Whether Deputy Director Of Income Tax Is Competent To Launch Prosecution Under Section 276 (C) And 277 Of The Income Tax Act?

In the case titled as Karti P.Chidambaram & Anr. Vs. The Deputy Director of Income Tax (Investigation), Criminal Revision Petition Nos. 510 and 511 of 2020, the High Court of Karnataka decided the revision petitions filed by the Petitioners, Smt. Srinidhi Karti Chidambaram and Karti P. Chidambaram, against the order passed by the Ld. Special Court dismissing the discharge applications filed under Section 245 of Code of Criminal Procedure, 1973 (hereinafter also referred as “Cr.P.C.”) for seeking discharge from the trial of the complaint filed by Deputy Director of Income Tax under sections 276C(1), 277 and 278 of the Income Tax Act (hereinafter also referred as “IT Act”).

In the present matter, the criminal complaints were filed by the Deputy Director of Income Tax against the Petitioners on the ground that the Petitioners sold their immovable property situated in Muttukadu village for which they had received certain amount through cheque and some amount in cash and the Petitioners did not disclose the cash component in their respective income tax returns for the assessment years 2014-15 and 2015-16. The said facts came to light in a survey under Section 133 A of the IT Act carried out in the case of M/s. Advantage Strategic Consulting Private Limited and M/s. Agni Estates and Foundation Pvt. Ltd. by the Income Tax Department.

After the Ld. Trial Court took the cognizance of the complaint, the Petitioners had filed petitions under Section 245 of the Cr.P.C., seeking discharge from the prosecution, inter alia,  on the grounds that:

• The Deputy Director of Income Tax is not a competent person to file the present complaint for the alleged false declaration; and

• Only the Assessing Officer of Income Tax, before whom the returns were filed is competent to file any complaint for the alleged false Returns or evidence as the assessment proceedings are deemed to be a judicial proceedings within the meaning of Section 193 and 196 of the Indian Penal Code, 1860 (hereinafter also referred as “IPC”) and therefore, the complaint filed by the Deputy Director of Income Tax is not maintainable.

The Ld. Trial Court had dismissed the petitions filed by the petitioners herein.

The main contentions of the Petitioners before the High Court of Karnataka in the revision petitions were as under:

• That the returns of the year 2014-15 and the assessment still hold good and merely on the basis of the some search said to have taken place in third party premises and statements recorded from 3^rd parties, the prosecution could not have been launched when none of the ingredients to attract the offence under Section 276(C) of the IT Act was made out.

• That the Deputy Director of Income Tax is not the competent authority to launch the prosecution for the offences under Section 276(C) and 277 of the IT Act.

• That only the Assessing Officer who records the finding on the basis of the search materials that there is a wilful attempt to evade any tax, or any another person authorised by him is only competent to file a complaint as per Section 195 of the Cr.P.C. and without any finding as to the nature of the escaped income or false Return by the Assessing Officer, the Deputy Director of Income Tax cannot assume the role of fact finding authority and lodge a complaint for the present offences and the Income Tax Department cannot avoid the rigour of Section 195 of Cr.P.C. by avoiding the IPC offences.

In a nutshell, the main contentions of the petitioners before the High Court of Karnataka were that the prosecution is premature and launched by the incompetent person.

While hearing the present revision petitions, the Hon’ble Court observed that the perusal of the complaint makes it clear that the petitioners never incriminated themselves in the statements recorded by the raiding officers at any point of time and when the income tax officers confronted the petitioners, they took the stand that the relevant income tax returns filed by them are correct. The Hon’ble Court further observed that the officer who had lodged the complaint in fact formed the opinion that an offence has been committed since the petitioners had denied the receipt of cash portion and therefore, the petitioners had wilfully attempted to evade the payment of tax by concealing the income through sale of the property. Furthermore, the Hon’ble Court observed that in the present case neither the false Return nor any false statement or verification done by the Petitioners before the Deputy Director of Income Tax Act.

The Hon’ble High Court of Karnataka while deciding the present petitions, inter alia, relied upon the following judgments:

In the case of Lalji Haridas vs. State of Maharashtra and Another [AIR 1964 SC 1154], the Hon’ble Supreme Court has held that the proceedings before the Income Tax officers are deemed to be a judicial proceedings and any false statement given before him deemed to be made within the meaning of 193 of I.P.C and the complaint can only be filed as contemplated under section 195 of the Cr.PC.

In the case of Basir-Ul-Huq and Ors. vs. The State of West Bengal [1953 AIR 293], the Hon’ble Supreme Court has held that that the provision under Section 195 of the Cr.P.C. cannot be evaded by the device of charging a person with an offence to which that section does not apply and then convicting him of an offence to which it does, on the ground that the latter offence is a minor one of the same character, or by describing the offence as one punishable under some other section of the Indian Penal Code, though in truth and substance the offence falls in the category  of sections mentioned in section 195 of the Cr.P.C.

In the case of Babita Lila and Another vs. Union of India [(2016)9 Supreme Court Cases 647], the Hon’ble Supreme Court has held that the complaint made by the Deputy Director of Income Tax Department for alleged false statement made during the income tax search proceedings under Section 131 of the Income Tax Act not maintainable. Such complaint cannot be maintainable by the Deputy Director of Income Tax Department as he is not a court or forum or authority to whom appeal would lie from any decision or action of the Income Tax Officer named in 131 proceedings.

In the case of G.S.R. Krishnamurthy vs. M. Govindaswamy [1991 SCC Online Mad 580], the Hon’ble Madras High Court has held that in the course of the same transaction distinct offence are made out apart from commission of offences falling within the ambit or the purview of Section 195(1)(b)(i) Cr.P.C. and a complaint had been lodged in respect of all the offences without a complaint emanating from the court under the provisions of section 195(1)(b)(i), Cr.P.C., the entirety of the prosecution shall not stand vitiated and, if at all, that part of the prosecution as relatable to the offences falling within the ambit of section 195(1)(b)(i), Cr.P.C., alone would become invalid and the prosecution in respect of other offence has to be continued in the manner allowed by law 41.

The Hon’ble Court even after coming to the conclusion that the offences under Section 276, 277 and 278 of the IT Act are distinct offences and the Deputy Director can launch the prosecution as per Section 279 of the IT Act, held that the prosecution will not be maintainable only because the power has been conferred to the Deputy Director to launch a complaint on sanction which has been granted on the basis of some materials said to have been collected from third parties. The Hon’ble Court further held as under:

 The very explanation provided under Section 276C makes it clear that such incriminating materials and documents ought to have been seized from the accused. Unless strong materials seized from accused or any incriminating statement recorded from accused the prosecution has to wait till the finding recorded by Assessing Officer. In view of the same, complaint filed by the Deputy Director for the offence allegedly committed while filing Returns and false verification filed before the Assessing Authority, this Court is of the view that only the Assessing Authority or any other officer authorised by that officer is competent to file a complaint, not by the Deputy Director.

The Hon’ble Court referred to the facts of the present matter and observed that no incriminating statements nor any documents had been seized from the petitioners either under survey or search and what is sought to be used against the petitioners is some statements said to have been contained in hard disc seized from the possession of the third parties, and the Deputy Director had filed the complaints merely on the basis of his opinion without any concrete material.

Considering the facts of the present case, the Hon’ble Court allowed the revision petitions of the petitioners and dismissed the complaints on the grounds that the prosecution is premature and launched by the incompetent person.

While allowing the revision petitions, the Hon’ble Court made some important observations with respect to the offences under the IT Act, which are as under:

Offence under Section 276 (C) of the IT Act:

That unless a finding is recorded by the Assessing Officer as to wilful attempt to evade tax or filing false verification, the complaint filed by the Deputy Director is not maintainable. Only the Assessment Officer shall reassess the total income, then Assessing Authority take note of the income disclosed in the earlier report and any undisclosed income found during the search, and then find out what is the total income. When such finding is given and the Assessing Officer come to such conclusion that there is under reporting or the wilful attempt to evade any tax or penalty, it is well within the power of the Assessment Office to proceed against the accused for penal action. There cannot be any bar for the Department to take a penal action after reassessment order is passed.

The very object of the statute as could be discernible under Section 276 is that to maintain such complaint by the Deputy Director of Income Tax Act, the materials seized or collected during search should unerringly pointing towards the accused, not mere statements of some third parties and some entries made by them.

Offence under Section 277 of the IT Act:

That where the returns are filed before the Assessing Officer by the assessee and the verification is also done by him while filing his return then whether such verification is false or not, has to be decided by the Assessing Officer before whom such verification has been filed. Mere keeping silent does not amount to giving false evidence and just because assessee did not accept every accusation made against him by the Department, such conduct cannot be taken by the Department to contend that the assessee committed an offence.

Offence under Section 278 of the IT Act:

That mere ignorance by one of the assessee by maintaining that only her husband is aware of the return such conduct cannot be construed as abetment to attract the offence under Section 278 of the Income Tax Act. To attract the offence of abetment there must be materials to show that the assessee has instigated or invites her husband to commit any offence.

Thus, in view of the above judgment, it is apparent that the Deputy Director of Income Tax is competent to file prosecutions under sections 276 C and 277 only in the cases where the incriminating material is seized or collected during the search conducted at the premises of the accused and the false statements are made before the Deputy Director of Income Tax.