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by Admin
28 April 2026 11:17 AM
“It was the duty of the Revenue to inform the Court that prosecution would amount to an abuse of process once Settlement Commission found no willful evasion”: Supreme Court of India quashing a criminal prosecution initiated under Section 276C(1) of the Income Tax Act, 1961, despite the appellant having settled his tax liabilities through the Settlement Commission. The Court held that continuation of the prosecution amounted to gross abuse of process of law and imposed a cost of ₹2,00,000 on the Revenue.
The origin of the case traces back to a search and seizure operation under Section 132 of the Income Tax Act conducted on April 24, 2016, at the residence of Vijay Krishnaswami, where unaccounted cash amounting to ₹4.93 crores was recovered. The Department alleged willful attempt to evade tax for the assessment year 2017–2018 and filed a criminal complaint under Section 276C(1) before the Additional Chief Metropolitan Magistrate (Economic Offences), Egmore, Chennai.
Parallelly, the appellant approached the Settlement Commission under Section 245C, declaring undisclosed income of ₹61.5 lakhs. In November 2019, the Settlement Commission granted immunity from penalty, observing full cooperation and honest disclosure by the assessee, but refrained from granting immunity from prosecution citing the pendency of the quashing petition before the High Court.
The Madras High Court, however, dismissed the quashing petition, which led to the present appeal before the Supreme Court.
The key legal issues considered by the Court were:
Whether the continuation of prosecution under Section 276C(1) after the order of the Settlement Commission amounts to abuse of process of law;
Whether the High Court erred in dismissing the quashing petition filed by the appellant.
The Court noted that Section 276C(1) penalizes willful attempt to evade tax or interest, not merely the failure to pay. The mens rea—the intention to evade—must be established beyond doubt.
“What is made punishable under Section 276C(1) is not the ‘actual evasion’ but the ‘willful attempt to evade’,” the Court emphasized.
"Revenue Ignored Its Own Guidelines While Launching Prosecution"
A significant portion of the judgment was devoted to highlighting the procedural irregularities and guideline violations by the Income Tax Department. The Court found that at the time of launching prosecution:
There was no penalty confirmed by the ITAT, as required under CBDT Circular dated 24.04.2008 and Prosecution Manual, 2009.
The tax liability was below ₹25 lakhs, triggering the 2019 CBDT Circular, which required prior approval of a Collegium of senior tax officials.
The Revenue failed to comply with its own internal procedures for launching prosecution.
The Court reaffirmed the binding nature of such departmental circulars, relying on precedents such as K.C. Builders v. CIT, Ranadey Micronutrients v. CCE, and UCO Bank v. CIT:
“It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision… consistency and discipline are of far greater importance than the winning or losing of court proceedings,” the bench observed, quoting Ranadey Micronutrients.
Finding No Mens Rea, Supreme Court Quashes Prosecution
The Supreme Court held that once the Settlement Commission concluded that the disclosure was full and truthful and granted immunity from penalty, there was no scope for continuing prosecution in the absence of mens rea:
“In absence, lodging such prosecution would result into futility... The Revenue acted in blatant disregard to their own binding circular dated 24.04.2008... such an act cannot be construed in right perspective.”
Further, the Court criticized the High Court for failing to apply its mind to the binding nature of the Settlement Commission’s findings and ignoring the legal and factual context:
“The High Court’s approach appears to be entirely misdirected, having failed to appreciate the factual and legal position in right earnest.”
Revenue Penalized, Prosecution Quashed
The appeals were allowed, and the prosecution against Vijay Krishnaswami was quashed. The Court also imposed costs of ₹2,00,000 on the Revenue, stating that its persistent pursuit of prosecution, in defiance of its own circulars and without valid justification, was unjustified and unlawful.
Date of Decision: August 28, 2025
