Offences and Prosecution – Section 276CC applies to situations where an assessee has failed to file a return of income as required u/s. 139 of the Act or in response to notice issued to the assessee u/s. 142 or section 148 of the Act.

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Sasi Enterprises vs. ACIT (2014) 361 ITR 163(SC)

M/s.
Sasi Enterprises was formed as a partnership firm by a deed dated 6th
February, 1989, with N. Sasikala and T. V. Dinakaram as its partners,
which was later reconstituted with effect from 4th May, 1990, with J.
Jayalalitha and N. Sasikala as partners. The firm did the business
through two units, namely, M/s. Fax Universal and M/s. J. S. Plan
Printers, which, inter alia, included the business in running all kinds
of motor cars, dealing in vehicles and goods, etc.

The
Partnership deed dated 4th May, 1990, stated that the partners, are
responsible and empowered to operate bank accounts, have full and equal
rights in the management of the firm in its business activities, deploy
funds for the business of the firm, appoint staff, watchman, etc., and
to represent the firm before Income-tax, sales tax and other
authorities.

M/s. Sasi Enterprises, the firm, did not file any returns for the assessment years 1991-92 and 1992-93.

J.
Jayalalitha and N. Sasikala filed their individual returns for the
assessment years 1991-92 and 1992- 93, though belatedly on 20th
November, 1994, and 23rd February, 1994, respectively. In those returns
it was mentioned that the accounts of the firm had not been finalised
and no returns of the firm had been filed. J. Jayalalitha and N.
Sasikala did not file returns for the assessment year 1993-94.

In
the complaint E.O.C.C. No. 202 of 1997 filed before the Chief
Metropolitan Magistrate Egmore, M/s. Sasi Enterprises was shown as the
first accused (A-1) and J. Jayalalitha and N. Sasikala were shown as
(A-2) and (A-3), respectively, who were stated to be responsible for the
day-to-day business of the firm during the assessment years in question
and were individually, jointly and severally made responsible and
liable for all the activities of the firm.

The Assistant
Commissioner of Income-tax in his complaint stated that the firm through
its partners ought to have filed its returns u/s. 139(1) of the Act for
the assessment year 1991-92 on or before 31st August, 1991, and for the
assessment year 1992-93 on or before 31st August, 1992, and A-2, in her
individual capacity, also should have filed her return for the year
1993-94 u/s. 139(1) on or before 31st August, 1993, and A-3 also ought
to have filed her return for the assessment year 1993-94 on or before
31st August, 1993, as per section 139(1) of the Act. The accused
persons, it was pointed out, did not bother to file the returns even
before the end of the respective assessment years, nor had they filed
any return at the outer statutory limit prescribed u/s. 139(4) of the
Act, i.e., at the end of March of the assessment year. It was also
pointed out the a survey was conducted in respect of the firm u/s. 133A
on 24th August, 1992, and following that a notice u/s. 148 was served on
the partnership firm on 15th February, 1994, to file the return of
Income-tax for the years in question. Though notice was served on 16th
February, 1994, no return was filed within the time granted in the
notice. Neither the return was filed, nor were particulars of the income
furnished. For the assessment year 1991-92, it was stated that
pre-assessment notice was served on 18th December, 1995, notice u/s.
142(1)(ii) giving opportunities was also issued on 20th July, 1995. The
Department made the best judgment assessment for the assessment year
1991-92 u/s. 144 on a total income of Rs. 5,84,860 on 8th February,
1996, and tax was determined as Rs. 3,02,434 and demand notice for Rs.
9,95,388 was issued as tax and interest payable on 8th February, 1996.

For
the assessment year 1992-93, the best judgment assessment u/s. 144 was
made on 9th February, 1996, on the firm on a total income of Rs.
14,87,930 and tax determined at Rs. 8,08,153, a demand notice was issued
towards the tax and interest payable.

So far as A-2 was
concerned, the due date for filing of return of income as per section
139(1) of the Act for the assessment year 1993-94 was 31st August, 1993.
Notice u/s. 142(1)(i) was issued to A-2 calling for return of income on
18th January, 1994. The said notice was served on her on 19th January,
1994. Reminders were issued on 10th February, 1994, 22nd August, 1994
and 23rd August, 1995. No return was filed as required u/s. 139(4)
before 31st March, 1995. The Department on 31st July, 1995, issued
notice u/s. 142(1)(ii) calling for particulars of income and other
details for completion of assessment. Neither the return of income was
filed nor were the particulars of income furnished. Best judgment
assessment u/s. 144 was made on 9th February, 1996 on a total income of
Rs. 1,04,49,153 and tax determined at Rs. 46,68,676 and demand of Rs.
96,98,801, inclusive of interest at Rs. 55,53,882 was raised after
adjusting pre-paid tax of Rs. 5,23,759. The Department then issued
show-cause notice for prosecution u/s. 276CC on 14th June, 1996. Later,
sanction for prosecution was accorded by the Commissioner of Income-tax
on 3rd October, 1996.

A-3 also failed to filed return of income
as per section 139(1) for the assessment year 1993-94 before the due
date, i.e., 31st August, 1993. Notice u/s. 142(1)(i) was issued to A-3
calling for filing of return of income on 8th November, 1995. Further,
notice was also issued u/s. 142(1)(ii) on 21st July, 1995, calling for
particulars of income and other details for completion of assessment.
Neither the return of income was filed nor the particulars of income
were furnished. Best judgment assessment u/s. 144 was made on 8th
February, 1996, on a total income of Rs. 70,28,110 and tax determined at
Rs. 26,86,445. The total tax payable, inclusive of interest due was Rs.
71,19,527. After giving effect to the appellate order, the total income
was revised by Rs. 19,25,000, resulting in tax demand of Rs. 20,23,279,
inclusive of interest levied. Later, a show-cause notice for
prosecution u/s. 276CC was issued to A-3 on 7th August,1996. A-3 filed
replies on 24th November, 1996, and 24th March, 1997. The Commissioner
of Income-tax accorded sanction for prosecution on 4th August, 1997.

The
final tax liability, so far as the firm was concerned, was determined
as Rs. 32,63,482 on giving effect to the order of the Income-tax
Appellate Tribunal (B-Bench), Chennai dated 1st September, 2006 and
after giving credit of prepaid tax for the assessment year 1991-92. For
the assessment year 1992-93 for the firm, final tax liability was
determined at Rs.52,47,594 on giving effect to the order of the
Income-tax Appellate Tribunal (B-Bench), Chennai dated 1st September,
2006, and after giving credit of pre-paid tax. So far as A-2 was
concerned for the assessment year 1993-94 final tax liability was
determined at Rs. 12,54,395 giving effect to the order of the Income-tax
Appellate Tribunal (B-Bench), Chennai dated 11th October, 2008, after
giving credit to pre-paid tax. So far as A-3 was concerned, for the
assessment year 1993-94, the final tax liability was determined as Rs.
9,81,870 after giving effect to the order of the Income-tax Appellate
Tribunal (B-Bench), Chennai dated 14th September, 2004, and after giving
credit to pre-paid tax.

For not filing of returns and due to
non-compliance with the various statutory provisions, prosecution was
initiated u/s. 276CC of the Act against all the accused persons and the
complaints were filed on 21st August, 1997, before the Chief
Metropolitan Magistrate which the High Court by its order dated 2nd
December, 2006 had permitted to go on by dismissing the revision
petitions filed by the firm and the two partners against the dismissal
of their discharge petitions by the Chief Metropolitan Magistrate.

On appeal, the Supreme Court held that section
276CC applies to situations where an assessee has
failed to file a return of income as required u/s.
139 of the Act or in response to notice issued to
the assessee u/s. 142 or section 148 of the Act.
The proviso to section 276CC gives some relief to
genuine assessees. The proviso to section 276CC
gives further time till the end of the assessment
year to furnish return to avoid prosecution. In
other words, even though the due date would be
31st August of the assessment year as per section
139(1) of the Act, as assessee gets further seven
months time to complete and file the return and
such a return though belated, may not attract
prosecution of the assessee. Similarly, the proviso
in Clause (ii)(b) to section 276CC also provides
that if the tax payable determined by regular assessment
as reduced by advance tax paid and tax deducted at source does not exceed Rs. 3,000,
such an assessee shall not be prosecuted for
not furnishing the return u/s. 139(1) of the Act.
Resultantly, the proviso u/s. 276CC takes care of
genuine assessees who either file the returns belatedly
but within the end of the assessment year
or those who have paid substantial amounts of
their tax dues by pre-paid taxes, from the rigour
of the prosecution u/s. 276CC of the Act.

Section 276CC, takes in s/s. (1) of the section 139,
section 142(1)(i) and section 148. But the proviso
to section 276CC takes in only s/s. (1) of section
139 of the Act and the provisions of section 142(1)
(i) or section 148 are conspicuously absent. Consequently,
the benefit of the proviso is available
only to voluntary filing of return as required u/s.
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 u/s. 142(1)(i) or
section 148 of the Act is issued calling for filing
of the return of income. The proviso, therefore,
envisages the filing of even belated return before
the detection or discovery of the failure and issuance
of notice u/s. 142 or section 148 of the Act.

The Supreme Court referred to s/s. (4) of section
139 wherein the Legislature has used an expression
“whichever is earlier”, and observed that
both section 139(1) and s/s. (1) of section 142 are
referred to in s/s. (4) to section 139, which specify
time limit, therefore, the expression “whichever is
earlier” has to be read within the time if allowed
under s/s. (1) of section 139 or within the time allowed
under notice issued under s/s. (1) of section
142, whichever is earlier. The Supreme Court held
that so far as the present case was concerned, it
was noticed that the assessee had not filed the
return either within the time allowed under s/s. (1)
of section 139 or within the time allowed under
notice issued under s/s. (1) of section 142.

The Supreme Court noted that on failure to file
the returns by the appellants, the Income-tax Department
made a best judgment assessment u/s.
144 of the Act and later show-cause notices were
issued for initiating prosecution u/s. 276CC of the
Act. The Supreme Court held that the proviso to
section 276CC nowhere states that the offence
u/s. 276CC has not been committed by the categories
of assesses who fall within the scope of
that proviso but it is stated that such a person
shall not be proceeded against. In other words,
it only provided that under specific circumstances
mentioned in the proviso, prosecution may not be
initiated. An assessee who comes within Clause
(2)(b) of the proviso, no doubt he has also committed
the offence u/s. 276CC but is exempted
from prosecution since the tax falls below Rs.
3,000. Such an assessee may file belated return
before the detection and avail of the benefit of
the proviso. The proviso cannot control the main
section, it only confers some benefit to certain
categories of assesses. In short, the offence u/s.
276CC is attracted on failure to comply with the
provisions of section 139(1) or failure to respond
to the notice issued u/s. 142 or section 148 of the
Act within the time limit specified therein.

Applying the above principles to the facts of
the case in hand, the Supreme Court held that
the contention of the learned senior counsel for
the appellant that there has not been any willful
failure to file their return could not be accepted
and on facts, offence u/s. 276CC of the Act had
been made in all these appeals and the rejection
of the application for the discharge called for no
interference by it.

The Supreme Court also found no basis in the
contention of the learned senior counsel for the
appellant that pendency of the appellate proceeding
was a relevant factor for not initiating prosecution
proceedings u/s. 276CC of the Act. According
to the Supreme Court, 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 the
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. If it was the intention of the Legislature
to hold up the prosecution proceedings till the
assessment proceedings are completed by way of
appeal or otherwise the same would have been
provided in section 276CC itself.

The Supreme Court was also of the view that the
declaration or statement made in the individual
returns by partners that the accounts of the firm
were not finalised, hence no return had been
filed by the firm, would not absolve the firm in
filing the statutory return u/s. 139(1) of the Act. The firm was independently required to file the
return and merely because there had been a best
judgment assessment u/s. 144 would not nullify
the liability of the firm to file the return as per
section 139(1) of the Act.

The Supreme Court further held that, section
278E deals with the presumption as to culpable
mental state, which was inserted by the Taxation
Laws (Amendment and Miscellaneous Provisions)
Act, 1986. The question is on whom the burden
lies, either on the prosecution or the assessee,
u/s. 278E to prove whether the assessee has or
not committed willful default in filing the returns.
The 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 notice u/s.
142 and 148 of the Act.