Prosecution and Penalties under Income Tax Act, 1961

The Income Tax Act, 1961 is a vast subject in itself. Below, we have given a brief on the topic Prosecution and Penalties under Income Tax Act, covering the various aspects as much as possible.

Various lapses that can lead to Prosecution and Penalties under Income Tax Act

In order to ensure correct payment of Income Tax by the commoners in India ruling out the chances of tax evasion, the Income Tax Act, 1961 has certain structured sections, namely 275A, 275B, 276, 276A, 276B, 276BB, 276C, 276CC, 276D, 277, 277A or 278, which allows the income tax authorities to impose penalties or even exercise prosecution against a person in case of tax defaults under these sections.

However, prosecution is only possible by the Magistrate of a court after getting prior sanction from the Principal Commissioner, Commissioner (Appeals), Commissioner or any other appropriate higher authority of Income Tax who is competent to give a sanction in this regard.

Sanction for prosecution of offences under Income Tax Act, 1961:

It is extremely important to take utmost care while granting sanctions in such cases and following points must be borne in mind:

• The sanction can be granted only within the proper territorial jurisdiction of the concerned competent authority or authorized official who is giving the sanction.
• Every single matter that is relevant in this regard must be taken into consideration before granting the necessary sanction.
• A speaking order is required in case of a sanction and mere statement that the concerned authority has looked into the documents will not suffice as it does not strengthen the wise and judicious ground of granting a particular sanction.
• The authorized official must keep in mind that the sanctioning is not just a formality and must be done by application of proper intelligence.

Cases where the Sanction of Prosecution under Income Tax Act was declared Perverse

The long and short form of the matter is, the whole process of granting a sanction in case of prosecution against a defaulter must be done very carefully taking into account every single matter of relevance and ousting every other irrelevant matters.

This can be found in the example of the Supreme Court’s decision in the case of the Municipal Committee Vs Punjab State Electricity Board (Ref: ‘2010’ 13 SCC 216) where a sanction order was declared as ‘perverse’ stating the reasons of relevance.

Authority which can grant sanction of Prosecution under Income Tax Act:

1. The matter of an authority is very crucial in this regard and only the authority, which has been specified by law, is entitled to see through and grant sanction without passing over the responsibility to any other person, unless the delegation of power/authority is permitted by the Statute.
2. In the case of A.K. Roy V. State of Punjab [Ref.: AIR 1986 SC 2160], the Supreme Court, after absolute analysis of the Section 20(1), inhibited the institution of prosecution for an offence except of fulfillment of the conditions that the prosecutions must be given from the Central or State Government or any authorized person on their behalf and the prosecution must accompany written consent of any of the four specified categories of authorities or persons.
3. Above all, it is vital to keep in mind that “A delegation of power is essentially a legislative function” that should invariably be given by the statute and in certain cases, the Director himself is the delegating authority. Therefore, he or she cannot sub-delegate his power to any other person, even of his designation. In fact, Section 279 of Income Tax Act 1961 clearly states that only the ‘Principal Commissioner or Commissioner (Appeals) or the appropriate authority’ is the authorized person to grant sanction in cases of prosecution against defaulters by the Income Tax officials followed by Principal Chief Commissioner, Chief Commissioner, Principal Director General or Director General as per sub-section (1) of section 279 of the Income Tax Act, 1961 for institution of prosecution proceedings.

Careful about Clauses that allow initiation of prosecution:

Sometimes certain clause such as an interpretation clause is specified in cases of delegation of power to the Director or the Additional Director, whichever may be the case. Yet, the same has a limited effect and does not bear a positive enactment, which can easily be regarded as improper during the course of trial in the court. When a statutory power is conferred by a Board, it is always done in favor of a particular statutory authority and any kind of violation in the matter of the concerned authority can be viewed seriously while deciding upon the cases of prosecution proceedings in the court. The words ‘Director’ and ‘Commissioner’ are extremely essential to note depending upon the nature and scope of the proceedings, especially in the matters of prosecution.

To sum up, it can be said that the sanction for prosecution of an offence must be done by only the concerned delegated authorized officials only. This will ensure a clean and correct proceeding taking into consideration every matter of concern.

Related Read- Offenses for which one can be prosecuted under income tax act