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The provisions regarding the prosecution under the Income Tax Act are very stringent and complex in nature which often lead to several intricacies in understanding and application of those provisions. The various sections of Income Tax Act, 1961 which govern the prosecution include sections like 276, 276B, 276C, 276CC, 277etc.

In the wake of the latest judgement of the Hon’ble Madras HCin the case of M/S. Bejan Singh Eye Hospital Pvt. Ltd., Dr. S.M. Bejan Singh, Smt. RooshithaBejan Singh Versus Income Tax Department, Crl.O.P(MD)No.13383 of 2019 And Crl.M.P.(MD) Nos.8303 and 8304 of 2019, following the judgment of Karnataka High Court in the case of M/s. Vyalikaval House Building Co Operative Society Vs. Deputy Commissioner of Income Tax Central Circle- 1(1) Banglore, Criminal Petition No. 4891 of 2014 C/W Criminal Petition No. 4892 of 2014, in this article, we would be discussing role of mens rea under section 276C of the Income Tax Act:-

 

The relevant section 276C reads as under:

276C. (1) If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or importable, or under reports his income, under this Act, he shall, without prejudice to any penalty that may be impossible on him under any other provision of this Act, be punishable,-

(i)In a case where the amount sought to be evaded or tax on under-reported income exceeds twenty-five hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

(ii)in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine.

(2) If a person willfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be impossible on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and shall, in the discretion of the court, also be liable to fine.

Explanation.-For the purposes of this section, a willful attempt to evade any tax, penalty or interest chargeable or impossible under this Act or the payment thereof shall include a case where any person.

(i)has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement; or

(ii)makes or causes to be made any false entry or statement in such books of account or other documents; or

(iii)willfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or

(iv)causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or impossible under this Act or the payment thereof.

Reading through the section, it becomes clear that the very basic ingredient for levying of penalty u/s 276C is willful attempt to evade tax. i.e. to say willful attempt to evade any tax, penalty or interest chargeable or impossible under the Act under section 276C is a positive act on the part of the accused which is required to be proved to bring home the charge against the accused. Necessary mens rea, therefore, is required to be established for ordering any prosecution either in section 276C or 277. Now the question arises as to what all will construe willful attempt to evade tax, penalty or interest chargeable or impossible under the Act. In legal echelons ‘attempt’ is understood as a “movement towards the commission of the intended crime”. It is doing something in direction of commission of offence. Viewed in that sense, in order to render the accused guilty of “attempt to evade tax” it must be shown that he has done some positive act with an intention to evade tax.

In cases wherein the return has been filed by the assessee but the self assessment tax being not paid, the same could not be taken as a willful attempt of nonpayment of tax on part of the assessee. It has been held in this judgement of the Hon’ble Madras HC in the case of M/S. Bejan Singh Eye Hospital Pvt. Ltd., Dr. S.M. Bejan Singh, Smt. RooshithaBejan Singh Versus Income Tax Department, Crl.O.P(MD)No.13383 of 2019 And Crl.M.P.(MD) Nos.8303 and 8304 of 2019, following the decision of Hon’ble Karnatak HC in the case of M/s. Vyalikaval House Building Co Operative Society Vs. Deputy Commissioner of Income Tax Central Circle- 1(1) Banglore, Criminal Petition No. 4891 of 2014 C/W Criminal Petition No. 4892 of 2014. It is observed by the hon’ble High Court that on the first instance had the intention of the assessee being nonpayment of tax then it would not have filed the return of income itself. The act of filing of return by itself cannot be construed as an attempt to evade tax, rather the submission of the returns would suggest that the assessee has voluntarily declared his intention to pay the tax. The act of submitting returns is not connected with the evasion of tax. It is only an act which is closely connected with the intended crime, that can be construed as an act in attempt of the intended offence.It is admitted in the counter affidavit itself that the petitioner has since cleared the dues and since as on date no tax dues are payable in respect of the aforesaid financial years. Inasmuch as the tax has been subsequently paid, the court is of the view that continuance of the impugned prosecution would only amount to an abuse of legal process.

Further, delayed payments, under the provisions of the Act, may call for imposition of penalty or interest, but by no stretch of imagination, the delay in payment could be construed as an attempt to evade tax so as to entail prosecution of the petitioner for the alleged offence under section 276C(2) of the Act as held by the Hon’ble Karnatak HC in the case of M/s. Vyalikaval House Building Co Operative Society Vs. Deputy Commissioner of Income Tax Central Circle- 1(1) Banglore, Criminal Petition No. 4891 of 2014 C/W Criminal Petition No. 4892 of 2014. The hon’ble Karnataka High Court also commented that when a part of the total tax has been paid but due to lack of availability of resources the rest could not be paid then it cannot construe the intention of the assessee to be malicious and in favour of non payment or willful evasion of tax. The prosecution being such a harsh punishment could be given only when the willful evasion of tax is proved on part of the assessee and not otherwise. In such a case it is the duty of the revenue to prove:-

(1) with evidence on record that the assessee has enough resources to pay the tax

(2) and he had willfully evaded to pay the tax.

In absence of any of the mentioned conditions the assessee would not be held guilty of willful evasion of tax and therefore cannot be punished with prosecution. Similar view has been taken up by the Hon’ble Patna High Court in the case of Sushil Kumar Saboo Vs. State of Bihar, [2011] 336 ITR 202 and Hon’ble Punjab and Haryana High Court in the case ITO Vs. Chiranjilal Cotton Industries, [2002] 254 ITR 181.

In another scenario, it is often seen in the cases wherein ad-hoc additions are made by the AO later got reduced, increased or confirmed by the CIT(A), the question does not arise as to the non payment of tax but on the amount of tax liability which should have been discharged by the assesseei.e. under or over payment of tax. Therefore, in such circumstances the intent of the assessee cannot be doubted as he made the payment of tax on the basis of self assessment which itself implies the assessee being a law-abiding person. Further if the tax liability of the assessee stood substantially reduced then that itself demonstrates that no criminal liability could be fastened on the assessee. This would merely be considered as a difference of opinion to the estimate made by the assessee and the estimate made by the Department and, therefore, there would beno case of concealment of income or furnishing of inaccurate particulars of income for the purpose of evasion of tax. Similar view has been confirmed by the Hon’ble SC in the case of Prem Dass Vs. ITO, [1999] ITR 683.

It was thus concluded that a positive act on the part of the accused is required to be established to bring home the charge against the accused for the offence u/s 276C(2).

Role of presumption under section 278E of the Act

Having studied the observation of the hon’ble Karnataka High Court, now we will study the role of section 278E of the Income Tax Act, which, unlike other criminal laws provides a presumption of mens rea, i.e. the culpable mind against the subject, in prosecution cases under the Income Tax Act.

The provisions of section 278E read as under:

“Presumption as to culpable mental state.

278E. (1) In any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

Explanation.—In this sub-section, “culpable mental state” includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.

(2) For the purposes of this section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.”

Presence of a culpable state of mind has always been a fundamental rule of jurisprudence applicable to criminal proceedings. However with this provision the Income Tax Act diverts from this rule and states that culpable state of mind is no more a fundamental to prosecution under this Act. It is also to be appreciated that the ball has been thrown to the court of the accused to prove such absence of culpable mind, that too not only with the existence of preponderance of probability, but beyond reasonable doubts. In this manner a very heavy duty is cast on the offender in its defence.

In the case of SASI ENTERPRISES VERSUS ASSISTANT COMMISSIONER OF INCOME TAX [2014] 361 ITR 163(SC), hon’ble Supreme Court had observed as under:

“30. 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, under Section 278E to prove whether the assessee has or has not committed willful default in filing the returns. 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 notices under Sections 142 and 148 of the Act.”

Similar view had been expressed by the hon’ble Madras High Court in R. INBAVALLI VERSUS INCOME-TAX OFFICER[2010] 327 ITR 226 (Mad), andHon’ble Himachal Pradesh High Court, in PRAKASH NATH VERSUS COMMISSIONER OF INCOME-TAX [1997] 225 ITR 305, 141 CTR 52 (HP).

In the latest Karnataka High Court, the benefit of doubt has been given to the assessee, as he had filed the return of income, without paying the self assessment tax. In our humble understanding the provisions of section 278E have been given a go by. The decision has been rendered according to the general criminal jurisprudence and it is also observed that the provisions of section 278E have not been discussed.

In any case, the judgement brings some respite to the assesses from the rigors of section 278E, specifically in cases where the assessee files return without depositing the self assessment tax.

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