India: Black Money - Demonetization Of ₹ 500 & ₹ 1000 - Law & Criminal Prosecutions

Last Updated: 14 November 2016
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

Sizzling!, is the word that can describe the current relationship of the Government of India, Income Tax Authorities, and those who have failed to disclose their income as required under the Income Declaration Scheme - 2016 (http://incometaxindia.gov.in/Pages/income-declaration-scheme.aspx). An opportunity was given by the Government of India for disclosure of the black money/undisclosed income under the Income Declaration Scheme - 2016.

A declaration under the Income Declaration Scheme could have been made in respect of any income or income in the form of investment in any asset located in India and acquired from income chargeable to tax under the Income-tax Act for any assessment year prior to the assessment year 2017-18 for which the declarant had, either failed to furnish a return under the Income-tax Act, or failed to disclose such income in a return, or such income had escaped assessment by reason of the omission or failure on the part of such person to make a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.

As the government announced the Rs 500 and Rs 1,000 banknotes cease to be legal tender with effect from 9th November, 2016, in the country's biggest crackdown against black money, corruption and counterfeit currency, any person who deposits currency notes of denominations of Rs. 500 and Rs. 1000, shall not enjoy any immunity from tax laws and shall be subject to the provisions of Income Tax Act, 1961. Deposit in the bank account of the discontinued notes have become a compulsion, as no other alternative is left to exchange the cash which one may possess. A statement has come from the Government that any sum up to Rs. 2,50,000/- deposited in the bank account in cash will not be looked into with suspicion, however, any money deposited in any bank account beyond Rs. 2,50,000/- will be monitored. The reasoning of threshold of Rs. 2,50,000/- appears to be that in a normal case the exemption limit under the Income Tax Act for payment of tax is Rs. 2,50,000/-. Take note, that this is not an AMNESTY SCHEME, hence depositing cash in the bank is not a solution.

However, here a question arises, i.e. about the treatment of amount of money beyond Rs. 2,50,000/- deposited in a bank account. Such deposit may amount to disclosure of past undisclosed income for the current year and the person making the deposit will have to explain the source of income and substantiate the manner of earning of such income. If the sources of income are unaccounted for, these might be deemed to be current year's income under Section 69A of the Income-Tax Act, 1961, and may attract income tax at the rate of 30% along with applicable surcharge and education cess, under Section 115BBE of the Act. However, if the money is legitimate, which had been previously withdrawn from bank or earned legally and saved and had been disclosed, the criminal provisions of the Income Tax Act shall not be applicable.

It is pertinent to note that any person who deposits currency notes of denominations of Rs. 500 and Rs. 1000, without being able to explain the source of such income may amount to willful attempt to evade tax, and shall attract beside tax liability, penalty under Section 270A, Section 271 and prosecution under Section 276C of the Income Tax Act, 1961. Similarly, any declaration of past undisclosed income in the current year amounts to false verification of return of income which shall attract prosecution under section 277 of the Income-Tax Act and Section 181 of the Indian Penal Code, 1860.

By virtue of the provisions of section 197(c) of the Finance Act, 2016, any undisclosed income (deposit of notes of Rs. 500 and Rs. 1000, without legitimate explanation) that is not declared under the Scheme, then such undisclosed income shall be deemed income of the year in which notice u/s 143 (2)/ 142 (1)/ 148/ 153A or 153C is issued, i.e., in the present case A.Y. 2017-18. Section 270A of the Income Tax Act, 1961 deals with the penalty for under reporting and misreporting of income. Any unaccounted income would attract penalty under Section 270A of the Act, which can range from 50- 200% of evaded tax. The penalty of 50% is prescribed for under-reporting cases and penalty of 200% is prescribed for misreporting instances. Section 271(1)(c) of the Income Tax Act, 1961 provides that the penalty will be levied for concealing the particulars of income or for furnishing inaccurate particulars of income.  The amount of penalty can vary from 100% to 300% of the amount of tax sought to be evaded. It is important to note that Section 270A will be applicable on cases pertaining to assessment year 2017-18 onward, whereas Section 271(1)(c) will continue to be applicable for cases up to A.Y. 2016-17.

Section 276C of the Income Tax Act, 1961 provided that for the evasion of tax on under reported income, which exceeds Rs.25,00,000/-, the offence is punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven (7) years with fine, and for all other cases the rigorous imprisonment shall not be less than three months but which may extend to two (2) years and with fine.

There is another dimensions to the above prosecution, as Section 277 of the Income Tax Act and Section 181 of the Indian Penal Code, 1860 (IPC) (https://indiankanoon.org/doc/852002/) are also attracted. Section 277 states that when a person makes a statement under this Act or delivers an account or statement, which is false, and which he either knows or believes to be false, or does not believe to be true, rendering such person punishable with rigorous imprisonment for a period up to seven years with fine or two years with fine, depending upon the amount, which the person making the statement would have been evaded if the statement or account had been accepted as true. Similarly, under Section 181 of the IPC, the offence of false statement on oath or affirmation to public servant or person authorized to administer an oath or affirmation, any statement which is false, and which he either knows or believes to be false or does not believe to be true, is punishable with imprisonment for a term which may extend to three years and fine. Accordingly, the Income Tax Department may launch prosecution under Section 276C and Section 277 of the Income Tax Act read with Section 181 of the IPC, until and unless other Sections relating to various other offences are also attracted.

Chapter XII of the Income Tax Act, 1961 (I.T. Act), which deals with the OFFENCES & PROSECUTIONS, is always a matter of concern for anyone concerned and related with the I.T. Act. It is quite perplexing to understand the defenses available to anyone prosecuted under the provisions of this chapter of the I.T. Act.

To understand various offences and criminal prosecutions under the Income Tax, please refer to another article written by the author at http://www.mondaq.com/india/x/373388/Income+Tax/
Offences+and+Prosecutions+Under+Chapter+XXII+of+the+Indian+IncomeTax+Act+1961
.

JUDICIAL PRESUMPTION OF MENS REA IN CASE OF PROSECUTION UNDER CHAPTER XXII OF THE I.T. ACT

It is utmost important to note that with respect to all the offences under Chapter XXII of the I.T. Act, a judicial presumption, under Sec. 278E of the I.T. Act, as to the culpable state of mind i.e. Mens rea, is raised against all accused in relation to all offences. The onus of proof has been put on the accused to prove that the accused had no Mens rea which include intention, motive or knowledge of a fact or belief in, or reason to believe a fact, to commit any offences under the said Chapter. Absence of Mens rea can be taken as a defense and this is one of the strongest defense available for any prosecutions under this Chapter.

While dealing with the aspect of Mens rea in relation to Sec.276C of the I.T. Act, the Supreme Court in the case of Gujarat Travancore Agency v. CIT ([1989]177ITR455(SC)), held that:

"There can be no dispute that having regard to the provisions of Sec. 276C, which speaks of willful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established."

DEFENSES IN CASE OF PROSECUTION UNDER CHAPTER XXII OF THE I.T. ACT

In case, a prosecution has been launched, the accused may defend the case:

  • By compounding (Guidelines for Compounding of Offences under Direct Tax Laws, 2014 – Circular F.NO.285/35/2013 IT (INV.V)/108 dated 23-12-2014: http://www.incometaxindia.gov.in/Lists/Departmental%20News/DispForm.aspx?ID=391&ContentTypeId=0x0100BF6F5D786BC54F4082A102516EA7F3C4 );
  • By pleading not guilty and facing trial;
  • By discharging the onus of proof of absence of Mens rea for commission of the crime alleged;
  • In a Warrant-case, by demonstrating at the state of framing of the charge by the court, that no case can be made out on the basis of the facts and documents available on record; or
  • By filing a petition under Sec. 482 of the Cr.P.C. for quashing of the prosecution, provided merits of the case support such petition.

PENDENCY OF THE REASSESSMENT PROCEEDINGS: NO BAR TO THE CRIMINAL PROSECUTION ACT (MANU/SC/0100/1984)

In a case, before the Supreme Court the question was, whether prosecutions under Sec. 276 and 277 of the I.T. Act and under Sec. 193 and 196, Indian Penal Code, instituted by the Department while THE REASSESSMENT PROCEEDINGS under the Act are pending, are liable to be quashed on the ground that they were not maintainable. The Supreme Court, in the circumstances of that case held that:

"On a careful consideration of the relevant provisions of the Act, we are of the view that the PENDENCY OF THE REASSESSMENT PROCEEDINGS CANNOT ACT AS A BAR TO THE INSTITUTION OF THE CRIMINAL PROSECUTION for offences punishable under Sec. 276C or Sec. 277 of the Act. The institution of the criminal proceedings cannot in the circumstances also amount to an abuse of the process of the court."

COGNIZABLE/NON-COGNIZABLE AND BAILABLE / NON-BAILABLE, WHICH SHALL BE SUBJECT TO THE SPECIAL PROVISIONS OF THE I.T. ACT

Since the provisions of Cr.P.C., 1973 have been made applicable for conduct of trial for commission of offenses under Chapter XXII, it may be necessary to understand the methodology for classification of offenses as cognizable/non-cognizable and Bailable / Non-Bailable, which shall be subject to the special provisions of the I.T. Act.

PROCESS OF CRIMINAL TRIAL IN INDIA

The process of criminal trial in India can be understood by clicking at the following link at http://documents.lexology.com/b3e42a02-9eb5-4854-b250-3362a79d73f5.pdf#page=2.

REMEDIES

Case of UNDERREPORTING of income, under Section 270AA(2) of the Income Tax Act, an application can be filed before the Assessing officer to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or under section 276CC. The conditions for grant of immunity under section 270AA are that the applicant has paid the tax and interest payable as per the order of assessment of reassessment, and has not filed any appeal against such order. The time limit to file the application is one month from the end of the month in which such order is received. Under section 270AA(4) the Assessing officer is required to pass an order accepting or rejecting such application within a period of one month from the end of the month in which application under section 270AA(1) is received. This provision shall come into force w.e.f. 01.04.2017.

Once a prosecution has been launched by the Income Tax Authorities then one of the option is approaching the concerned Authority under the Section 279(2) of the Income Tax Act (http://incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=act&cname=cmsid&cval=102120000000036877&k=&isdlg=1) for compounding of the offences. However, the discretion of compounding the offences under Section 276C and Section 277 solely lies with the appropriate Income Tax Authorities. Under Section 279(2) of the Income Tax Act, compounding of any offence can be done either before or after the launch of the prosecution. The catch under this Section is that compounding of offences cannot be claimed as a matter of right.

Prior to the launch of the prosecution for commission of the above offences under the Income Tax Act, an option is available with the assessee to approach the Settlement Commission (only in case of a pending case of assessment) under Section 245C of the Income Tax Act (http://www.incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=act&cname=cmsid&cval=102120000000036738&opt=&isdlg=1) by making a full and true disclosure, which has not been disclosed before the Assessing Officer, the manner in which such income has been derived, the additional amount of income tax payable on such income. Under Section 245H of the Income Tax Act (http://www.incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=act&cname=cmsid&cval=102120000000036744&opt=&isdlg=1 ) the Settlement Commission has the power to grant immunity from prosecution and penalty under the Income Tax Act. However, the right to claim immunity by approaching the Settlement Commission is not available, where the prosecution for any such offence has been initiated before the filing of the application under Section 245C of the Income Tax Act (First Proviso to Section 245H of the Income Tax Act).

© 2016, Vaish Associates Advocates,
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Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Vijay Pal Dalmia, Partner
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