Facts of the Case

The first respondent, S.P. Bansal, was required to file his Income-tax return for the Assessment Year 1987-88 on or before 31 July 1987 under Section 139(1) of the Income-tax Act. Since the return was not filed within the prescribed period, a notice under Section 139(2) was issued.

The respondent ultimately filed the return on 20 January 1989. In the return, he declared a loss, whereas the assessment resulted in income being assessed at a substantially different figure. The Income Tax Department alleged that the respondent, in collusion with another respondent, had made false statements regarding sale transactions and maintained false accounts for use in assessment proceedings.

Consequently, a criminal complaint was filed under Sections 276CC, 276C, 277 and 278 of the Income-tax Act. The Magistrate issued process against the accused persons.

Subsequently, the Income Tax Appellate Tribunal set aside the assessment order and remanded the matter for reassessment. Based on the remand order, the respondents sought dropping of the criminal proceedings. While the Magistrate refused to drop the prosecution, the Additional Sessions Judge allowed the revision and ordered the proceedings to be dropped. Aggrieved by that order, the Income Tax Department filed the present revision petition before the Delhi High Court.

Issues Involved

  1. Whether criminal prosecution under Sections 276C, 276CC, 277 and 278 of the Income-tax Act can continue when reassessment proceedings are pending.
  2. Whether remand of the assessment order by the Income Tax Appellate Tribunal automatically renders the criminal prosecution unsustainable.
  3. Whether pending reassessment proceedings constitute a legal bar to the continuation of criminal proceedings initiated under the Income-tax Act.

Petitioner’s Arguments (Income Tax Department)

  • The Department contended that mere pendency of reassessment proceedings does not affect the maintainability of criminal prosecution.
  • It was argued that prosecution had been validly initiated on allegations of wilful failure to furnish returns, concealment of income, false statements and maintenance of false accounts.
  • Reliance was placed on the Supreme Court judgment in P. Jayappan v. S.K. Perumal (1984) 149 ITR 696 (SC), wherein it was held that reassessment proceedings do not bar criminal prosecution under the Income-tax Act.
  • The Department submitted that the Additional Sessions Judge had misinterpreted the law laid down by the Supreme Court and had wrongly ordered the dropping of criminal proceedings.

Respondents’ Arguments

  • The respondents argued that since the Income Tax Appellate Tribunal had set aside the assessment order and remanded the matter for reassessment, the very basis of the prosecution had become uncertain.
  • It was contended that until reassessment proceedings were concluded, continuation of criminal prosecution would be improper.
  • The respondents sought dropping of the criminal proceedings on the ground that the reassessment could ultimately result in findings favourable to them.

Court Order / Findings

The Delhi High Court allowed the revision petition filed by the Income Tax Department.

The Court held that:

  • Pendency of reassessment proceedings does not create a legal bar to the institution or continuation of criminal prosecution under the Income-tax Act.
  • The Supreme Court in P. Jayappan v. S.K. Perumal had clearly held that reassessment proceedings cannot prevent criminal prosecution from proceeding.
  • A mere expectation that the assessee may succeed in reassessment proceedings is not a valid ground for terminating criminal proceedings.
  • The Additional Sessions Judge incorrectly interpreted the Supreme Court decision and committed a manifest illegality by directing the criminal proceedings to be dropped.
  • Since no finding had been recorded by the Tribunal disbelieving the allegations forming the subject matter of the complaint, there was no justification for terminating the prosecution.

Important Clarification by the Court

The Court clarified that:

Mere pendency of assessment, reassessment, appeal or reference proceedings under the Income-tax Act does not bar criminal prosecution for offences under Sections 276C, 276CC, 277 and 278.

The Court further observed that only a favourable finding by the competent tax authority on the allegations forming the basis of prosecution may have relevance; however, the existence of pending proceedings alone is insufficient to halt criminal prosecution.

Final Decision

  • Revision Petition Allowed.
  • Order of the Additional Sessions Judge dated 15 October 1997 was set aside.
  • Order of the Additional Chief Metropolitan Magistrate dated 3 July 1995 refusing to drop the proceedings was restored.
  • Criminal prosecution against the respondents was permitted to continue.

Sections Involved

Income-tax Act, 1961

  • Section 139(1) – Filing of Return of Income
  • Section 139(2) – Notice for Filing Return
  • Section 276C – Wilful Attempt to Evade Tax
  • Section 276CC – Failure to Furnish Return of Income
  • Section 277 – False Statement in Verification
  • Section 278 – Abetment of False Return, Statement or Declaration

Criminal Procedure

  • Revisional Jurisdiction relating to criminal proceedings.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/1999:DHC:3240/63208121999CRLR331998_163225.pdf

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