High Court Imposes Financial Penalty of 200,000 Rupees on the IT Department for Disregarding Institutional Guidelines

In a significant ruling, the Supreme Court of India has quashed the tax evasion prosecution against businessman Vijay Krishnaswami and ordered the Income Tax Department to pay a fine of ₹2 lakhs as costs. The case was heard by a Bench of Justice JK Maheshwari and Justice Vijay Bishnoi.

The saga began in August 2018 when the Deputy Director of Income Tax (DDIT) filed a complaint, alleging that Krishnaswami had willfully attempted to evade tax for Assessment Year 2017-18. The Principal Director of Income Tax (Investigation), Chennai authorised the prosecution of the assessee.

However, the Supreme Court's ruling has highlighted a serious lapse on the part of the Revenue authorities. The Court held that the willful non-compliance of the Revenue's own directives reflected a serious lapse. The Court noted that prosecution for attempted tax evasion must be initiated only after the Income Tax Appellate Tribunal (ITAT) confirms the penalty for alleged income concealment, as per CBDT circulars issued in 2008, 2009, and 2019.

The Revenue authorities, represented by Additional Solicitor General N Venkatraman, Senior Advocate Nisha Bagchi, and Advocates Raj Bahadur Yadav, V Chandrashekhara Bharathi, Udai Khanna, and Navanjay Mahapatra, offered no justification for why the PDIT or the DDIT failed to follow this procedure before launching the prosecution in this case.

The Settlement Commission, which had already found that there was nothing to indicate a wilful attempt to evade taxes in this case, had granted immunity from penalty but refrained from granting immunity from prosecution due to the pendency of a quash petition before the Madras High Court.

The Court's ruling also questioned why the Madras High Court had not factored such aspects in its decision. The Court set aside the Madras High Court order, quashed the prosecution, and imposed ₹2 lakh costs on the Revenue authority to be paid to the assessee/appellant.

The case was a plea challenging a ruling from the Madras High Court that declined to quash prosecution proceedings initiated by the Revenue. Senior Advocate Preetesh Kapur and Advocates Ravi Raghunath, R Sivaraman, and Namanjeet Singh Bhatia appeared for the assessee.

A search under Section 132 of the IT Act was conducted at Krishnaswami's residence in April 2016, leading to the seizure of unaccounted cash worth ₹4.93 crores. The assessee was accused of attempted tax evasion under Section 276C(1) of the Income Tax Act, 1961.

The Court's ruling underscores the importance of adhering to the Revenue's own directives and circulars in tax matters. Departmental circulars and prosecution manuals are binding on the Revenue authorities and cannot be disregarded at will. This ruling serves as a reminder to the Income Tax Department to uphold the principles of fairness and due process in all its proceedings.

High Court Imposes Financial Penalty of 200,000 Rupees on the IT Department for Disregarding Institutional Guidelines