Krishna Pipe and Tubes vs Union of India

N.S. Gupta, J.—By means of this petition u/s 482 of the Code of Criminal Procedure, 1898, the petitioner Krishna Pipe & Tube and its partners Nand Kishore Agarwal and Smt. Krishna Devi seek to quash the proceedings of criminal complaint No. 19 of 1988, Union of India through Shri V.B. Mishra, ITO v. Krishna Pipe & Tube initiated against them for the contravention of the provisions of the income tax Act (''the Act'') punishable u/s 276C of the said Act, which are pending before the Chief Judicial Magistrate (Special), Kanpur. The facts of the case briefly stated are as follows :

The petitioner No. 1 is a firm registered under the Indian Partnership Act, 1932. It carried on business for purchase and sale of steel tubes and fittings at Kanpur. The petitioner Nos. 2 and 3 were the partners of the said firm. For the assessment year 1980-81, relevant to the accounting year ending 31-3-1980, the petitioner No. 1 filed a return of income showing an income of Rs. 1,08,260 on 31-1-1981. On 21-5-1980, a search was conducted at the residential and business premises of Shri Banwari Lal Agarwal, husband of petitioner No. 3. On the basis of the papers found on the said search, it transpired that the petitioners had omitted to record certain transactions in their account books. However, a settlement was arrived at between the Commissioner and the petitioner, in accordance with which the petitioner surrendered a sum of Rs. 60,000 on the understanding that no penal action or prosecution would be initiated against them. The petitioner, accordingly, filed return surrendering an amount of Rs. 60,000. The assessments of the applicants were completed on 28-2-1981 and no penal action u/s 271(1)(c) was initiated against the petitioners. The petitioners claimed that in view of the settlement arrived at with the Commissioner, Kanpur, no appeal was filed by them against the order of the assessment. It was pleaded that the aforesaid criminal complaint has been filed by the O.P. without giving any opportunity of being heard. The applicants at no stage were informed about the impugned prosecution. The said complaint was pleaded to be absolutely frivolous and false, inasmuch as the applicants had not made any attempt wilfully or otherwise to evade any tax or penalty or interest. No allegations have been made in the complaint as to who out of the two petitioners, viz., No. 2 and 3 was in charge of the affairs of the firm in question, the complaint filed by the O.P. was without jurisdiction and the sanction for prosecution accorded by the Commissioner was vitiated, the same having been granted without application of mind and mechanically, the Commissioner having failed to consider the settlement reached between him and the petitioner and the assurance given by him.

On behalf of the O.P., viz., the Union of India and the Commissioner, a counter affidavit was filed, which was sworn in by Shri V.L. Sharma, income tax Inspector, Ward 3/6, Kanpur. It was stated therein that upon the detection of the concealed income by the department on the basis of incriminating account books seized during the search, the return filed by the petitioners showing extra income of Rs. 60,000 was accepted. It was stated that no assurance was given to the petitioners to the effect that there would be no prosecution. It was, however, admitted that only penalty and interest were later on waived by the Commissioner, Kanpur, in pursuance of the waiver application filed by the petitioner. The applicants were not entitled for an opportunity of being heard granted to them before filing the complaint in question. There was no bar for the initiation of the criminal prosecution against the petitioners without the issuance of notice u/s 271(1)(c). The Commissioner had not waived his right to launch prosecution against the applicant. The petition filed by the petitioners was, therefore, bad in law and was sought to be dismissed.

I have heard Shri R.S. Agarwal, the learned counsel for the petitioners and Shri Shekher Srivastava, the learned standing counsel for the income tax Department and considered their contentions.

This is an admitted case of the parties that a search at the business and residential premises of the petitioner was conducted by the income tax Officials. The petitioner thereafter filed a return of income mentioning therein a sum of Rs. 60,000 as income from other sources, which was added to the trading account for working out the gross profit of the firm. It is also not disputed that the said assessment had become final and was not further challenged in appeal, and further that the penal proceedings were waived by the Commissioner. The petitioners in paragraphs 8 and 9 of their petition have very clearly averred that in order to purchase peace and in order to avoid protracted litigation with the department, the dispute was settled with the then Commissioner, Kanpur, in pursuance of which the petitioner surrendered a sum of Rs. 60,000 on the assurance that no penal action in the form of penal interest shall be taken against the petitioner. When the Commissioner admittedly waived the penalty and interest, which were imposable upon the petitioners, it was obvious that all the penal action which was available to the department including their criminal prosecution was also waived.

When the petitioners have made specific allegations regarding the settlement of their dispute with the Commissioner, the affidavit sworn in by the Inspector of income tax in proof of the fact that no such waiver was granted by the Commissioner, could not be regarded as good. The petitioners have specifically made the Commissioner as O.P. No. 2 in their petition. Thus, the Commissioner, the O.P. No. 2, was the proper person to refute the allegations of the compromise of waiver, pleaded by the petitioner and not the Inspector of the department like Shri V.L. Verma who probably was not associated with the proceedings in question.

It was next argued by the learned counsel for the petitioners that no opportunity of being heard was afforded to the petitioners before launching the impugned prosecution. The learned counsel for the petitioner argued that the principles of natural justice were flouted and on that score also the criminal complaint filed by the O.P. was bad in law.

In the instant case, the prosecution was launched against the Krishna Pipe & Tube which was a partnership firm and was a juristic person as also against the partners of the said firm, viz., Shri Nand Kishore Agarwal and Smt. Krishna Devi. The learned counsel for the petitioner argued that Shri Nand Kishore Agarwal has since died. Smt. Krishna Devi was only a sleeping partner, meant for sharing the profit of the business. She was not an active partner in the said firm and, therefore, was not responsible for any omission or commission of the errors of the firm. Mens rea is an important ingredient of every offence; if there was no Mens rea on the part of the petitioner No. 3, Smt. Krishna Devi, the criminal complaint against her was not maintainable.

The provisions of section 276C makes only a wilful attempt to evade tax punishable. Section 278 of the Act makes a person liable who abets or induces in any manner another person to make and deliver an account or statement or declaration relating to income chargeable to tax which is false and which he either knows to be false or does not believe to be true.

The provision of section 278B makes a person who was in charge and was responsible for the conduct of the business and affairs of the company responsible and as per explanation appended to the said section company includes a firm. It would, thus, follow that for attracting the penal provisions of committing an offence punishable under the Act, it has got to be pleaded and proved in case of a company, a firm and association of persons that at the time of occurrence of the offence in question, the person complained against was in charge of and was responsible for the conduct of business and that the omissions or errors in books of account, etc., were wilfully committed by him with an intention to evade tax. So in case of the present petition, if the petitioner No. 3, Smt. Krishna Devi, was only a sleeping partner in the firm, and had nothing to do with the business of the firm, except to share the profit of the business and if she was not incharge for the conduct of the business, she cannot be deemed to be guilty of any error, omission or commission in the books of account of a partnership firm. The complaint filed against the petitioner does not disclose any word to show as to who was the partner responsible for the conduct of the business of the firm.

The provisions contained in section 279 which reads as under have provided the safeguard against launching of false and frivolous prosecution against the assessees :

"279. Prosecution to be at instance of Chief Commissioner or Commissioner.- A person shall not be proceeded against for an offence u/s 275A, section 276, sections 276A, 276B, section 276BB, section 276C, section 276CC, section 276D, section 277 or section 278 except with the previous sanction of the Commissioner or Commissioner (Appeals) or the appropriate authority :

Provided that the Chief Commissioner, or as the case may be, the Director General may issue such instructions or directions to the aforesaid income tax authorities as he may deem fit for institution of proceedings under this sub-section.

(1A) A person shall not be proceeded against for an offence u/s 276C or section 277 in relation to the assessment for an assessment year in respect of which the penalty imposed or imposable on him under clause (iii) of sub-section (1) of section 271 has been reduced or waived by an order u/s 273A.

(2) Any offence under this Chapter may, either before or after the institution of proceedings, be compounded by the Chief Commissioner or a Director General."

Sub-section (2) of section 279 as reproduced above makes an offence punishable under the Act compoundable by the Chief Commissioner or the Director General either before or after the institution of the proceedings.

The words ''either before or after the institution of proceedings'' are very significant. By providing that an offence punishable under the Act may be compounded even before the institution of the criminal proceedings fully goes to show that the Legislature intended to cast a duty upon the authorities of the income tax Department to issue a show-cause notice to the assessee before proposing a criminal prosecution to show cause as to whether he was prepared to compound the offence or to face penal consequence. It obviously follows that before according sanction of the prosecution contemplated by the provisions of section 279, the concerned authorities should issue a show-cause notice and to accord sanction only after recording their satisfaction. If such a show-cause notice is issued to the person intended to be prosecuted, it is quite possible that such person may avail of the benefits of the provisions regarding compounding before the institution of the criminal complaint and would further be able to satisfy the sanctioning authority about his bona fides or the circumstances under which certain errors or omissions were committed by him with regard to the maintenance of his account books or for the making of the statement and submission of return, etc. Instances may not be rare where the assessee may be anxious to offer compromise before the initiation of criminal proceedings in order to save himself from disgrace and the ordeals of the criminal prosecution. Mostly the persons who are sought to be prosecuted in connection with the offence punishable under the Act are the persons holding positions and status in the society. Even if there is a case of wilful concealment of income tax, such person may repent or out of fear of the prosecution or of standing as an accused in the dock before the criminal court, may offer to compound with the terms and conditions which the compounding authority may impose. When the law offers an opportunity for compounding before or after prosecution is launched, the income tax authorities in their wisdom should offer an opportunity to the prosecution to compound the offence before launching of the prosecution.

The aforesaid view taken by me finds support from the following rulings which were relied upon by the learned counsel for the petitioner:

(1) P.V. Pai, B.R. Shetty, Biyar Rubbers Pvt. Ltd. and Smt. Lasha B. Shetty Vs. R.L. Rinawma, Deputy Commissioner of Income Tax, .

(2) Shree Singhvi Brothers and Others Vs. Union of India (UOI) and Others, .

(3) Dunlop India Ltd. and Others Vs. Arun Chandra Sinha, Assistant Commissioner of Income Tax and Others, .

Thus, to sum up, I find that after the search of the premises of the petitioner the compromised assessment was made by the ITO himself; that the penal action regarding the imposition of the penalty was waived by the Commissioner; that no finding that the petitioner No. 2, Smt. Krishna Devi, was an active partner in the affairs of the firm and had wilfully concealed her income or for that matter wilfully filed false return was recorded by the ITO and that no opportunity of compounding the offence before launching the impugned prosecution was afforded to the petitioners. I, therefore, hold that the initiation of the criminal proceedings by way of filing impugned criminal complaint by the ITO amounted to an abuse of the process of the criminal courts, and to secure the ends of justice the impugned criminal complaint deserves to be quashed. Thus, this petition is allowed and the proceedings initiated on the basis of the criminal complaint No. 19 of 1988, Union of India v. Krishna Pipe & Tube pending in the court of C.J.M. (Special), Kanpur, are hereby quashed.