Principles for Sanction of Prosecution issued under Section 279(1) of the Income Tax Act, 1961

Principles for Sanction of Prosecution issued under Section 279(1) of the Income Tax Act, 1961, mentioned hereunder have been culled out of the High Court of  Delhi in the case of  INDO ARYA CENTRAL TRANSPORT LIMITED & ORS:  

 

·       It is incumbent on the prosecution to prove that the valid sanction has been granted by the sanctioning authority after being satisfied that a case for sanction has been made out.

 

·       The  sanction  order  may  expressly  show  that  the sanctioning authority has perused the material placed before it and, after consideration of the circumstances, has granted sanction for prosecution.

 

·       The   prosecution   may   prove   by   adducing   the evidence that the material was placed before the sanctioning authority and its satisfaction was arrived at upon perusal of the material placed before it.

 

·       Grant of sanction is only an administrative function and the sanctioning authority is required to prima facie reach the satisfaction that relevant facts would constitute the offence.

 

·       The   adequacy   of   material   placed   before   the sanctioning authority cannot be gone into by the court as it does not sit in appeal over the sanction order.

 

·       If  the  sanctioning  authority  has  perused  all  the materials placed before it and some of them have not been proved that would not vitiate the order of sanction.

 

·       The  order  of  sanction  is  a  prerequisite  as  it  is intended  to  provide  a  safeguard  to  a  public  servant against frivolous and vexatious litigants, but simultaneously an order of sanction should not be construed in a pedantic manner and there should not be a hyper-technical approach to test its validity.

 

Original Judgment can be accessed from : http://lobis.nic.in/ddir/dhc/SKN/judgement/24-03-2018/SKN12032018CW39642017.pdf

 

IN THE  HIGH COURT OF DELHI  AT NEW DELHI

 

WRIT PETITION (CIVIL) No.  3964/2017

 

 

Date of Decision: 12th March, 2018

 

 

INDO ARYA CENTRAL TRANSPORT

LIMITED & ORS

Versus

COMMISSIONER OF INCOME TAX (TDS),

DELHI -1 & ANR.                                         

 

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE CHANDER SHEKHAR

 

 

SANJIV KHANNA, J. (ORAL):

 

 

M/s Indo Arya Central Transport Limited have filed the present writ petition praying for the following reliefs:-

 

"(a)        Issue a writ of certiorari setting aside/quashing the impugned order dated 14.03.2017 passed by the Respondent No.1;

 

(b)         Restrain the Respondent No.1 and the officers of the Respondents from carrying out any act in pursuance of the impugned order dated 14.03.2017 directing launching of criminal prosecution against the Petitioners; and,

 

(c)          Direct the Respondents to release refunds due to the Petitioner No.1, amounting to approximately Rs.5,09,41,361/- (Rupees five crore, nine lac, forty one thousand, three hundred and sixty one only); and

 

(d)         pass  such  other  and/or  further  orders  as  this Hon’ble Court may deem fit and proper.”

 

2.         Impugned  order  dated  14th   March,  2017  passed  by  the  first respondent namely the Commissioner of Income Tax (TDS) Delhi-1 is the sanction for prosecution issued under Section 279(1) of the Income Tax Act, 1961 (Act, for short).

 

3.         Sanction records that during the financial year 2012-13 relevant to the Assessment Year 2013-14, amount of Rs.3,52,99,059/- was deducted by the petitioner company as tax at source (TDS), but was not  deposited  in  the  government  treasury  within  the  prescribed statutory time.  These defaults were in respect of salary as well as non- salary TDS deductions.

 

4.         Sanction order refers to due date for filing of e-statements in respect of salary or non-salary TDS deductions and the date of actual filing of the statement. Sanction order also refers to the show cause notice dated 5th April, 2016 (sic. 6th April, 2016) issued to the petitioners, as to why they should not be prosecuted under Section 276B and Section 278B of the Act.   In response to the notices, authorised   representative   of   the   petitioners   had   appeared   and submitted that the petitioner company and his principal officer would opt for compounding.  Accordingly, the prosecution proceedings were kept  in  abeyance  subject  to  the  petitioners  filing  compounding  petition. However, when no compounding application was filed, another show cause notice dated 25th  January, 2017 was issued to resume the proceedings. Several adjournments were taken where after reply  dated  3rd   March,  2017  was  filed  accepting  that  there  were defaults in the deposit of TDS on account of financial crunch due to sluggish   business   activity.   Financial   position   of   the   petitioner company was adversely affected by sudden drop in business orders. It was alleged that undisputed income tax refunds constituting 4-5 times the amount of shortfall in TDS had also remained pending.

 

5.         Commissioner of Income Tax (TDS) in the sanction order had observed :-

 

“3.        The reply filed by the deductor company and its director is carefully considered.   I am convinced that offence u/s 276B and u/s 278B of the Act have been committed.   It is further observed that the explanation offered by the accused are neither tenable nor satisfactory as it is clear from the following facts:

 

(a)          The assessee has a wrong impression that it has compensated the Government by paying interest on delayed deposit of TDS and hence not prosecutable. The utilization of Government money attracts prosecution and not even the penalty. Moreover, Interest is just compensatory in nature.

 

(b)         Further  non-deposit  of  TDS  in  time  due  to shortage of funds is not a reasonable and justifiable cause the deductor was just beholder of the tax payable by the deductee which  should have deposited in  time so that deductee may get the credit of such TDS.

 

(c)          The deductor assessee has taken plea of pending refunds  with  Income  Tax  Department.  However,  it  is silent on the pending scrutiny assessments or appeals, etc and then provisions of law u/s 143(1D) of the Act. Thus refunds if any were lying with the department were under some  authority of law.  Moreover, refund  was  its  own money and TDS belonged to the Govt. to be deposited on behalf of the deductees. Hence it is not a justifiable ground.

 

(d)         The plea taken by the deductor that it has pan India presence and because of several branches, it takes time to reconcile the accounts and compute TDS liability. A minor delay is understandable on this ground although now-a-days accounting software are such that all the accounts are kept centralized and space does not remain a constraint.   However, the delay is much more (from 2 month to 11 months) which is not condonable.

 

3.1         The  details  of  TDS  default  show  that  the company  was  making  defaults  on  a  regular  way  (the delay extending from 2 months to 11 months). The tax liability had arisen on the day the amount was credited as the company was following mercantile system of accounting. The tax which was deducted by the company out of the various expenses incurred was the Government money and the deductor was merely a custodian of the same and was legally bound to deposit the amount of tax within the time specified in the law.   It is the legal responsibility   of   the   Principal   Officers/Directors   to comply with such legal requirement, which he had failed to do. The various Courts have held that the assessee cannot be granted immunity from prosecution merely on the ground that ultimately TDS was deposited in Govt. account albeit lately.   In the case of M/s Rishikesh Balkishandas Vs I.D. Manchanda, ITO [1987] 167 ITR 49,  the  Hon'ble  Delhi  High  Court  held  that  merely because tax has been deposited to the credit of the Central Government before filing of the complaint, it will not absolve the assessee of the offence under section 276B of the  Act.  Regarding  the  culpability  of  the  Principal Officers/Directors u/s 278B of the Act, reliance is also placed on the judgment of the Supreme Court in the case of M/s Madhumilan Syntex Limited vs. UOI [2007] 160 Taxman 71/290 ITR 199 (SC), wherein it is held that it would be sufficient compliance if in the SCN issued to the concern, it is mentioned that the assessing Officer intends to treat the Directors as Principal Officers of the company under the Act. `Further, reliance is placed on the judgment of Hon'ble Punjab and Haryana High Court in the case of Dy. CIT Vs M/s Modern Motor Works [1996] 87 Taxman 182/220 ITR 415 wherein it is held that mens rea is not required to be established in a case under section 276B of the Act. Support is also drawn from the judgment of the Hon'ble Apex Court rendered in the case of M/s Madhumailan Sytnex Ltd Vs UOI [2007] 160 Taxman 71/290 ITR 199 (SC) wherein it is held that prosecution lies if TDS is not paid to Government within the stipulated period. Reliance is also placed on the judgments  of  Hon'ble  jurisdictional  High  Court  in  the case of ITO vs. Delhi Iron Works (P) Ltd. 2010 (175) DLT 495 and in the case of ITO vs. Anil Batra & Anr dated 23.09.2014 (CRL.L.P 241, 242, 243 of 2012).

 

4. As may be seen, in this case, the payment of TDS was not made within the time limit prescribed u/s 200(1) of the Act and the said  default  attracts the provisions of section 276B of the Act.   Shri Ratan Prakash Arya and Shri Yogesh Arya, Directors being the Principal Officers of the company, during the financial year 2012-13 was responsible for and was in charge of conduct of the business of the said company and hence prosecutable u/s 278B of the Act.”

 

6.         During the course of hearing, it was accepted by the Counsel for the petitioners  that  on  the  criminal  complaint  being  preferred, the Additional   Chief   Metropolitan   Magistrate   ('ACMM')   has   taken cognizance and issued summons to the petitioners i.e.: the company and person in charge for appearance and to face trial.

 

7.         Counsel   for   the   petitioners   submits   that   the   Sanctioning Authority has failed to consider the requirements of Section 278AA, which states that no punishment would be imposed for offence committed under Section 276A, 278AB or Section 276B if the person being prosecuted proves that there was reasonable cause for such failure.

The second contention raised is that the Sanctioning Authority has failed to   correctly apply the Press Note dated 6th  August, 2013 and Standard Operating Procedure in the form of instruction F.No.285/90/2008-IT(Inv-I)/05 dated 24th April, 2008 modified by the Central  Board  of  Direct  Taxes  (CBDT)  vide  instruction  F.No. 285/90/2013-IT(Inv.) dated 7th  February, 2013 on the ground that the delay in deposit of TDS did not exceed the prescribed period of twelve months.  

Further, the petitioners had paid interest on late deposit of TDS prior to issuance of the notice.   The findings recorded by the Sanctioning Authority are neither fair nor judicious as they do not take into account the provisions of Section 278AA.

 

8.         Petitioners, do not dispute default and delay in deposit of TDS of more than Rs.3.53 crore relating to the four quarters between 30th June,  2012  to  31st  March,  2013.  TDS  was  belatedly  deposited between 30th June, 2013 to 16th September, 2013.The issues raised by the petitioners are ex-facie factual and could constitute defense of the petitioners, as constituting reasonable cause. Onus to prove reasonable cause under Section 278AA of the Act is on the person being prosecuted.

 

9.         Similarly, with regard to the Standard Operating Procedure, the contention that default had continued for less than twelve months and effect thereof are aspects which would be considered and decided in the course of criminal proceedings. Late deposit of TDS in gigantic proportions after the end of the financial year, as per the respondents, has huge ramifications and consequences not limited to non-payment of tax, but adverse consequences and sufferance of hundreds of deductee who did not get credit of the tax deducted and had to pay tax and interest. Subsequently, they would have filed revised returns for refund causing harassment and inconvenience. We would accept that grant  of  sanction  could  become  subject  matter  of  judicial  review, albeit in a limited manner to ensure that the authority has acted fairly and reasonably and we do not act as an appellate forum that can substitute the opinion. Necessity of sanction is to filter out frivolous, malafide  and  vindictive  prosecution.  It  is  given  on  prima  facie reaching the result that relevant facts constitute an offence. Technicalities and hyper-technical approach should not be adopted when the sanction order indicates and reflects application of mind.

 

10.     In The Director, CBI and Others. vs.   Ashok Kumar Aswal and Others, (2015) 16 SCC 163 it was observed that once grant of Sanction by the competent Authority was accepted, the test would be whether prejudice was caused to the accused. This was to be left to be determined during the course of trial. This Judgment refers to Prakash Singh Badal and Another vs. State of Punjab and Others, (2007) 1SCC  1  and  Chairman,  Airport  Authority  of  India  and  Another, (2012) 1 SCC 532. Legality or validity of order granting sanction would be the subject matter of the review before the Criminal Court, even if the order was silent and application of mind does not appear from sanction or extrinsic evidence may be placed before the Court. Evidence could be lead.

 

11.     In State of Maharashtra Through C.B.I. Vs. Mahesh G.Jain (2013) 8 SCC 119, it was held;-

 

"11. In R.  Sundararajan v. State [(2006)  12  SCC  749  : (2007) 2 SCC (Cri) 563] , while dealing with the validity of the order of sanction, the two learned Judges have expressed thus: (SCC p. 752, para 14)

“14. … it may be mentioned that we cannot look into the adequacy or inadequacy of the material before the sanctioning authority and we cannot sit as a court of appeal over the sanction order. The order   granting   sanction   shows   that   all   the available materials were placed before the sanctioning authority who considered the same in great detail. Only because some of the said materials could not be proved, the same by itself, in our opinion, would not vitiate the order of sanction. In fact in this case there was abundant material before the sanctioning authority, and hence we do not agree that the sanction order was in any way vitiated.”

 

12. In State  of  Karnataka v. Ameerjan [(2007)  11  SCC 273 : (2008) 1 SCC (Cri) 130] it has been opined that: (SCC p. 277, para 9)

“9. …   an   order   of   sanction   should   not   be construed in a pedantic manner. But, it is also well settled  that  the  purpose  for  which  an  order  of sanction is required to be passed should always be borne in mind. Ordinarily, the sanctioning authority is the best person to judge as to whether the public servant concerned should receive the protection  under the Act  by refusing  to  accord sanction for his prosecution or not.”

 

13. In Kootha  Perumal v. State [(2011)  1  SCC  491  : (2011) 1 SCC (Cri) 418 : (2011) 2 SCC (L&S) 657] it has been opined that the sanctioning authority when grants sanction  on  an  examination  of  the  statements  of  the witnesses as also the material on record, it can safely be concluded   that   the   sanctioning   authority   has   duly recorded its satisfaction and, therefore, the sanction order is valid.

 

14. From    the    aforesaid    authorities    the    following principles can be culled out:

 

14.1. It is incumbent on the prosecution to prove that the valid sanction has been granted by the sanctioning authority after being satisfied that a case for sanction has been made out.

 

4.2. The  sanction  order  may  expressly  show  that  the sanctioning authority has perused the material placed before it and, after consideration of the circumstances, has granted sanction for prosecution.

 

14.3. The   prosecution   may   prove   by   adducing   the evidence that the material was placed before the sanctioning authority and its satisfaction was arrived at upon perusal of the material placed before it.

 

14.4. Grant of sanction is only an administrative function and the sanctioning authority is required to prima facie reach the satisfaction that relevant facts would constitute the offence.

 

14.5. The   adequacy   of   material   placed   before   the sanctioning authority cannot be gone into by the court as it does not sit in appeal over the sanction order.

 

14.6. If  the  sanctioning  authority  has  perused  all  the materials placed before it and some of them have not been proved that would not vitiate the order of sanction.

 

14.7. The  order  of  sanction  is  a  prerequisite  as  it  is intended  to  provide  a  safeguard  to  a  public  servant against frivolous and vexatious litigants, but simultaneously an order of sanction should not be construed in a pedantic manner and there should not be a hyper-technical approach to test its validity.”

 

 

15.       At this stage, it will neither be fair nor proper for the writ court to question and decide the question of validity of Sanction Order on merits of reasonable cause etc. as it would amount to a pre trial adjudication. Questions and issues relating to grant and issue of sanction could be raised and decided during trial. We do not think it will be appropriate and proper for the writ Court while examining sanction, examine merits of allegations made in the criminal complaint and act as a fact finding authority.

 

16.       We have merely recorded what has been stated by the counsel for the revenue and not given our pronouncement or judgment in view of  the  contentions  raised  in  the  writ  petition  or  on  merits  of  the criminal complaint which is pending trial. These issues will have to be examined in accordance with law in the criminal proceedings.   Of course, in case the petitioners are able to make out that cognizance was not justified and as per law they can challenge and question the summoning order by way of petition under Section 397 read with Section 401 of the Code of Criminal Procedure, 1973 (Code) or if permissible, by way of a petition under Section 482 of the Code.

 

16.       Some   controversy   was   raised   regarding   non-payment   of refunds. There is difficulty in examining this allegation. Petitioners have not impleaded the jurisdictional Assessing Officer and Commissioner as respondents/parties to the writ petition.   The Sanctioning  Authority  is  the  first  respondent  and  Directorate  of Income  Tax,  Ministry  of  Finance  is  the  second  respondent.    The second respondent is not an authority and does not have any legal existence.

 

17.       As  per  

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