Prosecution under Section 276CC Is Impermissible and Liable

Prosecution under Section 276CC Is Impermissible and Liable to Be Quashed When No Tax Is Outstanding Due to Prepaid TDS

Issue

Whether criminal prosecution under Section 276CC for failure to furnish a return of income can be sustained when tax liability is fully covered by TDS and additions have been deleted by the Tribunal.

Facts

Prosecution Initiated: The assessee-firm was prosecuted under Section 276CC for failure to furnish its return of income for Assessment Year 2013-14.
Deletion of Additions: During the pendency of the criminal proceedings, the reassessment additions made by the tax authorities were completely deleted by the Income Tax Appellate Tribunal.
Prepaid Tax Coverage: The assessee established that no tax was due or payable as the entire tax liability was fully covered by Tax Deducted at Source (TDS), leaving excess TDS with the Income-tax Department.
Protection Claimed: The assessee claimed protection under the proviso to Section 276CC, arguing that prosecution cannot lie when no net tax liability exists.

Decision

Protection Under Proviso: Under the proviso to Section 276CC, an assessee cannot be proceeded against for failure to file a return if no tax is due and excess TDS remains with the Department.
Abuse of Process: Continuing criminal prosecution despite the deletion of underlying additions and full tax coverage via TDS amounts to an abuse of the process of law.
Quashing of Proceedings: The High Court held in favor of the assessee and quashed the criminal proceedings initiated under Section 276CC.

Key Takeaways

Application of Proviso to Section 276CC: Prosecution under Section 276CC cannot be maintained if the net tax payable (after reducing TDS, advance tax, and self-assessment tax) falls below the statutory threshold specified in the proviso.
Impact of Relief in Quantum Proceedings: Deletion of underlying tax additions by higher appellate authorities directly vitiates the foundation of criminal prosecution for non-filing/evasion.
Prevention of Abuse of Law: Continuing criminal prosecution when there is zero tax liability violates statutory safeguards and warrants intervention by higher courts to quash the proceedings.

HIGH COURT OF MADRAS

K.P. Constructions Engineers and Contractors

Income-tax Officer

P. Dhanabal, J.

CRL OP (MD) No. 22117 of 2022
CRL MP (MD) Nos. 15596 and 15597 of 2022

JULY 17, 2026

Ms. H. Lakshmi Shankar for the Petitioner. Ms. M. Sheela, Standing Counsel for the Respondent.

ORDER

1. This Criminal Original Petition is filed by the petitioner to quash the proceedings pending in CC No.7 of 2016 on the file of the Additional Chief Judicial Magistrate, Madurai.

2. The case of the prosecution is that the petitioner is a partnership firm doing Engineering and Contract Works. The second accused is the Managing Director of the said firm and he is in-charge of the business and conduct of the said firm. The complainant is a public servant working as Income Tax Officer, Ward -1, Dindigul and he has been authorized by the Principal Commissioner of Income Tax, Madurai, to prefer the complaint against the accused for the offence punishable under Section 276CC of the Income Tax Act. Further, the Principal Commissioner of Income Tax, Madurai has also accorded valid sanction order to prosecute the accused for the said offence. The accused M/s.K.P. Construction, who is already an Income Tax assessee and the Managing Partner are liable for filing of Return of Income for every Assessment Year on behalf of A1 – Firm. During financial year 2012 – 2013, the A1 – Firm has earned Rs.14,21,60,235/-under TDS – payment to contractor (A1) through Ponnaiyah Ramajayam Institute of Science and Technology Trust, Titan Educational Trust and Sai Substrates Private Limited under Section 194C of Income Tax Act and also A1 – Firm has earned Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank, Dindigul, under Section 194A of the Income Tax Act and also made time deposit of Rs. 2,46,67,915/- in Tamilnadu Mercantile Bank, Dindigul. Since the assessee has earned income through TDS and also made investment in the bank, during financial year 2012 – 2013, the assessee firm (A1) has to file Return of Income for the assessment year 2013 – 2014 on or before 30.09.2013 under Section 139(1) of the Income Tax Act or one year from the end of the assessment year under Section 139(4) of the Income Tax Act. The accused after knowing the fact that the Return of Income should be filed on or before 30.09.2013 for the assessment year 2013 -2014, since they are already assessee, the accused have not filed Return of Income in due time as mentioned under Section 139 of the Income Tax Act. Thereby, the accused willfully and intentionally not filed Return of Income for the assessment year 2013 – 2014 in order to omit to pay tax to Central Government. While so, on 29.04.2016, a show cause notice was issued to M/s.K.P. Constructions for initiation of prosecution under Section 276CC of the Income Tax Act by the Principal Commissioner of Income Tax, Madurai and the accused also had sent a reply dated 23.05.2016 and 09.06.2016 granting extension of time and the reasons mentioned by the accused are not acceptable. The above said act of the accused for non filing of the Return of Income within due time is punishable under Section 276CC of the Income Tax Act. Therefore, filed the complaint. The said complaint was taken on file by the Additional Chief Judicial Magistrate, Madurai, and the same is pending in CC No.7 of 2016. Now the said proceedings have been challenged by the petitioner.

3. The learned counsel appearing for the petitioner would submit that the petitioner is a partnership firm represented currently by Managing Partner. On 29.04.2016, the respondent department issued a show cause notice under Section 276CC of the Income Tax Act pointing that the petitioner firm had not filed Return of Income for the financial year 2012 – 2013 (assessment year 2013 – 2014). Thereafter, the petitioner sought time and also pointed out that the tax payable will be less than the TDS already available. As per the return of income, the tax payable is Rs.25,96,576/- whereas the TDS already available with the respondent department is Rs.28,87,319/-. Thereby, the petitioner firm is entitled for a refund of Rs.2,90,740/-. Without considering the above, the department has launched prosecution against the petitioner firm.

3.1. He further submitted that during the pendency of the complaint, the second accused, who was in-charge of the business died on 21.08.2018. Now the present petitioner, namely, J.Shanthi was substituted to represent the first accused the petitioner firm. As per proviso to Section 276 CC of the income Tax Act clearly bars the proceedings in the facts of the present case as the tax payable is actually less than the TDS available with the respondent department. Further, during the pendency of the quash petition, the respondent department informed the petitioner that the tax arrears for the financial year 2012 – 2013 is Rs.1,60,55,962/- after reassessment. As against the said order, the petitioner has preferred an appeal before the Commissioner of Income Tax. In the appeal, the amount of Rs. 1,02,90,322/- was deleted, since M/s.IVRL and M/s.Chettinadu Cement Corporation had not responded the discrepancies noted for the balance amount of Rs.55,72,910/-, but ledger accounts were properly submitted for scrutiny. Thereafter, the petitioner also preferred an appeal before the Income Tax Appellate Tribunal with respect to the disputed addition of Rs.55,72,910/- and the Income Tax Appellate also confirmed that the closing balance of M/s.IVRC and M/s.Chettinad Cement Corporation as appearing in the book of account of the assessee is found to be genuine. Therefore, the Income Tax Appellate Tribunal directed the AO to delete the addition of Rs.17,86,300/- with respect to M/s.IVRC and also directed the AO to delete the addition of Rs.38,98,560/- with respect to M/s.Chettinad Cements. Therefore, the balance disputed amount of Rs.55,72,910/-was reconciled and the appeal came to be allowed on 06.05.2026. In view of the said orders, the total additions of Rs.1,60,55,962/- made by the AO during the reassessment was reconciled and deleted. Therefore, as the original Return of Income, the tax payable is Rs.25,96,576/- and the TDS already available with the respondent is Rs.28,87,319/-. Therefore, the pending prosecution is abuse of process of law and the same is liable to be quashed.

4. The learned counsel appearing for the respondent would submit that the petitioner has not filed Return of Income for the financial year 2012 – 2013 and earned a sum of Rs.14,21,60,235/- under TDS – payment of contractor (A1) through Ponnaiyah Ramajayam Institute of Science and Technology Trust, Titan Educational Trust and Sai Substrates Private Limited under Section 194C of Income Tax Act and also earned a sum of Rs.4,41,441/- through TDS from Tamilnadu Mercantile Bank, Dindigul under Section 194A of Income Tax Act and also made time deposit of Rs.2,46,67,915/- in Tamilnadu Mercantile Bank, Dindigul. The assessee firm has to file Return of Income for the assessment year 2013 – 2014 on or before 30.09.2013 under Section 139(1) of Income Tax Act or one year from the end of the assessment year. Section 139(4) of the Income Tax Act which is mandatory. But the accused have failed to file the Return of Income within time and thereby it is punishable under Section 276CC of Income Tax Act. Therefore, filed the complaint.

4.1. During the pending of the complaint, the department reassessed the income tax and issued notice by quantifying amount of Rs.1,60,55,962/- and the same was challenged before the Commissioner of Income Tax and the same was partly allowed and thereafter, again the petitioner had filed an appeal before the Income Tax Appellate Tribunal and the same was also allowed. The above said orders of the Tribunal and the Appellate Tribunal are in respect of arrears of tax after reassessment. But they have not filed any Returns for the financial year 2012 – 2013 (assessment year 2013 – 2014). Therefore, they filed the complaint and the petitioner has to face the trial and the petition is liable to be dismissed.

5. This Court heard both side and perused the records.

6. In this case, the complaint has been lodged by the Income Tax department for the offence under Section 276CC of the Income Tax Act for non filing of the Returns for the financial year 2012 – 2013 (assessment year 2013 – 2014). For the non filing of the Returns, the complaint has been lodged. During the pendency of the complaint, once again the reassessment was made by the authorities to the tune of Rs.1,60,55,962/- and the same was challenged before the Income Tax Commissioner and the same was reduced to Rs.55,72,910/-. As against the said order, an appeal was preferred before the Income Tax Appellate Tribunal, who allowed the appeal and thereby the reassessment order reconciled and deleted. According to the petitioner, the TDS already available with the respondent department is Rs.28,87,319/-, the income tax payable is Rs.25,96,576/-. Therefore, the petitioner is entitled for a refund of Rs.2,90,740/-. There is no money payable to the department by the petitioner.

7. At this juncture, the learned counsel for the petitioner brought to the notice of this Court that the proviso to Section 276 CC of Income Tax Act clearly bars the proceedings if the tax is payable on the total income determined, on regular assessment as reduced by advance tax, if any paid and any tax deducted at source does not exceed Rs.3,000/-, the person shall not be proceeded against under Section 276CC of the Income Tax Act for failure to furnish in due time the return of income under Section 139(1) of Income Tax Act. In the case on hand, on perusal of the record it is observed that no tax is due. The excess amount of TDS available with the Income Tax department. Thereby, as per proviso to Section 276 CC of the Income Tax Act, the petitioner shall not be proceeded against under Section 276CC of the Income Tax Act. Moreover, the original Managing Partner, A2, who was incharge of the business, was also died on 21.08.2018. Considering all the factors, pending proceedings in this case are nothing but abuse of process of law. Therefore, the pending proceedings are liable to be quashed.

8. Accordingly, the Criminal Original Petition is allowed and the proceedings pending in CC No.07 of 2016 on the file of the Additional Chief Judicial Magistrate, Madurai, is quashed. Consequently, connected Criminal Miscellaneous Petitions are closed.