The Commissioner of Income Tax vs. M/s Supriya Wines

IN THE HIGH COURT OF JHARKHAND AT RANCHI Cr.M.P. No. 591 of 2017

Satendra Kumar Jalan

…… Petitioner

Versus 1.State of Jharkhand

2.Union of India through Sri Mayank Mishra, Deputy Director of Income Tax (Investigation), Unit-II, Ranchi

…… Opp. Parties

With Cr.M.P. No. 593 of 2017

Murari Lal Jalan

…… Petitioner

Versus 1.State of Jharkhand

2.Union of India through Sri Mayank Mishra, Deputy Director of Income Tax (Investigation), Unit-II, Ranchi

…… Opp. Parties

CORAM: HON'BLE MR. JUSTICE SANJAY KUMAR DWIVEDI

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For the Petitioners :Mr. Sumeet Gadodia, Advocate

Mr. Ranjeet Kishwaha, Advocate

Ms. Aanya, Advocate

( in both cases) For the State : Mr. Rajneesh Vardhan, A.P.P.

(in both cases) For the O.P. No. 2 : Mr. Ratnesh Nandan Sahay, Sr. Standing Counsel

(in both cases) 07/Dated: 29/11/2022

These matters were taken up on 09.03.2017 and on that date learned counsel for the O.P. No. 2 took time to file reply to the arguments made by the learned counsel for the petitioner. Again on 28.03.2022 these matters were adjourned at the instance of the learned counsel for the O.P. No. 2. Further on 28.04.2022 and 02.08.2022, again these matters were adjourned at the instance of the learned counsel for the O.P. No. 2 for filing counter-affidavit and on 14.10.2022 with the consent of the learned counsel for the parties these matters were posted for 29.11.2022. 2.

Today, Mr. Ratnesh Nandan Sahay, learned counsel for the O.P. No. 2 seeks further time for filing counter affidavit but the said prayer is rejected in view of the fact that much indulgence has been provided to the O.P. No. 2 for filing counter-affidavit and accordingly, these matters are being heard on merit. 3.

In both the cases common question of law is involved that is why both the petitions are being heard together with the consent of the learned counsel for the parties.

Heard Mr. Sumeet Gadodia, learned counsel for the petitioners, Mr. Rajnesh Vardhan, learned counsel for the State and Mr. Ratnesh Nandan Sahay, learned counsel for the O.P. No. 2. 5.

Cr.M.P. No.591 of 2017 has been filed for quashing of entire criminal proceeding including order taking cognizance dated 10.11.2016 passed by the Special Sub-Judge-VII, Economic Offence, Ranchi in Complaint Case No. 07 of 2016/Eco. Off. Case No. 7 of 2016 for the offence under sections 276C (1), 277 and 278E of the Income Tax Act, 1961, pending in the Court of learned Special Sub-Judge-VII, Economic Offence, Ranchi. 6.

Cr.M.P. No.593 of 2017 has been filed for quashing of entire criminal proceeding including order taking cognizance dated 10.11.2016 passed by the Special Sub-Judge-VII, Economic Offence, Ranchi in Complaint Case No. 06 of 2016/Eco. Off. Case No. 6 of 2016 for the offence under sections 276C (1), 277 and 278E of the Income Tax Act, 1961, pending in the Court of learned Special Sub-Judge-VII, Economic Offence, Ranchi. 7.

In Cr.M.P. No. 591 of 2017 complaint has been filed alleging therein as under:- (i). It has been alleged that petitioner is the Karta of Satendra Kumar Jalan HUF and search and seizure operation was conducted in the residence of the petitioner under section 132(1) of the Income Tax Act, 1961 on 22.07.2015. (ii). It has been alleged that during course of search and seizure operation, it was found that the petitioner had claimed huge Bogus Long Term Capital Gain during the Financial Year 2013-14 relevant to Assessment Year 2014- 15 and during the course of Post Search Investigation, the petitioner was even examined on oath under section 131(1A) of the Income Tax Act, 1961 (for short „Act‟) but he denied that his claim for Long Term Capital Gain is bogus. (iii).It has been further alleged that even subsequent to the said search,

false statement was made by the petitioner on examination on oath under section 131(1A) of the Act. (iv).It has been further alleged that the petitioner had even attempted to evade tax which attracts offence under section 276 C (1), 277 and 278 E of the Income Tax Act, 1961 and, accordingly, proposal was made for launching prosecution under section 276 C (1), 277 and 278E of the Act by Deputy Director of Income Tax (Investigation) to the Principal Director of Income Tax (Investigation), Patna vide letter dated 20th May, 2016. (v). It has been further alleged that even opportunity of being heard was afforded to the petitioner by issuance of Show Cause Notice dated 07.06.2016 requiring the petitioner to show cause against the intended prosecution against him under section 276C(1), 277 and 278E of the Income Tax Act. (vi). It has been further stated that the assessee had replied to the said show cause notice and in his reply, the assessee has specifically stated that the case of the petitioner is yet to be assessed under section 153A of the Income Tax Act and, at present, the Show Cause Notice for initiation of prosecution is based on presumption. (vii). It has been further alleged that the reply of the assessee was carefully considered by Principal Director of Income Tax (Investigation) and sanction was accorded under section 279(1) of the Income Tax Act by the said authority for prosecuting the petitioner. (viii). In the complaint petition, it has been further alleged that the Enquiry/Investigation Report reveals that the petitioner has transacted certain scripts of shares whose value has been appreciated 50 times in one year. (ix). It has been further alleged that the Director of the Company, in whose share the petitioner had transacted, has been examined on oath and he has stated that the was only a dummy Director and the company was

controlled and managed by one Deepak Patwari. (x). It has been further alleged that said Deepak Patwari has been examined on oath and he has admitted that he was engaged in the business of providing bogus accommodation entries to various beneficiaries. (xi). In view of the aforesaid facts, it has been stated in the complaint petition that the said statements strengthen and adequately corroborate the evidences found in the search operation. (xii). In the complaint petition, further reference has been given to other similarly situated persons in respect of whom similar search operations were conducted and it was stated that the said persons have accepted that Long Term Capital Gain claimed by them was bogus in nature. (xiii). it has been further stated in the complaint petition itself that the petitioner had, suo motu, deposited tax of Rs. 33,98,550/- for the Assessment Year 2014-15 and the said deposit of tax has not been followed by any Assessment Order/Demand Notice. It is an admitted fact in the complaint case that till date no Assessment Order/Demand Notice has been issued. (xiv). On the basis of the aforesaid allegations, it has been alleged against the petitioner that the petitioner has committed offence under section 276 C (1), 277 and 278 of the Income Tax Act and, accordingly, it has been stated in the complaint petition that the Principal Director of Income Tax (Investigation), Patna has authorized Shri Mayank Mishra, Deputy Director of Income Tax (Investigation), Unit-II, Ranchi to file complaint before the competent court against the petitioner, and accordingly, the complaint case has been filed. 8. In Cr.M.P. No. 593 of 2017 complaint has been filed alleging therein as under:- (i). It has been alleged that petitioner is the Karta of Murari Lal Jalan HUF

and search and seizure operation was conducted in the residence of the petitioner under section 132(1) of the Income Tax Act, 1961 on 22.07.2015. (ii). It has been alleged that during course of search and seizure operation, it was found that the petitioner had claimed huge Bogus Long Term Capital Gain during the Financial Year 2013-14 relevant to Assessment Year 2014- 15 and during the course of Post Search Investigation, the petitioner was even examined on oath under section 131(1A) of the Income Tax Act, 1961 (for short „Act‟) but he denied that his claim for Long Term Capital Gain is bogus. (iii). It has been further alleged that even subsequent to the said search, false statement was made by the petitioner on examination on oath under section 131(1A) of the Act. (iv).It has been further alleged that the petitioner had even attempted to evade tax which attracts offence under section 276 (C) (1),277 and 278 E of the Income Tax Act, 1961 and, accordingly, proposal was made for launching prosecution under section 276C(1), 277 and 278E of the Act by Deputy Director of Income Tax (Investigation) to the Principal Director of Income Tax (Investigation), Patna vide letter dated 20th May, 2016. (v). It has been further alleged that even opportunity of being heard was afforded to the petitioner by issuance of Show Cause Notice dated 07.06.2016 requiring the petitioner to show cause against the intended prosecution against him under section 276C(1), 277 and 278E of the Income Tax Act. (vi). It has been further stated that the assessee had replied to the said show cause notice and in his reply, the assessee has specifically stated that the case of the petitioner is yet to be assessed under section 153A of the Income Tax Act and, at present, the Show Cause Notice issued for initiation of prosecution is based on presumption. (vii). It has been further alleged that the reply of the assessee was carefully

considered by Principal Director of Income Tax (Investigation) and sanction was accorded under section 279(1) of the Income Tax Act by the said authority for prosecuting the petitioner. (viii). In the complaint petition, it has been further alleged that the Enquiry/Investigation Report reveals that the petitioner has transacted certain scripts of shares whose value has been appreciated 50 times in one year. (ix). It has been further alleged that the Director of the Company, in whose share the petitioner had transacted, has been examined on oath and he has stated that the was only a dummy Director and the company was controlled and managed by one Deepak Patwari. (x). It has been further alleged that said Deepak Patwari has been examined on oath and he has admitted that he was engaged in the business of providing bogus accommodation entries to various beneficiaries. (xi). In view of the aforesaid facts, it has been stated in the complaint petition that the said statements strengthen and adequately corroborate the evidences found in the search operation. (xii). In the complaint petition, further reference has been given to other similarly situated persons in respect of whom similar search operations were conducted and it was stated that the said persons have accepted that Long Term Capital Gain claimed by them was bogus in nature. (xiii) it has been further stated in the complaint petition itself that the petitioner had, suo motu, deposited tax of Rs. 33,32,980/- for the Assessment Year 2014-15 and the said deposit of tax has not been followed by any Assessment Order/Demand Notice. It is an admitted fact in the complaint case that till date no Assessment Order/Demand Notice has been issued. (xiv). On the basis of the aforesaid allegations, it has been alleged against

the petitioner that the petitioner has committed offence under section 276C(1), 277 and 278 of the Income Tax Act and, accordingly, it has been stated in the complaint petition that the Principal Director of Income Tax (Investigation), Patna has authorized Shri Mayank Mishra, Deputy Director of Income Tax (Investigation), Unit-II, Ranchi to file complaint before the competent court against the petitioner, and accordingly, the complaint case has been filed. 9.

After filing of the complaint case in both the cases, the learned court has taken cognizance under sections 276(C)(1), 277 and 278E of the Income Tax Act vide order dated 10.11.2016 against the petitioners in both the cases. 10.

Mr. Sumeet Gadodia, learned counsel appearing on behalf of the petitioners in both the cases draws the attention of the Court to Section 277C(1) of the Income Tax Act and submits that this section provides for penalty and prosecution is prescribed therein. He further submits that section 277 of the Income Tax Act speaks of false statement filed by any assessee. He further submits that section 278(E) of the Act speaks of culpable state of mind. He further submits that there is allegation against the petitioners that the petitioners have obtained Long Term Capital Gain which is found to be incorrect. He submits that the penalty was imposed upon the petitioner in Cr.M.P. No. 591 of 2017 by order dated 06.06.2018 which was challenged by the petitioner before the First Appellate Authority and the First Appellate Authority affirmed the penalty thereafter the Second Appellant Authority by order dated 15.07.2020 set aside the penalty imposed upon the petitioner. He further submits that so far as petitioner in Cr.M.P. No. 593 of 2017 is concerned, penalty has not been imposed upon the petitioner. He elaborates his arguments by way of submitting that once the penalty imposed upon the petitioner is set aside there is no question of continuity of criminal proceeding. To buttress his argument, he

relied in the case of “ K.C. Builders and Anr. Vs. Assistant Commissioner of Income Tax” reported in (2004) 2 SCC 731 wherein para 8 and 24 to 26 the Hon‟ble supreme Court has held as under:- “8. On the above pleadings and facts and circumstances of the case, the following questions of law arise for consideration by this Court: (a) Whether a penalty imposed under Section 271(1)(c) of the Income Tax Act and prosecution under Section 276-C of the Income Tax Act are simultaneous? (b) Whether the criminal prosecution gets quashed automatically when the Income Tax Appellate Tribunal which is the final court on the facts comes to the conclusion that there is no concealment of income, since no offence survives under the Income Tax Act thereafter? (c) Whether the High Court was justified in dismissing the criminal revision petition vide its impugned order ignoring the settled law as laid down by this Court that the finding of the Appellate Tribunal was conclusive and the prosecution cannot be sustained since the penalty after having been cancelled by the complainant following the Income Tax Appellate Tribunal's order no offence survives under the Income Tax Act and thus the quashing of the prosecution is automatic? (d) Whether the finding of the Income Tax Appellate Tribunal is binding upon the criminal court in view of the fact that the Chief Commissioner and the assessing officer who initiated the prosecution under Section 276-C(1) had no right to overrule the order of the Income Tax Appellate Tribunal? More so when the Income Tax Officer giving the effect to the order cancelled the penalty levied under Section 271(1)(c)? (e) Whether the High Court's order is liable to be set aside in view of the errors apparent on record? 24. In the instant case, the penalties levied under Section 271(1)(c) were cancelled by the respondent by giving effect to the order of the Income Tax Appellate Tribunal in ITAs Nos. 3129-32. It is settled law that levy of penalties and prosecution under Section 276-C are simultaneous. Hence, once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under Section 276-C is automatic. 25. In our opinion, the appellants cannot be made to suffer and face the rigours of criminal trial when the same cannot be sustained in the eye of the law because the entire prosecution in view of a conclusive finding of the Income Tax Tribunal that there is no concealment of income becomes devoid of jurisdiction and under section 254 of the Act, a finding of the Appellate Tribunal supersedes the order of the assessing officer under Section 143(3) more so when the assessing officer cancelled the penalty levied. 26. In our view, once the finding of concealment and subsequent levy of penalties under Section 271(1)(c) of the Act has been struck down by the Tribunal, the assessing officer has no other alternative except to correct his order under Section 154 of the Act as per the directions of the Tribunal. As already noticed, the subject-matter of the complaint before this Court is concealment of income arrived at on the basis of the finding of the assessing officer. If the Tribunal has set aside the order of concealment and penalties, there is no concealment in the eye of the law and, therefore, the prosecution cannot be proceeded with by the complainant and further proceedings will be illegal and without jurisdiction. The Assistant Commissioner of Income Tax cannot proceed with the prosecution even after the order of concealment has been set aside by the Tribunal. When the Tribunal has set aside the levy of penalty, the criminal proceedings against the appellants cannot survive for further consideration. In our view, the High Court has taken the view that the charges have been framed and the matter is in the stage of further cross-examination and, therefore, the prosecution may proceed with

the trial. In our opinion, the view taken by the learned Magistrate and the High Court is fallacious. In our view, if the trial is allowed to proceed further after the order of the Tribunal and the consequent cancellation of penalty, it will be an idle and empty formality to require the appellants to have the order of the Tribunal exhibited as a defence document inasmuch as the passing of the order as aforementioned is unsustainable and unquestionable.”

On the other hand, Mr. Ratnesh Nandan Sahay, learned counsel appearing on behalf of O.P. No. 2 in both the cases submits that Long Term Capital Gain has been fraudulently enjoyed by the petitioners that is why the complaint has been filed. He submits that once criminal case is filed even subsequently if penalty is set aside by the appellate authority, criminal case cannot be quashed. He relied in the case of S.J. Surya Vs.The Deputy Commissioner of Income Tax Central Circle,-II (4), Chennai in Crl. O.P. No. 29914, 29915, 29916, 29917, 29918 & 29919 of 2015 and M.P. Nos. 1 and 2 of 2015. Referring para 21 of the said judgment he submits that mens rea is required to be looked into which is subject matter of trial. On these grounds, he submits that the Court may not interfere with the matters under section 482 Cr.P.C. 13.

In view of above submission of the learned counsel for the parties the Court has gone through the materials on record and finds that admittedly complaint was filed under sections 276(C)(1), 277 and 278E of the Income Tax Act in both the cases and accordingly, the learned court has taken cognizance in that sections and aggrieved with the same, the petitioners have moved this Court. It is an admitted fact that the petitioner

in Cr.M.P. No. 591 of 2017 was imposed penalty which was affirmed by the First Appellate Authority and the Second Appellate Authority by order dated 15.07.2020 has been pleased to set aside penalty imposed upon the petitioner. In the second case i.e. Cr.M.P. No. 593 of 2017 the penalty has not been imposed upon the petitioner. The question framed in the case of K.C. Builders (supra) at para 8 are the identical which is subject matter of these cases. Particularly the law point framed at para 8 (a), (b)and (c) and in that case in para 25 it has been clearly held that once the penalties are cancelled on the ground that there is no concealment, the quashing of prosecution under section 276C is automatic. The case of the petitioners is fully covered with the case of K.C. Builders (supra). The case of K.C. Builders (supra) and another judgment in the case of “G.L. Didwania & Another V. Income Tax Officer & Another” (1997) 224 ITR 687 (SC) was considered by this Court in the case of Suresh Kumar Agarwal (supra). In the said case in para 13 it has been held as under:- “13. In the instant case, the crux of the matter is attracted and whether the prosecution can be sustained in view of the order passed by the Tribunal. As noted above, the assessing 9 Cr.M.P. No. 1553 of 2016 authority held that the appellant-assessee made a false statement in respect of income of Young India and Transport Company and that finding has been set aside by the Incometax Appellate Tribunal. If that is the position then we are unable to see as to how criminal proceedings can be sustained. 14. Both the two judgments are in favour of the petitioners. Admittedly in the first case penalty has been set aside by the second appellate authority and in second case penalty has not been imposed upon the petitioner. It is well settled that the creation of an offence by Statute proceeds on the assumption that society suffers injury by and the act or omission of the offence. It is also well settled that in most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent. In the case in hand in the first case second appellate authority has set aside the penalty and it is and admitted fact that whether criminality can be sustained or not. In the similar circumstances in the case of G.L. Didwania (supra) the Hon‟ble Supreme Court has held that if that is the

position then the Court is unable to see as to how criminal proceedings can be sustained and the same view was taken in the case of K.C. Builders (supra). The judgment relied by Mr. Sahay appearing for the O.P. No. 2 in the case of S.J. Surya (supra) is distinguishable in the facts and circumstances of the present case and the Madras High Court was of the view that if the penalty has been quashed on the technical ground not on merit the criminal proceeding cannot be quashed which has been considered at para 19 of the said judgment which is quoted here-in-below:- “19. From the reading and understanding of the judgments aforesaid, it is made clear that pendency of re-assessment proceedings are remanding matter for adequate opportunity and that adjudication by Tribunal through adjudication proceedings are not a bar for launching a criminal prosecution. Even if the adjudication proceedings ended in favour of assessee, it can be taken in favour of assessee only if the adjudication proceedings discussed all the issues raised in the complaint on merits and gave its findings. If the adjudication proceedings were disposed on technical ground and not on merits, prosecution can continue and assessee/accused cannot take advantageof the order passed in adjudication proceedings.”

15.

In the case in hand the penalty was quashed on merit. This judgment is not helping the O.P. No. 2. Moreover two judgments of the Hon‟ble Supreme Court as discussed here-in-above are in favour of the petitioner. 16.

In view of above facts, reasons and analysis, the entire criminal proceeding including order taking cognizance dated 10.11.0216 passed by the Special Sub-Judge-VII, Economic Offence, Ranchi in Complaint Case No. 07 of 2016/Eco. Off. Case No. 7 of 2016 in Cr.M.P. No.591 of 2017 and the entire criminal proceeding including order taking cognizance dated 10.11.0216 passed by the Special Sub-Judge-VII, Economic Offence, Ranchi in Complaint Case No. 07 of 2016/Eco. Off. Case No. 6 of 2016 in Cr.M.P. No. 593 of 2017 are hereby quashed. 17.

Both the petitions allowed and disposed of. Pending I.A., if any, stands disposed of. Interim orders passed in respective cases are vacated.

( Sanjay Kumar Dwivedi, J.) Satyarthi/