Madras HC Quashes Section 276CC Prosecution Where TDS Exceeded Tax Liability

K.P. Constructions Engineers and Contractors Vs ITO (Madras High Court)

Summary: The Madras High Court allowed a Criminal Original Petition seeking quashing of prosecution pending in CC No.7 of 2016 before the Additional Chief Judicial Magistrate, Madurai, for alleged failure to file the return of income for Assessment Year 2013-14. The prosecution had been launched against the petitioner partnership firm under Section 276CC of the Income Tax Act.

According to the prosecution, the firm had earned Rs.14,21,60,235/- under TDS-payment to contractor through specified entities under Section 194C, earned Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank under Section 194A and made a time deposit of Rs.2,46,67,915/-. It was required to file its return for Assessment Year 2013-14 on or before 30.09.2013 under Section 139(1), but failed to do so. A show-cause notice for initiation of prosecution under Section 276CC was issued on 29.04.2016, following which the complaint was filed.

The petitioner contended that the tax payable as per the return of income was Rs.25,96,576/-, whereas TDS of Rs.28,87,319/- was already available with the Department, resulting in a refund of Rs.2,90,740/-. During pendency of the prosecution, reassessment resulted in tax arrears of Rs.1,60,55,962/-. The petitioner challenged the additions, and ultimately the Income Tax Appellate Tribunal, by order dated 06.05.2026, directed deletion of the disputed additions. According to the petitioner, the reassessment additions therefore stood reconciled and deleted, restoring the position that TDS exceeded the tax payable.

The Revenue maintained that the prosecution arose from the failure to file the return within the prescribed time and that subsequent appellate relief concerning reassessment did not alter that default.

The High Court observed that, after the reassessment additions had been deleted, the TDS available with the Department was Rs.28,87,319/- against tax payable of Rs.25,96,576/-. Consequently, no money was payable to the Department and the petitioner was entitled to a refund of Rs.2,90,740/-. The Court applied the proviso to Section 276CC referred to in the supplied judgment and held that the petitioner could not be proceeded against under Section 276CC when no tax was due and excess TDS was available with the Department. The Court also noted that the original Managing Partner, who was in charge of the business, had died on 21.08.2018.

Considering these circumstances, the High Court held that continuation of the proceedings amounted to abuse of process of law. It allowed the Criminal Original Petition and quashed the proceedings in CC No.07 of 2016 pending before the Additional Chief Judicial Magistrate, Madurai. The connected Criminal Miscellaneous Petitions were also closed.

Prosecution for Failure to File Return for Assessment Year 2013-14

The Income Tax Department lodged the complaint for an offence under Section 276CC for non-filing of the return for financial year 2012-13, corresponding to Assessment Year 2013-14.

The prosecution stated that the petitioner was a partnership firm engaged in Engineering and Contract Works and was already an Income Tax assessee. The second accused was stated to be the Managing Director of the firm and in charge of its business and conduct.

The complainant was the Income Tax Officer, Ward-1, Dindigul, who had been authorised by the Principal Commissioner of Income Tax, Madurai, to file the complaint. The Principal Commissioner had also accorded sanction for prosecution.

According to the prosecution, during financial year 2012-13, the firm earned Rs.14,21,60,235/- under TDS-payment to contractor through Ponnaiyah Ramajayam Institute of Science and Technology Trust, Titan Educational Trust and Sai Substrates Private Limited under Section 194C. It also earned Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank, Dindigul, under Section 194A and made a time deposit of Rs.2,46,67,915/- with the bank.

The prosecution alleged that the firm was required to file its return for Assessment Year 2013-14 on or before 30.09.2013 under Section 139(1) of the Income Tax Act or within the period referred to under Section 139(4), but did not file the return within time.

A show-cause notice for initiation of prosecution under Section 276CC was issued on 29.04.2016. The accused sent replies and sought extension of time, but the reasons furnished were not accepted. The complaint was thereafter taken on file as CC No.7 of 2016.

Petitioner’s Case Against Section 276CC Prosecution

The petitioner submitted that the tax payable was Rs.25,96,576/-, whereas TDS of Rs.28,87,319/- was already available with the Department. On this basis, the petitioner claimed entitlement to a refund of Rs.2,90,740/-.

The petitioner contended that the proviso to Section 276CC barred prosecution in these circumstances because the tax payable, after giving effect to the available TDS, did not cross the threshold referred to in the provision.

The petitioner further submitted that during pendency of the complaint, the second accused, who was in charge of the business, died on 21.08.2018 and J.Shanthi was subsequently substituted to represent the petitioner firm.

Reassessment Additions and Subsequent Appellate Relief

During pendency of the quashing proceedings, the Department informed the petitioner that tax arrears for financial year 2012-13 were Rs.1,60,55,962/- following reassessment.

The petitioner challenged the reassessment before the Commissioner of Income Tax. According to the petitioner’s submissions recorded by the High Court, an amount of Rs.1,02,90,322/- was deleted, while a disputed amount of Rs.55,72,910/- remained.

The petitioner thereafter approached the Income Tax Appellate Tribunal regarding the disputed additions. The Tribunal directed deletion of an addition of Rs.17,86,300/- relating to M/s.IVRC and Rs.38,98,560/- relating to M/s.Chettinad Cements. The appeal was allowed on 06.05.2026.

The petitioner therefore submitted that the additions of Rs.1,60,55,962/- arising from reassessment ultimately stood reconciled and deleted and that the original position of tax payable at Rs.25,96,576/- against TDS of Rs.28,87,319/- stood restored.

Revenue’s Opposition to Quashing of Prosecution

The Revenue submitted that the prosecution concerned the petitioner’s failure to file its return for financial year 2012-13 corresponding to Assessment Year 2013-14 within the prescribed time.

It reiterated the income and investment particulars relied upon while launching prosecution and submitted that the assessee firm was required to file its return within the period prescribed under Section 139.

The Revenue acknowledged that reassessment had subsequently resulted in a demand of Rs.1,60,55,962/-, which was challenged before the Commissioner of Income Tax and thereafter before the Income Tax Appellate Tribunal. However, according to the Revenue, those proceedings concerned tax arrears arising from reassessment, whereas the prosecution was for failure to file the return.

The Revenue therefore contended that the petitioner should face trial and that the petition for quashing should be dismissed.

Madras High Court’s Findings

The High Court noted that the complaint had been filed under Section 276CC for non-filing of the return for financial year 2012-13 corresponding to Assessment Year 2013-14.

The Court further noted that reassessment had initially resulted in an amount of Rs.1,60,55,962/-, which was reduced in the first appellate proceedings and subsequently considered by the Income Tax Appellate Tribunal. The Tribunal allowed the appeal and the reassessment additions were consequently reconciled and deleted.

No Tax Remained Payable After Adjusting TDS

The High Court recorded the petitioner’s position that TDS of Rs.28,87,319/- was already available with the Department, whereas the income tax payable was Rs.25,96,576/-.

The Court observed that the petitioner was therefore entitled to a refund of Rs.2,90,740/- and that no money was payable to the Department.

A materially similar application of Section 276CC where tax payable was nil is also discussed on TaxGuru.

Proviso to Section 276CC Applied

The High Court considered the proviso to Section 276CC referred to by the petitioner’s counsel. As recorded in the supplied judgment, the proviso barred proceedings where the tax payable on the total income determined on regular assessment, after reduction by advance tax and tax deducted at source, did not exceed Rs.3,000/-.

On the facts before it, the Court observed that no tax was due and excess TDS was available with the Income Tax Department. It therefore held that, in terms of the proviso to Section 276CC, the petitioner could not be proceeded against under that provision.

TaxGuru has also reported a case concerning Section 276CC prosecution where the assessee was entitled to refund.

Death of Managing Partner Also Noted

The High Court additionally noted that the original Managing Partner, A2, who was in charge of the business, had died on 21.08.2018.

Considering all these factors, the Court concluded that continuation of the pending prosecution amounted to abuse of process of law.

Final Decision: Section 276CC Proceedings Quashed

The Madras High Court allowed the Criminal Original Petition and quashed the proceedings pending in CC No.07 of 2016 on the file of the Additional Chief Judicial Magistrate, Madurai.

Consequently, the connected Criminal Miscellaneous Petitions were closed.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

This Criminal Original Petition is filed by the petitioner to quash the proceedings pending in CC No.7 of 2016 on the file of the Additional Chief Judicial Magistrate, Madurai.

2. The case of the prosecution is that the petitioner is a partnership firm doing Engineering and Contract Works. The second accused is the Managing Director of the said firm and he is in-charge of the business and conduct of the said firm. The complainant is a public servant working as Income Tax Officer, Ward – 1, Dindigul and he has been authorized by the Principal Commissioner of Income Tax, Madurai, to prefer the complaint against the accused for the offence punishable under Section 276CC of the Income Tax Act. Further, the Principal Commissioner of Income Tax, Madurai has also accorded valid sanction order to prosecute the accused for the said offence. The accused M/s.K.P. Construction, who is already an Income Tax assessee and the Managing Partner are liable for filing of Return of Income for every Assessment Year on behalf of A1 – Firm. During financial year 2012 – 2013, the A1 – Firm has earned Rs.14,21,60,235/-under TDS – payment to contractor (A1) through Ponnaiyah Ramajayam Institute of Science and Technology Trust, Titan Educational Trust and Sai Substrates Private Limited under Section 194C of Income Tax Act and also A1 – Firm has earned Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank, Dindigul, under Section 194A of the Income Tax Act and also made time deposit of Rs. 2,46,67,915/- in Tamilnadu Mercantile Bank, Dindigul. Since the assessee has earned income through TDS and also made investment in the bank, during financial year 2012 – 2013, the assessee firm (A1) has to file Return of Income for the assessment year 2013 – 2014 on or before 30.09.2013 under Section 139(1) of the Income Tax Act or one year from the end of the assessment year under Section 139(4) of the Income Tax Act. The accused after knowing the fact that the Return of Income should be filed on or before 30.09.2013 for the assessment year 2013 – 2014, since they are already assessee, the accused have not filed Return of Income in due time as mentioned under Section 139 of the Income Tax Act. Thereby, the accused willfully and intentionally not filed Return of Income for the assessment year 2013 – 2014 in order to omit to pay tax to Central Government. While so, on 29.04.2016, a show cause notice was issued to M/s.K.P. Constructions for initiation of prosecution under Section 276CC of the Income Tax Act by the Principal Commissioner of Income Tax, Madurai and the accused also had sent a reply dated 23.05.2016 and 09.06.2016 granting extension of time and the reasons mentioned by the accused are not acceptable. The above said act of the accused for non filing of the Return of Income within due time is punishable under Section 276CC of the Income Tax Act. Therefore, filed the complaint. The said complaint was taken on file by the Additional Chief Judicial Magistrate, Madurai, and the same is pending in CC No.7 of 2016. Now the said proceedings have been challenged by the petitioner

3. The learned counsel appearing for the petitioner would submit that the petitioner is a partnership firm represented currently by Managing Partner. On 29.04.2016, the respondent department issued a show cause notice under Section 276CC of the Income Tax Act pointing that the petitioner firm had not filed Return of Income for the financial year 2012 – 2013 (assessment year 2013 – 2014). Thereafter, the petitioner sought time and also pointed out that the tax payable will be less than the TDS already available. As per the return of income, the tax payable is Rs.25,96,576/- whereas the TDS already available with the respondent department is Rs.28,87,319/-. Thereby, the petitioner firm is entitled for a refund of Rs.2,90,740/-. Without considering the above, the department has launched prosecution against the petitioner firm.

3.1. He further submitted that during the pendency of the complaint, the second accused, who was in-charge of the business died on 21.08.2018. Now the present petitioner, namely, J.Shanthi was substituted to represent the first accused the petitioner firm. As per proviso to Section 276 CC of the income Tax Act clearly bars the proceedings in the facts of the present case as the tax payable is actually less than the TDS available with the respondent department. Further, during the pendency of the quash petition, the respondent department informed the petitioner that the tax arrears for the financial year 2012 – 2013 is Rs.1,60,55,962/- after reassessment. As against the said order, the petitioner has preferred an appeal before the Commissioner of Income Tax. In the appeal, the amount of Rs. 1,02,90,322/- was deleted, since M/s.IVRL and M/s.Chettinadu Cement Corporation had not responded the discrepancies noted for the balance amount of Rs.55,72,910/-, but ledger accounts were properly submitted for scrutiny. Thereafter, the petitioner also preferred an appeal before the Income Tax Appellate Tribunal with respect to the disputed addition of Rs.55,72,910/- and the Income Tax Appellate also confirmed that the closing balance of M/s.IVRC and M/s.Chettinad Cement Corporation as appearing in the book of account of the assessee is found to be genuine. Therefore, the Income Tax Appellate Tribunal directed the AO to delete the addition of Rs.17,86,300/- with respect to M/s.IVRC and also directed the AO to delete the addition of Rs.38,98,560/- with respect to M/s.Chettinad Cements. Therefore, the balance disputed amount of Rs.55,72,910/-was reconciled and the appeal came to be allowed on 06.05.2026. In view of the said orders, the total additions of Rs.1,60,55,962/- made by the AO during the reassessment was reconciled and deleted. Therefore, as the original Return of Income, the tax payable is Rs.25,96,576/- and the TDS already available with the respondent is Rs.28,87,319/-. Therefore, the pending prosecution is abuse of process of law and the same is liable to be quashed.

4. The learned counsel appearing for the respondent would submit that the petitioner has not filed Return of Income for the financial year 2012 – 2013 and earned a sum of Rs.14,21,60,235/- under TDS – payment of contractor (A1) through Ponnaiyah Ramajayam Institute of Science and Technology Trust, Titan Educational Trust and Sai Substrates Private Limited under Section 194C of Income Tax Act and also earned a sum of Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank, Dindigul under Section 194A of Income Tax Act and also made time deposit of Rs.2,46,67,915/- in Tamilnadu Mercantile Bank, Dindigul. The assessee firm has to file Return of Income for the assessment year 2013 – 2014 on or before 30.09.2013 under Section 139(1) of Income Tax Act or one year from the end of the assessment year. Section 139(4) of the Income Tax Act which is mandatory. But the accused have failed to file the Return of Income within time and thereby it is punishable under Section 276CC of Income Tax Act. Therefore, filed the complaint.

4.1. During the pending of the complaint, the department reassessed the income tax and issued notice by quantifying amount of Rs.1,60,55,962/- and the same was challenged before the Commissioner of Income Tax and the same was partly allowed and thereafter, again the petitioner had filed an appeal before the Income Tax Appellate Tribunal and the same was also allowed. The above said orders of the Tribunal and the Appellate Tribunal are in respect of arrears of tax after reassessment. But they have not filed any Returns for the financial year 2012 – 2013 (assessment year 2013 – 2014). Therefore, they filed the complaint and the petitioner has to face the trial and the petition is liable to be dismissed.

5. This Court heard both side and perused the records.

6. In this case, the complaint has been lodged by the Income Tax department for the offence under Section 276CC of the Income Tax Act for non filing of the Returns for the financial year 2012 – 2013 (assessment year 2013 – 2014). For the non filing of the Returns, the complaint has been lodged. During the pendency of the complaint, once again the reassessment was made by the authorities to the tune of Rs.1,60,55,962/- and the same was challenged before the Income Tax Commissioner and the same was reduced to Rs.55,72,910/-. As against the said order, an appeal was preferred before the Income Tax Appellate Tribunal, who allowed the appeal and thereby the reassessment order reconciled and deleted. According to the petitioner, the TDS already available with the respondent department is Rs.28,87,319/-, the income tax payable is Rs.25,96,576/-. Therefore, the petitioner is entitled for a refund of Rs.2,90,740/-. There is no money payable to the department by the petitioner.

7. At this juncture, the learned counsel for the petitioner brought to the notice of this Court that the proviso to Section 276 CC of Income Tax Act clearly bars the proceedings if the tax is payable on the total income determined, on regular assessment as reduced by advance tax, if any paid and any tax deducted at source does not exceed Rs.3,000/-, the person shall not be proceeded against under Section 276CC of the Income Tax Act for failure to furnish in due time the return of income under Section 139(1) of Income Tax Act. In the case on hand, on perusal of the record it is observed that no tax is due. The excess amount of TDS available with the Income Tax department. Thereby, as per proviso to Section 276 CC of the Income Tax Act, the petitioner shall not be proceeded against under Section 276CC of the Income Tax Act. Moreover, the original Managing Partner, A2, who was Incharge of the business, was also died on 21.08.2018. Considering all the factors, pending proceedings in this case are nothing but abuse of process of law. Therefore, the pending proceedings are liable to be quashed.

8. Accordingly, the Criminal Original Petition is allowed and the proceedings pending in CC No.07 of 2016 on the file of the Additional Chief Judicial Magistrate, Madurai, is quashed. Consequently, connected Criminal Miscellaneous Petitions are closed.