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No Mens Rea, No Prosecution: Bombay High Court Quashes Tax Evasion Proceedings

Introduction

The Hon’ble Bombay High Court (‘Bombay HC’) has recently in its judgment in Unique Trading Company v. Income Tax Officer[i] held that merely delay in payment of tax by the assessee cannot be equated to wilful evasion of tax liability, especially so when the assessee has itself declared the income in assessment year but failed to pay income tax. This judgment adds to the catena of judgements where the courts have construed a strict meaning of ‘wilful attempt to evade tax’ and upheld that mens rea is essential to the initiation of criminal proceedings against an assessee.

Brief Facts

  • This case involved an application under s. 482 of the Code of Criminal Procedure, 1973 (‘CrPC’) seeking to quash the complaint lodged by the income tax authorities (‘IT Dept.’) against the applicants. Applicant no. 1, a partnership firm with applicants no. 2 to 4 as its partners, filed its original return of income for assessment year (‘AY’) 2010-11 declaring income and computing tax payable along with interest. However, a portion of the tax remained unpaid until 2018.

  • The applicant’s manager, Mr. P. G. Purohit, passed away in May 2014, leaving the other partners unaware of the unpaid tax liability. The Principal Commissioner of Income-tax (‘PCIT’) issued a show cause notice (‘SCN’) proposing prosecution under s. 276C(2) of the Income-tax Act, 1961 (‘IT Act’), alleging a ‘wilful attempt’ to evade payment of due tax. On receiving the SCN, the applicants paid the entire due tax including interest within 5 days and also provided a reasoned explanation for the delay in payment due to the demise of Mr. Purohit.

  • Despite the payment, the IT Dept. granted sanction to prosecute the applicants, leading to the filing of a complaint. The applicants subsequently approached the Bombay HC to quash such criminal proceedings against it.

Held

  • The Bombay HC quashed the criminal proceedings under s. 276C(2) of the IT Act holding that there was no ‘wilful attempt’ to evade the tax payment due to the immediate response of the applicants to the SCN and the lack of any action indicating an intent to evade tax.

  • The Bombay HC noted that penal statutes must be interpreted strictly. It determined that a ‘wilful attempt’ necessitates an element of mens rea, or a culpable mental state, distinguishing it from mere breaches or failures that result in civil liability.

  • The Bombay HC placed reliance on established precedents such as Vyalikaval House Building Co-operative Society Ltd. & Ors. v. Deputy Commissioner of Income Tax[ii] and Tolaram Relumal & Anr. v. State of Bombay[iii] regarding the interpretation of ‘willful attempt’ and the necessity for mens rea in constituting a criminal offence under the IT Act.

Analysis

The Bombay HC’s decision emphasizes the strict interpretation of criminal offences under s. 276C(2) of the IT Act, highlighting the necessity of a clear mens rea, or guilty mind, for establishing wilful tax evasion. This judgment aligns with prior precedents, reinforcing that mere delay in tax payment does not constitute a criminal offence without demonstrable intent to evade taxes. It also highlights the importance of prompt corrective action and explanations in response to tax-related notices.

These ruling impacts legal practices and tax enforcement, clarifying that criminal proceedings should be reserved for cases with clear evidence of malicious intent. It reinforces the importance of balancing strict tax law enforcement with the protection of taxpayer rights, ensuring fairness in the legal process.

In essence, the Bombay HC’s decision provides critical guidance on assessing mens rea in tax evasion cases, reinforcing that penalties should only apply where there is deliberate intent to evade taxes, thus ensuring justice and fairness in tax-related prosecutions.


End Notes:

[i] [2024] 159 taxmann.com 216 (Bombay), dated 05.02.2024.

[ii] (2020) 428 ITR 89 (Karn.)

[iii] AIR 1956 SC 496


Authored by Aditya Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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