Taxable income arising because of waiving of exemption u/s 11 is not an act covered by Sec 276C or explanation thereto

While deciding on Assessee’s conviction for wilful attempt to evade tax, the Calcutta High Court held that the Revenue failed to make out a prima facie case against the Assessee as the Assessee waived the exemption under Section 11 of Income Tax Act in the post-search assessment and offered income to tax, which is not an act covered under Section 276C.

While rejecting the AO’s plea of presumption of mens rea under Section 278E, the High Court held that Section 278E shifts the onus of proof on the Assessee during trial, however the initial onus of showing that a prima facie case is made out against the Assessee lies on the Revenue.

A Single Judge Bench of Justice Jay Sengupta observed that it is one thing to suffer a penalty under Section 271 (1) (c) of the Income Tax Act for avoiding to pay tax or penalty.

At the same time, the Bench stated that it is quite another to be prosecuted for wilfully trying to evade tax or evade payment of tax.

“The facts of the case may be at the best sufficient for inviting a penalty under Section 271 (1) (c) of the Act, but appear to be grossly insufficient for making out a prima facie case of a wilful attempt to evade tax or evade payment of tax”, added the Bench.

Senior Advocate J.P. Khaitan appeared for the Assessee while the Revenue was represented Advocate Vipul Kundalia.

Briefly, the Assessee, a charitable trust, registered under Section 12AA, engaged in running a medical college and hospital, filed its return of income for AY 2011-12 declaring Nil income after claiming deduction under Section 11. Later, the Assessee filed a revised return of income under Section 153C without claiming the deduction under Section 11, declaring income of Rs. 1.41 Cr., pursuant to a survey operation based on the statement of a third person recorded during search and seizure operation at his residence. During assessment, the AO held the declared income as Assessee’s undisclosed income and levied penalty thereon under Section 271(1)(c) of Rs.43.56 Lacs. Thereafter, prosecution was launched against the Assessee in the Trial Court under Section 276C(1) and 276C(2) read with Section 2(35) for wilful attempt to evade tax and evade payment of tax.

The Trial Court convicted the Assessee and its Principal Officer, against which the Assessee preferred the revision application, and the Additional Sessions Court discharged Assessee from the case.

After considering the submission, the Bench pointed that there must be some additional material or averment of fact to convey the wilfulness on part of the Assessee in committing the offences under Section 276C.

The Bench observed that Section 278E cannot be invoked without some material justifying the presumption, and pointed that the first witness recanted the statement made against the Assessee and claimed the entire seized money to be his own, which was not dispute by the Department and the second witness passed away, thus his statement would hardly be of much consequence without a cross-examination.

Finding that the statements of the both the witnesses against Assessee are rendered ineffective; the Bench emphasized that since the source of corpus donations were from the five companies, the obligation to explain the source of the funds was actually that of the five companies and their directors, which was not pursued by the AO and in the meantime the said companies were dissolved.

The Bench went on to explain that taxable income arising because of waiving of exemption under Section 11 is not an act covered by Section 276C or explanation thereto.

Observing that the Assessee retained its status of charitable entities possessing necessary certificates which were not withdrawn by the I-T authorities and filed revised return within the stipulated time, the Bench stated that the exemption under Section 11 was waived to avoid long drawn and costly litigation, and resultantly, income of Rs. 1.41 Cr became taxable.

Thus, the High Court concluded that the facts of the case are grossly insufficient for making out a prima facie case of a wilful attempt to evade tax or evade payment of tax under Section 276C.

Cause Title: Deputy Commissioner of Income Tax vs Kali Pradip Chowdhuri & Ors. [CRR 3198 of 2018/ 2023-Enterslice-12-HC-Cal-IT]

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