Mechanical Approval for TDS Prosecution Set Aside for Non-Application of Mind

G M Infinite Dwelling India Pvt Ltd. Vs CIT (TDS) (Karnataka High Court)

Sanction for Prosecution under Section 276B r/w Section 278B — Requirement of Application of Mind, Reasonable Cause, and Limits of Criminalisation of TDS Defaults

Statutory Framework Involved

1. Section 276B — Failure to Pay Tax Deducted at Source

Section 276B provides for criminal prosecution where a person fails to pay to the credit of the Central Government:

• tax deducted at source under Chapter XVII-B, or

• tax payable under section 115-O(2).

The offence is punishable with:

• rigorous imprisonment ranging from three months to seven years, and

• fine.

The provision is penal in nature and therefore must be strictly construed.

2. Section 278B — Offences by Companies

Section 278B creates vicarious criminal liability by deeming every person who was:

• in charge of, and responsible for, the conduct of the business of the company

to be guilty of the offence, unless such person proves that the offence was committed without his knowledge or despite due diligence.

This section enlarges criminal exposure to directors and officers, making compliance with procedural safeguards critical.

3. Section 279(1) — Sanction for Prosecution

Section 279(1) mandates that no prosecution for offences under Chapter XXII shall be instituted except with prior sanction of the Principal Commissioner/Commissioner of Income-tax.

Judicially settled principles require that:

• sanction must be preceded by independent application of mind,

• all relevant facts and explanations must be considered, and

• sanction must not be mechanical or routine.

Sanction under section 279(1) is therefore a jurisdictional safeguard, not an administrative formality.

4. Section 201(1A) — Interest for Delay in Remittance of TDS

Section 201(1A) provides for levy of mandatory interest where TDS is remitted belatedly.

Legislatively, this provision recognises that delay and default are distinct concepts, and interest is the primary civil consequence for delay.

Factual Background

For Assessment Year 2016–17, the petitioner company deducted tax at source in accordance with law. However, due to financial stress, the TDS amount was remitted to the credit of the Central Government on 17.08.2016, with a delay of approximately seven months, along with statutory interest.

Nearly four years later, on 14.01.2020, the TDS authorities issued notices proposing prosecution under section 276B. The petitioners submitted replies explaining that:

• the period coincided with demonetisation,

• there was significant disruption due to GST implementation, and

• the financial distress was further aggravated by COVID-19, resulting in acute cash-flow constraints.

The petitioners highlighted that:

• the TDS amount was fully paid,

• interest was discharged, and

• there was no element of wilful or contumacious default.

Subsequently, fresh show-cause notices were issued in March and April 2024. Detailed replies were filed again, along with a request for time to submit additional supporting documents.

Ignoring these explanations, the first respondent granted sanction for prosecution on 31.05.2024 under section 279(1), pursuant to which criminal complaints were filed before the Special Court for Economic Offences, Bengaluru, arraying both the company and its directors as accused.

Core Issue Before the High Court

Whether sanction for prosecution under section 276B read with section 278B is legally sustainable where:

• TDS has been fully remitted with interest,

• delay is supported by bona fide and documented reasons, and

• the sanctioning authority fails to consider explanations and mitigating circumstances before according sanction under section 279(1).

Judicial Analysis and Reasoning

The High Court undertook a limited but critical judicial review of the sanction order. It held that:

1. Sanction is a condition precedent
The Court reaffirmed that sanction under section 279(1) is a jurisdictional requirement. Absence of proper consideration vitiates the entire prosecution.

2. Non-consideration of “reasonable cause” is fatal
The petitioners had specifically pleaded reasonable cause arising from macro-economic disruptions. The impugned sanction order failed to examine whether the delay was deliberate or merely circumstantial.

3. Mechanical sanction defeats statutory safeguards
The Court observed that merely reproducing facts without analysing replies amounts to non-application of mind, rendering the sanction vulnerable.

4. Justice-oriented approach in economic offences
While recognising the seriousness of TDS compliance, the Court emphasised that criminal law should not be invoked mechanically, especially when civil consequences have already been discharged.

5. Opportunity to produce additional material
The petitioners’ request for additional time to file documents was not frivolous. Denial of such opportunity violated principles of natural justice.

Final Decision

The High Court passed the following operative directions:

1. The writ petition was allowed.

2. The sanction order dated 31.05.2024 was set aside.

3. The matter was remanded to the sanctioning authority for fresh consideration.

4. Liberty was granted to the petitioners to file additional replies and documents.

5. The authority was directed to grant reasonable opportunity of hearing, including personal hearing, and thereafter pass a reasoned order in accordance with law.

Ratio Decidendi

Sanction for prosecution under section 276B read with section 278B must reflect conscious and informed application of mind. Where TDS is ultimately remitted with interest and delay is supported by plausible and bona fide reasons, failure to consider such explanations vitiates the sanction and renders prosecution unsustainable.

Practical and Precedential Value

• Reinforces procedural discipline in TDS prosecutions

• Protects directors from routine criminalisation

• Recognises economic realities such as demonetisation and pandemic-related disruptions

• Strengthens the jurisprudence that penal provisions must not be invoked mechanically

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

In this petition the petitioners seeks for the following reliefs:

“a. Issue a writ of certiorari quashing the order bearing DIN & Order No.ITBA/COM/F/17/2024-25/1065319712(1) dated 31.05.2024 passed by the first respondent under Section 279(1) of the Act vide Annexure-F,

b. Issue a writ of certiorari quashing the Criminal Case registered as CC Nos.199/2024 and 200/2024 filed by the second respondent on the files of the Special Court for Economic Offences, Bengaluru in which the summons dated 8.7.2024 vide Annexure-G, Annexure-G1 and Annexure-G2 are issued to petitioners,

c. Pass such other Writ or direction as this Hon’ble Court deems fit to grant in the facts and circumstances of the present case.”

2. A perusal of the material on record will indicate that for the assessment year 2016-2017, the petitioner deducted tax at source (TDS) and remitted the said amount to the credit of the Central Government by 17.08.2016, after 7 months along with penal interest.

Subsequently, on 14.01.2020, the second respondent issued a notices to the petitioners seeking explanation as to why prosecution proceedings should not be recommended against the petitioners on account of the delayed payment deduction of TDS by the petitioners. The petitioners having submitted replies dated 20.01.2020 and 28.01.2020, the first respondent issued show cause notices dated 15.03.2024 and 30.04.2024 to which the petitioners submitted detailed replies dated 16.02.2024 and 02.05.2024, interalia contending that the reasonable cause for delayed payment of TDS was on account of demonetization policy and subsequent GST implementation as also the COVID-19 pandemic on account of which the company faced financial loss and cash flows where cash flow was badly affected and huge monies had to be borrowed from NBFC’s by way of debentures to run the business activities. It is submitted on instructions that the petitioners also requested time to produce additional documents in support of its claim.

3. Pursuant to the aforesaid notices and replies, the respondent proceeded to pass the impugned order dated 31.05.2024 granting sanction for prosecution under Section 276B read with Section 278B of the Income Tax Act, aggrieved by which the petitioners are before this Court by way of the present petition.

4. Per contra learned counsel for the respondents would reiterate the various contentions urged in the statement of objections and submit that since the impugned order is detailed and a well considered order, the same does not warrant interference by this Court in the present petition and sufficient opportunity had been extended/granted in favour of the petitioners who are not entitled to any indulgence in the present petition.

5. A perusal of the material on record including the impugned order will indicate that though the petitioners had submitted detailed replies along with documents to indicate that the TDS amount was subsequently paid together with penal interest and offering an explanation as to why there was a delay on the part of the petitioners, the same has not been considered by the respondents in its proper perspective.

6. Further in the light of the specific assertion on the part of the petitioners that if one more opportunity is provided, the petitioners would submit additional documents in support of its claim, I deem it just and appropriate to adopt a justice oriented approach and set aside the impugned order at Annexure-F passed by the first respondent and remit the matter back to the first respondent for reconsideration afresh in accordance with law.

7. In the result the following:

ORDER

i. The petition is allowed.

ii. The impugned order dated 31.05.2024 at Annexure-F is hereby set aside.

iii. The matter is remitted back to first respondent for reconsideration afresh in accordance with law.

iv. Liberty is reserved in favour of the petitioners to submit additional pleadings, documents, replies etc., which shall be considered by the respondent, who shall provide sufficient and reasonable opportunity to the petitioners and provide an opportunity of personal hearing to the petitioners and proceed further in accordance with law.