By Ravi Sawana
The mechanism for enforcing tax compliances under the Income-tax Act, 1961 (‘the Act’) is provided by way of three pillars vis-à-vis imposition of interests, imposition of penalties, and prosecutions. Chapter XXII of the Act contains provisions relating to prosecutions. Amongst other provisions, Section 276C of the Act contains provisions relating to prosecution against “wilful attempt to evade any tax, penalty or interest chargeable or imposable or under-reporting of income or, to evade payment of such tax, penalty or interest”.
Analysis of legal provisions
A bare reading of Section 276C of the Act shows that it provides prosecution for wilful attempt to evade the chargeability or imposition or payment of tax, penalty or interest. The said provision is divided in two parts. Sub-section (1) deals with ‘wilful attempt’ to ‘evade’ tax, penalty or interest, which is “chargeable” or “imposable” or “under-reporting of income” whereas sub-section (2) deals with ‘wilful attempt’ to ‘evade’ ‘payment’ of tax, penalty or interest. Thus, both the sub-sections deal with two kinds of offences committed at two different points in time by an assessee.
Under sub-section (1), a ‘wilful attempt’ by an assessee to ‘evade’ the chargeability or imposition of tax, penalty or interest of an income either by under-reporting of income or non-reporting of income which is achieved either by falsification of books of accounts or non-recording of income, may lead to prosecution. It is germane to note that sub-section (1) lays emphasis on the evasion of tax, etc., before charging or imposition or under reporting of income. In another words, all the acts done by an assessee whereby the income is not offered to tax either due to falsification of books of accounts or non-reporting of income or under reporting of income, etc, would be a punishable offence u/s. 276C(1) of the Act.
Under sub-section (2), a ‘wilful attempt’ by an assessee to evade the payment of tax either by not paying the due taxes, interest or penalties or claiming excessive relief in the return of income thereby reducing the quantum of taxes payable. In another words, the provisions of sub-section (2) would operate when the payment of tax, penalty or interest is due and an attempt is made to evade such payment.[Vinodchandra C.Patel Vs. State of Gujarat - (2002) 253ITR (Guj.)]
The basic difference between applicability of sub-section (1) or (2) is the stage at which an offence is committed. If an offence is committed before the stage of filing of return of income, it shall be covered by sub-section (1). Any offence committed at or after the stage of filing of return of income, would be covered by sub-section (2). However, in certain circumstances there may be overlapping between applicability of sub-section (1) and sub-section (2).
Under both the sub-sections to Section 276C of the Act, the first requirement is that the attempt to evade should be ‘wilful’. This term has not been defined under the Act. Under common parlance, the word ‘wilful’ suggests the guilty mind of the assessee. In other words, the assessee has consciously or knowingly attempted to thwart the chargeability or payment of tax, interest or penalty. Further, such wilful attempt should be to ‘evade’ chargeability or imposition or payment of tax, etc. The word ‘evade’ has also not been defined in the Act. As per the Cambridge Dictionary, the word “evade” means “to avoid or escape from someone or something”. Further, as per the K.J. Aiyar’s Judicial Dictionary, “the word evade is capable of being used in two senses, one which suggest underhand dealing, and another which means nothing more than the intentional avoidance of something disagreeable”. Further, the Hon’ble Supreme Court in the case of Tamil Nadu Housing Board, has held that:
“when the law requires an intention to evade payment of duty then it is not mere failure to pay duty. It must be something more. That is, the assessee must be aware that the duty was leviable and it must deliberately avoid paying it. The word ‘evade’ in the context means defeating the provisions of law of paying duty. It is made more stringent by use of the word ‘intent’. In other words the assessee must deliberately avoid payment of duty which is payable in accordance with law.”
In view of the aforesaid discussion, if an assessee intentionally commits an act to escape the chargeability or imposition or payment of any tax, penalty or interest, such an act shall be regarded as a wilful attempt to ‘evade’. Thus, the law mandates the intentional escapement of chargeability or imposition of tax, etc. or non-payment of taxes due, but would not cover cases of “bonafide claim” or “delay in payment of tax, etc., on account of financial difficulties or similar situations”.
Further, Explanation to Section 276C also defines the phrase “wilful attempt to evade any tax, penalty or interest chargeable or imposable under this act or the payment thereof”. The explanation appended to the provision provides an illustrative list of cases which can be covered under the said term. Therefore, the explanation is not exhaustive but inclusive in nature and any other circumstance which has not been defined therein but is hit by the rigours of the provisions of Section 276C of the Act, would also be punishable.
However, a question arises as to whether the explanation is applicable to the entire section 276C or is restricted either to sub-section (1) or (2) to the said section? The rules of interpretation of statutes stipulates that where an explanation is appended to a section, it is to explain the meaning of words contained in that section. The meaning to be given to an explanation must depend upon its terms. The explanation has been inserted after sub-section (1) & (2) and starts with the words “for the purpose of this section”. One school of interpretation would mean that the said explanation applies to both the sub-sections to Section 276. However, a view may also be taken that the illustrative list of cases contained in the said explanation, suggests that the situations mentioned therein would occur before the stage of filing of return of income and therefore, are relevant only for the purpose of sub-section (1) to Section 276C. Nothing therein has been mentioned to suggests as to what situations can be termed as ‘evasion’ of payment of tax, interest or penalty. In the case of G. Viswanathan[(1987)167 ITR 103 (ker.)], it was held that the explanation is applicable only to sub-section (1) and it does not cover “wilful attempt to evade payment of any tax, penalty or interest” as covered by sub-section (2) to Section 276 of the Act.
Section 276C of the Act provides for prosecution where an assessee has wilfully attempted to evade the chargeability or imposition of tax, penalty or interest or has wilfully attempted to evade the payment of tax, penalty or interest. Before a prosecution can be launched, it is necessary to show that that act of assessee was wilful as well as to evade the tax, interest or penalty. A bona fide claim or financial distress to pay the taxes, are some of the examples which should not be covered by the rigours of Section 276C of the Act.
[The author is a Principal Associate, Direct Tax Team, Lakshmikumaran & Sridharan, Mumbai]