TDS – OFFENCES, PROSECUTION & COMPOUNDING

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NORTHERN INDIA REGIONAL COUNCIL

OF

THE INSTITUTE OF CAHRTERED ACCOUNTANTS OF INDIA

CA SANDIP AGRAWAL

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29 April 2022

STATISTICS OF THE NO, OF PROSECUTION CASES

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Note:

• In FY 2017-18 in 4527 cases prosecution launched as compared to 1252 in previous year as such four fold increase in prosecution cases.
• The cases of compounding raised from 575 in FY 2016-2017 to 1052 in FY 2017-2018.
• That the percentage of incremental compounding is 182% as compared to previous year.
• On a contrary Conviction fallen to as low as 13 from 48 in preceding financial year.

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*Above Statistics show that increased prosecution is merely used as revenue generation mechanism.

STAND OF REVENUE

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• Increasing direct tax collection by greater focus on TDS / TCS compliance is of high priority on the Government’s agenda.
• Government’s shift to digitization – in filing of TDS returns, processing of data through data analytics has resulted in identifying the non-compliances made by taxpayers.
• Serious non-compliance of TDS provisions by well-known corporate houses in the recent past led to a paradigm shift in the approach of the Government in dealing with the defaulters.
• Grave consequences have been carved out for taxpayers committing default / non compliance of TDS provisions.
• Clear directions by CBDT to its officers to take coercive action and enforce catastrophic consequences (viz. recovery of tax, interest, penalty and launch the prosecution proceedings) on defaulters.
• Issuance of prosecution notices led to many defaulters coming forward for settlement of tax disputes through the compounding process - In the past three years, the cases of compounding of offences have increased multifold.
• In cases of serious defaults, however, as per clear directions of the Government, prosecution has been launched on defaulters – cases of launch of prosecution have multiplied significantly in the past few years

WHY PROSECUTION

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The idea of undergoing imprisonment if convicted of offences can be a strong deterrent from brazen tax evasion and non- compliance

WHAT IS PROSECUTION

• All legislatures provide certain consequences (sanctions) for non-compliances
• Income Tax Act also provides for prosecution, for tax evasion and non-compliances to the tax laws.
• Prosecution is in addition to tax, interest and penalty
• The term of rigorous imprisonment under prosecution ranges from 3 months to 7 years (depends upon the severity of the offence).

The provisions of Offences and Prosecution are provided under chapter - XXII of the Act comprising of 29 Sections

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MATRICES

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CHARGING SECTIONS - OFFENCES FOR LAUNCHING PROSECUTION

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RELEVANT C H ARGING SECTION

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SECTION 276B – FAILURE TO PAY TAX TO THE CREDIT OF CENTRAL GOVERNMENT

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• If a person fails to pay to the credit of the Central Government
• TDS under the provisions of Chapter XVII-B; or
• the tax payable by him, as required by or under
1. Section 115-O (2) (tax on distributed profits of domestic companies)
2. Second proviso to 194B (Winnings from lottery or crossword puzzle partly or wholly in kind)

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Punishable with rigorous imprisonment - Minimum three months and maximum up to seven years and with fine.

Note:

** No prosecution on failure to deduct [Kaushal Kishore Biyani vs UOI [2002] 256 ITR 679 (Madhya Pradesh)]

*Section 276BB – Failure to pay Tax collected at source

TDS Default Amount and period is small – No Prosecution

• CBDT has issued instruction no. 1335 of CBDT, dated 28-5-1980 to the effect that prosecution should not normally be proposed when the amounts involved are not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.

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• Vijay Singh Vs Union of India & Anr (2005) 199 CTR (MP) 653- The Hon. High Court gave its judgment in favour of assessee for a TDS default of 28,776/- for a period of 5 months and some days.

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• Mr. Firoz Abdul Gafar Nadiadwala Vs ITO(TDS) - The Hon. Court gave his judgement in favour of revenue for TDS default of Rs.8,56,102/- for a long period of 12 months even after the TDS as paid with interest and the assesse was convicted for offence punishable u/s 276B of the Income Tax Act.

Relevant Concepts

1. Person Responsible

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Section 278B - Offences by Companies

• In case of Offence by company
• Every person incharge at the time of commissioning of offence.
• Responsible for conduct of business of company
• as well as company

Shall be guilty and liable to be proceeded and punished.

No prosecution - provided if it is proved that the offence was committed without knowledge of such person or that he had exercised all due diligence to prevent the commission of such offence.

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If it is proved - Offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of,

• any director, manager, secretary or
• other officer of the company,

such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

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Offence committed by company and the punishment for such offence is imprisonment and fine in such a case company shall be punished with fine and every person involved shall be punished in accordance with law.

PROSECUTION IN CASE OF CO. ASSESSEE

• (COMMISSIONER OF INCOME TAX vs. DELHI IRON WORKS (P) LTD. & ORS (2011) 331 ITR 5 (Del) : (2010) 195 TAXMAN 372 (Del)
• Prosecution can’t be initiated against the company. It has to be initiated in the name of Director or Principal Officer responsible for TDS compliances. For initiating prosecution proceedings against the director of the company, the assessee officer has to give notice u/s 2(35) expressing his intention to treat such directors of a company as “principal officers”. However, it would be sufficient compliance if in the show-cause notice issued to the company it is mentioned that the directors are to be considered as principal officers of the company.
• A company is not a natural person but legal or juristic person. That would not mean that it is not liable to prosecution under the Act. In Standard Chartered Bank v. Directorate of Enforcement [2005] 145 Taxman 154, the Supreme Court held that juristic person is also subject to criminal liability under the relevant law. Only thing is that in case of substantive sentence, the order is not enforceable and juristic person cannot be ordered to suffer imprisonment. Other consequences, however, would ensue, that is, payment of fine, etc.

Note:

In absence of notice u/s 2(35) no person can be treated as ‘Principal Officer’ -

ITO vs Shiv Sewak Cotton Co. [2006] 153 TAXMAN 509 (PUNJ. & HAR.)

ORDER U/S 2(35) - SAMPLE

DIRECTORS CANNOT BE ACQUITTED MERELY ON GROUND THAT NO SEPARATE NOTICES WERE ISSUED TO THEM

• Where both directors of company had signed Company's balance sheets, their defense that they were not in charge of affairs of company was untenable and they could not be acquitted merely on ground that no separate notices were issued to them ITO vs Anil Batra [2018] 409 ITR 428 (Delhi)

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• Where assessee had subscribed her signature in profit and loss account and balance sheet of company for relevant assessment year which were filed alongwith returns, Assessing Officer was justified in naming her as Principal Officer and accordingly she could not be exonerated for offence under section 277 Mrs. Sujatha Venkateshwaran v. ACIT [2018] 96 taxmann.com 203 (Madras)

IN CHARGE AT THE TIME OF OFFENCE - RESPONSIBLE

• SMS Pharmaceuticals v. Neeta Bhalla & Anr. [2005] 148 Taxman 128 (SC)

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• The person accused should be in charge of, and responsible for the conduct of business at the time the offence was committed.
• Merely being a director of a company is not sufficient.
• Managing and joint director would admittedly in charge.

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• Kalanithi Maran v.Union of India[2018] 405 ITR 356 (Madras) - No material to establish that assessee was in-charge of day-to-day affairs, management, and administration of company - could not be prosecuted under section 276B for TDS default committed by his company see also Homi Phiroze Ranina v. State of Maharashtra [2003] 131 Taxmann 100 (Bom).

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• In the case of a continuing offence - it can, at best, apply to the company in respect of which the offence is continuing one and not to its directors who may have come on its board subsequent to the commission of the offence by the company. K.C. Palaniswamy v. Income-tax Officer [2008] 174 Taxman 259 (Delhi)

IN CHARGE AT THE TIME OF OFFENCE - RESPONSIBLE

• The petitioners were directors of the company but the company had appointed competent officers and consultant to deal with the company's account. It was therefore, submitted that petitioners were not responsible for every act and day-to-day conduct of the business of the company. They could not be prosecuted for company's failure to deposit tax deducted at source Om Prakash Katyal v. Union of India [2009] 310 ITR 174 (Patna)

278C -OFFENCES BY HINDU UNDIVIDED FAMILIES

• Where an offence under this Act has been committed by HUF then the Karta thereof shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

2. Concept of Mens Rea – S. 278E

S. 278E - PRESUMPTION AS TO CULPABLE MENTAL STATE

1) In any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defense for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

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Explanation.—In this sub-section, "culpable mental state" includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.

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(2) For the purposes of this section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

CONCEPT OF MENS REA – S. 278E

• Section 278E places the burden of proving the absence of Mens rea upon the accused.

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• Constitutional validity of the said provision was upheld: −Selvi J. Jayalalitha v. UOI and Ors. (2007) 288 ITR 225 (Mad) (HC)

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• In Prakash Nath Khanna v. CIT (2004) 266 ITR 1 (SC) (12), the Court observed that the Court has to presume the existence of culpable mental state, and the absence of such mental state can be pleaded by an accused as a defense in respect of the Act charged as an offence in the prosecution. It is, therefore, open to the appellants to plead absence of a culpable mental state when the matter is taken up for trial.

UNINTENTIONAL DEFAULT – �NOT PUNISHABLE

• In UNION OF INDIA vs. PYARELAL TARACHAND & ANR. (2003) 180 CTR (MP) 551: (2003) 264 ITR 525 (MP): (2004) 135 TAXMAN 97.

- The Hon High Court declined to interfere in the judgment where trial court acquitted the assessee because it was not proved that the assessee has deliberately or intentionally committed the default.

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• Hon’ble Punjab & Haryana High Court in the case of ITO Vs. Shiv Kumar reported in 282 ITR 406(P&H), held that when there is no wilful attempt to evade tax, prosecution was not valid.

3. Reasonable Cause – 278AA

REASONABLE CAUSE – 278AA

• No prosecution for any failure as referred in
• …………
• …………
• section 276B (Failure to pay TDS or tax payable under section 115 -0 or 2nd proviso to section 194B)

If existence of reasonable cause for such failure proved.

Financial Hardship – No reasonable cause

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Shaw Wallace & Co. Ltd. vs CIT [2004] 136 TAXMAN 346 (CAL.)

Oversight on part of its accountant – No prosecution –

396 ITR 636 (Patna)/2017 (State of Bihar vs Sonali Autos (P) Ltd

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- If assessee deducted TDS but same was not deposited within specified time due to oversight on part of its accountant, and subsequently the petitioner immediately after noticing the aforesaid defects by the Statutory Auditors of the petitioner company deposited the amount with Interest.

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- Prosecution proceedings against assessee after three years would be contrary to CBDT instruction and, thus, deserved to be quashed.

REASONABLE CAUSE – 278AA

4. Prosecution Proceeding Procedure

Prosecution to be at instance of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner - 279

Procedure to be followed by the Department

Procedure before the Court

Proposal to commissioner

Commissioner to issue show cause notice

Commissioner to grant sanction

Assessing Officer to file complaint

Summons to accused

Framing of charges

Trial

Prosecution proceedings - Procedure

AO to issues show cause notice

CIT/CIT (TDS) to authorize AO to proceed with prosecution after hearing taxpayer

Response satisfactory, Prosecution dropped

Response not satisfactory, continue the prosecution proceedings

No action

Tax payer to opt for compounding

AO files complaint with Magistrate Court

File compounding application

Accepted

Rejected

Pay compounding fees

Prosecution dropped, no further action

Response by tax payer

No

Yes

COMPOUNDING

COMPOUNDING OF OFFENCE

• Sec 279(2) of the Act provides for compounding either before or after the institution of proceedings.
• compounded by
• Principal Chief Commissioner
• or Chief Commissioner or
• a Principal Director General
• or Director General.
• As per section 2(15A) of the Act Chief Commissioner of Income Tax includes Principal CCIT
• As per section 2(21) of the Act Director General of Income tax includes

Principal DGIT.

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Guidelines was issued by the CBDT for compounding of offences dated 23-12-2014. New guidelines issued on 14-06/2019 superseding old guidelines.

Old guidelines [23 December 2014]

• Valid for the compounding applications filed w.e.f 1 Jan 2015 till 14 June 2019 (post which new guidelines would be applicable)
• The offences are classified into two parts as under:

Category ‘B’

• Inter-alia includes offences under Section 276(A), 276C(1), 276C(2), 276CC of the Act
• Can be compounded only once
• Can be compounded by a Committee involving 3 members (where compounding charges exceed Rs.10 lakhs)

Category ‘A’

• Inter-alia includes offences under Section 276B, 276BB, 276DD, etc of the Act
• Can be compounded only on 3 occasions
• Can be compounded by CCIT

First occasion - 3 % per month

Subsequent occasion

- 5% per month

276B

Fees for compounding

Old guidelines [23 December 2014]

• Various shortcomings were faced by the taxpayers in the old guidelines, such as:

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Lack of clarity on whether a single compounding application filed for related offences covering multiple years

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No recognition for suo-moto filing of compounding application by the taxpayer

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No clarity on the procedure for co-accused and its charges

• Several representations were made to the CBDT with respect to the above

New guidelines [14 June 2019]

• The new guidelines will supersede the old guidelines and applicable to all applications filed on or after 14 June 2019
• As per the Guidelines the offences committed by taxpayers are bifurcated in two categories:

Category A

• inter-alia includes offences punishable under Section 276B,
• Section 276CC

• Can be compounded only on 3 occasions in the life time of the taxpayer

Category B

• inter-alia includes offences punishable under Section 276C(1),
• Section 276C(2)

• Can be compounded only once in the lifetime of the taxpayer

• Under Category A - Clarification on multiple years could be included under single application.
• Under category B – If the application is made suo-moto, multiple years can be included in first application
• Offences covered u/s 276CC moved from Category B to A [can be compounded on 3 occasions]
• Lesser compounding charges at 2% per month for filing suo-moto application for Section 276B cases

Welcome Changes

OFFENCES NOT TO BE COMPOUNDED

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Category ‘A’ offence on more than 3 occasions

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Category ‘B’ offence other than the first offence

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Applicant convicted by court of law

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Result of investigation

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Have a bearing on a case under investigation

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Relating to undisclosed foreign bank account / assets

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Offence under Black Money Act, benami transactions

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Not fit case for compounding

(CCIT at his discretion will decide)

Authority Competent for Compounding of offence

Eligibility Conditions for compounding

• Application to the CCIT/ DGIT in prescribed format in form of an Affidavit on a stamp paper of Rs.100/-.
• The outstanding tax, interest, penalty and any other sum due, relating to the offence for which compounding has been sought has been paid.
• Undertaking to pay compounding charges which includes compounding fee, prosecution establishment expense and litigation expense including counsel fees, if any. Which is communicated by the CCIT/DGIT
• Undertaking to withdraw appeal filed, if any, in case the same has a bearing on the offence sought to be compounded.

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Note: Compounding is not a matter of right

Compounding proceedings procedure�

(for Section 276B)

New guidelines, provides detailed procedure for compounding of offence

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Undertaking to pay compounding charges

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Filing of application by taxpayer and co- accused separately

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Payment of outstanding tax, interest, penalty prior to filing of application

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• AO will prepare report and forward its report to CIT(TDS) [through JCIT]

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CIT(TDS) to provide approval and forward report to CCIT(TDS)

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CCIT(TDS) will provide opportunity of being heard to taxpayer and all co- accused

Typically, time period of 3-6 months goes in reaching the application before the CCIT(TDS)

Compounding proceedings procedure�

(for instance Section 276B)

Pursuant to the hearing, the CCIT(TDS) at his discretion

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Accept the compounding application

Reject the compounding application

Direct the taxpayer to pay the compounding charges

Pass the compounding order and drop the prosecution

Launch prosecution proceedings against the taxpayer and the

co-accused

Compounding charges – How to calculate?

Compounding fees

276B

Suo-moto @ 2% per month

First occasion @ 3% per month

Subsequent occasion (ie. 2^nd and 3^rd occasion) @ 5% per month

Judicial Pronouncement

• S. 276C(1), compounding fee has to be computed on basis of 100 per cent of tax sought to be evaded by assessee and not amount of income sought to be evaded - Supernova System (P.) Ltd. v. CCIT [2019] 260 Taxman 345 (Gujarat)
• The department cannot on the strength of the Circular dated 23-12-2014 reject an application for compounding either on the ground of limitation or on the ground that such application was not accompanied by the compounding fee or that the compounding fee was not paid prior to the application being considered on merits. Vikram Singh vs Union of India [2017] 394 ITR 746 (Delhi)

Initiating prosecution proceedings –

Law of limitation does not apply.

• Prosecution should not be launched hurriedly by the Dept during the pendency of case before the ITAT. The law of limitation u/s 468 Cr.P.C. for criminal prosecution has been excluded by the Economic Offences (Inapplicability of Limitation) Act, 1974 & so there is no need for hasty action. Sayarmull Surana vs. ITO (Madras High Court) Crl. R.C .N o. 111 of 2011 & Crl. M.P. No. 1 o f 2011 dated 14.12.2018

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• In Friends Oil Mills & Ors. v. ITO (1977) 106 ITR 571 (Ker.) (HC), dealing with S.277 of the Act, the Hon’ble Kerala High Court held that the bar of limitation specified in section 468 of the Code of Criminal Procedure, 1973 would not apply to a prosecution, under the Income-tax Act.

Prolong prosecution proceedings may cause injustice to assessee.

• In State of Maharashtra v. Natwarlal Damodardas Soni AIR 1980 SC 593, 1980 SCR (2) 340, the Court held that a long delay along with other circumstances be taken into consideration in the mitigation of the sentence.
• In Gajanand v. State (1986) 159 ITR 101 (Pat) (HC), the Hon’ble High Court held that where the Criminal Proceedings had proceeded for 12 years and the Income tax department failed to produce the evidence, the prosecution was to be quashed.
• Rakoor Industries (P.) Ltd. v. ITO [2011] 203 Taxman 107 (Delhi)(MAG.) - Immense delay caused in prosecution of case vitiated trial - Fit case to exercise jurisdiction under article 227 of Constitution of India and section 482 of Criminal Procedure Code in order to quash complaint case filed by Department

No prosecution if age of 70 attained

• As per the instruction No. 5051 of 1991 dt. 7-2-1991 issued by the Board stated as under:

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“Prosecution need not normally be initiated against a persons who have attained the age of 70 years at the time of commission of the offence”.

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• In Pradip Burma v. ITO (2016) 382 ITR 418 (Delhi) (HC), the court held that, at the time of commission of offence the petitioner has not reached the age of 70 years, hence the circular was held to be not applicable.

THANK YOU

One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.

- Ayn Rand

CA SANDIP AGRAWAL

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email: sandip@icai.org

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M - 9868527948