PROCEDURE GOVERNING INCOME TAX PROSECUTION PROCEEDINGS

The procedure governing prosecution proceedings under the Income-tax Act, 1961 can be divided into two parts i.e.

(1)   Procedure to be followed by the Department while launching prosecution proceedings, and

(2)   The procedure before the Court.

(1)  Procedure followed by the department while lunching the prosecution

Though there is no specific procedure provided under the Act or Rules, the Department has framed their own guidelines and instructions for initiating prosecution proceedings. The said instructions are referred in the following cases while quashing the prosecutions under Section 271C(1) read with Sections 277 and 276CC of the Act.

The Income-tax department’s manual deals with various guidelines to be followed before launching prosecution proceedings and the broad parameters as laid down are as follows:

STEP - 1. The Assessing Officer on the basis of the records of the assessee sends the proposal to the respective Commissioner.

STEP -2. The Commissioner issues the show cause notice to the assessees.

STEP - 3. If Commissioner is satisfied with the reply of the assessee he may not grant sanction to the Assessing Officer to file complaint before the Court. The commissioner has to apply his mind to the reply and material produce before him.

Opportunity of being heard before giving sanction under section 279 of the Act
When an Assessing Officer takes a decision to initiate proceedings or a Principal Commissioner or Commissioner grants sanction for such proceedings. He has to apply his mind and on the basis of the circumstances and the facts on record, he has to come to the conclusion whether prosecution is necessary and advisable in a particulars case or not. The said Act does not provide that the Commissioner has to necessarily afford the assessee an opportunity to be heard before deciding to initiate proceedings. The absence of an opportunity to be heard will not make the order of sanction void or illegal as held in CIT v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC).

Income-tax Act does not provide that the Commissioner has to necessarily afford of  an opportunity hearing before deciding to initiate proceedings. – [UOI v Banwari Lal Agarwal (1998) 101 Taxman 508 (SC)]

However, it is being observed that the commissioners are issuing a show cause notice before sanctioning the Sanction for prosecution based on the internal manual.

Sanction for launching of prosecution

Under Section 279, the competent authority to grant sanction for prosecution is Principal Commissioner or Commissioner or Commissioner (Appeals), Principal Chief Commissioner or Chief Commissioner or the Principal Director General or Director General. Prosecution, without a requisite sanction shall make the entire proceedings void ab initio.

(i)            Sanction is a weapon to ensure discouragement of frivolous and vexatious prosecutions and is safe guard for the innocent but not  ashield  for guilty.

(ii)           The order of sanction must ex facie disclose that the sanction authority had considered the evidence and material place before it.

(iii)         The sanctioning authority has to apply its own independent mind.

(iv)          Discretion should be shown to have not been affected by any extraneous consideration.

            If the above test is not satisfied sanction  may be held to be bad in law . the ratio of the decision referred above is equally applicable  when sanction is given under section 279 of the Income -tax Act.  – [Mansukhlal Vithaldas Chauhan v. State of Gujarat (1977) 7 SCC 622 : AIR 1997 SC 3400]

Sanction must be in respect of each of the offences in respect of which the accused is to be prosecuted

The sanction must be in respect of each of the offences in respect of which the accused is to be prosecuted. Where the Commissioner has held that an assessee had made a return containing false entries and gave sanction for prosecution for an offence under Section 277, and the accused was found guilty of an offence under Section 276CC, and not under Section 277, it was held in revision that an offence under Section 276CC was of a different nature from that under Section 277, and as there was no sanction for prosecution for an offence under Section 276CC, the conviction was illegal – [Champalal Girdharlal v. Emperior (1933) 1 ITR 384 (Nag)(HC)]

Prosecution be initiation during the pendency and before the completion of assessment or during the pendency of Appeal before the appellate authority

The answer to this question is noticeable from the decision of Apex Court in the case of P. Jayappan v. CIT (1984) 149 ITR 696 (SC). The Apex Court held that the assessment proceedings and criminal proceedings are independent proceedings. They can simultaneously take place and one proceeding need not wait for the other proceeding. This is because the income tax assessment proceedings are civil proceedings in nature and conducted by Income Tax Authority. For the offences committed, once the proceedings are initiated, they are tried before a competent court. Strict rules of evidence as per the Evidence Act need not be followed by the income tax authorities. The Evidence Act has strictly to be implemented in the criminal proceedings.

In Nemi Chand Garg v. ITO, it was observed by this Court that if the appeal is pending before the Tribunal further proceedings should not be taken during the pendency of that appeal. – [Nemi Chand Garg v. ITO (1986) 161 ITR 500 (Raj)]

Pendency of appeal before CIT(A) – Stay – Alleged bogus purchases – During pendency of stay the criminal prosecution should not be launched and, if it has been already launched, the same shall not be proceeded - Prosecution proceedings were  stayed as the appeal was pending before the CIT(A)

Prosecution - Initiation of criminal proceedings against assessee during pendency of appeal and stay application before CIT(A) Validity of - Where assessee challenged the initiation of criminal proceedings against it while appeal and stay application was pending before CIT(A), keeping the wider question open, Court granted ad interim stay till the decision of CIT(A) was received. - Assessee challenged the show cause notice issued for launching the prosecution under section 276C(1) of the Income Tax Act, 1961 contending the appeal and stay application against the assessment order was pending before CIT(A) and no hearing was provided to assessee before issuance of the said show cause notice. Held: In the interest of justice keeping the larger and wider question open, the Court directed the assessee to make a stay application to Assessing Officer to seek a stay of the order passed, then, during the pendency of such application, the criminal prosecution should not be launched and, if it was already launched, the same shall not proceed. Thus, the ad interim stay granted by the Court would continue till the disposal of the application for stay by the CIT(A). – [Ramchandran Ananthan Pothi v. UOI & Ors. (2018) TaxPub(DT) 5900 (Bom)]

The decision of Patna High Court in the case of Md. Moinul Haque & Ors. v. State of Bihar & Ors., where the petition under section 482 CrPC 1973, was allowed and the prosecution was quashed observing that no useful purpose would be served in remitting the case to the trial Court itself for consideration since the penalty imposed for concealment of income has been set aside by the CIT(A), and the basis for a prosecution under sectionss 276C  and 277 of the Income-tax Act, 1961 no longer exists. – [Md. Moinul Haque & Ors. v. State of Bihar & Ors. (1997) 224 ITR 239 (Pat)

Finding of the Appellate Tribunal

The apex Court in the case of G. L. Didwania & Anr. v. ITO, wherein it was observed that if the finding of false statement in respect of income have been set-aside by the Tribunal, the criminal proceedings could no longer be sustained. This decision was given following the judgment of Uttam Chand v. ITO (1982) 133 ITR 909 (SC). – [G. L. Didwania & Anr. v. ITO (1997) 224 ITR 687 (SC)]

It was held that while dealing with the prosecution proceedings under section 277, the findings given by the Income -tax Appellate Tribunal are binding on the criminal courts. This is because, the Income -tax Appellate Tribunal is the final fact finding authority under the Income- tax Act 1961.The findings of Income Tax Appellate Tribunal are binding on the Principal Commissioner of Income -tax or The Commissioner of Income -tax as the case may be. Once it is brought to the notice of the trial court that the Income Tax Appellate Tribunal held, that there is no prima facie case against the assessee for concealment of income, the finding has to be respected by the trial court and the trial court has to discharge or acquit the accused. – [Uttam Chand v. ITO (1992) 133 ITR 909 (SC)]

Existence of other mode of recovery cannot act as a bar to the initiation of prosecution proceedings

In a case relating to the mode of recovery of tax demand where the prosecution was initiated under Section276C of Income -tax Act 1961, for non-payment of admitted tax and interest thereon, the A.P. & T.  High Court in the decision of Kalluri Krishna Pushkar v. DCIT held that the existence of other mode of recovery cannot act as a bar to the initiation of prosecution proceedings. – [Kalluri Krishna Pushkar v. DCIT (2016) 236 Taxman 277 (AP&T)]

 (2) Procedure before Court [see Trial Chart]

On the basis of complaint filed before a court, the court sends summons to the accused along with the copy of complaint, to attend before the court on a particular date. The complaint being criminal complaint, the accused must be present before the court, unless the court gives a specific exemption.

If the accused is not present on such particular date, the court can issue a warrant against the accused. If the warrant is issued, unless the accused secures bail, he may be arrested and produced before the court. In normal Course Complainant and his witnesses are required to be examined on oath by the Magistrate before the accused can be summoned under section 200 of Cr.Pc

But as the Complainant in the cases under Income Tax Act are “Public Servants” the Magistrate need not examine him on oath before summoning the accused. If the opinion of the magistrate there is sufficient ground for proceeding:

v  If it is a “Summons Cases” – Issue summons

v  If it is a “Warrant Cases” – Issue summons or Warrants

v  Cases instituted otherwise than on police report. Relevant sections 244 to 250 of Cr.P.C.

Step – 1 : Case is instituted under section 190 of Code of Criminal Procedure, 1973

Under Section  190  of the Code, it is the application of judicial   mind   to   the   averments   in   the   complaint   that   constitutes cognizance. At this stage, the Magistrate has to be satisfied whether there is sufficient ground for proceedings and not whether there is sufficient ground for conviction. Whether the evidence is adequate for supporting the conviction can be determined only at the trial and not at the stage of enquiry.  If there is sufficient ground for proceeding   then   the   Magistrate   is   empowered   for   issuance   of process Under Section 204 of the Code.

Text of Section 190 of The Code of Criminal Procedure, 1973

190. COGNIZANCE OF OFFENCES BY MAGISTRATES.

(1)   Subject to the provisions of this Chapter, any Magistrate of the first class, and any Magistrate of the second class specially empowered in this behalf under sub- section (2), may take cognizance of any offence-

(a) upon receiving a complaint of facts which constitute such offence;

(b) upon a police report of such facts;

(c) upon information received from any person other than a police officer, or upon his own knowledge, that such offence has been committed.

(2) The Chief Judicial Magistrate may empower any Magistrate of the second class to take cognizance under sub- section (1) of such offences as are within his competence to inquire into or try.

STEP – 2 : Summons is issued under section 204 of The Code of Criminal Procedure, 1973

Text of Section 204 of The Code of Criminal Procedure, 1973

204. ISSUE OF PROCESS.

(1) If in the opinion of a Magistrate taking cognizance of an offence there is sufficient ground for proceeding, and the case appears to be-

(a) a summons- case, he shall issue his summons for the attendance of the accused, or

(b) a warrant- case, he may issue a warrant, or, if he thinks fit, a summons, for causing the accused to be brought or to appear at a certain time before such Magistrate or (if he has no jurisdiction himself) some other Magistrate having jurisdiction.

(2) No summons or warrant shall be issued against the accused under sub- section (1) until a list of the prosecution witnesses has been filed.

(3) In a proceeding instituted upon a complaint made in writing every summons or warrant issued under sub- section (1) shall be accompanied by a copy of such complaint.

(4) When by any law for the time being in force any process- fees or other fees are payable, no process shall be issued until the fees are paid and, if such fees are not paid within a reasonable time, the Magistrate may dismiss the complaint.

(5) Nothing in this section shall be deemed to affect the provisions of section 87.

KEY NOTE

Summons can be challenged in revision before the sessions court/under criminal application u/s 482 of CR.P.C. accused appears and file for bail

STEP – 3 : The accused can file discharge application under section 245.

v  Arguments on discharge application. if discharged the matter is over, if not discharged, The prosecution will lead evidence of the complainant.

v  The evidence is recorded by the magistrate.

v  Opportunity is granted to the accused to cross examine the complainant or not to cross examination at this stage also discharge can be filed by the accused under section 245 of CR.P.C.

Text of Section 245 of The Code of Criminal Procedure, 1973

245. WHEN ACCUSED SHALL BE DISCHARGED.

(1) If, upon taking all the evidence referred to in section 244, the Magistrate considers, for reasons to be recorded, that no case against the accused has been made out which, if unrebutted, would warrant his conviction, the Magistrate shall discharge him.

(2) Nothing in this section shall be deemed to prevent a Magistrate from discharging the accused at any previous stage of the case if, for reasons to be recorded by such Magistrate, he considers the charge to be groundless.

STEP – 4  : Charges are framed Under section 246(1) of The Code of Criminal Procedure, 1973

v  Again evidence is lead by the prosecution of the complainant and other witnesses.

v  Cross examination of the complainant and the other witnesses by the accused advocate. (under section  246(4) Cr.P.C.

Text of Section 246 of The Code of Criminal Procedure, 1973

246. PROCEDURE WHERE ACCUSED IS NOT DISCHARGED.

(1) If, when such evidence has been taken, or at any previous stage of the case, the Magistrate is of opinion that there is ground for presuming that the accused has committed an offence triable under this Chapter, which such Magistrate is competent to try and which, in his opinion, could be adequately punished by him, he shall frame in writing a charge against the accused.

(2) The charge shall then be read and explained to the accused, and he shall be asked whether he pleads guilty or has any defence to make.

(3) If the accused pleads guilty, the Magistrate shall record the plea, and may, in his discretion, convict him thereon.

(4) If the accused refuses to plead, or does not plead or claims to be tried or if the accused is not convicted under sub- section (3), he shall be required to state, at the commencement of the next hearing of the case, or, if the Magistrate for reasons to be recorded in writing so thinks fit, forthwith, whether he wishes to cross- examine any, and, if so, which, of the witnesses for the prosecution whose evidence has been taken.

(5) If he says he does so wish, the witnesses named by him shall be recalled and, after cross- examination and re- examination (if any), they shall be discharged.

(6) The evidence of any remaining witnesses for the prosecution shall next be taken, and after cross- examination and re- examination (if any), they shall also be discharged.

STEP – 5 : Accused statement is recorded under section 313.

v  Opportunity is given to the accused to examine any witnesses, defence witness (under section 247, provisions of section 243 if applied here).

v  The accused enters his defence and produces his evidence, can file written statement too which is taken on record.

v  Accused can call for his defence witnesses too or for examination or cross examination of witnesses. Arguments by both the parties. Judgement.

Text of Section 313 of The Code of Criminal Procedure, 1973

313. POWER TO EXAMINE THE ACCUSED.

(1) In every inquiry or trial, for the purpose of enabling the accused personally to explain any circumstances appearing in the evidence against him, the Court-

(a) may at any stage, without previously warning the accused, put such questions to him as the Court considers necessary;

(b) shall, after the witnesses for the prosecution have been examined and before he is called on for his defence, question him generally on the case: Provided that in a summons- case, where the Court has dispensed with the personal attendance of the accused, it may also dispense with his examination under clause (b).

(2) No oath shall be administered to the accused when he is examined under sub- section (1).

(3) The accused shall not render himself liable to punishment by refusing to answer such questions, or by giving false answers to them.

(4) The answers given by the accused may be taken into consideration in such inquiry or trial, and put in evidence for or against him in any other inquiry into, or trial for, any other offence which such answers may tend to show he has committed.

STEP – 6 : If the trial results in a conviction, then an appeal to the court of session will lie under Section  374(3) of the Criminal Procedure Code

The said appeal will be heard under Section 381 of the CrPC, either by the a Sessions Judge or by an Additional Sessions Judge. The petition of appeal is to be presented in the form prescribed accompanied by a copy of the Judgment appealed against within a period of 30 days from the date of order, as per the Limitation Act.