Madras Spinners Ltd. vs Deputy Commissioner of Income Tax

L. Manoharan, J.—This petition u/s 482 of the Code of Criminal Procedure, 1973 is to quash Annexure-I complaint in Civil Case No. 84 of 1990 on the file of the Chief Judicial Magistrate (Economic Offences), Ernakulam. The first petitioner is an assessee, under the income tax Act, 1961 (''the Act''), the second petitioner is the managing director, the third petitioner is one of the directors and the fourth petitioner is the general manager of the first petitioner-company. For the assessment year 1986-87, the first petitioner-company filed a return after deducting certain claims under the Act. Two such claims were depreciation and investment allowance under sections 32 and 32A of the Act in respect of two items of machinery. These two machines were purchased on 5-3-1986 and 8-3-1986, respectively. If the said machines were put to use during the accounting period, the two claims could be entertained. The assessing authority conducted enquiries and found that the machinery was not used during the accounting year and, hence, the assessing authority completed the assessment rejecting the two claims. An appeal was preferred by the first petitioner-company before the Commissioner of income tax; but he confirmed the order of assessment. The assessing authority had also initiated proceedings u/s 271(1)(c) of the Act. In that, after completing the necessary steps, the authority passed an order levying penalty. The order of assessment as also the order levying penalty were challenged by the company before the Tribunal, Ernakulam. The Tribunal, by Annexure-II order, allowed the two claims and set aside the order appealed against. Annexure-I complaint is based on the assessment order as confirmed by the Commissioner. The department filed an application for reference u/s 256(1); that was also dismissed by the Tribunal by Annexure-III order. According to the petitioners, since the very basis of the prosecution is thus no longer in existence, the prosecution is not sustainable; consequently, the same is liable to the quashed u/s 482.

It was contended by the learned counsel for the respondent that the respondent has a right to file an application u/s 256(2) for compelling the Tribunal to make the reference for which the period is six months and the same is yet to expire, and, therefore, the challenge is premature and that the grounds now raised are such that they could urge the same before the criminal court and, hence, they cannot, in the circumstances, invoke the jurisdiction of this Court u/s 482.

The learned counsel for the petitioners maintained that, as matters now stand, the very basis of the prosecution is no longer existing as a result of Annexures II and III orders. According to him, in such circumstances, Annexure I complaint is only an abuse of the process of the Court and, consequently, the same has to be quashed. In the decision in Uttam Chand and Others Vs. Income Tax Officer, Central Circle, Amritsar, , the ITO granted registration to the firm for the assessment year 1969-70. The ITO cancelled the registration of the firm on the ground that the firm was not genuine, since one of the alleged partners stated that her signature in the records was not hers and that she was not a partner. The Tribunal found that she was in fact a partner of the firm and that the firm was genuine and set aside the cancellation of the order of the ITO. In the meantime, the ITO initiated prosecution against the firm u/s 277 of the Act for having filed false returns. In a revision petition for quashing the prosecution against the firm, the Punjab and Haryana High Court held that the Tribunal''s finding was not binding on the criminal court and the same cannot be a bar to the prosecution proceedings. The firm preferred an appeal before the Supreme Court by special leave. The Supreme Court held, in view of the finding recorded by the Tribunal that she was a partner of the firm and that the firm was genuine, the assessee could not be prosecuted for filing false returns and quashed the prosecution. In the subsequent decision of the Supreme Court in P. Jayappan Vs. S.K. Perumal, First Income Tax Officer, Tuticorin, , a search was conducted in the premises of the petitioner and several documents and account books which revealed suppression of purchase and deposits were revealed. The return filed by the assessee, was thus, not true and correct. A complaint was filed against the assessee under sections 271(1)(c), 273A, 276C, 277, 279(1A) of the Act and sections 193 and 196 of the Indian Penal Code. The assessee filed a petition u/s 482 of the Code of Criminal Procedure, 1973, to have the proceedings quashed contending that the launching of the prosecution was premature because the reassessment proceedings started against it for these years had not been completed. The High Court dismissed the petition. The petitioner preferred a petition under article 136 of the Constitution for special leave. The Supreme Court dismissed the petition, holding that the tendency of the reassessment proceedings could not act as a bar to the institution of the criminal prosecution for the offence u/s 276C or section 277. In considering the said aspect, the Supreme Court, in P. Jayappan''s case (supra), adverting to the case of Uttam Chand (supra) observed:

... It is true that, as observed by this Court in Uttam Chand and Others Vs. Income Tax Officer, Central Circle, Amritsar, , the prosecution once initiated may be quashed in the light of a finding favourable to the assessee recorded by an authority under the Act subsequently in respect of the relevant assessment proceedings but that decision is no authority for the proposition that no proceedings can be initiated at all u/s 276C and section 277 as long as some proceeding under the Act in which there is a chance of success of the assessee is pending...." (p. 700).

Thus, the decision in Uttam Chand''s case (supra) is reaffirmed by the Supreme Court. What is significant to be noted is that in this case no proceeding is now pending and there is a finding of the Tribunal in favour of the assessee.

The Punjab and Haryana High Court also has held in the decision in Parkash Chand Vs. Income Tax Officer, A-Ward, that, in view of the finding of the Tribunal that there was no concealment, the criminal prosecution against the assessee is liable to be quashed. The fact that the finding of the Tribunal in favour of the assessee would take away the very basis of the prosecution is reiterated in the decision of the Supreme Court in K.T.M.S. Mohd. and another Vs. Union of India, , where it is observed:

In the present case, on two occasions, the Tribunal has held that the amount of Rs. 6 lakhs was not owned by the first appellant. In exhibit D-4, the Tribunal has further held that section 69A dealing with unexplained money, etc., has no application to the facts of the case. Taking this finding of the Tribunal into consideration, we are constrained to hold that the appellants cannot be held to be liable for punishment u/s 120B read with section 277 and section 277 (simpliciter) of the income tax Act, 1961, as the very basis of the prosecution is completely nullified by the order of the Tribunal which fact can be given due regard in deciding the question of the criminal liability of appellants Nos. 1 and 2." (p. 219)

These decisions would show that the finding of the Tribunal, since it is in favour of the assessee, would take away the very basis of Annexure I complaint. But the learned counsel for the respondent relied on the decision of the Madras High Court in Hema Mohnot Vs. State, to contend that, in such circumstances the proper procedure is not to invoke the jurisdiction u/s 482 to quash the proceedings, but the proper forum is the criminal court itself where an assessee could prove that the prosecution is not sustainable. In that case, the prosecution had reached the stage of questioning the accused u/s 313(a) of the Code. The decision is distinguishable on facts and also is not in accordance with Uttam Chand''s case (supra).

The only other question that remains to be considered is the contention of the respondent that, since the period of six months u/s 256(2) has not expired on the basis of the order of the Tribunal, relief u/s 482 cannot be allowed. The learned counsel for the respondent relied on the decision in Commissioner of Income Tax Vs. Bansi Dhar and Sons, . In that case, the Supreme Court held that for staying the recovery pending reference before the High Court or the Supreme Court, the assessee should apply before the appellate authority. In that case, it was observed that until the reference is answered, the appeal is kept pending and that the jurisdiction of the High Court is purely advisory. But here the question for consideration is, with due regard to the scope of section 256(2), in the context of the order of the Tribunal in favour of the assessee, whether it is necessary to quash the criminal proceeding to secure the ends of justice. This Court in Criminal M.C. No. 1047 of 1991, invoked its jurisdiction u/s 482 and quashed the complaint where the prosecution was launched against the assessee under sections 276C(1) and 277 read with section 278B. In that case, the orders on the basis of which the complaints were laid were set aside by the Tribunal and reassessment was ordered. This Court quashed the complaints without prejudice to the right of the respondent to file a fresh application in the light of the result of the reassessment proceedings.

In the decision in W.L. Kohli and Vijay Kohli Vs. Commissioner of Income Tax and Another, , the Tribunal''s decision was in favour of the assessee. The application by the department u/s 256(1) was rejected and the application u/s 256(2) was pending. A complaint against the assessee under sections 277 and 278 of the Act and sections 193 and 196 of the Indian Penal Code was quashed, but it was clarified that, if the application made u/s 256(2) is allowed, the complaint will be treated as pending and the ITO will be entitled to revive the complaint. Again, in the decision in D.N. Bhasin and Another Vs. Union of India (UOI) and Others, , on the basis of the decision of the Commissioner (Appeals) in favour of the assessee, criminal proceedings pending against the assessee were quashed, providing that in case the order of the Commissioner (Appeals) is set aside, the revenue will be entitled to file fresh complaints. The said view is in accordance with the decision of this Court in Criminal M.C. No. 1047 of 1991. The Revenue has not yet filed any reference u/s 256(2). In view of the fact that, so long as the decision of the Tribunal is in force. The criminal court cannot come to a contrary conclusion, as the effect of the decision of the Tribunal is to take away the very basis of the prosecution. The prosecution is liable to be quashed safeguarding the right of the Revenue to file a fresh complaint in case the order of the Tribunal is set aside consequent upon the decision u/s 256(2). Therefore, Annexure I complaint is quashed without prejudice to the rights of the respondent to file a fresh complaint if the order of the Tribunal is set aside consequent upon an order u/s 256(2). In the result, the Criminal Miscellaneous Case No. 1047 is allowed as indicated above.