Case Law Details
C.S. Projects India Private Limited Vs ITO (Madras High Court)
Material Facts: The petitioners, who were facing trial in C.C. No. 2958 of 2025 for an offence under Section 276C(1) of the Income-tax Act, 1961, filed a petition seeking quashing of the criminal proceedings.
For Assessment Year 2012-13, the first petitioner filed its income tax return on 24.05.2013 declaring a total income of ₹29,88,480. Following scrutiny, the Assessing Officer completed the assessment under Section 143(3) by order dated 31.03.2015, determining total income at ₹80,04,299. The assessment included additions of ₹37,15,819 towards alleged unproven liabilities/cessation of liability and ₹13,00,000 towards alleged unexplained cash credit under Section 68.
Consequently, penalty proceedings under Section 271(1)(c) were initiated. By order dated 28.09.2015, a penalty of ₹15,49,889, being 100% of the tax sought to be evaded, was levied.
Procedural History
The petitioners challenged the penalty before the Commissioner of Income Tax (Appeals)-3, Coimbatore in ITA No. 268/15-16. By order dated 18.08.2016, the CIT(A) dismissed the appeal and confirmed the penalty.
The petitioners thereafter appealed before the Income Tax Appellate Tribunal in I.T.A. No. 3240/Chny/2017. By order dated 19.03.2021, the Tribunal allowed the appeal and deleted the penalty in its entirety.
Subsequently, a criminal complaint under Section 276C(1) was filed against the petitioners, leading to the present quash petition.
Legal Issues
- Whether prosecution under Section 276C(1) could continue after the ITAT had deleted the penalty levied under Section 271(1)(c).
- Whether the deletion of penalty removed the basis for the criminal prosecution.
Relevant Statutory Provisions
- Section 68
- Section 143(3)
- Section 271(1)(c)
- Section 276C(1) of the Income-tax Act, 1961
Parties’ Submissions
Petitioners’ Submissions
The petitioners submitted that the ITAT, by order dated 19.03.2021, held that mere dissatisfaction of the Assessing Officer with the explanation furnished by the assessee did not establish furnishing of inaccurate particulars of income.
Regarding the addition relating to alleged unexplained cash credit of ₹13,00,000 and alleged unproven liabilities/cessation of liability, the Tribunal considered the material on record and held that the Assessing Officer had merely doubted the transactions. The Tribunal concluded that such dissatisfaction could not justify levy of penalty under Section 271(1)(c).
The petitioners contended that once the Tribunal had deleted the penalty, the prosecution was liable to be quashed.
In support, reliance was placed on the decision of the Supreme Court in K.C. Builders and another Vs. Assistant Commissioner of Income Tax reported in (2004) 2 SCC 731 and on an order of the Madras High Court dated 08.04.2025 passed in Crl.O.P. Nos. 15988 and 16013 of 2023.
Respondent’s Submissions
The Income Tax Department submitted that during scrutiny the Assessing Officer found that the petitioners had furnished inaccurate particulars and suppressed taxable income, resulting in initiation of penalty proceedings and imposition of penalty.
The Department acknowledged that during the pendency of the criminal prosecution, the ITAT had set aside the penalty order by its order dated 19.03.2021.
Court’s Findings and Reasoning
The Court noted the petitioners’ contention that, in view of the ITAT’s order deleting the penalty, the very foundation of the prosecution no longer survived.
After considering the submissions, the Court allowed the Criminal Original Petition.
Final Ruling
The Madras High Court allowed the Criminal Original Petition and quashed the proceedings against the petitioners in C.C. No. 2958 of 2025 pending before the Chief Judicial Magistrate, Erode. The connected miscellaneous petitions were also closed.
Cases Discussed
- Crl.O.P.Nos.15988 and 16013 of 2023 (Madras High Court), order dated 08.04.2025
- K.C.Builders and another Vs. Assistant Commissioner of Income Tax (Supreme Court of India), (2004) 2 SCC 731
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The petitioners / accused, who are facing trial in C.C.No.2958 of 2025 for an offence under Section 276C(1) of the Income-tax Act, 1961, have filed the present quash petition.
2. The case of the petitioners is that, for the assessment year 20122013, the first petitioner filed the income tax return on 24.05.2013, declaring a total income of Rs.29,88,480/-. The case was taken for scrutiny and after the issuance of statutory notices, calling for books of account and details, the respondent completed the assessment under Section 143(3) of the IT Act by order dated 31.03.2015, determining the total income at Rs.80,04,299/- by making additions of Rs.37,15,819/- towards alleged “unproven liabilities / cessation of liability” and Rs.13,00,000/- towards alleged “unexplained cash credit” under Section 68. Consequent upon the said assessment, the respondent initiated penalty proceedings under Section 271(1)(c) of the IT Act, alleging concealment of income and furnishing of inaccurate particulars and levied a penalty by order dated 28.09.2015 amounting to Rs.15,49,889/-being 100% of the tax sought to be evaded. The petitioners carried the matter in appeal to the Commissioner of Income Tax (Appeals)-3, Coimbatore, in ITA No.268/15-16 and by order 18.08.2016, the learned CIT(A) dismissed the appeal and confirmed the levy of penalty under Section 271(1)(c) of IT Act. Thereafter, the petitioners preferred a further appeal before the Income Tax Appellate Tribunal, in I.T.A.No.3240/Chny/2017 and by order dated 19.03.2021, the Tribunal, allowed the appeal and deleted, in toto, the penalty levied under Section 271(1)(c), categorically holding that the additions in question did not amount to concealment of income or furnishing of inaccurate particulars of income and that the penalty under Section 271(1)(c) was not leviable on the facts of the case. The Tribunal, recorded findings that, in respect of the alleged “unproved liabilities”, the assessee had furnished particulars of the parties, confirmations and supporting evidences, the services rendered and payments made were not in dispute, and that mere non-acceptance of the assessee’s explanation at the assessment stage would not, ipso facto, amount to concealment of income or furnishing of inaccurate particulars of income. Likewise, with regard to the alleged “unexplained cash credit” of Rs.13,00,000/- in the name of one Shri Karur Ramaswamy, the Tribunal noticed that confirmation filed and held that dissatisfaction on the part of the Assessing Officer with the explanation offered could not, by itself, justify the levy of penalty under Section 271(1)(c). Thereafter, the complaint came to be filed against the petitioners.
3. The learned counsel for the petitioners submitted that, against the order passed by the CIT(A), an appeal was preferred before the Income Tax Appellate Tribunal in respect of the assessment year 2012-2013, for which the petitioners are now facing prosecution on the allegation of making a false declaration. The ITAT, after considering the submissions made on behalf of the petitioners as well as the Department, by order dated 19.03.2021, particularly in paragraph No.13 thereof, held that merely because the Assessing Officer was not satisfied with the explanation furnished by the assessee, it cannot be said that the assessee had furnished inaccurate particulars of income. With regard to the addition made towards the alleged unexplained cash credit of Rs.13 Lakhs, an unsecured loan obtained from Mr.Karur Ramasamy, and the addition towards alleged “unproven liabilities / cessation of liability”, the Tribunal took note of the materials placed on record and held that the Assessing Officer merely doubted the transactions. The ITAT ultimately concluded that mere dissatisfaction of the Assessing Officer with the explanation offered by the assessee would not justify the levy of penalty under Section 271(1)(c) of the IT Act. Accordingly, it was held that the Assessing Officer erred in levying penalty under Section 271(1)(c) of the IT Act. The learned counsel therefore, contended that, once the ITAT arrived at such a conclusion, the prosecution against the petitioners is liable to be quashed.
4. In support of the said contention, the learned counsel placed reliance on the decision of the Hon’ble Supreme Court in the case of K.CBuilders and another Vs. Assistant Commissioner of Income Tax reported in (2004) 2 SCC 731, wherein it was held that levy of penalties and prosecution under Section 276-C are simultaneous and that once the penalties are cancelled on the ground that there is no concealment of income, the quashing of prosecution under Section 276-C is automatic. The learned counsel further submitted that the said principle has been followed by this Court in its order dated 08.04.2025 passed in Cr1.0.P.Nos.15988 and 16013 of 2023.
5. Per contra, the learned counsel appearing for the Income Tax Department submitted that the Assessing Officer, on scrutiny of the records, found that the petitioners furnished inaccurate particulars and suppressed taxable income. Accordingly, penalty proceedings were initiated and an order imposing penalty was passed. Aggrieved thereby, the petitioners preferred an appeal before the ITAT. During the pendency of the criminal prosecution, the ITAT, by order dated 19.03.2021 set aside the penalty order.
6. Relying upon the ITAT order, the petitioners contended that the very foundation for the prosecution no longer survives and therefore, the criminal proceedings are liable to be quashed.
7. Accordingly, the Criminal Original Petition stands allowed and the proceedings against the petitioner in C.C.No.2958 of 2025 pending on the file of the learned Chief Judicial Magistrate, Erode, are hereby quashed. Consequently, connected miscellaneous petitions are closed.
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