Recently, a two-judge bench of the Delhi High Court in Indo Arya Central Transport Limited & Ors vs. CIT held that criminal proceedings initiated for late deposit of TDS cannot be challenged through a writ petition when it’s under the consideration of the trial court.
M/s Indo Arya Central Transport Limited, the petitioner, had made default in the deposit of TDS into the Government treasury within the prescribed statutory time. Show cause notices were issued to the Petitioner, as to why they should not be prosecuted under Section 276 B and Section 278B of the Income Tax Act, 1961.
In response to the notices, authorised representative of the petitioner had appeared and submitted that the petitioner company and his principal officer would opt for compounding. Accordingly, the prosecution proceedings were kept in abeyance subject to the petitioners filing compounding petition. However, when no compounding application was filed, another show cause notice was issued to resume the proceedings. Several adjournments were taken whereafter reply was filed accepting that there were defaults in the deposit of TDS on account of financial crunch due to sluggish business activity. The financial position of the petitioner company was adversely affected by the sudden drop in business orders. It was alleged that undisputed income tax refunds constituting 4-5 times the amount of shortfall in TDS had also remained pending.
Commissioner of Income Tax (TDS) issued the sanction order and initiated prosecution under 278B of the Act. Meanwhile, the Additional Chief Metropolitan Magistrate (‘ACMM’) took cognizance and issued summons to the petitioners.
The Petitioners in the writ petition filed before the High Court contends that the Sanctioning Authority has failed to consider the requirements of Section 278AA, which states that no punishment would be imposed for the offence committed under Section 276A, 278AB or Section 276B if the person being prosecuted proves that there was reasonable cause for such failure. Relying upon a press note issued by the CBDT, the petitioner argued that the delay in deposit of TDS did not exceed the prescribed period of twelve months and thus cannot be prosecuted for default.
The respondent submitted that the late deposit of TDS in gigantic proportions after the end of the financial year has huge ramifications and consequences not limited to non-payment of tax, but adverse consequences and sufferance of hundreds of deductee who did not get the credit of the tax deducted and had to pay tax and interest. Subsequently, they would have filed revised returns for refund causing harassment and inconvenience.
While dismissing the Petition, The division Bench comprising of Justice Sanjiv Khanna & Justice Chander Shekhar observed” At this stage, it will neither be fair nor proper for the writ court to question and decide the question of the validity of Sanction Order on merits of reasonable cause etc. as it would amount to a pre-trial adjudication. Questions and issues relating to grant and issue of sanction could be raised and decided during trial. We do not think it will be appropriate and proper for the writ Court while examining sanction, examine merits of allegations made in the criminal complaint and act as a fact-finding authority. In case the petitioners are able to make out that cognizance was not justified and as per law they can challenge and question the summoning order by way of petition under Section 397 read with Section 401 of the Code of Criminal Procedure, 1973 (Code) or if permissible, by way of a petition under Section 482 of the Code”.
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