightly placed reliance on a decision in the case of K.C. Builders Vs. Assistant Commissioner of Income-Tax.
The Hon’ble Supreme Court in the case of G.L. Didwania and another Vs. Income Tax Officer and another while dealing with an appeal preferred by the assessee made following observations in paragraph 4; ... If that is the position then we are unable to see as to how criminal proceedings can be sustained.
Decision:
The Court granted all petitions, overturning the orders for process issuance in several criminal cases and nullifying the related revision applications. It determined that criminal proceedings could not proceed due to the cancellation of penalties and the final findings of the appellate authority, which had invalidated the grounds for the criminal charges.
Case Title: Hemant Mahipatray Shah and Anr. v. Anand Upadhyay
Court: Bombay High Court
Coram: Justice Prithviraj K. Chavan
Date: 12th August, 2024
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