In the case tilted D.K. Shivakumar and Ors. Vs. Income Tax Department, Criminal Revision Petition Nos. 955, 959 and 969/2019, MANU/KA/7956/2019, the High Court of Karnataka has dismissed the criminal revision petitions filed by the Petitioners (Revisionists) challenging the dismissal of applications filed by them under Section 245(2) of Code of Criminal Procedure, 1973, seeking discharge from the criminal complaints filed against them for the offences punishable under Sections 276(C)(1), 277, 278 of the Income Tax Act, 1961 (hereinafter referred as “Act”) for the assessment year 2018-19 and Sections 193, 199 and 120B of Indian Penal Code, 1860.  

The petitions were filed primarily on the 3 grounds: 

A. That there is no valid sanction as contemplated under Section 279 of the Act as the sanction has been granted by Principal Director of Income Tax, but as per Section 279 of the Act, sanction has to be given by Commissioner or Principal Commissioner; 

B. That the prosecution proceedings are premature at this stage, as in the instant matter, search was conducted on 2.8.2017 and as per Section 139(1) of the Act, the due date for filing the return of income was 31.7.2018 or up to 30.9.2018 in case of the audit was required, and till the filing of return of the Income Tax for the year 2018 was not completed, the prosecution should not have been initiated; and  

C. That the finding of the Income Tax Tribunal is conclusive and has bearing on the pending criminal proceedings and since no order has been passed by the tribunal, if the tribunal acquits, no offence survives under the Act. Under such circumstances, till the assessment is made, any penalty is imposed and if the order of the tribunal is not finalized, till then the initiation of the proceedings as against the petitioners-accused is not sustainable in law.  

With respect to the Ground A, the petitioners in support contended as under: 

• As per Section 279 of the Act, sanction has to be given only by Principal Commissioner who is heading the assessment wing, as there are two wings, i.e., the investigation wing and assessment wing.  

• That as per Section 279 of the Act no proceedings can be initiated for the offence under Sections 275A, 275B, 276, 276A, 276B, 276BB, 276C, 276CC, 276D, 277, 277A or 278 except with the previous sanction of the Principal Commissioner or the Commissioner or Commissioner (Appeals) or the appropriate authority. 

• That though Section 2(16) of the Act defines the Commissioner and it includes the Commissioner of Income Tax or Director of Income Tax or a Principal Commissioner of Income Tax or a Principal Director of Income Tax, but the general definition does not have a legislative intent to include them under Section 279 of the Act.  

• That in the provisions of Sections 132, 132A, 133 of the Act both the Principal Director and the Principal Commissioner together have been included. Non-inclusion in Section 279 of the Act clearly shows that no power has been given to Principal Director. 

• That grant of proper sanction by a competent authority is a sine-qua-non for taking cognizance of an offence and trial.  

• That the Notification dated 13.11.2014 vide which the Principal Director, inter alia, has been authorized to exercise and perform the functions relating thereto in respect of the provisions under Chapter XXII (Offences and Prosecutions) for other authorities, has been already challenged before the Hon’ble Court on the following  grounds:  

o That the administrative and special powers cannot be delegated on the basis of the notification when the statute itself is in existence and the said notification has been issued not under Section 120(4) of the Act but under Section 120(1) and (2).  

o That the Central Board of Income Tax cannot issue any such notification of delegation of the power.  

o That sanctioning power given does not corresponds to the provisions of the ChapterXIII (C) of the Act, under which Section 120 falls.  

o That many notifications have been issued by the Income Tax Department, but therein what power has been entrusted has been specifically mentioned, but the Notification dated 13.11.2014 is not in the form in which the Notifications have been earlier issued. 

The Hon’ble Court while rejecting the Grounds B and C of the Petitioners, held as under: 

• That the pendency of the assessment proceedings cannot act as a bar to institution of a criminal prosecution for the offences punishable under Section 276(1) or Section 277 of the Act. 

• That no provision of the Act provides that a prosecution for the offence cannot be launched until reassessment proceedings are initiated against the assesse and are completed. 

• When the criminal proceedings have been initiated in the first instance, thereafter the returns have been filed for the assessment year, then the contention taken up that the proceedings initiated are premature before the assessment year is not tenable in law. 

The Hon’ble Court while dealing with the Ground A of the Sanction, did not find much substance in the submissions of the Respondent that the Principal Director is entitled to grant sanction, as the Principal Director is already included in the definition of Commissioner under Section 2(16) of the Act, or that Section 116 of the Act mentions both the Principal Directors of Income-tax or Principal Commissioners of Income-tax under the same class. However, the Hon’ble Court held that the Principal Director is deriving the power to issue the sanction under the Notification dated 13.11.2014. The Hon’ble Court also relied upon Under Article 13 of the Constitution of India and stated as under: 

“Law" has been defined and it includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India, the force of Law. When the said Notification has been challenged and not yet finalized with regard to legality or otherwise, in that light, Notification dated 13.11.2014 as per Article 13 of the Constitution of India is having a force of law and by virtue of the said authority, if the sanction has been issued by the Principal Director of Commissioner, then under such circumstances, it cannot be held that he is not having any authority to issue the sanction order.” 

The Hon’ble Court while dismissing the Writ Petitions also held that although Section 279 of the Act starts with a non-obstante clause, still any error or omission in the sanction cannot be considered to be an illegality, but it will be only an irregularity.  

In the author’s view, the observation of the Hon’ble Court that any error or omission in the sanction under the Income Tax Act cannot be considered to be an illegality but only an irregularity is not correct.  

The Hon’ble Court while giving the above observation relied upon the judgments of the Hon’ble Supreme Court given in the context of the Prevention of Corruption Act, 1988.  In the Prevention of Corruption Act, 1988, there is Section 19 which elaborately deals with the sanction, and includes, inter alia, that no court shall stay the proceedings on the ground of any error, omission or irregularity in the sanction granted by the authority, unless it is satisfied that such error, omission or irregularity has resulted in failure of justice. However, such section is missing in the Income Tax Act and further, Section 279 of the Act also starts with a non-obstante clause and therefore, it appears that any error or omission in the sanction under the Income Tax Act tantamount to illegality. 

Further, in author’s view the Income Tax Act is a fiscal statute and the main aim is to collect taxes rather than penalizing people. There is no specific bar under the Act for initiation of criminal proceedings in absence of the assessment proceeding. However, considering the scheme of the Act and the manuals/ circulars of the Income Tax Department, it would be improper for the Income Tax Department to rush with the prosecution without a proper determination of the Tax under the Act.