1. Introduction:

1.1. Central Board of Direct Taxes, CBDT, in an attempt to limit initiation of prosecution to deserving cases and also to provide an opportunity to the assessees to file a compounding application beyond the period of limitation as a one-time measure till 31.12.2019, issued two circulars on 09.09.2019. These circulars have been analysed for the benefit of tax professionals and public at large in the following write-up.

1.2. CBDT by circular dated 09.09.2019 titled ‘Procedure for identification and processing of cases for prosecution under direct tax laws’, has eased norms for prosecution for TDS and defaults in filing IT returns. The circular lays down limits and time period for proceeding with prosecution in cases where norm – payment of TDS is ₹ 25 lakhs or below and delay in deposit is less than 60 days. The punishment for certain acts under the Direct Tax have been reduced, so that honest taxpayers are not harassed, and those who commit minor or procedural violations are not subjected to disproportionate or coercive action.

1.3. For the first time a “collegium” comprising of two senior ranking officers is established.

1.4. It may be noted that earlier there was a CBDT Instruction dated 28-5-1980, which had instructed IT officials not to launch prosecution where delay in depositing TDS was less than 1 year. This circular was withdrawn in August 2013.

1.5. By Circular dated 09.09.2019, CBDT has also relaxed prosecution norms for offences relating to under reporting of income. Where the amount sought to be evaded or tax on under-reported income is ₹ 25 lakhs or below prosecution can only be launched after approval of the Collegium.

1.6. The circular comes in to immediate effect and shall apply to all pending cases where prosecution complaint is in process to be filed in court.

1.7. Under existing provision, failure to deposit TDS u/s 276B attracts rigorous imprisonment from 3 months to 7 years and a fine. Now, under the new procedure, no prosecution would be initiated if the amount not deposited is ₹ 25 lakhs or less or delay in depositing TDS is less than 60 days.

1.8. Under Section 276C(1), for offence of under reporting of income of an amount of ₹ 25 lakhs or less, there is rigorous imprisonment for a period of 3 months up to maximum of 2 years and fine, whereas under the new norms, where evaded amount or tax is ₹ 25 lakhs or less, prior approval of the Collegium would be required before initiating prosecution.

1.9. If there is failure to file Income-tax return then, as per section 276CC the person is liable for rigorous imprisonments for term of 3 months up to 7 years and fine.

1.10. The Income-tax Act provides a low threshold of rupees ₹ 10,000 for launching prosecution for non-filing of IT returns as per section 276CC w.e.f. 01.04.2020, which can result in even rigorous imprisonment starting from 3 months and extending up to 7 years. As per the new circular, limit on the evaded amount of tax for non-filing is ₹ 25 lakh or less, where prior approval of Collegium is required to initiate prosecution.

1.11. There are certain issues which arise for consideration from Circular No. 24/2019 dt. 09.09.2019 which are discussed herein below:

2. Collegium System

2.1. The Collegium System is for the first time introduced via circular No. 24/2019 dated 09.09.2019 where a reference to the Collegium has been made mandatory in cases where the threshold limit of tax/amount evaded is ₹ 25 lakh or below.

2.2. The Black Law’s Dictionary defines a Collegium to be, ‘An assemblage of people empowered to act as a juristic person in the pursuit of some useful purpose of business’. However, there is no definition of the term ‘Collegium’ under the Income-tax Act or the Income-tax Rules.

2.3. A question arises as to whether the government can introduce the Collegium System when the legislature has not provided for any such rule or provision. The Income-tax Act or Rules do not provide for any such advisory or administrative board like a collegium, neither is it defined under any definition in the Act nor has any reference in the Rules. Such an introduction may be done through an amendment in the Finance Act or the Income-tax Act or the Income-tax Rules, since it is a new mechanism for easing prosecution norms.

2.4. However, it would be pertinent to mention here that the concept of introducing a Collegium and also a reference to a higher authority i.e. a Principal Chief Commissioner of Income tax is beneficial since the idea of majority vote would prevail in case of disagreement between the officials of the Collegium, thereby making the framework more robust.

2.5. The Collegium as is set up, comprises of CCsIT/DGIT and even Pr. CCIT(CCA). It appears that this would be mostly represented from the department/revenue’s point of view. To make it more impartial, fair and workable and by giving a separate independent status, it would be highly advisable that an independent party not from the government may also be inducted in the Collegium.

3. Administrative Approval

3.1. Para 3 of the Circular mentions an ‘Administrative Approval’ to be sought from the Collegium by the Sanctioning Authority as specified under section 279(1). The Circular coins the two terms, ‘Administrative’ and ‘Approval’ in an attempt to convey the type of such approval sought.

3.2. Administrative Approval may be taken as an internal communication in the department. The Circular is silent on the aspect of whether any order would be passed to give effect to such administrative approval or whether such administrative approval itself could be considered as an order.

4. Whether the Administrative Approval can be challenged

4.1. Approval can also be considered as advisory or administrative consent or sanction. Since, the sanctioning Authority mandatorily needs to obtain prior approval of the Collegium, it is nothing but an act of sanction/approval prior to the act of proceeding with prosecution. If we juxtapose the provisions of reopening, where sanction needs to be obtained as per section 151 in certain cases, and such sanction is not obtained, the initiation of reassessment proceedings become void ab initio. Similarly, when the approval before the initiation of prosecution is not obtained, even when the case falls within the parameters of the guidelines mentioned in the circular, could such an act be challenged in a court of law? Would a complaint filed in a case, where the amount/tax sought to be evaded for non-filling of returns, be treated as bad in law if it violates the modalities laid down in the circular? And if pointed out, would the department withdraw complaints already filed with the Magistrate?

4.2. It can be argued that the Circular is an internal communication and gives directions to authorities in matter of prosecution. The question that arises is whether any aggrieved assessee would have any rights against such administrative approvals/sanction and thereby to file a Writ or any other remedy against such approvals sought by the sanctioning authority. It follows that an Approval or a direction or a sanction is required to be given by the Collegium to the sanctioning authority and such approval/direction/sanction partakes the character of an Order which could be challenged in appropriate legal forums.

4.3. The Circular provides a particular benefit to the assessees, and the appropriate authority’s act takes away such benefit conferred and hence it can be argued that there would arise a right to enforce such a benefit. Hence, the Administrative Approval may be considered as a mandatory aspect to be followed by the department, which, if not followed, should attract the intervention of higher authorities or Judicial authorities to enforce such directions in view of Public Interest.

5. Amount sought to be evaded

5.1. In Para 2(iii), it has been mentioned that the limit of ₹ 25 Lakh is available for cases where the amount sought to be evaded, or tax on under-reported income, is below ₹ 25 Lakh. When the circular mentions ‘amount sought to be evaded’, no clarity has been given as to whether such amount is the tax amount on the amount sought to be evaded or the quantum which the Assessing Officer seeks to make an addition of or an any other amount.

5.2. Prima Facie the circular seems to portray that the tax amount on the amount sought to be evaded should be considered for the purpose of the threshold provided by the circular. However, clarification may have to be provided by the department.

5.3. It appears under the heading Para 2(iii) – Offences under section 276C(1) – Wilful attempt to evade tax, etc., the words ‘amount sought to be evaded’ is superfluous and not required since even section 276C(1) clearly states ‘If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or [imposable, or under reports his income,] under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable’, thus by importing the words ‘amount sought to be evaded’ is travelling beyond the scope and jurisdiction of section 276C itself and therefore requires to be deleted. It is pertinent to point out that there is a huge difference between amount sought to be evaded vis-a-vis tax and this has to be appreciated in the light of the intention of the legislature in enacting section 276C which deals with wilful attempt to evade tax, penalty or interest.

5.4. Further, the Gujarat High Court in the case of Supernova System Private Limited vs. CCIT (www.itatonline.org) has also held that the wordings ‘amount sought to be evaded’ means the amount of ‘tax’ sought to be evaded.

5.5. In view of the same, it can safely be said that the amount sought to be evaded is the amount of tax which will considered for the purpose of the threshold limit.

6. Habitual Defaulters

6.1. The Circular in Para 2 mentions that only ‘deserving cases’ would be taken up for prosecution. The categories of cases where the beneficial clauses of the Circular would not be applicable have been mentioned to be exceptional cases like habitual defaulters based on the particular facts of each case, the prosecution may be initiated only with the previous approval of a collegium of two Chief Commissioners or Director General rank officers of Income-tax department. However, Habitual Defaulters have not been defined.

6.2. Habitual defaulter can be any person committing an offence repeatedly and who is habituated in committing the offence. It could be so that a person may have committed any of the prosecutable offence once, and thereafter had a clean record for a long time. If such a person, unintentionally, commits the offence again, would such person be prosecuted even though such assessee had maintained himself to be honest throughout? An issue would arise that in case of non-deduction of TDS, the offence is spread over a number of months and years. In such circumstances, would the assessee be regarded as Habitual Defaulter. One has also to look into the issue of ‘Reasonable Cause’. It may be due to compelling circumstances and tight market conditions coupled with financial difficulties which prevented the assessee from making the TDS payments, but which were subsequently paid late. It is confined to only that patch of difficult times faced by the Assessee. The issue would be whether such a person can be treated as a habitual defaulter.

6.3. It is also mentioned in Para 2(i)where it has been mentioned, ‘inexceptional cases like Habitual Defaulters based on the particular facts and circumstances of the case…..’, the words used are ‘Exceptional Cases’ followed by the descriptive word ‘Like’. Would it imply that there is a separate list of exceptional cases and that habitual defaulter is only one illustrative instance.

7. Issue of Pending Cases

7.1 Para 5 of the circular shall come in to effect immediately from 09.09.2019 and the words “shall apply to all the pending cases where complaint is yet to be filled”, implies that the effect of the circular shall apply to all pending cases, where the prosecution complaint is yet to be filled. Thus the implication is that all cases which are in the pipeline and where prosecution is yet to be filed would qualify for the benefit of this circular.

7.2 This is extremely harsh, unreasonable and discriminatory. The correct approach should be that even cases where prosecution is already launched and complaint is filed before Magistrate and cases which are pending to be heard should also get the benefit of the circular. Thus the issue that circular would apply to pending cases where complaint is yet to be filled should be modified to cover pending cases which are already filed before the magistrate court .

7.3 This would amount to an equitable approach otherwise this issue could be constitutionally challenged on the grounds of discrimination, inequality, classification and unreasonableness.

Relaxation of time – Compounding of Offences under Direct Tax Laws – One Time measure

1. There is also Circular No. 25/2019 dt. 09.09.2019 titled ‘Relaxation of time-Compounding of Offences under Direct Tax Laws – One Time measure’Vide this circular, with a view to mitigating unintended hardship to taxpayers in deserving cases, and to reduce the pendency of existing prosecution cases before the courts, the CBDT has issued as a one-time measure, the condition that compounding application shall be filed within 12 months, is relaxed whereby such application shall be filed before the Competent Authority i.e. the Pr. CCIT/CCIT/Pr. DGIT/DGIT concerned, on or before 31-12-2019.

2. The Circular further mentions the situations in which the application can be filed as mentioned below:

‘(a) prosecution proceedings are pending before any court of law for more than 12 months, or

(b) any compounding application for an offence filed previously was withdrawn by the applicant solely for the reason that such application was filed beyond 12 months, or

(c) any compounding application for an offence had been rejected previously solely for technical reasons.’

3. As per Clause 7(ii) of the Guidelines for Compounding of offences under the Direct tax laws, 2019 issued by CBDT, Department of Revenue, Ministry of Finance, Govt. of India, dated 14.06.2019, an application for compounding was required to be filed within 12 months from the end of the month in which the prosecution complaint has been filed in a court of law in respect of the offence for which the compounding has been sought.

4. In number of cases, the compounding application was filed after the period laid down in the guidelines with the result that there was delay in filing the compounding application. Consequently assessees filed application for condonation of delay along with application for compounding of offence.

5. The Central board of Direct Taxes, Department of Revenue, Ministry of Finance, Govt. of India, has now in terms of Circular 25/2019 dated 09.09.2019, extended the time limit for filing such applications which were filed under the above guidelines to 31.12.2019. Thus under clause 4.2 of the circular dated 09.09.2019, all applications for compounding filed with application for condonation of delay are now deemed to have been filed within the time prescribed in terms of clause 7(ii) of the Compounding Guidelines dated 14.06.2019.

6. The two circulars give much relief to the tax payers and are a step in the right direction, so as not to harass the honest taxpayers or unnecessarily subject to hardship innocent taxpayers for minor offences. It is sincerely urged that prosecution is a drastic step and is a Criminal proceedings. It spoils the reputation of an individual as having committed an offence and crime. Thus small and minor offences should be subjected to penalties and fines but not prosecution.

For detailed discussion on Offences and Prosecutions, please visit www.itatonline.org to refer to the article on ‘Guide To Offenses And Prosecutions Under The Income-tax Act, 1961’.

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