Vyalikaval House Building Co Operative Society Ltd. Vs Income Tax Department (Karnataka High Court)
The Karnataka High Court considered petitions filed by a co-operative society, its Secretary and its Ex-Vice President seeking quashing of criminal proceedings initiated under Section 276C(2) of the Income Tax Act, 1961.
The premises of the society were subjected to search and seizure under Section 132 of the Act on 5 July 2011. Subsequently, the Assessing Officer issued notice under Section 153A dated 27 September 2011 requiring the society to file returns for assessment years 2006-07 to 2011-12. Since there was no compliance, a show cause notice dated 31 July 2013 was issued proposing prosecution under Section 276CC.
In response, the society filed returns on 8 August 2013 for assessment years 2010-11 and 2011-12. It declared total income of Rs.3,49,93,300/- and tax payable of Rs.10,54,420/- for assessment year 2010-11, and total income of Rs.3,78,36,508/- and tax payable of Rs.1,03,88,310/- for assessment year 2011-12.
Although the returns were filed, the society did not pay the self-assessment tax under Section 140A along with the returns.
Meanwhile, the society’s property was attached under Section 281B. The attachment was subsequently lifted on the condition that the sale proceeds of the property would be directly remitted to the Department.
The society thereafter sent a cheque for Rs.1.25 crore towards self-assessment tax. The cheque contained an instruction that it should be presented at the time of registration of the property. The Department did not encash the cheque.
The Department contended that these circumstances demonstrated a willful and deliberate attempt to evade payment of tax and lodged a complaint under Section 276C(2). The Special Court (Economic Offences), Bengaluru, took cognizance and issued summons.
The petitioners contended that the circumstances did not disclose any intention to evade payment of tax. They relied on subsequent payments, including payments of Rs.1,34,03,190/- for assessment year 2009-10, Rs.62,00,000/- for assessment year 2010-11 and the balance of Rs.1,03,88,310/- for assessment year 2010-11.
They submitted that these payments demonstrated that there was no intention to evade tax. They also relied on Sushil Kumar Saboo Vs State of Bihar and Anr. and Prem Dass Vs Income Tax Officer, contending that a positive act coupled with the requisite intention was necessary to establish an offence involving an attempt to evade tax under Section 276C(2).
The Department contended that the payments were made after the complaint had been lodged and therefore did not absolve the petitioners from the operation of Section 276C(2). It also relied on the fact that the cheque was issued with a condition that it should not be encashed immediately and submitted that these circumstances disclosed mens rea to evade tax.
The High Court examined Section 276C(2), which applies where a person willfully attempts in any manner whatsoever to evade payment of tax, penalty or interest.
The Court held that the gist of the offence is a willful attempt to evade tax, penalty or interest. What is punishable is an attempt to evade payment and not the actual evasion of tax.
The Court observed that an attempt involves movement towards commission of the intended offence and requires some positive act in that direction. In the present case, the circumstance relied upon by the Department was that the society had filed returns but failed to pay the self-assessment tax along with them.
The Court held that filing the returns by itself could not be construed as an attempt to evade tax. Rather, submission of the returns indicated that the society had voluntarily declared its intention to pay tax. The act of submitting returns was not connected with evasion of tax.
The Court further considered the payments made by the society, although they were delayed and made after coercive steps had been taken by the Department. It held that the payments did not lead to an inference that they were made in an attempt to evade the tax declared in the returns.
The Court observed that delayed payments could attract penalty or interest under the Income Tax Act, but the delay in payment could not be treated as an attempt to evade tax so as to warrant prosecution under Section 276C(2).
The High Court concluded that the prosecution initiated against the petitioners was illegal and amounted to abuse of the process of the Court.
Accordingly, the petitions were allowed and the proceedings in C.C. No.94/2014 and C.C. No.95/2014 pending before the Special Court (Economic Offences), Bengaluru, were quashed.
The Court clarified that its order would not prevent the Department from taking necessary steps for recovery of any tax that remained due and payable by the petitioners in accordance with law.
Cases Discussed
- Sushil Kumar Saboo – vs – State of Bihar and Anr. (Patna High Court), 2011(1) PLJR 785.
- Prem Dass – vs – Income Tax Officer (Supreme Court), (1999) 5 Supreme Court Cases 241.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The Karnataka High Court considered petitions filed by Vyalikaval House Building Co Operative Society Ltd. and its office bearers seeking quashing of criminal proceedings initiated under Section 276C(2) of the Income Tax Act, 1961.
The petitioner-society was subjected to search and seizure under Section 132 on 5 July 2011. Thereafter, the Assessing Officer issued notice under Section 153A requiring the society to file returns for assessment years 2006-07 to 2011-12. As there was no compliance, a show cause notice was issued proposing prosecution under Section 276CC. The society subsequently filed returns for assessment years 2010-11 and 2011-12, declaring total incomes of Rs.3,49,93,300/- and Rs.3,78,36,508/- respectively, with tax liabilities of Rs.10,54,420/- and Rs.1,03,88,310/-.
Although the returns were filed, the society did not pay the self-assessment tax under Section 140A along with the returns. Meanwhile, the Department attached the society’s property under Section 281B. The attachment was later lifted subject to a condition that sale proceeds would be remitted directly to the Department. The society subsequently sent a cheque for Rs.1.25 crore towards self-assessment tax, with an instruction on the cheque that it should be presented at the time of registration of the property. The Department did not encash the cheque.
The Department contended that these circumstances demonstrated a willful and deliberate attempt to evade payment of tax and lodged a complaint for prosecution under Section 276C(2). The Special Court took cognizance and issued summons.
The petitioners contended that the subsequent payments demonstrated that there was no intention to evade tax. They also relied upon the decision in Prem Dass Vs Income Tax Officer, contending that a positive act coupled with the requisite intention was necessary to establish an offence under Section 276C(2).
The High Court examined Section 276C(2), under which a person is punishable if he willfully attempts in any manner whatsoever to evade payment of tax, penalty or interest. The Court held that the gist of the offence is a “willful attempt to evade” tax, penalty or interest. What is punishable is an attempt to evade payment and not the actual evasion of tax.
The Court observed that an “attempt” involves movement towards the commission of the intended offence and requires some positive act in that direction. In the present case, the circumstance relied upon by the Department was essentially that the petitioner had filed returns but failed to pay the self-assessment tax along with them.
The Court held that filing the returns could not itself be construed as an attempt to evade tax. Rather, filing the returns indicated that the petitioner had voluntarily declared its intention to pay the tax. The submission of returns was not an act connected with evasion of tax.
The Court further noted that the payments made by the petitioner, although delayed and made after coercive steps were taken by the Department, did not establish an attempt to evade the tax declared in the returns. Delayed payment could attract penalty or interest under the Income Tax Act, but such delay could not, by itself, be treated as an attempt to evade tax warranting prosecution under Section 276C(2).
Accordingly, the High Court held that the prosecution initiated against the petitioners was illegal and amounted to abuse of the process of the Court. The proceedings in C.C. Nos. 94/2014 and 95/2014 pending before the Special Court (Economic Offences), Bengaluru, were quashed.
The Court clarified that the order would not prevent the Department from taking appropriate steps for recovery of any tax that remained due and payable by the petitioners in accordance with law.
Cases Discussed
Prem Dass Vs Income Tax Officer
The High Court relied upon the decision of the Supreme Court in Prem Dass Vs Income Tax Officer, reported in (1999) 5 SCC 241, regarding the requirement of a positive act for establishing an offence involving an attempt to evade tax under Section 276C(2).
Sushil Kumar Saboo Vs State of Bihar and Anr.
The petitioners also relied upon the decision of the Patna High Court reported in 2011(1) PLJR 785.
Five Alternative SEO Titles
- Karnataka HC Quashes Section 276C(2) Prosecution: Delayed Tax Payment Not Attempt to Evade Tax
- Vyalikaval House Building Society Case: Mere Delay in Self-Assessment Tax Payment Does Not Attract Section 276C(2)
- Section 276C(2) Income Tax Act: Karnataka HC Says Positive Act Needed to Prove Attempt to Evade Tax
- Filing Returns and Delayed Tax Payment Not Sufficient for Tax Evasion Prosecution: Karnataka High Court
- Karnataka High Court Quashes Tax Evasion Proceedings Against Vyalikaval House Building Co Operative Society Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Petitioner No.1 is a Co-operative Society registered under the provisions of the Karnataka Co-operative Societies Act. Petitioner No.2 is the Secretary and petitioner No.3 is the Ex-Vice President of the said Society, in both the petitions.
2. The premises of petitioner No.1 was subjected to search and seizure under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as the Act, for brevity) on 5.7.2011. Consequent to search, assessment proceedings came to be initiated by the Assessing Officer by issuing a notice under Section 153A of the Act dated 27.9.2011 calling upon petitioner No.1 to file its returns of income for the assessment years 200607 to 2011-12. Since there was no compliance of the aforesaid notice, the Assessing Officer issued a show cause notice dated 31.7.2013 calling upon petitioner No.1 as to why prosecution for the offence punishable under Section 276CC of the Act could not be initiated. In response to the said show cause notice, petitioner No.1 filed returns of income on 8.8.2013 for the assessment years 2010-11 and 2011-12. In the said returns, petitioner No.1 declared the total income of Rs.3,49,93,300/-and the total tax payable at Rs.10,54,420/- for the assessment year 2010-11 and income of Rs.3,78,36,508/- and the tax payable thereon at Rs.1,03,88,310/- for the assessment year 2011-12 respectively. Petitioner No.1 though filed returns, failed to pay the self-assessment tax along with the return of income under Section 140A of the IT Act. In the meanwhile, the property owned by petitioner No.1 was attached under Section 281B of the Act. The attachment was later lifted on condition that the sale proceeds of the attached property would be directly remitted to the Department. Thereafter, petitioner No.1 sent a cheque for Rs.1,25,00,000 towards self-assessment tax due for the assessment years 2010-11 and 2011-12. On the back of the said cheque, it was instructed that “cheque to be presented at the time of registration of the property”. In view of this instruction, Department did not encash the said cheque. Contending that the petitioners have willfully and deliberately made an attempt to create circumstances to enable them to evade payment of tax, a complaint was lodged before the Court for Economic Offences, Bengaluru, seeking prosecution of the petitioners for the offence punishable under Section 276C(2) of the Act. The Special Court took cognizance of the offence and issued summons to the petitioners. Aggrieved by the impugned action, the petitioners have invoked the jurisdiction of this Court under Section 482 of Cr.P.C. seeking to quash the impugned proceedings.
3. I have heard the learned counsel Sri.K.Suman, appearing for the petitioners and Sri.Jeevan Neeralagi, learned Standing counsel appearing for respondent-Department and have perused the records.
4. The contention of the learned counsel for the petitioners is that the circumstances pleaded by the respondent – Department do not disclose any intention on the part of the petitioners to evade payment of tax. On the other hand, facts disclosed therein reveal that, a sum of Rs.1,34,03,190 was paid on 7.8.2013 for the assessment year 2009-10 and a sum of Rs.62,00,000/- was paid on 7.8.2013 and the balance of Rs.1,03,88,310 was paid on 15.5.2014 in respect of the assessment year 2010-11. These payments indicate that petitioners had no intention to evade tax and hence the prosecution of the petitioners for the alleged offence is patently illegal and an abuse of the process of Court. Further, he submitted that insofar as petitioner No.3 is concerned, there is no averment whatsoever in the complaint as to on what basis he has been implicated in the aforesaid offence, which again indicates that the respondent-Department has adopted arm twisting methods to recover the alleged tax.
5. In support of his submissions the learned counsel has placed reliance on the decision of the High Court of Patna in the case of Sushil Kumar Saboo – vs – State of Bihar and Anr. Reported in 2011(1) PLJR 785 and the decision of the Hon’ble Supreme Court in the case of Prem Dass – vs – Income Tax Officer reported in (1999) 5 Supreme Court Cases 241 and with reference to paragraph 8 thereof, has emphasized that, “willful attempt to evade any tax, penalty or interest chargeable or imposable under the Act under Section 276-C is a positive act on the part of the accused which is required to be proved to bring home the charge against the accused…… Necessary mens rea, therefore, is required to be established by the prosecution to attract the provisions of Section 277”.
6. Disputing the above submissions, the learned standing counsel appearing for the respondent-Department has pointed out that all the payments were made by the petitioners subsequent to the lodging of the complaint and therefore, the said payment do not absolve the petitioners from the rigors of Section 276C(2) of the Act. Even the cheque was issued with a rider not to encash the same. These circumstances, clearly disclose mens rea on the part of the petitioners to evade tax and hence there is no reason to quash the proceedings.
7. I have given my anxious consideration to the rival submissions made at the bar and have carefully scrutinsed the material on record. Undisputedly, petitioners are sought to be prosecuted under Section 276C(2) of the Act. The Section reads as under :-
“276C (2) If a person willfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and shall, in the discretion of court, also be liable to fine.”
8. The gist of the offence under Section 276C(2) of the Act is the willful attempt to evade any tax, penalty or interest chargeable or imposable under the Act. What is made punishable under this Section is an “attempt to evade tax penalty or interest” and not the actual evasion of tax. ‘Attempt’ is nowhere defined in the Act or in the Indian Penal Code. In legal echelons ‘attempt’ is understood as a “movement towards the commission of the intended crime”. It is doing “something in the direction of commission of offence”. Viewed in that sense, in order to render the accused guilty of “attempt to evade tax” it must be shown that he has done some positive act with an intention to evade tax.
9. In the instant case, the only circumstance relied on by the respondent in support of the charge levelled against the petitioners is that, even though accused filed the returns, yet, it failed to pay the self-assessment tax along with the returns. This circumstance even if accepted as true, the same does not constitute the offence under Section 276C (2) of the Act. The act of filing the returns by itself cannot be construed as an attempt to evade tax, rather the submission of the returns would suggest that petitioner No.1 had voluntarily declared his intention to pay tax. The act of submitting returns is not connected with the evasion of tax. It is only an act which is closely connected with the intended crime, that can be construed as an act in attempt of the intended offence. In the backdrop of this legal principle, the Hon’ble Supreme Court in the case of Prem Dass – vs – Income Tax Officer cited supra, has held 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.
10. In the case on hand, conduct of petitioner No.1 making payments in terms of the returns filed by him, though delayed and made after coercive steps were taken by the Department do not lead to the inference that the said payments were made in an attempt to evade tax declared in the returns filed by him. Delayed payments, under the provisions of the Act, may call for imposition of penalty or interest, but by no stretch of imagination, the delay in payment could be construed as an attempt to evade tax so as to entail prosecution of the petitioners for the alleged offence under Section 276C(2) of the Act. In that view of the matter, the prosecution initiated against the petitioners, in my considered opinion, is illegal and tantamount to abuse of process of Court and is liable to be quashed.
For the aforesaid reasons, petitions are allowed. The proceedings initiated against the petitioners in C.C.No.94/2014 and C.C.No.95/2014 pending before the Special Court (Economic Offences) Bengaluru are quashed. It is made clear that this order shall not come in the way of the Department taking necessary steps for recovery of the tax, if any, due and payable by the petitioners in accordance with law.
