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Direct Tax Amicus - April 2019

Lakshmikumaran & Sridharan
MEMBER FIRM OF TerraLex

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India April 25 2019

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

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

3

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,

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

4

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

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

5

DIRECT TAX AMICUS April, 2019

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

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

6

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)]

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

7

DIRECT TAX AMICUS April, 2019

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