Court’s Decision
The Bombay High Court (Justice S. M. Modak) quashed a criminal prosecution initiated by the Income Tax Department under Section 276C(2) of the Income Tax Act, 1961, ruling that mere delay in payment of self-assessment tax does not amount to a willful attempt to evade tax. The Court observed that penal provisions must be strictly construed and that the “failure to pay tax cannot automatically imply an intention to evade tax.”
The Court held that since the assessee had paid the entire tax liability, albeit belatedly, the continuation of prosecution would be “an abuse of the process of law.”
Facts
The petitioner, an assessee engaged in the business of stone crushing and manufacturing cement pipes through two partnership firms, had filed his income tax return for the assessment year 2022–2023 on 5 November 2022, declaring an income of ₹2,17,10,710 and showing a self-assessed tax liability of ₹94,22,300.
Under Section 140A of the Income Tax Act, such self-assessment tax must be paid before filing the return. However, the assessee failed to deposit the amount at that time and made the payment later on 16 January 2023, with applicable interest.
The Income Tax Department processed the return on 15 December 2023 under Section 143(1) and determined a tax liability of ₹1,05,04,470. Subsequently, the Department sought sanction to prosecute the assessee under Section 276C(2) for willful failure to pay self-assessment tax, alleging that he prioritized his business expenditures over statutory tax obligations.
After obtaining sanction from the Principal Commissioner of Income Tax (Central) on 18 September 2024, the Department filed a complaint before the JMFC, Pune, which issued process against the assessee on 5 December 2024. The assessee challenged this order before the High Court, arguing that there was no willful intent to evade tax, as the liability had been fully discharged prior to initiation of prosecution.
Issues
- Whether non-payment of self-assessment tax along with the return constitutes a willful attempt to evade tax under Section 276C(2)?
- Whether the subsequent payment of tax nullifies criminal liability?
- Whether the order issuing process under Section 276C(2) could be quashed under Article 227 of the Constitution?
Petitioner’s Arguments
The petitioner contended that delay in payment cannot be equated with willful evasion. He emphasized that the tax amount was duly paid within a reasonable time after filing the return, along with interest, demonstrating good faith rather than intent to evade.
It was argued that the essential ingredient of Section 276C(2)—the presence of “willful attempt”—was missing. The petitioner distinguished between mere “failure” to pay tax and a “willful attempt to evade” tax, asserting that only the latter attracts prosecution.
Relying on the Bombay High Court decision in Unique Trading Co. v. Income Tax Officer ([2024] 159 taxmann.com 216), counsel argued that where tax is ultimately paid, the element of intent to evade is absent, and criminal proceedings cannot be sustained. The petitioner also submitted that penalty and prosecution under the Income Tax Act serve different purposes—non-payment might invite penalty but not necessarily prosecution unless mala fide intent is proven.
Respondent’s Arguments
The Income Tax Department argued that the failure to pay self-assessment tax before or along with filing the return, as required by Section 140A, constitutes a clear offence under Section 276C(2).
Counsel for the Revenue asserted that mens rea (criminal intent) could be inferred from the conduct of the assessee, who utilized available funds for other business purposes instead of paying the statutory tax dues. The Department contended that willful evasion can be presumed under Section 278E, which shifts the burden onto the assessee to prove absence of intent.
The Department relied on:
- Madhumilan Syntex Ltd. v. Union of India, (2007) 160 Taxman 71 (SC), holding that prosecution is independent of assessment proceedings;
- ITO v. Sultan Enterprises, (2003) 127 Taxman 514 (Mad), emphasizing that mens rea can be inferred from conduct;
- Kashiram v. Income Tax Officer, [1977] 107 ITR 825 (AP), which held that tax due to the State is akin to a debt, and failure to pay justifies prosecution;
- Nayan Jayantilal Balu v. Union of India, (Bom HC, 2021), where the Court declined to interfere with sanction for prosecution under similar circumstances.
Analysis of the Law
The Court noted that Section 276C of the Income Tax Act comprises two sub-sections with distinct scopes:
- Sub-section (1) deals with willful attempt to evade tax or interest, including evasion by falsifying returns;
- Sub-section (2) pertains specifically to non-payment of tax, interest, or penalty, provided such non-payment is willful.
Justice Modak emphasized that prosecution under Section 276C(2) requires demonstration of willful intention—a deliberate act of evasion, not merely a lapse or delay.
The Court clarified that the penal provisions must be construed strictly, and where the language introduces the requirement of intent, such element cannot be presumed merely from default. The presence of the word “willful” distinguishes Section 276C(2) from provisions such as Section 276B, where simple failure to deposit TDS constitutes an offence without need to prove intent.
Precedent Analysis
- Unique Trading Co. v. ITO ([2024] 159 taxmann.com 216):
Held that mere failure to pay self-assessment tax along with the return does not automatically constitute willful evasion. The Bombay High Court quashed prosecution where tax was subsequently paid, emphasizing that “failure” and “willful evasion” are distinct. - Madhumilan Syntex Ltd. v. Union of India (2007) 160 Taxman 71 (SC):
The Supreme Court held that prosecution may proceed independently of penalty proceedings but must be founded on specific averments showing intent. The High Court observed that this case was not directly applicable since it dealt with deliberate falsification and TDS defaults, not delayed self-assessment payments. - Kashiram v. ITO (1977) 107 ITR 825 (AP):
Dealt with non-payment of tax deducted from others’ income, where the Court held that such tax is not the assessee’s property. Justice Modak distinguished this case as involving TDS under Section 276B, not self-assessment tax. - V. Nayan Jayantilal Balu v. Union of India (Bom HC, 2021):
Referred for its limited scope regarding the Court’s refusal to quash sanction; however, it did not address the core issue of willfulness under Section 276C(2).
These precedents collectively reinforced the Court’s conclusion that Section 276C(2) requires deliberate intent, not merely technical non-compliance.
Court’s Reasoning
The Court analyzed the timeline of events and found that:
- The assessee had filed the return on 5 November 2022;
- Paid the self-assessment tax on 16 January 2023;
- The Department initiated prosecution more than a year later, despite full payment with interest.
It noted that while default existed, the subsequent payment and explanation of financial difficulty indicated no deliberate evasion. The Court observed that the Department’s complaint lacked specific averments proving intentional non-payment.
Justice Modak emphasized that criminal law cannot be invoked mechanically for mere delay:
“In cases where there is a genuine reason for delayed payment, such failure cannot be considered as willful evasion. To continue prosecution in such a case would be an abuse of process of court.”
The Court concluded that the presumption of culpability under Section 278E arises only after establishing the primary ingredients of the offence, i.e., deliberate intent—which was absent here.
Conclusion
The High Court allowed the writ petition, quashed the order of issuance of process dated 5 December 2024, and dismissed the complaint pending before the JMFC, Pune. It held that no case of willful evasion was made out under Section 276C(2) of the Income Tax Act, and the prosecution would amount to misuse of judicial process.
“Since the assessee has paid the tax amount within a short span and there is no element of intention to evade, the prosecution cannot stand.”
Implications
This ruling reaffirms that tax delay is not tax evasion. It draws a clear distinction between willful default and mere failure to comply, setting an important precedent for taxpayers who rectify defaults promptly. The judgment underscores that criminal liability under Section 276C(2) demands proof of intentional evasion—not inadvertent delay or financial hardship.
It also cautions authorities against mechanical initiation of prosecution without verifying the presence of mens rea, thereby preserving the balance between tax enforcement and fairness.
