Supreme Court Pulls Up Income Tax Dept For Launching Prosecution For Tax Evasion Without ITAT Confirmation, Imposes Rs 2 Lakh Cost

The Supreme Court on Thursday (Aug. 28) imposed Rs. 2 Lakhs cost on Income Tax Department for 'grossly abusing its position' to continue a prosecution against an assessee alleging willful tax evasion.

The bench comprising Justices JK Maheshwari and Vijay Bishnoi set aside the Madras High Court's decision, which refused to quash the prosecution case initiated by the department. The Court criticized the department's action of launching the prosecution against the assessee in contrast to its own circulars, which allow launching the prosecution for tax evasion under Section 276C (1) of the Income Tax Act, 1961 (“IT Act”) only after the penalty for concealment is confirmed by the Income Tax Appellate Tribunal (ITAT).

The Case

The case originated from a search operation in 2016 where unaccounted cash of nearly ₹5 crore was allegedly seized from the appellant's residence. The Department initiated prosecution under Section 276C(1) of the Income Tax Act, 1961, accusing him of wilfully attempting to evade tax for the Assessment Year 2017-18.

Subsequently, Appellant approached the Income Tax Settlement Commission, which, in an order dated November 26, 2019, settled the case. The Commission recorded that he had made a "full and true disclosure" and granted him immunity from penalty, finding no suppression of facts. However, it refrained from granting immunity from prosecution as the criminal case was already pending.

Aggrieved by the High Court's refusal to quash the case, the Appellant approached the Supreme Court.

Decision

Setting aside the High Court's decision, the judgment authored by Justice Maheshwari observed that the Department flouted its own binding circulars issued by the Central Board of Direct Taxes (CBDT). The Court cited a 2008 circular and the 2009 Prosecution Manual, which mandate that prosecution under Section 276C(1) should be launched only after the penalty for concealment is confirmed by the Income Tax Appellate Tribunal (ITAT).

Since no penalty was confirmed by the ITAT, the Court termed the department's action to be arbitrary and an abuse of the process of law.

“On the date of lodging the prosecution, the finding of concealment of income or imposition of the penalty of more than Rs. 50,000/- has not been recorded by the ITAT. Nothing has been brought on record to show that any wilful attempt to evade the payment of tax by assessee was made. No explanation has been put forth by Revenue to demonstrate as to why PDIT or DDIT did not comply the procedure while lodging prosecution in this case. Therefore, in our view, the act of the authority in continuing prosecution is in blatant disregard to their own binding circular dated 24.04.2008 and in defiance to the guidelines of the Department.”, the court observed.

“In view of the foregoing discussions in conclusion we can safely hold that the prosecution lodged with the help of proviso to sub-section (1) to Section 245H was in defiance to the circular dated 24.04.2008, which was in vogue. It was the duty of the PDIT and DDIT to look into the facts that in absence of any findings of imposition of penalty due to concealment of fact, the said prosecution cannot be proved against the assessee. It seems, even after passing the order by the Settlement Commission on 26.11.2019, it was brought to the notice of the High Court, but the authorities were persistent to pursue the prosecution without looking into the procedural lapses on their part. Such an act cannot be construed in right perspective and the Revenue have acted in blatant disregard to binding statutory instructions. Such willful non-compliance of their own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability, which in any manner cannot be treated to be justified or lawful.”, the court added.

Accordingly, the appeal was allowed.

Cause Title: VIJAY KRISHNASWAMI @ KRISHNASWAMI VIJAYAKUMAR VERSUS THE DEPUTY DIRECTOR OF INCOME TAX (INVESTIGATION)

Citation : 2025 LiveLaw (SC) 851

Click here to read/download the judgment

Appearance:

For Petitioner(s) : Mr. Preetesh Kapur, Sr. Adv. Mr. R. Sivaraman, Adv. Mr. B. R. Varshini, Adv. Ms. Vandana Vyas, Adv. Mr. S. Mohan, Adv. Mr. Aditya Sharan, Adv. Mr. Ravi Raghunath , AOR

For Respondent(s) : Mrs. Nisha Bagchi, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mr. V Chandrashekhara Bharathi, Adv. Mr. Udai Khanna, Adv. Mr. Navanjay Mahapatra, Adv.