In the case of R. P. Darrmalingam[1] (Taxpayer), the issue before the Madras High Court pertained to sustainability of prosecution proceedings in a case where penalty proceedings were quashed on technical grounds.
In the facts of the case, the original return was filed belatedly by the Taxpayer whereby certain transactions pertaining to purchase of immovable property were not disclosed therein. Subsequently a search was conducted on the Taxpayer wherein a notice was issued requiring the Taxpayer to file a return within 30 days disclosing all sources of income. However, the Taxpayer failed to comply with such notice on time due to illness and absence of information (considering seizure of books and records by tax authority) where the return pursuant to search was filed nearly 1.5 years late.
Considering the above, the tax authority initiated criminal proceedings on the ground of wilful default in furnishing the return as well as penalty proceedings for furnishing inaccurate particulars of income. In this regard, the Taxpayer contended before the appellate authority that the tax authority commenced penalty proceedings after a period of three years from the stipulated date, hence the complaint filed was time barred in terms of Criminal Penal Code (Cr.P.C.). Further, the Taxpayer also argued that once penalty proceedings are cancelled, even prosecution proceedings are quashed automatically[2].
The Tribunal upheld the quashing of penalty on limitation grounds but stated that prosecution for non-filing of returns has no correlation with the adjudication of assessment proceedings and hence can be continued. Aggrieved with this order, the Taxpayer filed the instant appeal before the Madras High Court.
The Madras High Court upheld the Taxpayer’s contention that once tax authority accepted the belated return filed pursuant to the notice, the original return abates and becomes non-est. In other words, notice issued in course of search proceedings to file a return effectively affords a taxpayer a second chance to make good its omission. Thus, penalty for concealment of income is also to be seen qua such return filed pursuant to search notice and not qua the original belated return.
However, it noted that in the instant case, as mens rea was categorically proved by the tax authority against the Taxpayer, setting aside of penalty proceedings merely on technical grounds (and not on merits of the case) cannot impair sustainability of prosecution proceedings. Further, it held that Taxpayer’s subsequent act of offering additional income to tax and making payment thereof, after detection of concealment of income in the search proceedings, cannot be regarded as voluntary compliance by the Taxpayer. Lastly, the HC held that all the grounds raised by the Taxpayer regarding merits pertaining to bona fides for delay in filing return pursuant to search notice after 1.5 years can be agitated before the court only at the trial stage.
[1] [TS-677-HC-2023(MAD)]
[2] In this respect, the Taxpayer placed reliance on favourable Supreme Court ruling in K.C.Builders v. ACIT [(2004) 135 Taxman 461]
