The Supreme Court has delivered a stern message to the Income Tax Department, quashing prosecution proceedings against assessee Vijay Krishnaswami and imposing a Rs 2 lakh cost on the Revenue for acting in "blatant disregard" of binding Central Board of Direct Taxes (CBDT) circulars.
A bench of Justices J.K. Maheshwari and Vijay Bishnoi slammed the Department for "wilful non-compliance", holding that such conduct undermines fairness, consistency, and accountability in tax administration.
Background of the Case
The case arose from a search operation in April 2016 under Section 132 of the Income Tax Act, where officials seized unaccounted cash worth Rs 4.93 crore from the assessee. Prosecution was sanctioned in June 2018 under Section 276C(1) for alleged wilful tax evasion.
However, in December 2018, the assessee approached the Settlement Commission, making additional disclosures. In November 2019, the Commission granted immunity from penalty, holding there was no wilful attempt to evade tax, though it withheld immunity from prosecution due to pending litigation.
The Madras High Court later dismissed the assessee's plea against prosecution, prompting an appeal to the Supreme Court.
Key Issues Before the Court
The central question was whether prosecution under Section 276C(1) could stand when:
- No Income Tax Appellate Tribunal (ITAT) order confirming concealment existed, and
- The Department ignored CBDT's binding circulars requiring such confirmation before prosecution.
CBDT Circulars Ignored
The bench referred to three critical directives:
- CBDT Circular (2008): Prosecution only after ITAT confirms concealment penalty > Rs 50,000.
- Prosecution Manual (2009): Reaffirmed ITAT confirmation as a precondition.
- CBDT Circular (2019): Cases below Rs 25 lakh require Collegium approval and ITAT confirmation before prosecution.
The Court reiterated earlier rulings in K.C. Builders Ltd. v. CIT and UCO Bank v. CIT, affirming that circulars binding on tax authorities cannot be disregarded.
Supreme Court's Observations
The judges noted:
- No ITAT confirmation existed when prosecution was launched.
- The Settlement Commission had already found no wilful tax evasion.
- The Revenue acted with "wilful non-compliance" of binding instructions.
The Court remarked:
"Such wilful non-compliance reflects a serious lapse, and undermines fairness, consistency, and accountability. It cannot be treated as justified or lawful."
High Court's Oversight
The Supreme Court held that the Madras High Court erred in overlooking the impact of Settlement Commission findings and CBDT circulars, and failed to examine whether prosecution served any real purpose.
Final Ruling
- The prosecution proceedings were quashed.
- The Income Tax Department was directed to pay Rs 2 lakh in costs to the assessee.
Implications of the Judgment
This ruling reinforces that CBDT circulars are binding on the Revenue and prosecution cannot proceed in their violation. It also strengthens taxpayer protection against arbitrary actions and highlights the judiciary's role in ensuring consistency, fairness, and accountability in tax administration.
Official copy of the judgment has been attached
CAclubindia
