Application of 276CC to Willful and Deliberate Failure to File Income-tax Returns
Issue
In past one year, many assesses have received notices from Income-tax Department (‘Department’) for non-filing of tax returns for earlier tax years such as Assessment Year (‘AY’) 2009-10, 2010-11 etc. Since such notices are often seen as fishing in nature and are not issued under any particular section of the Income-tax Act, 1961 (‘Act’), our response to the same remains vague at best and contemptuous at worst.
Another issue, though a side one is the perception among tax payers that the small tax-payers and businessmen are harassed by the Income-tax officials and the rich and powerful get away.
It is in this regard, it is important for us to appreciate the powers of the Department in dealing with cases of willful and deliberate default in filing income-tax return.
While the Act does provide for adequate safeguards for the genuine cases of defaults through providing additional time before penalty provisions become operational such as proviso to section 276cc providing time till the end of year to file tax returns and adequate opportunities for assesses to present/argue their case before any order of levying penalty is passed, it also clamps down hard on the willful defaulters.
While Section 271F provides for a meager penalty of Rs 5,000 for not filing the return before the end of the relevant assessment year, Section 276CC provides for very strict penalties by way of rigorous punishment in jail.
It in envisage two situations:
1. Cases where the amount of alleged tax evasion is less than Rs 1 lakh; and
2. Cases where the amount of alleged tax evasion is more than Rs 1 lakh
In first type of cases, the minimum penalty is three months of rigorous imprisonment and a maximum of three years.
In the second type of cases, the minimum penalty is six months of rigorous imprisonment and a maximum of seven years.
The judgment in case of Sasikala Enterprises set aside our lack of respect of the law as well as our misplaced belief that laws are different for rich and poor – powerful and common man!
The Instant Case
In Sasi Enterprises Vs Assistant Commissioner of Income-tax, Supreme Court while deciding on the applicability of Section 276CC, ruled that while the section does provide some relief for the genuine cases, willful and deliberate failure, in absence of sufficient reason, to file return shall attract provisions of 276CC.
The background
Sasi Enterprises didn’t file income-tax return for AY 1991-92 and 1992-93. The partners, J Jayalalitha and N Sasikala didn’t file tax returns for AY 1993-94. A survey under Section 133A was carried against the Firm out and subsequently notice under Section 148 was issued for the years for which the Firm didn’t file the tax returns. For AY 1991-92, a notice under Section 142(1) was issued too. No return was filed in response to any of these notices. In absence of any return filed, the AO decided to assess the income under Section 144 (best judgment).
Subsequent to the assessment, the AO issued show-cause notice for initiation of penalty under Section 276CC. In absence of any concrete reasoning from the assesses, the AO initated prosecution proceedings under Section 276CC and filed complaint with the Chief Metropolitan Magistrate. The legal battle continued for years and finally Karnataka High Court gave nod for continuation of the criminal proceedings. Giving a body blow to the appellants in the last para of the judgment – “The appeals, therefore, lack merits and the same are dismissed and the Criminal Court is directed to complete the trial within four months from the date of receipt of this Judgment.”
But before that it also expounded on the following issue (leaving aside trite issues like liability to file return under Section 139(1)):
Effect of best judgment assessment under Section 144 on the Liability to file return under Section 139(1);
Supreme Court held “declaration or statement made in the individual returns by partners that the accounts of the firm are not finalized, hence no return has been filed by the firm, will not absolve the firm in filing the ‘statutory return under section 139(1) of the Act. The firm is independently required to file the return and merely because there has been a best judgment assessment under Section 144 would not nullify the liability of the firm to file the return as per Section 139(1) of the Act…..”
Legality of invocation of Section 276CC in case of non-compliance of Section 139(1), 142 and 148;
Supreme Court stated that “the benefit of proviso (to 276CC) is available only to voluntary filing of return as required under Section 139(1) of the Act. In other words, the proviso would not apply after detection of the failure to file the return and after a notice under Section 142(1)(i) or 148 of the Act is issued calling for filing of the return of income. Proviso, therefore, envisages the filing of even belated return before the detection or discovery of the failure and issuance of notices under Section 142 or 148 of the Act.”
Is non-attaining of finality of assessment proceedings is a bar in initiating prosecution under Section 276CC?
Responding to this question, the Court held “Section 276CC contemplates that an offence is committed on the non-filing of the return and it is totally unrelated to the pendency of assessment proceedings except for second part of the offence for determination of the sentence of the offence, the department may resort to best judgment assessment or otherwise to past years to determine the extent of the breach………. the contention of the learned senior counsel for the appellant that no prosecution could be initiated till the culmination of assessment proceedings, especially in a case where the appellant had not filed the return as per Section 139(1) of the Act or following the notices issued under Section 142 or Section 148 does not arise.”
Who needs to prove that the default was not willful?
The Court held, “Court in a prosecution of offence, like Section 276CC has to presume the existence of mens rea and it is for the accused to prove the contrary and that too beyond reasonable doubt. Resultantly, the appellants have to prove the circumstances which prevented them from filing the returns as per Section 139(1) or in response to notices under Sections 142 and 148 of the Act.”
Way Forward
The above judgment should act as a reminder to each and every assessee – rich and poor alike – that it is important that we work within the regulatory framework as prescribed by the laws enacted by the Parliament. A similar analogy can be made out of Vodafone judgments. However, Vodafone atleast had some grey areas in tax laws that were open for legal interpretation. In Sasikala enterprises, the assesses – J Jayalalitha, the current Chief Minister of Tamil Nadu and her longtime aide, Sasikala, despite repeated notices issued by the tax department, preferred not to comply with any such notices, thereby, forcing the AO to initiate criminal proceedings under Section 276CC of the Act.
It is advisable that we ensure that our clients don’t deliberately delay the Income-tax compliances. One the same subject, it is important to take cognizance of changes in other commercial laws, wherein slowly but steadily moving towards a stricter punishment norms including jail terms – recent arrests under Service-tax laws should act no less a constant reminder.
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