Facts of the Case

The petitioner, Viraj Exports Pvt. Ltd., deducted tax at source (TDS) but failed to deposit the same into the Government Treasury within the prescribed statutory period. The delay extended from approximately 12 to 17 months. During this period, the deducted amount, which constituted public/government money held in trust, remained with the petitioner and was utilized for its own benefit.

Subsequently, the petitioner deposited the TDS amount voluntarily upon realizing the lapse. However, the delay had already triggered prosecution under the Income Tax Act.

Issues Involved

  1. Whether delayed deposit of TDS constitutes an offence under Section 276B of the Income Tax Act, 1961.
  2. Whether voluntary subsequent payment of TDS absolves criminal liability.
  3. Whether the petitioner could claim protection under Section 278AA (reasonable cause).
  4. Whether absence of mens rea can be a valid defence in such cases.

Petitioner’s Arguments

  • The petitioner contended that the failure to deposit TDS was not intentional and lacked mens rea.
  • It was argued that the entire amount was deposited voluntarily without coercion, showing bona fide conduct.
  • The petitioner relied on Sequoia Construction Co. Pvt. Ltd. vs P.P. Suri (1986), arguing that “reasonable cause” should be interpreted liberally in criminal proceedings.
  • It was further submitted that penalty proceedings had recognized mitigating circumstances such as financial hardship, which should also apply in criminal prosecution.

Respondent’s Arguments

  • The Income Tax Department argued that wilful default in depositing TDS itself constitutes criminal liability.
  • It was contended that statutory provisions require strict compliance, and failure automatically attracts prosecution.
  • Reliance was placed on Madhumilan Syntex Ltd. vs Union of India (2007), wherein the Supreme Court held that delay in payment of TDS is an offence irrespective of subsequent deposit.
  • The respondent emphasized that no valid or exceptional “reasonable cause” was established.

Court’s Findings / Order

  • The Court held that TDS deducted is public money held in trust, and failure to deposit it within time is a serious statutory violation.
  • The argument of absence of mens rea was rejected, especially in light of contradictory pleas of inadvertence and financial hardship.
  • The Court observed that the petitioner failed to inform authorities about difficulties before issuance of show-cause notice, weakening claims of bona fide conduct.
  • Financial constraints or business losses were held insufficient to constitute “reasonable cause” under Section 278AA.
  • The Court relied on Supreme Court precedent affirming that delay in TDS payment attracts prosecution.

Final Order:
The petitions were dismissed, and the conviction under Section 276B of the Income Tax Act was upheld.

Important Clarification

  • Deposit of TDS after delay does not erase criminal liability.
  • “Reasonable cause” under Section 278AA requires strong, credible justification and cannot be based merely on financial hardship.
  • TDS is treated as government money held in fiduciary capacity, and misuse or delay is viewed seriously.
  • Penalty proceedings and criminal prosecution operate differently; findings in one are not automatically binding but may have evidentiary value.

Sections Involved

  • Section 276B – Failure to deposit TDS
  • Section 278AA – Reasonable cause defence
  • Section 201(1) – Consequences of failure to deduct/pay TDS

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:8602/NAW15102018CRLR3402018_162013.pdf

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