Facts of the Case

The petitioners challenged the sanction order dated 14.03.2017 issued by the Commissioner of Income Tax (TDS), Delhi-1 under Section 279(1) of the Income Tax Act for launching criminal prosecution.

The dispute arose because during Financial Year 2012–13 (Assessment Year 2013–14), the petitioner company deducted TDS amounting to ₹3,52,99,059/- but failed to deposit the same within the prescribed statutory period. The delay covered both salary and non-salary TDS deductions.

The department issued show cause notices proposing prosecution under Sections 276B and 278B. Initially, the petitioners indicated their intention to seek compounding, due to which prosecution proceedings were deferred. However, no compounding application was filed.

Subsequently, in reply to fresh show cause proceedings, the petitioners admitted the delay and attributed it to financial constraints, reduced business operations, and pendency of substantial tax refunds allegedly withheld by the department.

Issues Involved

  1. Whether sanction for prosecution under Section 279(1) was legally sustainable.
  2. Whether financial hardship constitutes “reasonable cause” under Section 278AA.
  3. Whether delayed payment of TDS with interest absolves criminal liability under Section 276B.
  4. Whether CBDT instructions regarding prosecution policy were properly considered.
  5. Whether writ jurisdiction can be invoked to quash sanction for prosecution at a pre-trial stage.

Petitioner’s Arguments

  • The sanctioning authority failed to properly consider Section 278AA, which protects an assessee from punishment if reasonable cause for default is established.
  • The delay occurred due to genuine financial hardship caused by business slowdown.
  • Large tax refunds due from the Income Tax Department remained unpaid, which materially affected liquidity.
  • Interest on delayed TDS had already been deposited, thereby compensating the Revenue.
  • CBDT’s Standard Operating Procedure and prosecution guidelines were not properly applied, especially where delay was less than twelve months. 

Respondent’s Arguments

  • TDS deducted is government money held in trust by the deductor and cannot be utilized for business purposes.
  • Payment of interest on delayed deposit does not erase criminal liability.
  • Financial difficulty is not a legally valid justification for non-deposit of TDS.
  • Refund claims and TDS liabilities are distinct legal obligations.
  • The sanction order was passed after due application of mind and based on sufficient material.

Court Findings / Observations

The Delhi High Court held:

1. Scope of Judicial Review of Sanction is Limited

The Court clarified that sanction under Section 279(1) is only a prima facie administrative satisfaction and judicial review over such sanction is limited.

2. Reasonable Cause under Section 278AA is a Matter of Trial

The plea of financial hardship and reasonable cause is essentially a factual defense which must be examined during criminal trial.

3. Delayed Deposit Does Not Extinguish Criminal Liability

Subsequent deposit of TDS along with interest does not wipe out the offence under Section 276B.

4. High Court Cannot Conduct Pre-Trial Adjudication

The writ court cannot enter into factual adjudication regarding defenses available to the accused before trial.

5. Refund Claims Cannot Justify TDS Default

The Court held that alleged pending refunds cannot justify withholding government dues collected through TDS.

Court Order

The Delhi High Court refused to quash the sanction for prosecution and disposed of the writ petition.

The Court granted liberty to the petitioners:

  • to raise all defenses during criminal trial,
  • to challenge summoning orders under appropriate criminal remedies,
  • and to separately pursue refund claims by filing appropriate proceedings.

Important Clarifications

  • Sanction under Section 279 is not an adjudication of guilt.
  • Section 278AA defense remains open for trial.
  • TDS is treated as trust money belonging to the Government.
  • Financial distress does not automatically amount to reasonable cause.
  • Payment of interest cannot substitute statutory compliance.

 Sections Involved

  • Section 200(1), Income Tax Act, 1961 – Duty to deposit TDS within prescribed time
  • Section 276B, Income Tax Act, 1961 – Failure to pay tax deducted at source
  • Section 278B, Income Tax Act, 1961 – Offences by companies
  • Section 278AA, Income Tax Act, 1961 – Reasonable cause as defense
  • Section 279(1), Income Tax Act, 1961 – Sanction for prosecution
  • Section 397 CrPC – Revision against summoning order
  • Section 401 CrPC – Revisional powers
  • Section 482 CrPC – Inherent powers of High Court

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:1746-DB/SKN12032018CW39642017.pdf

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