Can Revenue launch prosecution without waiting
for the outcome of appellate proceedings?

In recent days, some assessees have received the show cause notices for launching of the prosecution as soon as the penalty is confirmed by the Tribunal.

With respect, mere confirmation of penalty by the Tribunal cannot be a ground to initiate prosecution proceedings. Assessee may otherwise be filing returns regularly and paying the taxes and only in one year, unable to substantiate the claim of deduction. Can such an assessee be considered as tax evader?

Many times penalties are confirmed because the facts are not properly presented before the tax authorities and the appellate authorities.

The Economic Times on 8-6-2015 carried a news reporting that “The Apex policy making body of the I-T department, in a strategy paper for recent conference of top tax officials, told tax sleuths that the “need of the hour” is to effectively launch prosecution cases in wilful evasion cases at the earliest even “without” waiting for the outcome of any other appellate processes.”

With respect, it may not be appropriate for the revenue to launch prosecution even without waiting for the outcome of appellate proceedings. Under the Income-tax Act, the Income Tax Appellate Tribunal is final fact finding authority. In majority of the cases, though the quantum order making additions may be confirmed, but still they are not fit cases for levy of penalty. Assuming the penalty is confirmed by the Tribunal, the assessee may be filing an appeal to the High Court which may admit the appeal. High Court admits the appeal only when there is a substantial question of law is involved. When a substantial question of law is involved
qua the penalty, such a case may not be fit for launching of prosecution. In
K. C. Builders & Anr. v. ACIT [2004] 265 ITR 562 (SC) (573), the Apex Court held that once the penalties are cancelled on the ground that there is no concealment, quashing of prosecution under section 276C is automatic.

It may be worth noting that the Revenue has launched prosecution in some matters more than 20 years back. But, still the matters have not been taken up for final hearing. If this is the state of affairs, launching of prosecution will not serve as a deterrent and it will be a waste of taxpayers’ money.

When a show-cause notice for prosecution is issued against a company, the directors are also made party in the prosecution proceedings. In an appropriate case it may be desirable for the company to opt for compounding of the offences, so that the precious time of directors can be saved from attending to the Court proceedings for decades. CBDT has prescribed the guidelines for compounding of offences under
Direct Tax Laws {Guidelines dated 23-12-2014 [2015] 371 ITR 7 (St.)}. However, the compounding fee fixed by the CBDT is very exorbitant. It may be desirable to fix a reasonable amount of compounding fee so that more assessees can opt for compounding in order to avoid the prolonged litigation.

In an appropriate case, it may be desirable for an assessee to approach the Commissioner for waiver of penalty under section 273A. Even if the penalty is waived off partly, the Revenue is debarred from launching prosecution under section 279 of the Income-tax Act.

It may even be desirable for assessees to approach the Settlement Commission so as to obtain immunity from penalty as well as prosecution.

Having said that, as tax practitioners, one must caution assessees against very adventurous tax planning. We do hope that the tax administration does not initiate the prosecution against honest taxpayers who may be victims of penalty due to various technical reasons.

Taxpayers’ education and better tax compliance can save the assessee from penalty and prosecution.

Readers may send their valuable suggestions on the issues of prosecution in Direct Tax matters and compounding of offences which may help the Federation to make representation to the Government.

Dr. K. Shivaram

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