Court Quashes Tax Prosecution After Penalty Set Aside

Case Name**: Prem Tailor and Another vs Income Tax Officer

**Key Takeaways**:

1. When a penalty for concealment of income is set aside by the Income Tax Appellate Tribunal, criminal prosecution for the same offense cannot proceed.

2. The court relied on precedents that emphasize the importance of the penalty order in supporting criminal prosecution for tax offenses.

3. This judgment reinforces the principle that tax prosecutions must be based on valid penalty orders.

**Issue**: 

Can criminal prosecution for concealment of income proceed when the Income Tax Appellate Tribunal has set aside the penalty notice for the same offense?

**Facts**:

1. M/s Prem Tailors, a partnership concern, filed their income tax return for the assessment year 1993-94 on January 31, 1994, declaring an income of ₹5,810. 

2. The Income Tax Officer assessed their income at ₹5,79,500, adding ₹5,73,690 to the declared income. 

3. After appeals, the net income was worked out to ₹2,37,479. 

4. A penalty of ₹1,04,100 was initially imposed, which was confirmed by the Commissioner of Income Tax (Appeals). 

5. The Income Tax Appellate Tribunal quashed the imposition of penalty on legal grounds on June 8, 2007. 

6. Despite this, a criminal complaint was filed against the assessee for concealment of income. 

**Arguments**:

The petitioners (M/s Prem Tailors and partners) argued that since the penalty order had been quashed by the Tribunal, the criminal prosecution should also be quashed. They relied on previous court decisions supporting this view. 

The respondent (Income Tax Department) opposed the petition but failed to effectively counter the petitioners' arguments. 

**Key Legal Precedents**:

1. K.C. Builders and another versus Assistant Commissioner of Income-tax (Income Tax Reporters Vol. 265, p. 562): The Supreme Court held that when a Tribunal sets aside an order of concealment and penalties, there is no concealment in the eyes of law, and prosecution cannot proceed. 

2. Gupta Constructions Co. and others versus Income-Tax Officer and others (2003 Vol. 260 Income Tax Reports 415): The Punjab and Haryana High Court held that prosecution is an abuse of the process of law if the basis of penalty has been struck down by authorities under the Act. 

**Judgement**:

The High Court allowed the petition and quashed the criminal complaint. Key points of the judgment include:

1. The Income Tax Appellate Tribunal had set aside the penalty notice due to jurisdictional defects in its issuance. 

2. The court held that since the penalty notice was set aside, the petitioners cannot be prosecuted for concealment of income. 

3. The criminal complaint (No. 24 of 31.3.2010) under Sections 276(1) & 277 read with Section 278-B of the Income Tax Act for the assessment year 1993-94 was quashed, along with all subsequent proceedings. 

**FAQs**:

1. Q: What was the main reason for quashing the criminal complaint?

  A: The main reason was that the Income Tax Appellate Tribunal had already set aside the penalty notice, which formed the basis of the criminal complaint.

2. Q: Does this judgment mean that tax evaders can escape prosecution?

  A: No, it simply means that for prosecution to proceed, there must be a valid penalty order in place. If the penalty is set aside on legal grounds, the prosecution cannot continue.

3. Q: What is the significance of this judgment for other tax cases?

  A: This judgment reinforces the principle that criminal prosecutions for tax offenses should not proceed when the underlying penalty has been set aside by a competent authority.

4. Q: Can the Income Tax Department appeal this decision?

  A: While the judgment doesn't mention it explicitly, generally, the department could appeal to a higher court if they believe there are grounds to challenge this decision.

5. Q: What sections of the Income Tax Act were involved in this case?

  A: The case involved Sections 276(1), 277, and 278-B of the Income Tax Act, 1961, which deal with various offenses related to tax evasion and false statements in verification.

Vide this order, the above mentioned two petitions would be disposed of as the petitioners have sought quashing of the criminal complaint No. 24 of 31.3.2010 under Section 276(1) & 277 read with Section 278-B of the Income Tax Act, 1961 ('Act'for short) for the assessment year 1993-94 titled as Income Tax Officer Ward-3 Phagwara versus Ms. Prem Tailor and others and all the subsequent proceedings arising therefrom.

The case of the complainant, in brief, is that accused No.1 M/s Prem Tailors was a partnership concern whereas accused No.2 Prem Nath and accused No.3 Rajinder Pal were its partners. The accused filed their return with regard to assessment year 1993-94 on 31.1.1994 declaring their income as 5810/- along with other documents. Notices were issued under Section 142(1) and 143(2) of the Income Tax Act, 1961 to the accused. The Income Tax Officer after taking into consideration all the impounded material framed the assessment at an income of ` 5,79,500/-, thus, making an addition of ` 5,73,690/- to the return income of ` 5810/- . Penalty and demand notices were issued accordingly. Aggrieved by the same, the accused preferred an appeal before the Commissioner of Income Tax (Appeals) and relief of ` 3,42,021/- was allowed. The net income of the accused was worked out at ` 2,37,479/-. Against the said order, both the parties preferred appeals before the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar. Both the appeals were dismissed. Thereafter notice regarding penalty was issued to the accused. Since the reply submitted by the accused was found unsatisfactory, the demand notice was issued to them qua penalty of ` 1,04,100/-. The Commissioner of Income Tax (Appeals) vide order dated 18.3.2005 confirmed the levy of penalty. In appeal filed by the accused before Income Tax Appellate Tribunal, Amritsar Bench, Amritsar, the imposition of penalty was quashed on legal grounds vide order dated 8.6.2007. In appeal filed by Income Tax Department against the order of Income Tax Appellate Tribunal, Amritsar Bench, Amritsar, the appeal was dismissed in terms of order passed in ITA No. 180 of 2009 titled as The Commissioner of Income Tax, Jalandhar-II versus Smt. Parmatma Kaur village Langia Goraya, District Jalandhar. As per the said case, the matter was referred to the Tribunal for fresh decision on the issue of penalty in accordance with law. Hence, the complaint qua concealment of income with regard to Assessment Year 1993-94 was filed.

Learned counsel for the petitioners has submitted that since the order whereby penalty was imposed on the petitioners had been quashed by the Tribunal, the criminal prosecution of the petitioners was liable to be quashed. In support of his argument, learned counsel has placed reliance on 'K.C.Builders and another versus Assistant Commissioner of Income-tax, Income Tax Reporters (Vol. 265) 562. The Apex Court has held as under:-

“In our view, once the finding of concealment and subsequent levy of penalties under section 27(1)(c) of the Act has been struck down by the Tribunal, the Assessing Officer has no other alternative except to correct his order under section 154 of the Act as per the directions of the Tribunal. As already notices, the subject matter of the complaint before this court is concealment of income arrived at on the basis of the finding of the Assissing Officer. If the Tribunal has set aside the order of concealment and penalties, there is no concealment in the eyes of law and, therefore, the prosecution cannot be proceeded with by the complaint and further proceedings will be illegal and without jurisdiction. The Assistant Commissioner of Income-tax cannot proceed with the prosecution even after the order of concealment has been set aside by the Tribunal. When the Tribunal has set aside the levy of penalty, the criminal proceedings against the appellants cannot survive for further consideration. In our view, the High Court has taken the view that the charges have been framed and the matter is in the stage of further cross-examination and, therefore, the prosecution may proceed with the trial. In our opinion, the view taken by the learned magistrate and the High Court is fallacious. In our view, if the trial is allowed to proceed further after the order of the Tribunal and the consequent cancellation of penalty, it will be an idle and empty formality to require the appellants to have the order of the Tribunal exhibited as a defence document inasmuch as the passing of the order as aforementioned is unsustainable and unquestionable.”

Learned counsel has also placed reliance on 'Gupta Constructions Co. and others versus Income-Tax Officer and others, 2003 (Vol. 260) Income Tax Reports 415 (P&H), wherein it was held as under:-

“In view of the judgment of the Supreme Court, mentioned above, wherein, it has been held that if the penalty proceedings have been set aside in the deparmental proceedings then the very basis of launching of the prosecution against the assessee stands knocked down. In such facts, the Supreme Court had quashed the proceedings initiated under the Income-tax Act against the assessee. In view of the said judgment, I find that the prosecution against the petitioner is an abuse of the process of law. The very basis of penalty has been struck down by the authorities under the Act.”

Learned counsel for the respondent, on the other hand, has opposed the petition but has failed to controvert the submissions made by the learned counsel for the petitioners. After hearing learned counsel for the parties, I am of the opinion that the instant petition deserves to be allowed. The Income Tax Appeal Tribunal while quashing the penalty notice vide order dated 20.8.2010 has observed as under:-

“A bare perusal of the relevant provisions reproduced above clearly highlights that the penalty proceedings should be initiated by the specified authority, namely, the Assessing Officer or the Commissioner of Income Tax (Appeals) or the Commissioner of Income-tax, in the course of any proceedings under this Act, if the concerned office is satisfied that any person ------ In the present case, the A.O. has issued the impugned penalty proceedings notice on 24.2.1994. the survey under section 133A of the Act was conducted at the business premises of the assessee on 2.2.1994. In the course of such survey operation, it was found that the assessee failed to produce regular books on account, on the basis of which relevant accounts, were prepared by the assessee and the impugned return of income filed.

The Department found certain incriminating documentary evidence indicating concealment of income, which was made the basis for issue of the said notice of initiation of penalty proceedings under section 271(1)(c) of the Act. The revenue has not brought on record, the date of conclusion of the said survey. However, it is an undisputed fact that the survey was conducted on 2.2.1994 and the impugned penalty notice was issued on 24.2.1994. In view of the gap of 22 days, it cannot be presumed that survey proceedings were continuing upto the date of issuance of penalty notice i.e. dated 24.2.1994. This is also undisputed that no penalty notice under Section 271(1) (c) of the Act was issued in the course of assessment proceedings. Thus, in view of the factual details filed by the assessee, as reproduced above, in the matter of date of filing of the return, date of processing the return and date of issuance of the said notice, it is evident that the penalty notice, dated 24.2.1994, has been issued not in the course of survey proceedings under section 133A of the Act, but after its closure. Thus, there is jurisdictional defect in assumption of jurisdiction for levy of penalty, which cannot be cured. Consequently, the impugned penalty notice has been issued contrary to the express provisions of section 271(1)(c) of the Act, as reproduced above. It is also evident that the impugned penalty notice has not been issued in the course of assessment proceedings. Which commenced on service of notice u/s 143(2) of the Act on 20.5.1994. In view of the above discussions, the assumption of jurisdiction by the AO for initiation of impugned penalty proceedings is not valid, as the impugned penalty notice dated 24.2.1994, has not been issued in consonance of the express provisions of the Act. Admittedly, the said order has become final. Since the penalty notice has been set aside, the petitioners cannot be prosecuted qua concealment of income.

Accordingly, both the petitions are allowed. The criminal complaint No. 24 of 31.3.2010 under Section 276(1) & 277 read with Section 278-B of the Act for the assessment year 1993-94 titled as Income Tax Officer Ward-3 Phagwara versus Ms. Prem Tailor and others and all the subsequent proceedings arising therefrom , are quashed.

(SABINA)

JUDGE

August 27, 2012