SC Quashes Prosecution Under Section 276C(1) After Settlement Commission’s Conclusive Findings

SC Quashes Prosecution Under Section 276C(1) After Settlement Commission’s Conclusive Findings

A search under Section 132 of the Income Tax Act, 1961, was conducted at the residence of the appellant herein in the present matter on 24.04.2016, where unaccounted cash of Rs. 4.93 crores was seized. Thereafter, a sanction was granted under Section 279(1) of the Act, and a complaint was lodged against the appellant under Section 276C(1) for willful attempt to evade tax for A.Y. 2017-18. During the pendency of proceedings, the appellant approached the Settlement Commission under Section 245C and disclosed additional income. The Settlement Commission thereafter granted immunity from penalty but did not grant immunity from prosecution due to the pendency of the quashing petition before the High Court.

HC’s Decision: The HC observed that the Settlement Commission had consciously not extended immunity from prosecution, leaving the matter to be decided in criminal proceedings. Therefore, the High Court dismissed the appellant’s plea for quashing, leading to the present appeal before the Supreme Court.

Issues Raised: Whether continuing with the Revenue initiated prosecution under Section 276C (1) of the the Income Tax Act, 1961, against the appellant, after the Settlement Commission’s order would constitutes an abuse of the process of the Court and whether the High Court was justified in dismissing the appellant’s petition seeking quashing of the prosecution considering the facts of the present case?

SC’s Decision: The Apex Court held that it was unsustainable in law to continue prosecution against the appellant. The Hon’ble HC noted that departmental circulars dated 24.04.2008, the Prosecution Manual, 2009, and CBDT’s circular clearly provided that prosecution under Section 276C(1) should ordinarily be initiated only after confirmation of concealment penalty by the ITAT, and not otherwise. These circulars, being binding on the Revenue, were disregarded in the present case. The Court emphasised that prosecution cannot be sustained in absence of findings of wilful evasion or mens rea.

Reliance was placed on K.C. Builders Ltd. v. CIT (2004) 2 SCC 731, where it was held that if penalty for concealment fails, prosecution on the same material must also fail. Reiterating that departmental circulars are binding on tax authorities and cannot be ignored at their convenience. Since the Settlement Commission’s findings under Section 245D(4) were conclusive under Section 245-I, and no suppression or wilful evasion was established, continuation of prosecution was held to be an abuse of process. The Court therefore quashed the prosecution, imposed costs of Rs. 2,00,000 on the Revenue, and set aside the High Court’s order.

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