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Can Revenue Launch Prosecution Without Waiting For The Outcome Of Appellate Proceedings?

The author expresses concern over the proposal of the Income-tax department to launch prosecution proceedings against taxpayers without waiting for the outcome of the appeals filed by them. He argues that this proposal is ill-advised and will result in grave miscarriage of justice

In recent days, some assessees have received the show cause notices for launching of the prosecution as soon as the penalty is confirmed by the Tribunal.

With respect, mere confirmation of penalty by the Tribunal cannot be a ground to initiate prosecution proceedings. Assessee may otherwise be filing returns regularly and paying the taxes and only in one year, unable to substantiate the claim of deduction. Can such an assessee be considered as tax evader?

Many times penalties are confirmed because the facts are not properly presented before the tax authorities and the appellate authorities.

The Economic Times on 8-6-2015 carried a news reporting that “The Apex policy making body of the I-T department, in a strategy paper for recent conference of top tax officials, told tax sleuths that the “need of the hour” is to effectively launch prosecution cases in wilful evasion cases at the earliest even “without” waiting for the outcome of any other appellate processes.

With respect, it may not be appropriate for the revenue to launch prosecution even without waiting for the outcome of appellate proceedings. Under the Income-tax Act, the Income Tax Appellate Tribunal is final fact finding authority. In majority of the cases, though the quantum order making additions may be confirmed, but still they are not fit cases for levy of penalty. Assuming the penalty is confirmed by the Tribunal, the assessee may be filing an appeal to the High Court which may admit the appeal. High Court admits the appeal only when there is a substantial question of law is involved. When a substantial question of law is involved qua the penalty, such a case may not be fit for launching of prosecution. In K. C. Builders & Anr. v. ACIT [2004] 265 ITR 562 (SC) (573), the Apex Court held that once the penalties are cancelled on the ground that there is no concealment, quashing of prosecution under section 276C is automatic.

It may be worth noting that the Revenue has launched prosecution in some matters more than 20 years back. But, still the matters have not been taken up for final hearing. If this is the state of affairs, launching of prosecution will not serve as a deterrent and it will be a waste of taxpayers’ money.

When a show-cause notice for prosecution is issued against a company, the directors are also made party in the prosecution proceedings. In an appropriate case it may be desirable for the company to opt for compounding of the offences, so that the precious time of directors can be saved from attending to the Court proceedings for decades. CBDT has prescribed the guidelines for compounding of offences under Direct Tax Laws {Guidelines dated 23-12-2014 [2015] 371 ITR 7 (St.)}. However, the compounding fee fixed by the CBDT is very exorbitant. It may be desirable to fix a reasonable amount of compounding fee so that more assessees can opt for compounding in order to avoid the prolonged litigation.

In an appropriate case, it may be desirable for an assessee to approach the Commissioner for waiver of penalty under section 273A. Even if the penalty is waived off partly, the Revenue is debarred from launching prosecution under section 279 of the Income-tax Act.

It may even be desirable for assessees to approach the Settlement Commission so as to obtain immunity from penalty as well as prosecution.

Having said that, as tax practitioners, one must caution assessees against very adventurous tax planning. We do hope that the tax administration does not initiate the prosecution against honest taxpayers who may be victims of penalty due to various technical reasons.

Taxpayers’ education and better tax compliance can save the assessee from penalty and prosecution.

Readers may send their valuable suggestions on the issues of prosecution in Direct Tax matters and compounding of offences which may help the Federation to make representation to the Government.

Jai hind

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Dr. K. Shivaram

Editor-in-Chief, AIFTP Journal

Reproduced with permission from the AIFTP Journal

17 comments on “Can Revenue Launch Prosecution Without Waiting For The Outcome Of Appellate Proceedings?
  1. It is a settled principle, that never there can be concentration of power in any authority that need be distributed is the basic tenet of any prudent constitution any where in the world, after observing so many centuries past how arbitrary power worked.

    In England very Nobles took away from King John by Magna Carta in 1215; that way chandra gupta mauria was put on throne by dethroning mahapadmanandin in Magadha, Kautilya by inviting Alexander the Great to discipline, as none locally capable as every chieftain indulged in arbitrary power , such kinds you can find today in India in states and at center, so discipline them, is vital.

    NJAC Act wanted to get judicial power to be in the government, it is better riddance by the Apex court rightly quashed the other day.

    Now i see parliamentary committee wants to revive the NJAC constitutional amendment that should be be defeated by vigilant citizens.

    Parliament got 16 states support out of 30 states, obviously the parliament failed to convince all states, no point in talking percentages like more than 50 % states supported the constitutional amendment, is of no avail.

    Actually there should be referendum on this kind of issue , No point to say parliament is supreme, for it is a creature of the constitution like any other constitutional authority nothing more and nothing less. Discipline the parliament that is the responsibility of the citizens of india.

    Classical Economists like Adam Smith , John Stuart Mill, Alfred Marshall, John Maynard Keynes, Milton Ricardo, Friedman, Ludwig von Mises, Murray Rothbard and Friedrich von Hayek advocated enormous controls on the banks and abhored concentration of power in any government.

    They never believed ‘too big to fail’ to be bailed out by tax payers money .

    Too big to fail idea is leading corporate world work out for M&A and LBOs…too bad ideas supported by politics, people need to ensure to defeat such ideas by all means.

    Mill believed, clearly, that those who ‘overtraded and got caught ought to suffer the consequences, and the more quickly better to fall”.

    He argued, ‘It must be admitted’, the increased bank accommodation during speculative bubbles, ‘enables the speculative prices to be kept up for some time after they would otherwise have collapsed’; and therefore, prolongs and increases the drain of the precious metals for exportation, which is leading of this stage in the progress of commercial crisis’.

    He added, ‘the most incredible instances of reckless and fraudulent mismanagement'(on the part of England’s corporate banks) ‘ have shown only too clearly that…joint stock principle applied to banking is not adequate safeguard it was so confidently supposed to be’.

    He concluded, ‘then, that if banks were to be allowed to issue ‘Notes’,’some kind of special security in favor of the holders of Notes’ should be exacted as an imperative condition’.

    He was most probably for his stirring defense of human freedom in his 1859 short book ‘On Liberty’ advocated Banking Regulation’.

    He added, ‘the only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it.’

    He clearly advocated, ‘the society has the right to restrict dangerous activities’ – banking –

    He added, his desire to regulate financial institutions is not surprising given that he was a close follower of Adam Smith, who,held very similar views of banking and regulation.

    John Maynard Keynes held during 1930s depression, bailout is a tool through monetary tool as a fiscal and or monetary (not bail out of individual firm(s)) through bail out of ‘systemic and large scale’, during economic strangle hold like world war or depression, by deficit financing.

    Keynes had a basic distrust of the unfettered working of the market, especially the stock market. He said, ‘When the capital development of the country becomes a by-product of the casino’. he warned colorfully, ‘the job is likely to be ill-done’.

    Marshall advocated, ‘ expansion ((of) in 19th century) of the discretionary power of a bank’s directors in accord with ‘their knowledge of special circumstances of each case’, subject, rather than help extend the troubled institutions after an asset bubble had burst, he wanted, to keep all institutions -financial or otherwise, sound by preventing periods of ‘speculative fever’ in the first place, ‘I hold very strongly, he told, the Gold and Silver committee,that by far greatest evil we have to deal with is the occasional pressure in the money market.’ Similarly he told the members of the Indian currency committee’, in 1899, a fall of prices (of bonds and other property of the kind is seldom or never the product of natural causes.’

    It should be obvious, citizens obviously need to reign in any unruly horses’ is the summum bonum.

    None can cow down citizens that consists very very ordinary man on the street .

    the author of the article nicely pleaded, i am responding to.

    people need to assert their rights, not to be cowed down by any governmental irrational forces, is my strong view.

    if i have offended, please pardon me sirs, i am a staunch believer of a democracy it is by people for the people and to the people ‘ the whole nation of people only need to be protected and for which purposes only we give powers to to some groups but if they fail reign in the bridles in your hands, my dear people.

  2. if the revenue needs fast collection, better it is penalty section better be severed once and for all, after all penalty normally is applicable under law of crimes, certainly not in civil issues, tax payers if submitted to penalty naturally why tax payers need to pay taxes at all, let the department do its own investigation who shd pay what tax on its own .

    you cannot have cake and eat it too?

  3. Samir Bhuptani says:

    There is no provision under Income-tax Act, 1961 which restricts revenue from launching prosecution till appellate proceeding is disposed.

    There is need to amend the law so that unless penalty proceedings are finalised, by appellate authority, no prosecution should be launched, since it would be efforts and proceedings in vein. There is no need of haste in prosecuting the assessee in default, albeit there can be haste for recovery of demand. If the assessee is sent to jail, department would hardly be able to collect the demand even.

  4. Dheeraj says:

    Action should be taken whenever someone complain …how department came to know when someone compalain

  5. LAW OR AN ACT OR SECTION IS NOT WHOLESOME UNLESS DULY TESTED BY THE LAW COURTS BY DUE PROCESS ESTABLISHED BY LAW MEANS CONSTITUTION OF INDIA, NOT BY SOME 5YR TERM PARLIAMENT OR LEGISLATURE IS THE PURPORT.

    LAW ITSELF MIGHT BE DEFECTIVE AS NO MAN OR NO LEGISLATOR OR LEGISLATIVE DRAFTSMAN IS A GREAT INFALLIBLE JUSTICE, SO WE HAVE TO TEST EVERY ASPECT OF ANY LEGISLATION IS SUBJECT TO COURT REVIEW THAT WAY WAS BORN THE JUDICIAL REVIEW… WHEN SO EVERY DECISION IS SUBJECT TO APPEAL TILL APPEAL OPPORTUNITY IS EXHAUSTED.

  6. Ritu Verma says:

    This is totally vulnerable.How can department take actions without the result of appeals submitted by people.There should be proper policy and flexibility in system.People should raise their voices against this.

  7. Rajesh Bhardwaj says:

    findia.com.
    ”Prosecution of tax evaders habitual or otherwise requires diligence to prepare the case. Or the department will face the fiasco as in Hasan Ali case where the court proceedings as per reports are stayed due to ” non availability” of original records required for prosecution. I recall that when a certain Darshan Singh of Moranwali,Punjab was prosecuted by us in late 1970s it was the total support from our IAC Shri AS Saksena in preparing the case that prosecution could be launched and Darshan Singh could be convicted by court. Subsequently however by 1990s and early 2k when my TROs arrested tax defaulters in Patiala and Indore, I had to face heat. The initiative by CBDT is good but it should not degenerate into a statistical exercise. Only big cases such as of Hasan Ali etc should be taken up for prosecution/ arrest by TRO and department should not waste it’s limited resources on petty cases which will bring complaints of harassment or corruption from public. One big case successfully prosecuted/ tax defaulter arrested by TRO would give ample publicity to intent of the department and message will go to other tax evaders to pay taxes.” no doubt one can launch prosecution and get a person convicted even before a single assessment had been framed as in case of Darshan Singh quoted above but for that department should have a cast iron case lest it backfire on department itself. In most cases it is advisable to await outcome of proceedings before Hon. ITAT which is final fact finding authority as prosecution involves judiciary also and department should not lose face by launching half- baked prosecution cases.

  8. CH.G.MURALI KRISHNA MURTHY says:

    The action of the department in prosecuting the assessees without awaiting the outcome of the judicial authority is highly deprecating. It infringes the fundamental rights which is impermissible in law.

  9. K.Srinivasan says:

    Dept to boost statistics are threatening prosecution
    even before asst becomes final relying on some old cases.

  10. S PRAKASH says:

    Yes the assessing officers are showing extraordinary enthusiasm to levy penalties and also to file prosecution cases even though the appeals are pending before the Commissioner of Appeals.The CIT ( Appeals) will not post the case for hearing for years together.The CBDT should activate the CIT (Appeals) or should remove this forum under IT Act.In spite of number of court decisions the department is officers are been convinced The department is trying to set a bad judicial precedents under income tax law, which is bad both for the department and assesses.

  11. PERMIL GOEL ADVOCATE says:

    There is no uniform criterion for initiating prosecution proceedings. In no case it should be started before ITAT decision, as it is last fact finding body.Moreover prosecution proceedings should only be initiated only in cases, which are clear cases of deliberate concealment & not in cases where concealment/ mistake is bonafide

  12. Nem Singh says:

    I am agree with the views of K. Vasantji that decision to launch or not to launch is not judiciously taken by the concerned jurisdictional Officer. In one of my case the penalty was deleted by CIT(A). Department in ITAT and without any information of hearing of the appeal ITAT decided exparte against the assessee (sustained the order of levied penalty) on a first hearing. I was Surprised when I was appear in another penalty appeal before the court on the same facts as involved in earlier but this appeal was from my side and the department argued as this is covered matter and relied upon the exparte order decided earlier in my own client. After obtaining certified copy of the order filed MA but in the mean time the department launched prosecution despite my request (written submission in brief on facts before the CIT) till the disposal of MA petition. This was case of harassment nothing more because MA was accepted and re called exparte order and dismissed the department appeal. There is no fairness in prosecution/penalty proceedings the department official misused their discretionary powers.

  13. S. K. Mutsaddi says:

    Yes, penalties in respect of quantum additions, which are in appeal before the CIT(A), are being hastily levied without waiting for quantum decision. This is violative of the principles of section 275 of the Income Tax Act and decision of the Bombay High Court rendered in the case of CIT v. Wander Pvt. Ltd. – 358 ITR 408. This unfortunate trend seems to have been followed by the Department, mostly in the case of HSBC foreign account related cases. One of the other leading decisions of the Supreme Court is of CIT v. Bhupen Champaklal Dalal – 248 ITR 830, wherein, while affirming Bombay High Court decision, the Supreme Court held when ultimately result of proceeding before appellate authority had definite bearing on cases against respondent, High Court was justified in granting interim stay. In fact this line of launching prosecution seems to be followed because of a CBDT Instruction dtd.28.01.2011 in F No.: 285/90/2008 – ITINV, wherein it has been clarified by the CBDT that all cases fulfilling ingredients of section 276C(1) may be processed for launching prosecution without waiting for proceedings pending in appeal. In a decision of 25.03.2015, the Delhi ITAT in Jindal Steel & Power Ltd. 117 DTR 340 has held that Tribunal has powers to stay proceedings initiated by the Assessing Officer (AO) by issuing show cause notice for launching prosecution u/s.276(1) in view of the proviso to section 254(2A).

  14. A balanced approach is desired. When I started my practice in 1984, I was told by my seniors that have you ever heard about prosecution in Income-tax, when I told them about prosecution in default for TDS.
    Now, prosecution are being launched even for sundry defaults. In the present e-governance era, efforts shall be made to filter the cases where in fact prosecution is desired to be launched and not as a matter of routine which becomes a threatening whip in the hands of unscrupulous officials.

  15. cannot launch prosecution, if done is a questionable action under art 14 under 226 writ

    • CA S. K. Mutsaddi says:

      Yes, penalties in respect of quantum additions, which are in appeal before the CIT(A), are being hastily levied without waiting for quantum decision. This is violative of the principles of section 275 of the Income Tax Act and decision of the Bombay High Court rendered in the case of CIT v. Wander Pvt. Ltd. – 358 ITR 408. This unfortunate trend seems to have been followed by the Department, mostly in the case of HSBC foreign account related cases. One of the other leading decisions of the Supreme Court is of CIT v. Bhupen Champaklal Dalal – 248 ITR 830, wherein, while affirming Bombay High Court decision, the Supreme Court held when ultimately result of proceeding before appellate authority had definite bearing on cases against respondent, High Court was justified in granting interim stay. In fact this line of launching prosecution seems to be followed because of a CBDT Instruction dtd.28.01.2011 in F No.: 285/90/2008 – ITINV, wherein it has been clarified by the CBDT that all cases fulfilling ingredients of section 276C(1) may be processed for launching prosecution without waiting for proceedings pending in appeal. In a decision of 25.03.2015, the Delhi ITAT in Jindal Steel & Power Ltd. 117 DTR 340 has held that Tribunal has powers to stay proceedings initiated by the Assessing Officer (AO) by issuing show cause notice for launching prosecution u/s.276(1) in view of the proviso to section 254(2A).

  16. K.VASANTKUMAR says:

    It is unfortunate that the department is launching prosecution in some cases even without waiting for decision by CIT(A). But what I have seen is that the decision to launch or not to launch is not judiciously taken. It is at the merch of the officer who send proposal for launching of prosecution. There is no reaview by higher authorities or monitoring cases where penalty is confirmed by Tribunal. There are cases where penalty is confirmed by Tribunal but no prosecution is launched. this is more serious than launching of prosecution without waiting for decision by appellate authorities. Therefore it is better to take it up with department to ensure fairness in selecting cases for prosecution instead of random basis or as per the whims and fancies of the Assessing Officers.

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