Supreme Court Pulls Up Income Tax Department | Prosecution Under Section 276C Quashed for Ignoring CBDT Circulars Requiring ITAT Confirmation | ₹2 Lakh Costs Imposed
Kiran Raj
The Supreme Court of India Division Bench of Justice J.K. Maheshwari and Justice Vijay Bishnoi set aside the judgment of the High Court of Madras and quashed prosecution initiated under Section 276C(1) of the Income Tax Act, 1961. The Court directed that the complaint lodged by the Revenue be quashed, holding that continuation of the proceedings amounted to abuse of process. Costs of Rs. 2,00,000 were imposed on the Revenue, payable to the appellant.
The matter originated from a search conducted on 24 April 2016 at the residence of the appellant under Section 132 of the Income Tax Act, 1961. Authorities seized unaccounted cash amounting to Rs. 4,93,84,300. A statement under Section 132(4) was recorded, and a show cause notice was issued on 31 October 2017 asking why prosecution should not be initiated.
The appellant challenged the show cause notice before the High Court, which dismissed the writ petition on 17 November 2017, terming it premature as the notice was an administrative act. A subsequent writ appeal was dismissed on 6 September 2020, noting that the issue of the complaint filed was not raised before the Single Judge.
Meanwhile, on 21 June 2018, the Principal Director of Income Tax (Investigation), Chennai, accorded sanction under Section 279(1) for prosecution. Pursuant to this, the Deputy Director of Income Tax (Investigation), Chennai, filed a complaint on 11 August 2018 alleging wilful attempt to evade tax for the assessment year 2017–18 by failing to disclose seized cash in the return of income.
The appellant filed a quashing petition under Section 482 CrPC before the High Court in Crl. O.P. No. 28763 of 2018. Parallelly, on 7 December 2018, he applied under Section 245C of the Income Tax Act to the Settlement Commission, Additional Bench, Chennai. In its order dated 26 November 2019 under Section 245D(4), the Commission granted immunity from penalty but declined immunity from prosecution owing to pendency of the High Court matter.
The High Court dismissed the quashing petition, observing that non-disclosure of the seized sum in the return could amount to evasion of proposed tax for assessment year 2017–18. It held that the appellant’s defence that the amount related to the earlier year 2016–17 could be raised during trial. The Court also rejected the contention regarding the competence of the DDIT to initiate prosecution under Section 279(1).
In appeal, the appellant contended before the Supreme Court that the order of the Settlement Commission was conclusive under Section 245-I, granting immunity from penalty and reflecting full disclosure without suppression. It was urged that prosecution contravened departmental guidelines issued through the Finance Ministry’s circular dated 24 April 2008, the Prosecution Manual, 2009, and CBDT’s circular dated 9 September 2019. It was argued that these required confirmation of concealment penalty by ITAT before prosecution, and further stipulated a threshold of Rs. 25 lakhs for launching prosecution without Collegium approval.
Counsel for the Revenue submitted that the complaint preceded the settlement application, thereby invoking the proviso to Section 245H(1), which prevented immunity from prosecution. It was maintained that the non-disclosure constituted a wilful attempt to evade tax, justifying prosecution.
The issues framed before the Supreme Court were: (i) whether continuation of prosecution after the Settlement Commission’s order amounted to abuse of process, and (ii) whether dismissal of the quashing petition by the High Court was justified.
The Court examined Section 276C, distinguishing sub-section (1), which penalises wilful attempts to evade imposition of tax, penalty, or interest, from sub-section (2), which addresses attempts to evade payment. It stated: “The gist of the offence under sub-section (1) of Section 276C lies in the wilful attempt to evade the very imposition of liability, and what is made punishable under this sub-section is not the ‘actual evasion’ but the ‘wilful attempt’ to evade.”
Considering Section 279, the Court noted: “In addition to the other offences, looking to the allegations of the present case, the prosecution under Section 276C may be lodged with permission of the PDIT. Sub-section (1)(a) creates a bar that the person shall not be proceeded under Section 276C in relation to the assessment for the assessment year of which penalty imposed or imposable on him, has been reduced or waived.”
On the settlement scheme under Chapter XIXA, the Bench recorded: “The assessee from whom the recovery of the unaccounted money has been allegedly reported, may apply before the Settlement Commission disclosing full and true income… On such application, the Commission… may grant immunity from penalty and prosecution of any offence under the IT Act or under the Indian Penal Code.”
The Court reflected on the statutory proviso: “On literal construction of the first proviso, the prosecution initiated before the date of receipt of the application under Section 245C is saved… The aforesaid provisions do not, in any manner, affect the basic principles of criminal law that the prosecution has to prove the case on its own.”
Emphasising departmental circulars, the Court stated: “The departmental circular dated 24.04.2008, Prosecution Manual, 2009, and CBDT’s circular dated 09.09.2019, provide when the prosecution ought to be lodged by Revenue. The said Circulars have been issued to regulate the lodging of prosecution in genuine cases and to weed out the problems of the taxpayers.”
It stated the binding character of circulars: “From the above precedents, this Court unambiguously held that the circulars issued by the Revenue are binding on the authorities, and can tone down the rigour of the statutory provision.”
Evaluating the present case, the Court recorded: “On the date of lodging the prosecution, the finding of concealment of income or imposition of penalty… has not been recorded by ITAT. No explanation has been put forth by Revenue to demonstrate as to why PDIT or DDIT did not comply the procedure while lodging prosecution in this case. Therefore, in our view, the act of the authority in continuing prosecution is in blatant disregard to their own binding circular dated 24.04.2008.”
Further, referring to the Settlement Commission’s order, it observed: “In the settlement proceedings, assessee has disclosed all the facts material to the computation of his additional income… The overall additional income is not on account of any suppression of any material facts… Hence, the applicant is entitled to immunity from penalties under the Income-tax Act.”
The Court ultimately held: “It was the duty of the High Court to examine the facts of the case in their right context and assess whether, in light of the above circumstances, the continuation of the prosecution would serve any meaningful purpose. Upon a holistic consideration, we are of the view that the conduct of the authorities lacks fairness and reasonableness.”
The Supreme Court held: “We are constrained to allow these appeals setting aside the order impugned passed by the High Court. It is directed that prosecution lodged by the Revenue against the appellant shall stand quashed.”
The Court further ordered: “In the facts and circumstances of the case as discussed hereinabove, we are inclined to impose costs against the Revenue which is quantified at Rs. 2,00,000/- payable to the appellant. Pending application(s), if any, shall stand disposed of.”
Advocates Representing the Parties
For the Petitioners: Mr. Preetesh Kapur, Sr. Adv.; Mr. R. Sivaraman, Adv.; Mr. B. R. Varshini, Adv.; Ms. Vandana Vyas, Adv.; Mr. S. Mohan, Adv.; Mr. Aditya Sharan, Adv.; Mr. Ravi Raghunath, AOR
For the Respondents: Mrs. Nisha Bagchi, Sr. Adv.; Mr. Raj Bahadur Yadav, AOR; Mr. V. Chandrashekhara Bharathi, Adv.; Mr. Udai Khanna, Adv.; Mr. Navanjay Mahapatra, Adv.
Case Title: Vijay Krishnaswami @ Krishnaswami Vijayakumar v. The Deputy Director of Income Tax (Investigation)
Neutral Citation: 2025 INSC 1048
Case Number: Criminal Appeal Nos. of 2025 (Arising out of SLP (Crl.) Nos. 3618-3620 of 2024)
Bench: Justice J.K. Maheshwari, Justice Vijay Bishnoi
