EY Tax Alert. Executive summary. Supreme Court upholds initiation of prosecution for failure to file return. 3 February 2014
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1 3 February 2014 EY Tax Alert Supreme Court upholds initiation of prosecution for failure to file return Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Supreme Court of India (SC) in the case of Sasi Enterprises (Taxpayer) v. ACIT [1] where the SC held that prosecution can be initiated against a taxpayer who fails to furnish return of income (ROI) within the statutory due date or in response to a notice issued by Tax Authority. The SC also reiterated that, in the prosecution proceedings for failure to file ROI on time, the initial burden lies on the taxpayer to prove the circumstances which prevented the taxpayer from filing ROI on time and it is not for Tax Authority to prove that taxpayer had wilfully committed the default. Further, the fact that taxpayer s assessment has not become final due to pendency of appeal proceedings would not act as bar against initiating prosecution proceedings. [1] [TS-43-SC-2014]
2 Background and facts The Indian Tax Law (ITL) requires taxpayer to furnish ROI by the relevant due date [2] as applicable to the taxpayer. In case of failure to furnish ROI by the due date, the taxpayer is required to pay interest for the period of delay as also nominal penalty if delay is beyond one year from the relevant tax year. Tax Authority can also call upon the taxpayer to furnish ROI in certain circumstances. Failure to furnish ROI within the time permitted by Tax Authority also attracts interest and penalty consequences. In addition to interest and penalty, the ITL also provides for rigorous imprisonment extending from three months to seven years with fine if taxpayer wilfully fails to furnish ROI within the statutory due date or within the time permitted by Tax Authority in notice to file ROI. By way of exception (which operates only in relation to failure to furnish ROI voluntarily), the ITL provides that taxpayer shall not be prosecuted for failure to furnish ROI voluntarily by statutory due date if (a) ROI is furnished by taxpayer before the end of one year following the tax year or (b) the tax payable by the taxpayer as assessed by Tax Authority after reducing advance tax and withholding tax (i.e. prepaid taxes) does not exceed INR 3,000. Exceptions so carved out would not apply to cases of failure to file ROI in response to the notice of Tax Authority. The ITL provides that, in case of offences by persons other than individuals (like companies, partnership firms (firm), LLPs [3] etc.) person responsible for conduct of the business (including directors or partners) can be punished with imprisonment and fine. [2] i.e. 31 July or 30 September or 30 November of the year following the tax year [3] Limited Liability Partnerships The ITL provides that in any prosecution for offence under the ITL, which requires a culpable state of mind on the part of taxpayer, the court shall presume existence of guilt on the part of taxpayer, but the accused can defend himself/ herself by proving beyond reasonable doubt (and not merely on the basis of preponderance of probability) that he/she had no such guilty state of mind. Thus, the burden to prove that failure to furnish ROI was not wilful is on the taxpayer. In the case before the SC, the Taxpayers were a firm and its partners. Prosecution proceedings were initiated separately against each of them. Firm had failed to furnish ROIs for two tax years. Firm also omitted to file ROIs for these two tax years even in response to notices by Tax Authority to do so. Tax Authority completed the assessments on best judgement basis and raised tax demands. Firm had filed appeal against the assessments which were pending for disposal. In respect of a different tax year, partners in their individual capacity had defaulted in filing personal ROI even in response to a notice of Tax Authority to do so. Tax Authority completed the assessments on best judgement basis and raised tax demands. Each of two partners had filed appeals against his/her assessment which was pending for disposal. While the appeals were pending, Tax Authority initiated prosecution by filing complaint with Chief Metropolitan Magistrate (Magistrate) against the firm and the partners (hereinafter collectively referred to as accused ) for the respective offence of failure to file ROI in time. The partners were prosecuted in their individual capacity for the tax year in which they failed to file personal ROI and in their capacity as partners for the tax years for which firm failed to file ROI. The accused applied to the Magistrate for discharge from the prosecution, pending appeals against assessments. The applications were dismissed by the Magistrate. The accused filed appeals
3 before the High Court which upheld the dismissal. Being aggrieved, the accused filed further appeals to the SC. Taxpayer s contentions Before the SC, the accused contended that no prosecution could be initiated for the reasons that (a) the assessments had not become final owing to pendency of appeals; (b) Tax Authority had not shown that the failure to file ROI was wilful or deliberate. In case of firm, an additional defence was that, while the firm had not furnished its ROI, there was disclosure by one of the partners in her individual ROI for relevant tax years by reporting some business income and by claiming that firm s accounts were not finalized. Based thereon, it was argued that there was no intent on the part of firm to evade tax. Tax Authority s contentions Tax Authority contended that there is statutory mandate on part of Taxpayer to file ROI on time and failure to do so attracts prosecution. In the present case, the accused had not only failed to voluntarily furnish ROI by the statutory due date but also failed to do so when called upon by Tax Authority. Tax Authority further contended that protection is granted only in exceptional cases referred in the ITL. Mere pendency of appeal against assessment does not protect the taxpayer from initiation of prosecution proceedings. The burden to establish that the failure was not wilful is on the taxpayer. SC s ruling The SC dismissed appeals of the accused and held as follows: Taxpayer has a liability/duty to file ROI within the statutory due date. The ITL has not only stipulated levy of interest for failure or belated furnishing of ROI but has also provided for prosecution for such offence/infraction. Unless excepted by the ITL, failure to file ROI by due date and/or failure to do so when called upon by Tax Authority are valid grounds for invocation of prosecution. While failure to file ROI by statutory due date constitutes an offence, protection is afforded to genuine taxpayers in two circumstances viz., (a) who voluntarily file ROI belatedly within one year from tax year or (b) those who have paid substantial amounts of their tax dues by pre-paid taxes as compared to finally assessed tax. The exceptions cannot be invoked by the taxpayers who have not furnished their ROI in response to the notice of Tax Authority. Mere pendency of appeal proceedings against tax assessments does not act as bar against initiation of prosecution proceedings. The offence of failure to furnish ROI is unrelated to pendency of assessment proceedings. Finality of assessment proceedings and the tax liability may be relevant in determining the length of punishment/quantum of fine. Mere circumstance that one of the partners had, in her individual ROI, intimated that firm s accounts are not finalized would not absolve the firm from filing ROI by the statutory due date. In a prosecution proceeding under the ITL by virtue of specific direction in the ITL, the court has to presume the existence of guilty state of mind on the part of taxpayer and it is for the accused to prove the contrary and that too, beyond reasonable doubt. In the trial proceedings, the accused have to prove the circumstances which prevented them from furnishing ROI.
4 Comments The SC ruling emphasizes the need for strict adherence to statutory due date for furnishing ROI. This is imperative not only for claiming certain benefits such as of carry forward of losses and/or claiming tax holiday benefit but also for avoiding risk of prosecution. Furnishing of ROI in due time in response to Tax Authority s notice assumes greater importance due to absence of protection against prosecution even if substantial taxes have been paid. Directors of company and partners of firm/llp need to be particularly mindful of the harsh consequence of personal prosecution for default by the company/firm/llp.
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