Supreme Court slaps ₹2 lakh fine on IT Department for defying its own circulars

The Supreme Court on August 28 imposed costs of ₹2 lakhs on the Income Tax Department for prosecuting an assessee in violation of its own binding circulars [Vijay Krishnaswami @ Krishnaswami Vijayakumar vs. The Deputy Director of Income Tax].

A Bench of Justice JK Maheshwari and Justice Vijay Bishnoi held that such a willful non-compliance of the Revenue's own directives reflected a serious lapse.

"Such an act cannot be construed in right perspective and the Revenue have acted in blatant disregard to binding statutory instructions. Such willful non-compliance of their own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability, which in any manner cannot be treated to be justified or lawful," the judgment read.

It proceeded to order the Income Tax authority to pay ₹2 lakhs as costs to the assessee, while quashing the prosecution.

"It is directed that prosecution lodged by the Revenue against the appellant shall stand quashed. In the facts and circumstances of the case as discussed hereinabove, we are inclined to impose costs against the Revenue which is quantified at Rs. 2,00,000/- payable to the appellant," the Court said.

The Court was hearing a plea challenging a ruling from the Madras High Court, which had declined to quash prosecution proceedings initiated by the Revenue against a man named Vijay Krishnaswami, on allegations of attempted tax evasion under Section 276C(1) of the Income Tax Act, 1961 (IT Act).

In April 2016, a search under Section 132 of the IT Act was conducted at the assessee's residence, leading to the seizure of unaccounted cash worth ₹4.93 crores.

A show-cause notice was issued in October 2017, following which the Principal Director of Income Tax (Investigation), Chennai (PDIT) authorised the prosecution of the assessee in 2018.

Consequently, the Deputy Director of Income Tax (DDIT) filed a complaint in August 2018, alleging that the assessee had willfully attempted to evade tax for Assessment Year (AY) 2017–18.

Meanwhile, the assessee approached the Settlement Commission under Section 245C, IT Act, in December 2018, disclosing additional income and seeking immunity.

By order passed in November 2019, the Settlement Commission granted immunity from penalty, on finding that there was no wilful attempt to evade taxes. However, the Commission refrained from granting immunity from prosecution due to the pendency of a quash petition before the Madras High Court.

The High Court, however, later dismissed the petition, prompting the assessee to file an appeal before the Supreme Court.

The Supreme Court noted that, according to circulars issued by Revenue authorities, prosecution for attempted tax evasion could be initiated only after the Income Tax Appellate Tribunal (ITAT) confirms the penalty to be imposed for the alleged concealment of income.

This procedure was laid down by the Central Board of Direct Taxes (CBDT) in a circular dated April 24, 2008, in cases where the penalty exceeds ₹50,000. This procedure was also reflected in a 2009 Prosecution Manual, and a 2019 CBDT circular.

The Court, however, found that the IT Department offered no justification for why the PDIT or the DDIT failed to follow this procedure before launching the prosecution in this case.

The Supreme Court added that departmental circulars and prosecution manuals are binding on the Revenue authorities and cannot be disregarded at will. Referring to earlier precedents like M/s KC Builders Ltd. v. CIT and UCO Bank v. CIT, the Court reiterated that consistency and adherence to such circulars is crucial to prevent arbitrary action.

The Court held that the prosecution was unsustainable since, on the date of sanction, there was no ITAT finding confirming concealment of income or imposition of penalty, as required by CBDT circulars.

The Court also noted that the Settlement Commission had already found that there was nothing to indicate a wilful attempt to evade taxes in this case. The top court, therefore, questioned why the Madras High Court had not factored such aspects in its decision.

"It was the duty of the High Court to examine the facts of the case in their right context and assess whether, in light of the above circumstances, the continuation of the prosecution would serve any meaningful purpose in establishing the alleged guilt. Upon a holistic consideration of the matter, we are of the view that the conduct of the authorities lacks fairness and reasonableness, and the High Court’s approach appears to be entirely misdirected, having failed to appreciate the factual and legal position in right earnest," the Supreme Court said.

It proceeded to set aside the Madras High Court order, quashed the prosecution, and imposed ₹2 lakh costs on the Revenue authority to be paid to the assessee/ appellant.

Senior Advocate Preetesh Kapur and Advocates Ravi Raghunath , R Sivaraman and Namanjeet Singh Bhatia appeared for the assessee.

Additional Solicitor General N Venkatraman, Senior Advocate Nisha Bagchi, and Advocates Raj Bahadur Yadav, V Chandrashekhara Bharathi,Udai Khanna and Navanjay Mahapatra appeared for the Income Tax authorities.

[Read Judgement]