It is a general phenomenon that for effective implementation and ensuring due compliances under the law enacted by the parliament, provisions for prosecution have been embedded therein. Tax is no different, and is considered to be one of the key source of Revenue for the Government in India. Threefold liability has been imposed for non-performance of due obligations under the Act ie.

a. Interest;

b. Penalty; and

c. Prosecution.

While interest liability is mandatory and considered as compensatory in nature, penalty is a substantial monetary levy with an intent to deter the Assessee from non-compliance of tax laws.  However, Prosecution is meant to deter the wilful tax offenders/evader from resorting to tax evasion/ non-compliance of tax laws.

In light of the recent regulatory changes being introduced to tackle the menace of black money/ tax evasions, the Department has aggressively launched prosecution in various cases with a specific focus on tax withholding compliances.

The increase in number of cases where prosecution has been initiated and compounding of such cases, is evident from the statistics given in the press release issued by the Ministry of Finance on 12 January 2018. The key statistics are as follows:

The aforesaid table is a clear indication of the fact that Department is aggressively pursuing prosecution as an option for ensuring compliance and realizing additional revenue.

In the ensuing paras provisions relating to prosecution under ITL along with the practical aspects relating to prosecution for non-payment of taxes deducted at source have been discussed.

In certain cases, a person can avoid prosecution proceedings, if he/she is able to establish a reasonable cause with appropriate facts, which resulted in default. The key offences for which prosecution is being initiated under the ITL and the amount of punishment specified therein have been tabulated below:

[Other default attracting prosecution u/s 275A, 275B, 276, 276A, 276AB, 276CCC, 277,278,278A have not been discussed in this article]

Recent developments and trends on prosecution with respect to failure in payment of taxes deducted at source:

Prior to 2013, as per CBDT Instruction dated 28 May 1980, prosecution under section 276B (ie for failure to deposit tax deducted at source), was not initiated in case where the quantum involved is not substantial and if the amount has been deposited to the credit of Government within 12 months from the due date. This view has also been upheld by various high court decisions.

However, the Ministry of Finance on 6^th August 2013 issued a press release wherein the criterion of payment of TDS within period of 12 months was dispensed with. Post this press release, department can launch prosecution for a default of even 1 day.

As the offence committed for failure to pay tax deducted at source is eligible for compounding, the initiation of prosecution has been adopted as a tool to realise additional revenue.

Practical instances of prosecution proceedings in case of non-deduction of tax at source:

While there is no provision under the ITL to initiate prosecution proceedings for non-deduction of tax at source but it exists only for failure to deposit the tax deducted at source, but due to certain technical issues in the tax withholding returns, prosecution have been initiated where tax has not been deducted at source. For instance, if a person fails to deduct tax on certain payments and at a later stage, it is noticed that certain payments were liable for TDS, at this stage the tax is deducted and paid to the treasury of the Government along with due interest thereon. In order to give the due credit to the payee for the period in which tax was supposed to be deducted, the withholding returns relating to the period in which tax ought to have been deducted would be revised.

Given the fact that withholding returns allows the date of deduction to be reported of the said quarterly period, while the actual date is different, this results in mismatch. Due to this technical mismatch, such a situation is being treated as a case of tax deducted but not deposited and ultimately results in initiation of prosecution proceedings.

Procedure followed by Department for initiation of prosecution proceedings on account of default to pay tax deducted at source:

There is no specific procedure envisaged in the ITL for initiation of prosecution proceedings under section 276B of the Act. The Department has framed its own guidelines/internal manual for the same. Some of the key steps are highlighted below:

1. The Assessing officer on the basis of records and after giving the Assessee an opportunity of being heard, prepares a proposal for initiation of of prosecution and sends the same to the Jurisdictional Commissioner;

2. The Commissioner issues a show-cause notice to the Assessee as well as its principal officers, giving them an opportunity of being heard as to why prosecution should not be launched.

3. If the Commissioner is not satisfied with the response submitted by the Assessee, then he can grant sanction to the Assessing officer to file complaint before the Court.

Compounding of offence – A remedy to avoid prosecution:

In accordance with the provision of section 279(2) of the Act, an offence specified under the Chapter XXII of the Act can be compounded either before or after the initiation of prosecution proceedings which can be compounded by CCIT/DGIT. It is pertinent to note that Compounding is not a matter of right. The compounding charges levied are not uniform in nature and depends upon the nature of offence committed.

The Department has issued a new set of guidelines for compounding of offences vide Notification. F.NO.285/35/2013 IT(INV.V)/108 dated 23 December 2014. It is important to note that prosecution proceedings initiated under IPC cannot be compounded, however in accordance with the section 321 of CRPC,1973, such prosecution can be withdrawn.

Procedure to be followed for Compounding in case of delay in deposit of tax deducted at source:

A. Eligibility:

a. Application for compounding has to be made before the concerned Chief Commissioner [competent authority] having jurisdiction over the case;

b. Outstanding amount of tax liability, along with interest and penalty or any other sum due, relating to the offence needs to be paid-off;

c. Appeal pending (if any) relating to the offence needs to be withdrawn, wherein case there are multiple issues in the appeal and compounding application is made for a specific issue, then the grounds can be appropriately modified.

B. Procedure for compounding:

Key steps in processing the compounding application:

a. The Assessing officer to check the possibility of compounding of offence, then, has to process the application promptly and submit the same to the competent authority;

b. The competent authority after considering the application for compounding has to dispose every application through a speaking order with in the specified time limit of 180 days;

c. Where the application filed is acceptable, the competent authority has to intimate the amount of compounding charges to the applicant which has to be paid within 60 days. However under exceptional circumstances the same can be extended for a further period of 120 days; and

d. Post payment of compounding charges, the competent authority has to pass the compounding order with-in a period of 30 days.   

C. Compounding charges for failure to pay taxes deducted at source:

Compounding charges includes:

1. Compounding fees which is payable at 3% per month of the amount of tax which has been disclosed in the compounding application for the period from which tax was deducted at source till the date of deposit of such tax. For compounding of the subsequent offence (ie second) the fees payable increase to 5% per month.

2. Prosecution establishment expenses which is chargeable at 10% of the compounding fees subject to minimum of Rs 25,000; and

3. Litigation expense incurred including counsel’s fee.

It is important to note that the TDS default under section 276B committed for third time cannot be compounded, therefore before filing a compounding application, a person should ensure that defaults (if any) in subsequent years or previous year are identified and true and full disclosure is being made in the compounding application.   

Conclusion:

The recent instances of round tripping, fugitive offenders, corruption have made the various agencies of the Government vigilant and enhanced cooperation between these agencies is likely to be expected. To deter the tax evaders, the Department has been extensively using technology for collating the information from various sources to identify the defaults, which has resulted in sharp increase in prosecution cases. The Board has recently awarded a contract of USD 100 Million for setting up Project Insight with a specific focus on data analytics which could result in easy and effective identification of tax offenders. The overall efforts of the Department may result in substantial increase in prosecution proceedings being launched.

Given the specific objective of a taxpayer, is to conduct its business successfully in a peaceful manner, a taxpayer can consider implementing better tax management practices through use of modern technology and strengthen their internal controls for not committing default. Separately, a table has been given below containing some frequent asked question on practical aspects of prosecution.

The role of a tax professional/practitioner (mainly as Chartered Accountant) in prosecution matters may be restricted to the stage of compounding of offence. Once the prosecution is launched and the role of Judiciary kicks in, it may be only the lawyers who have expertise in handling criminal proceedings, can assist in judicial proceedings.