Bombay High Court Quashes Criminal Prosecution For Late ITR Filing As Taxpayer Entitled To Refund

The Bombay High Court on 22 July held that criminal prosecution for failure to file an income tax return cannot continue when a subsequent assessment shows that the taxpayer had no tax liability and was instead entitled to a refund, as continuing such proceedings would serve no purpose where the Revenue suffered no loss.

Justice Madhav J. Jamdar quashed the criminal complaint that the Income Tax Department filed against Rajesh Somandas Sachdev under Section 276CC of the Income Tax Act (which penalises wilful failure to furnish an income tax return), holding that the Supreme Court's ruling in Guru Nanak Enterprises v. Income Tax Officer squarely covered the case. The Bench held:

“...in the facts and circumstances of the case, the criminal prosecution is wholly unwarranted and the same would amount to an abuse of the process of law.”

The Income Tax Department initiated prosecution against Sachdev for allegedly wilfully failing to file his income tax return for Assessment Year 2014-15. The Department issued a notice to him under Section 148 of the Income Tax Act (which empowers reassessment proceedings) after he failed to file his return. When Sachdev did not file the return even after receiving the notice, the Department filed a criminal complaint against him in March 2018.

Sachdev later filed his return, which showed that tax of Rs. 2,54,788 had already been deducted from his income as tax deducted at source (TDS) and that he could claim a refund of Rs. 1,64,340. The Income Tax Department accepted the return and issued an assessment order granting the refund.

Before the High Court, Sachdev argued that the assessment established that he owed no tax and instead entitled him to a refund. He submitted that the proviso to Section 276CC protected him from prosecution in such circumstances. He relied on the Supreme Court's decision in Guru Nanak Enterprises, where the Court held that prosecution cannot continue when the tax liability falls below the statutory threshold.

The Income Tax Department argued that Sachdev could not claim the benefit of the proviso because he filed the return only after receiving the reassessment notice and after the Department had already filed the criminal complaint.

The High Court rejected the Department's contention and noted that the Department itself accepted after assessment that Sachdev could claim a refund of Rs. 1,64,340. It also found that the Commissioner of Income Tax failed to consider, while granting sanction for prosecution, that Sachdev had already paid Rs. 2,54,788 as tax deducted at source.

It held that the Supreme Court's decision in Guru Nanak Enterprises directly applied to the case. It observed that a prosecution serves no purpose when an assessment shows that a taxpayer owes no tax and the Revenue has suffered no loss.

Further, the Bench held that Sachdev fulfilled the conditions under the proviso to Section 276CC. It noted that the Supreme Court had already ruled that prosecution cannot continue when the tax liability remains within the statutory threshold and that Sachdev's case presented an even stronger situation because the assessment showed that he could claim a refund. It concluded that continuing the criminal proceedings would amount to an abuse of the process of law and quashed the criminal complaint pending before the Magistrate.

Accordingly, the High Court allowed Sachdev's writ petition and ended the prosecution against him.

Appearances for Petitioner: Ms. Rutuja N. Pawar (through Video Conferencing) Along with Ms. Sneha More and Ms. Tejal Mhatre, Advocates.

Appearances for Respondents: Mr. Subir Kumar Along with Ms. Ashita Aggarwal, Advocates Nos. 1 & 2 (Income Tax Department), Mr. S. V. Walve, APP for Respondent No. 3 (State)