Rendered in a situation where a partnership firm had failed to file returns and had challenged the prosecution initiated against its partners, the judgment sternly reminds the tax-payers of their obligation concerning the filing of returns and the serious consequences emanating from the failure to do so.
The legal fraternity traditionally holds that bad cases make hard laws. Perhaps this decision also qualifies as befitting the category as the factual position could not have been worse. In this case the assessee firm neither filed its voluntary return of income (Section 139 of the Income Tax Act) nor filed a return despite notices (Sections 142 and 148 of the Income Tax Act) issued by the Assessing Officer both during the separate assessment and reassessment proceedings. Consequently the Income Tax Department was compelled to undertake a best-judgment assessment, that is, an assessment based on information which it could gather on its own. Against this background, the failure on the part of the assessee firm to file the returns triggered the initiation of prosecution proceedings (Section 276CC of the Income Tax Act) against the firm’s partners which the assessee firm challenged. However the Criminal Court rejected the original challenge and the High Court turned down an appeal. As a last resort measure the assessee firm appealed to the was filed by Supreme Court, challenging the initiation of the prosecution.
Raising multifarious contentions before the Supreme Court the assessee firm contended wrongful action on the part of the Income Tax Department. It was principally argued that the Department launched the prosecution in haste as on the date of the filing of the complaint, the assessment had not attained finality in an appeal before another forum. It was further argued that unless the non-filing of return was established to be deliberate and willful, no prosecution could be launched and thus the action against the assessee firm was illegal.
Examining the relevant statutory provisions, the Supreme Court rejected the contentions of the assessee firm on all counts. Exhaustively dealing with various provisions of the Income-tax Act, 1961 the Court held that:
It is mandatory for an assessee to file its return of income by the prescribed date; and
An assessee is obligated to file its return of income in response to the notices served by the Department failing which the Department is well within its rights to levy penalty and also initiate prosecution.
Holding that the relevant provision (Section 276CC) gives ample opportunity to file a belated return to avoid prosecution and noting the failure on the part of the firm to file even a belated return, the Court dismissed the contentions that the initiation of prosecution was flawed. In fact it directed the criminal court to complete the trial expeditiously.
Filing requirement
With all major fiscal laws in India based on the self-assessment regime for the determination of tax liability, as a consequence, the filing of returns is the basis for this determination. Therefore the prescription of a penalty and prosecution as deterrence to discourage non-filers cannot be alleged to be outside the realm of a rule-of-law regime. From a pragmatic perspective, the judgment is a reminder to everyone that compliance with statutory provisions must not be seen as an empty formality and instead must be attended to diligently. And, against the backdrop of heightened activity on the part of the Income Tax Department in India to garner revenue by unearthing unreported transactions, the launch of a prosecution in this case cannot be ruled out as a one-off. In this perspective the assessees are best advised to take their cue from the judgment and ensure due compliance where required. It is not out of place to mention that other fiscal laws such as excise (Section 9 of Central Excise Act, 1944) and service tax (Section 89 of Finance Act, 1994) provide for prosecution similarly. Thus the concerned stakeholders are advised to tread the path with caution.
Tarun Jain (tarunjain@elp-in.com), Senior Associate at Economic Laws Practice (ELP), Advocates & Solicitors..
