Income-Tax Prosecutions and Changing Trends in India
“The income tax created more criminals than any other single act of government”
- Barry Goldwater
Chanakya, in his much-celebrated text Arthasastra, has given much importance to the collection and utilization of taxes. The public finance and taxation system finds paramount importance in the texts of Chanakya and the Mauryan Empire. According to Chanakya, revenue and taxes are the earning of the sovereign, against the services rendered to its citizens, and maintenance of law and order. The guide of Chanakya is still applicable as taxes form the single largest source of revenue generation for a nation. Every year, the Indian Government pegs a target taking into account the estimated expenses and budget allocations, for example, the gross tax revenue for the financial year 2021-22 is estimated at INR 22,17,029 Crore. With these targets, tax collection becomes the biggest challenge. If we look at the figures for the fiscal year 2019-20, revenue from income tax accounted for only 24.5% and corporate taxes accounted for 27.7% of the Centre's gross tax revenue. The remaining 48% came from indirect taxes like GST, Customs, Excise Duty, etc.
With such numbers, the Government works with the ‘Carrot and Stick’ policy, i.e., giving relaxations wherever required and imposing stricter enforcement mechanisms for effective tax collection. Primarily, there are three strings to ensure tax compliance under the (Indian) Income-tax Act, 1961 (‘Indian Tax Laws’), i.e. (i) imposition of Interest, (ii) imposition of Penalty, and (iii) imposition of Prosecution. Though levying interest and imposing penalty are the most used tools, prosecution is also quickly gaining prominence in the tax recovery mechanism. In the last 10 years, India has seen a sharp rise in tax prosecution cases and the Income tax department has become busier than ever. The growth in the numbers is sharp and steady:
Financial Year Number of prosecution cases launched
2019-20 1149 (Up to January 2020)
India saw a steep rise in prosecution following the demonetisation phase with the highest number of cases (i.e. 4527) being filed in the financial year 2017-18. This rapid rise led the Central Board of Direct Taxes (‘CBDT’) to issue a circular for the purpose of streamlining the prosecution process. The aim of the circular was to ensure that only the deserving cases should get prosecuted (‘Board Guidelines’). The circular lays down the criteria to be followed for launching prosecution in certain kinds of cases. Before we discuss these criteria, it is imperative to understand the law related to prosecution under the Indian Tax Laws.
Prosecution under Indian Tax Laws:
Indian Tax Laws contain a specific chapter dedicated to tax prosecution, i.e., Chapter XXII (Section 275A to 280D), defining punishment and offences in different circumstances. There are various kinds of offences enlisted under the said chapter, some of which are as follows:
1. Failure to facilitate inspection of accounts;
2. Removing seized assets;
3. Prevention of tax recovery;
4. Failure to pay Tax Deductible at Source or Dividend Distribution Tax to the credit of the Government;
5. Offences committed by a liquidator;
6. Failure to pay the tax collected;
7. Tax evasion;
8. Failure to furnish return of Income;
9. Failure to produce documents;
10. Enabling any other person to evade tax; and
11. Disclosure of assessee particulars by public servants.
Each of these offence ha a prescribed amount of punishment provided in respective provisions under the Indian Tax Laws. The punishment prescribed under law may range from anywhere between 3 months to 7 years, depending on the offence committed by a person. The Indian Tax Laws allow a court to presume the existence of culpable mental state, i.e. mens rea, against an accused person. However, an accused can rebut this presumption by producing necessary evidence before the court. The most pertinent question that arises is who is liable to be prosecuted?
Liability for prosecution:
According to Indian Tax Laws, any person committing the offence is liable to be prosecuted even when such person is not an assessee. In case of an offence committed by a company, firm, Association of Person (AOP), or Body of Individuals (BOI), every person who is responsible for the conduct of the business shall be deemed to be guilty of an offence. In the case of Hindu Undivided Family (HUFs), a karta shall be liable for prosecution. The liability in these cases is vicarious and shall only be applicable in cases where the company/firm is guilty of an alleged offence.
Various cases of Prosecution:
It may not be the case that where a company is liable of an offence, an officer will necessarily be liable of that offence. The Hon’ble Supreme Court of India, in Sham Sundar v. State of Haryana,has observed that while the company may be deemed to be guilty of the offence, so far as the partners or directors are concerned, only those persons who are in charge of and responsible to the company for the conduct of its business can be prosecuted. There are various cases where a person may or may not be liable for prosecution, some of which are discussed below:
1. Liability of a non-executive director: In cases where a non-executive director is not involved with the day-to-day affairs of a company, he or she may not be liable for prosecution and any proceeding against such person is liable to be quashed.
2. Sleeping partner: A sleeping partner who is not involved in the day-to-day affairs of a company may not be liable for prosecution.
3. Person signing the books of accounts: A person who has subscribed his or her signature on the books of accounts, profit and loss statement, or balance sheet which are filed with the return of income, shall be liable for prosecution.
There may be a case where a person who has nothing to do with an offence, or who has joined the business after the offence was committed, may also receive notices for prosecution. Each of these notices are to be dealt with and replied to carefully.
Impact of Pending Assessment:
Often a question that comes in mind is that, if the assessment is pending, prosecution should not be initiated. Naturally so, as the assessment becomes the first step to determine the existence of a default. However, the Supreme Court of India thinks otherwise on this point. According to the Hon’ble Supreme Court of India, the pendency of appellate proceedings relating to assessment is not a bar for initiating prosecution proceedings as both the proceedings are separate and independent from each other. Hence, the law is fairly settled to allow both the proceedings to run simultaneously.
Impact of Penalty Proceedings:
The treatment of a pending penalty proceeding is the same as of pending assessment (as mentioned above). However, the treatment becomes different where a penalty proceeding is decided in the favour of the assessee. In this regard, the Supreme Court of India has held that where a penalty proceeding is decided in the favour of the assessee, prosecution is automatically quashed. Hence, a favourable penalty order has always been the strongest defence in prosecution cases. However, the litmus test is that, a favourable penalty order should always be decided on merits of a case i.e. factual and legal position involved in case. A penalty order decided on the basis of technicalities, such as low tax effect, will not be helpful, as the court, while quashing the prosecution, will always get into the rationale given by the authorities (such as ITAT or CIT(A)) for deleting the penalty.
With increase in the number of complaints by the department and their often-arbitrary nature, the CBDT found it imperative to issue clarity and provide standards for initiating a prosecution. Previously, the Income tax department was routinely issuing prosecution notices, including to small tax offenders. The Government has now erected safeguards to reduce prosecution for pecuniary and small tax offences. With the aim and agenda of prosecuting only genuine cases, the Board Guidelines provide a two-fold mechanism to reduce the number of prosecutions. Firstly, the safeguards will apply to cases where the threshold is INR 25 Lakhs or less, and secondly, the following conditions (wherever applicable) must be satisfied:
1. Failure to deposit TDS and TCS to the credit of Central Government: The conditions prescribed in this case are as follows:
a. No prosecution in the circumstances where the delay in depositing the tax is less than 60 days from the due date; and
b. In exceptional cases, such as habitual defaulters, prosecution may be initiated with obtaining approval of the collegium of two CCIT/ DGIT rank officers (‘Collegium’).
2. Wilful attempt to evade tax: The conditions prescribed are as follows:
a. Previous approval of the Collegium; and
b. Only in cases where order confirming penalty is approved by the tax tribunal.
3. Failure to furnish the Return of income: In this case, only the previous sanction of the Collegium is required to initiate prosecution.
The Board Guidelines provides much needed relief to small tax defaulters, providing them a chance to correct. Furthermore, the Board Guidelines has provided a check and safeguards in the form of a sanction from the Collegium. This indeed ensures a better and more structured framework for prosecutions in the future.
Even after safeguards, a prosecution notice remains the most important stick against tax evaders, but also a tool of harassment for genuine tax payers. Once a notice arrives, so does the stigma attached to it. However, such prosecution notices are required to be dealt with utmost care and concern. In the first instance, a notice should be properly replied to along with the necessary factual and legal propositions. There are various strategies that may be adopted from time to time such as (a) taking the defence of a ‘reasonable cause’ for a default, wherever applicable, (b) filing a quashing petition before the jurisdictional High Court to quash the complaint filed by the department, (c) filing a discharge application before the trial court, or (d) applying for compounding.
Each of the above remedies are separate from each other and shall be selected carefully on a case to case basis. Though remedies exist and the Indian Government has made significant strides in curbing malicious prosecution cases, tax prosecutions still remain the biggest weapon for our authorities. Even though the numbers of complaints remain at all-time high, the number of actual convictions is much lower, while 10 being the lowest (FY 2012-13) and 104 being the highest (FY 2018-19). With these numbers, even where the department is using prosecution as a tool for core tax compliance, the courts and government have still kept a fair check on these prosecutions. However, the day where tax collection is done without these harsh measures is still afar. Tax education and effective compliance remain a far cry. The nation still awaits a ray of hope where each individual will provide his share towards nation building, without a sword on their neck.
Circular No. 24/2019 dated 09.09.2019 Sham Sundar & Ors. v. State of Haryana: 1989 SCR (3) 886 (Supreme Court of India)  Chanakya Bhupen Chakravarti v. Mrs. Rajeshri Karwa:  101 taxmann.com 264 (Delhi High Court)  ITO v. Kamra Trading Co.: (2004) 267 ITR 170 (Punjab and Haryana High Court)  Mrs. Sujatha Venkateshwaran v. Assistant Commissioner of Income-tax (Prosecution), City Circle-1, Chennai:  96 taxmann.com 203 (Madras High Court)  Sasi Enterprises v. Assistant Commissioner of Income-tax:  222 Taxman 78 (Supreme Court of India)  K. C. Builders v. ACIT: (2004) 265 ITR 562 (Supreme Court of India)
Cite This Article: Yojit Pareek, 'Income-Tax Prosecutions and Changing Trends in India' (Tax Terminal Blog, 24 August 2021) <https://www.taxterminal.in/post/income-tax-prosecutions-and-changing-trends-in-india>
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