Prosecution under Section 276C of Income-tax Act, 1961- An Overview
Introduction
The mechanism for enforcing tax compliances under the Income-tax Act, 1961 ("the Act") is provided by way of three pillars vis-a -vis imposition of interests, imposition of penalties, and prosecutions. Chapter XXII of the
Act contains provisions relating to prosecutions.
Amongst other provisions, Section 276C of the
Act contains provisions relating to prosecution
against “wilful attempt to evade any tax, penalty
or interest chargeable or imposable or under-
reporting of income or, to evade payment of such
tax, penalty or interestâ€.
Analysis of legal provisions
A bare reading of Section 276C of the Act
shows that it provides prosecution for wilful
attempt to evade the chargeability or imposition
or payment of tax, penalty or interest. The said
provision is divided in two parts. Sub-section (1)
deals with ‘wilful attempt’ to ‘evade’ tax, penalty
or interest, which is “chargeable†or “imposableâ€
or “under-reporting of income†whereas sub-
section (2) deals with ‘wilful attempt’ to ‘evade’
‘payment’ of tax, penalty or interest. Thus, both
the sub-sections deal with two kinds of offences
committed at two different points in time by an
assessee.
Under sub-section (1), a ‘wilful attempt’ by an
assessee to ‘evade’ the chargeability or
imposition of tax, penalty or interest of an income
either by under-reporting of income or non-
reporting of income which is achieved either by
falsification of books of accounts or non-
recording of income, may lead to prosecution. It
is germane to note that sub-section (1) lays
emphasis on the evasion of tax, etc., before
charging or imposition or under reporting of
income. In another words, all the acts done by an
assessee whereby the income is not offered to
tax either due to falsification of books of accounts
or non-reporting of income or under reporting of
income, etc, would be a punishable offence u/s.
276C(1) of the Act.
Under sub-section (2), a ‘wilful attempt’ by an
assessee to evade the payment of tax either by
not paying the due taxes, interest or penalties or
claiming excessive relief in the return of income
thereby reducing the quantum of taxes payable.
In another words, the provisions of sub-section
(2) would operate when the payment of tax,
penalty or interest is due and an attempt is made
to evade such payment.
The basic difference between applicability of
sub-section (1) or (2) is the stage at which an
offence is committed. If an offence is committed
before the stage of filing of return of income, it
shall be covered by sub-section (1). Any offence
committed at or after the stage of filing of return
of income, would be covered by sub-section (2).
However, in certain circumstances there may be
overlapping between applicability of sub-section
(1) and sub-section (2).
Under both the sub-sections to Section 276C
of the Act, the first requirement is that the attempt
to evade should be ‘wilful’. This term has not
been defined under the Act. Under common
parlance, the word ‘wilful’ suggests the guilty
mind of the assessee. In other words, the
assessee has consciously or knowingly
Article
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DIRECT TAX AMICUS April, 2019
attempted to thwart the chargeability or payment
of tax, interest or penalty. Further, such wilful
attempt should be to ‘evade’ chargeability or
imposition or payment of tax, etc. The word
‘evade’ has also not been defined in the Act. As
per the Cambridge Dictionary, the word “evadeâ€
means “to avoid or escape from someone or
somethingâ€. Further, as per the K.J. Aiyar’s
Judicial Dictionary, “the word evade is capable of
being used in two senses, one which suggest
underhand dealing, and another which means
nothing more than the intentional avoidance of
something disagreeableâ€. Further, the Hon’ble
Supreme Court in the case of Tamil Nadu
Housing Board, has held that:
“when the law requires an intention to evade
payment of duty then it is not mere failure to pay
duty. It must be something more. That is, the
assessee must be aware that the duty was
leviable and it must deliberately avoid paying it.
The word ‘evade’ in the context means defeating
the provisions of law of paying duty. It is made
more stringent by use of the word ‘intent’. In other
words the assessee must deliberately avoid
payment of duty which is payable in accordance
with law.â€
In view of the aforesaid discussion, if an
assessee intentionally commits an act to escape
the chargeability or imposition or payment of any
tax, penalty or interest, such an act shall be
regarded as a wilful attempt to ‘evade’. Thus, the
law mandates the intentional escapement of
chargeability or imposition of tax, etc. or non-
payment of taxes due, but would not cover cases
of “bonafide claim†or “delay in payment of tax,
etc., on account of financial difficulties or similar
situationsâ€.
Further, Explanation to Section 276C also
defines the phrase “wilful attempt to evade any
tax, penalty or interest chargeable or imposable
under this act or the payment thereofâ€. The
explanation appended to the provision provides
an illustrative list of cases which can be covered
under the said term. Therefore, the explanation is
not exhaustive but inclusive in nature and any
other circumstance which has not been defined
therein but is hit by the rigours of the provisions
of Section 276C of the Act, would also be
punishable.
However, a question arises as to whether
the explanation is applicable to the entire section
276C or is restricted either to sub-section (1) or
(2) to the said section? The rules of interpretation
of statutes stipulates that where an explanation is
appended to a section, it is to explain the
meaning of words contained in that section. The
meaning to be given to an explanation must
depend upon its terms. The explanation has
been inserted after sub-section (1) & (2) and
starts with the words “for the purpose of this
sectionâ€. One school of interpretation would
mean that the said explanation applies to both
the sub-sections to Section 276. However, a view
may also be taken that the illustrative list of cases
contained in the said explanation, suggests that
the situations mentioned therein would occur
before the stage of filing of return of income and
therefore, are relevant only for the purpose of
sub-section (1) to Section 276C. Nothing therein
has been mentioned to suggests as to what
situations can be termed as ‘evasion’ of payment
of tax, interest or penalty. In the case of G.
Viswanathan, it was held that the explanation is
applicable only to sub-section (1) and it does not
cover “wilful attempt to evade payment of any
tax, penalty or interest†as covered by sub-
section (2) to Section 276 of the Act.
Conclusion
Section 276C of the Act provides for
prosecution where an assessee has wilfully
attempted to evade the chargeability or
imposition of tax, penalty or interest or has
wilfully attempted to evade the payment of tax,
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DIRECT TAX AMICUS April, 2019
penalty or interest. Before a prosecution can be
launched, it is necessary to show that that act of
assessee was wilful as well as to evade the tax,
interest or penalty. A bona fide claim or financial
distress to pay the taxes, are some of the
examples which should not be covered by the
rigours of Section 276C of the Act.
[The author is a Principal Associate, Direct
Tax Team, Lakshmikumaran & Sridharan,
Mumbai]
Non-quoting of Aadhar Number in return filed prior to 1-4-2019: CBDT clarifies
As per Section 139AA of the Income Tax Act,
1961, quoting of Aadhar Number or enrolment
application number in case Aadhar number has
not be allotted, is mandatory, in application for
PAN as well as in return of income. However, in
wake of questions over constitutionality of Aadhar
and difficulties in complying with this provisions
on or after 1-7-2017, many assesses have filed
returns without quoting Aadhar. By way of
Circular No. 6/2019 dated 31-3-2019, CBDT has
clarified that in respect of return field before 1-4-
2019 without quoting Aadhar, either because the
online facility permitted the same or by following
judgements of certain High Courts, no adverse
consequence would follow.
Liability for purchase transaction not covered under ‘sum found credited’ for purpose of Section 68 (cash credit)
The assessee had bought certain investments
from a group concern and the amount was shown
as payable in its books. Further the liability was
settled by issue of debentures. The tax
department sought to add the amount shown in
credit in the books as per Section 68 on the
ground that the sum presented income of the
assessee and the explanation offered by the
assessee was not satisfactory. The assessee
argued that all particulars of the intra-group
transaction of transfer of investment, including
identity of parties who were also tax assesses
had been shared and also in the absence of any
monetary exchange in the transaction, no
addition under Section 68 was warranted.
Relying on interalia the decision of the Special
Bench in the case of Manoj Agarwal v. CIT, 113
ITD 377 wherein a distinction was drawn
between credit of receipt of money and credit of
liability of the assessee to state that Section 68
will not be applicable in the latter case, the
Tribunal held that the impugned transaction did
not fall within the rigours of Section 68. [Abhijeet
Enterprise Ltd. v. ITO - I.T.A. No. 308/Kol/2017,
Order of ITAT, Kolkata dated 27-3-2019]
Ratio Decidendi
Circular
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Definition of ‘substantially financed’ inserted in Section 10(23C) is not retrospective
The assessee trust was formed solely for
educational purposes. It had received
substantial grants from the government. It had
also received certain sums from other sources.
The grants received from the government was in
excess of 50% of total receipts/ total expenditure,
during the year. The Trust treated itself to be
‘substantially financed by the government’ and
accordingly claimed its income to be exempt
under Section 10(23C)(iiiab) of the IT Act. The
revenue authority however held that, in the
absence of a definition of the phrase
‘substantially funded by the Government’, the
phrase has to be understood as per the meaning
given in the Comptroller Auditor General's
(Duties, Powers and Conditions of Service) Act,
1971 (‘CAG Act’). The CAG Act deems any
institution which funds more than 75% of its
expenditure through government grants as
‘substantially financed’ by such grants. The
revenue authority held that the tax payer was not
funded to the extent of 75% of its total
expenditure from the Government and
consequentially held the tax payer to be in-
eligible for exemption under Section
10(23C)(iiiab). On appeal, the High Court held
that the scope and purposes of the IT Act is
entirely different from the CAG Act and hence, a
phrase not defined in the IT Act cannot take its
meaning from the CAG Act. Given that the
Parliament has subsequently clarified its intention
of holding 50% funding as the criteria for
determining substantial funding, without holding
the subsequent clarification to be retrospective,
the High Court interpreted the phrase
‘substantially funded’ to mean either (a) funding
of more than 50% of expenditure, or (b) granting
more than 50% of total receipts, by the
government as the qualifying criteria, for the
purpose of claiming exemption under Section
10(23C)(iiiab) of the IT Act. [DIT (Exemptions) v.
Tata Institute of Social Sciences - 1179 of 2013,
decision dated 26th March 2019, High Court of
Bombay]
Deduction under Section 80P allowable to a credit cooperative society even if loans are given to associate members
The assessee, a primary agricultural credit
cooperative society registered under the Tamil
Nadu Cooperative Societies Act, 1983 (the TNCS
Act) claimed portion of its income as deduction
under Section 80P(2)(a)(i) and 80P(2)(d) of the IT
Act. The revenue authority observed that the
‘associate members’ of the Society did not have
right to vote or dividend in the Society and hence,
the income earned from them was ineligible for
deduction under Section 80P of the IT Act. On
appeal, the High Court held TNCS Act permits a
borrower to be an ‘associate member’ in a lender
society and when the governing statute
recognises such borrowers as members, the
Revenue Authorities cannot disregard the
privilege granted under the TNSC Act. The High
Court also observed that the judgment of the
Supreme Court in the case of Citizen
Cooperative Society Limited [2017] 397 ITR 1
(SC)] was rendered in the context of lending of
money in a manner contrary to the States
Cooperative Societies Act and hence would not
apply to the facts of the Tax Payer. [PCIT v.
Ammapet Primary Agricultural Cooperative Bank
Ltd. - 882 & 891 of 2018, decision dated 6th
December 2018, High Court of Madras]
TPO can determine ALP of ‘specified domestic transactions’ only if the transaction is referred to him by AO
The Tax Payer had demerged one of its business
undertakings into its holding company. It also
reported certain specified domestic transactions
(‘SDT’) in Form 3CEB. The Assessing Officer
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DIRECT TAX AMICUS April, 2019
(‘AO’) made a reference to the Transfer Pricing
Officer (‘TPO’) in respect of the SDTs reported in
Form 3CEB. The TPO, in the course of
proceedings before him noted that there were
certain other SDTs not reported by the Tax Payer
and sought to determine the Arm’s Length Price
of such SDTs not referred to him. On a writ
petition, the High Court observed that Section
92CA(2A) and (3A) of the IT Act which permits
the TPO to determine ALP of transactions not
referred to him, will apply only to international
transactions and not to SDT. The High Court
held that sub-section 92(3A) and the provisions
relating to determination of SDT were inserted by
Finance Act, 2012, and had the Legislature
thought it necessary, they could have included a
reference to SDT’s in the sub-section. The High
Court accordingly held that it would not be open
to the TPO to exercise his powers to determine
ALP without a reference made to him by the AO.
[Times Global Broadcasting Co. Ltd. v. Union of
India - [2019] 103 taxmann.com 388 (Bombay)]
Tax to be deducted on salary paid to missionaries and nuns surrendered to religious institutions: Income not diverted at source
In a writ filed by the Union of India, the High
Court has held that Section 192 of the Income-
tax Act has nothing to do with religious character
of teachers who are paid such salary by the State
in form of Grant-in-Aid. The State Government
provided Grant-in-Aid to schools wherein certain
nuns, sisters and priests were teachers. The
teachers claimed that they are bound by their
canon law to vows of poverty to the Christ, and
thus, having renounced the world, they have
suffered a civil death and thus cannot be subject
to tax deduction at source. The issue arose since
the mode of payment by the State changed from
a lump sum payment to the educational institution
to direct transfer to the beneficiaries account,
from which the Department instructed the
authorities of the State Government to deduct
tax. The Court held that the salaries received by
the missionaries, although belonging to the
Church, were only an application of income and
not in the nature of diversion of income by
overriding title. The ‘vows of poverty’ taken by the
missionaries would not alter the taxability of the
receipts as salary. The Court observed that
operation of TDS provisions of the Act is uniform
and not affected by the religious character of the
recipient of the income. The Court, thus upheld
the instructions of the Union Government to the
State Government to deduct tax at source from
the payments made by way of salary or pensions
to members of religious congregations. [Union of
India v. Society of Mary Immaculate (Tamil
Nadu), Madras - [2019] 103 taxmann.com 333
(Madras)]
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