Facts of the Case

The petitioner company deducted Tax Deducted at Source (TDS) but failed to deposit the same with the Government Treasury within the prescribed time. The delay ranged between 12 to 17 months, during which the petitioner retained and utilized government funds.

The petitioner later deposited the TDS voluntarily, claiming it was an inadvertent mistake and due to financial constraints. However, prosecution was initiated under Section 276B for failure to deposit TDS within time.

Issues Involved

  1. Whether delayed deposit of TDS constitutes an offence under Section 276B of the Income Tax Act.
  2. Whether subsequent payment of TDS absolves criminal liability.
  3. Whether financial hardship or absence of mens rea qualifies as “reasonable cause” under Section 278AA.

Petitioner’s Arguments

  • The petitioner contended that the TDS amount was deposited voluntarily upon realization of the lapse.
  • It argued absence of mens rea (criminal intent).
  • Financial difficulties and business losses prevented timely payment.
  • Relied on precedent (Sequoia Construction Co. Pvt. Ltd. vs P.P. Suri) to argue that “reasonable cause” should be interpreted liberally.
  • Submitted that penalty proceedings having considered facts should influence criminal prosecution.

Respondent’s Arguments

  • The Income Tax Department argued that:
    • TDS represents public money held in trust, and failure to deposit is a serious default.
    • Wilful delay itself establishes criminal liability.
    • No valid or compelling reason was shown to justify delay.
  • Relied on Supreme Court judgment (Madhumilan Syntex Ltd. vs Union of India) holding that delay in TDS payment attracts prosecution even if payment is made later.

Court’s Findings / Order

  • The Court held that:
    • TDS is government money, and the assessee acts as a trustee.
    • Retaining such funds for personal/business use amounts to misuse.
    • Subsequent deposit does not erase the offence.
    • Financial difficulty is not a valid reasonable cause, especially when the company had substantial turnover and expenses.
    • Contradictory pleas (inadvertence + financial hardship) weaken the defence.
    • Absence of mens rea is not sustainable in such statutory violations.

Important Clarifications

  • Delay in depositing TDS constitutes an offence, even if the amount is later paid.
  • “Reasonable cause” under Section 278AA must be genuine and compelling—mere financial hardship is insufficient.
  • Penalty proceedings and criminal prosecution operate independently, though findings may be relevant.
  • The obligation to deposit TDS is strict and time-bound.

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

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