Facts: The Assessee is a partnership firm engaged in the business of construction and sale of flats. The Assessee filed revised Returns of Income (ROI) as per the approved valuer’s report for AY 1983-84 to 1986-87 on 4.11.1987 as the original ROIs were found to be defective with regard to cost of construction. The revised ROI were accepted by the Department and assessments were completed. The assessing authority treated the difference between the income as per original ROI and revised ROI as concealed income. The ACIT levied penalties under s. 271(1)(c) of the Income -tax Act, 1961 (IT Act) for all the aforesaid four AYs. Accordingly, penalty proceedings were initiated. CIT(A) confirmed the Penalty Order under section 271(1)(c) of AO and thereafter prosecution proceedings were initiated for a conspiracy to evade tax under section 276C and 278B of IT Act along with Section 120B, 34, 193, 196 and 420 of the Indian Penal Code, 1860 (IPC) before Addl. Chief Metropolitan Magistrate. On 24.10.1996, the appellants had preferred an appeal before the Appellate Tribunal against the consolidated order passed by CIT(A) on 18.07.1990 for asst. yrs. 1983-84 to 1986-87. The  Appellate Tribunal  after verifying the records, found that the additions were on the basis of settlement between the assessees and the Department and represents voluntary offer made by the assessee and, therefore, in such circumstances the ITAT applying the principles laid down  in the case of Sir Shadilal Sugar & General Mills Ltd. & Anr. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) held that there was no concealment of income by the assessee and accordingly the penalties were cancelled and allowed the appeals. The appellants thereupon moved an application before the Addl. Chief Metropolitan Magistrate, (E.O.II), Egmore, Chennai, by filing MP No. 614 of 1996 in CC No. 425 of 1990 praying the Court for adjourning the proceedings in the above case, however the learned Magistrate permitted the appellants to mark the order of the Appellate Tribunal  in evidence at the appropriate stage of trial for which prosecution has no objection. Thereafter the appellants preferred a criminal revision under sections 397 and 401 of the Criminal Procedure Code, 1973, (CrPC) before the High Court for setting aside the order passed by the Addl. Chief Metropolitan Magistrate, dated 21.07.1997. The Madras High Court rejected the criminal revision vide its impugned order held that the  Appellate Tribunal ’s order was not applicable since it was not marked as defence document whereas the fact remains that the order was passed at a subsequent date. Whereas the fact remains that the defence documents were marked earlier to the order dated 24.10.1996 passed by the Appellate Tribunal which was immediately thereafter brought to the notice of the trial Court even by the prosecution in their own application.

Issue: Question arises that whether prosecution under Section 276C of the IT Act survives after cancellation of penalty under Section 271(1)(c)?

View: In the case of G.L. Didwania & Anr. v. ITO  (1997) 140 CTR (SC) 273 : (1995) Supp. (2) SCC 724, the Supreme Court held that the whole question was whether the appellant made a false statement regarding the income which according to the assessing authority had escaped assessment and so far as this issue was concerned, the finding of the ITAT was conclusive and hence the prosecution cannot be sustained. Accordingly, this Court quashed the criminal proceedings and allowed the appeal filed by the assessee.

Held: the penalties levied under Section 271(1)(c) of the IT Act were cancelled by the respondent by giving effect to the order of the  Appellate Tribunal. It is settled law that levy of penalties and prosecution under Section 276C of the IT Act are simultaneous. Hence, once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under Section 276C is automatic.In this instant case, the charge of conspiracy has not been proved to bring home the charge of conspiracy within the ambit of Section 120B of IPC. As there was absence of dishonest and fraudulent intention, the question of committing offence under Section 420 of the IPC does not arise. ( AY .1986 -87)   ( CRA NOS 212 -2013 of 1998 dt 28 -1 2004 ) 

Editorial: In Shastri Sales Corporation & Ors. v. ITO(1998) 229 ITR 628 (Bom.) (HC) the Court held that, prosecution could not be continued on the same facts  and grounds as the penalty had been cancelled. In Bhupen Champaklal Dalal

1. Sandeep Kapoor (2001) 248 ITR 827/167 CTR 281//118 Taxman 258 (Bom.) (HC), prosecution for alleged offencesunder ss. 276C, 277 and 278B stayed during

pendency of appeals filed by the petitioner-accused against the reassessment orders; in case the appeals are dismissed, the criminal prosecutions are to proceed.