CBDT Circulars as Binding Constraints on Section 276C(1) Prosecutions; Conclusiveness of Settlement Commission Orders: Supreme Court Quashes Non‑Compliant Tax Prosecution as Abuse of Process

Introduction

This commentary analyses the Supreme Court of India’s decision in Vijay Krishnaswami @ Krishnaswami Vijayakumar v. Deputy Director of Income Tax (Investigation) (2025 INSC 1048), a significant pronouncement in tax‑crime jurisprudence. The Court quashed a prosecution under Section 276C(1) of the Income-tax Act, 1961 (IT Act), holding that:

• Departmental circulars and manuals governing initiation of tax prosecutions are binding on revenue authorities and cannot be disregarded;
• A conclusive order of the Settlement Commission under Section 245D(4) (read with Section 245-I) that records full and true disclosure and grants immunity from penalty undermines the mens rea necessary for a Section 276C(1) offence; and
• Even if the first proviso to Section 245H(1) saves prosecutions instituted before a settlement application, continuation of such prosecutions—when launched contrary to binding CBDT instructions and bereft of evidence of “wilful attempt”—can amount to abuse of process.

The case arose from a search under Section 132 on 24 April 2016, seizure of unaccounted cash (Rs. 4.93 crore), and subsequent prosecution for AY 2017–18. While the High Court refused to quash, the Supreme Court allowed the appeal, quashed the prosecution, and imposed costs of Rs. 2,00,000 on the Revenue.

Background and Key Issues

Parties: The appellant-assessee, Vijay Krishnaswami; the respondent, Deputy Director of Income Tax (Investigation), Chennai.

Procedural history and facts:

• Search under Section 132 on 24.04.2016; seizure of Rs. 4,93,84,300; assessee’s statement under Section 132(4).
• Show-cause for prosecution (31.10.2017). Writ against show-cause dismissed as premature (17.11.2017).
• Sanction for prosecution by Principal Director of Income Tax (Investigation) [PDIT] under Section 279(1) (21.06.2018); complaint filed by DDIT (Investigation) on 11.08.2018 under Section 276C(1) for AY 2017–18.
• Settlement application under Section 245C filed on 07.12.2018.
• Settlement Commission’s order under Section 245D(4) dated 26.11.2019: granted immunity from penalty; recorded that the assessee made full and true disclosure and there was no suppression; refrained from granting immunity from prosecution due to pendency of quash petition.
• High Court dismissed quash petition under Section 482 CrPC; Supreme Court reversed.

Core issues before the Supreme Court:

1. Whether continuation of prosecution under Section 276C(1) after the Settlement Commission’s order would amount to abuse of process;
2. Whether the High Court erred in dismissing the quash petition; and appropriate relief.

Summary of the Judgment

The Supreme Court allowed the appeal, set aside the High Court’s order, and quashed the prosecution. The Court held:

• Section 276C(1) targets wilful attempts to evade tax, penalty, or interest at the stage of “chargeability/imposability” and requires mens rea; Section 276C(2) is distinct, focusing on evasion of “payment.”
• Revenue’s own binding instructions—CBDT’s circular dated 24.04.2008, the Prosecution Manual, 2009, and CBDT’s circular dated 09.09.2019—require that prosecutions under Section 276C(1) generally be initiated only after confirmation of concealment penalty by the ITAT and, in cases where the tax sought to be evaded is Rs. 25 lakhs or below, with prior Collegium approval.
• On the date of filing the complaint (11.08.2018), there was no ITAT confirmation of concealment penalty; no Collegium approval was obtained as per the later CBDT clarification applicable to low tax amounts; and Revenue provided no justification for disregarding its binding circulars.
• The Settlement Commission’s order under Section 245D(4), conclusive under Section 245-I, recorded full and true disclosure and absence of suppression; this weighs heavily against the presence of mens rea required under Section 276C(1).
• Although the first proviso to Section 245H(1) prevents grant of immunity from prosecution where prosecution is instituted before a settlement application, continuation of such prosecution—in defiance of binding departmental instructions and absent evidence of wilful evasion—constitutes abuse of process.
• The High Court erred in refusing to quash and in failing to appreciate the combined effect of the binding circulars and the conclusive Settlement Commission findings.

Costs of Rs. 2,00,000 were imposed on the Revenue for pursuing the prosecution in “blatant disregard” of binding instructions.

Detailed Analysis

A. Precedents Cited and Their Influence

• K.C. Builders Ltd. v. CIT, (2004) 2 SCC 731: The Court reaffirmed the principle that if the penalty for concealment fails, a prosecution on the same material must also fail. This case undergirds the departmental practice—enshrined in the 2008 circular and the 2009 Prosecution Manual—that initiation of a Section 276C(1) prosecution should ordinarily await confirmation of penalty by the ITAT. In the present case, there was no ITAT-confirmed concealment penalty at the time of launching prosecution; the prosecution, therefore, ran counter to the Department’s own K.C. Builders–based protocol.
• Ranadey Micronutrients v. CCE, (1996) 10 SCC 387 and Paper Products Ltd. v. CCE, (1999) 7 SCC 84: These decisions emphasise that departmental circulars are binding on revenue authorities and promote uniformity, consistency, and predictability in tax administration. The Supreme Court applied these principles to conclude that CBDT instructions controlling launch of prosecutions cannot be ignored by the Department.
• UCO Bank v. CIT, (1999) 4 SCC 599: Restates that CBDT circulars issued under Section 119 of the IT Act are binding on authorities and can “tone down” the rigour of the law for proper administration and to prevent hardship to assessees. This doctrinal base underpins the Court’s view that the circulars are enforceable constraints on initiation/continuation of prosecutions.
• CCE v. Ratan Melting & Wire Industries, (2008) 13 SCC 1 (Constitution Bench): Clarifies that while courts are not bound by circulars, revenue authorities are. A circular contrary to statute has no existence; however, where a circular moderates administrative conduct within the statute’s framework, authorities must comply. The Court’s reliance ensures that CBDT’s prosecution thresholds and sequencing requirements are not treated as mere advisories.
• J.K. Lakshmi Cement Ltd. v. CTO, (2016) 16 SCC 213: Reaffirms that circulars can mitigate rigour and are binding on tax authorities, but cannot be adverse to the assessee beyond the statute. The present decision leverages this to mark the CBDT’s prosecution framework as beneficial, procedural safeguards which the Department must honour.
• Commissioner of Central Excise & Service Tax v. Merino Panel Product Ltd., (2023) 2 SCC 597: Emphasises that revenue cannot act contrary to its own circulars; doing so erodes uniformity and predictability. The Supreme Court imports this reasoning to prosecutions under the IT Act, labelling the Department’s contrary conduct as “blatant disregard.”

B. Legal Reasoning

1. Two distinct offences under Section 276C: The Court carefully distinguishes Section 276C(1) (attempts to evade tax/penalty/interest at the stage of chargeability/imposability or under-reporting) from Section 276C(2) (attempts to evade payment). This is crucial because Section 276C(1) prosecutions require proof of mens rea—a conscious, wilful attempt to evade the very imposition—rather than mere errors or differences of interpretation.
2. Binding nature of CBDT circulars and manuals: The Court assembles a line of authority to declare that departmental circulars are binding on revenue officers. Specifically:
   • 2008 CBDT Circular: Prosecutions under Section 276C(1) should be processed only where a penalty under Section 271(1)(c) exceeding Rs. 50,000 has been imposed and confirmed by the ITAT, preferably within 60 days of ITAT’s order.
   • 2009 Prosecution Manual: Advises initiating Section 276C(1) prosecution only after ITAT confirms concealment penalty (citing K.C. Builders).
   • 2019 CBDT Circular: For cases where “amount sought to be evaded or tax on under-reported income is Rs. 25 lakhs or below,” prosecution shall not be processed except with prior Collegium approval, and in any event only after ITAT confirms the penalty.
   The prosecution in the present case was launched without ITAT confirmation and, by the appellant’s uncontested showing post-settlement, fell under the Rs. 25 lakhs tax-liability threshold—triggering the Collegium approval requirement. The authorities ignored these preconditions without explanation.
3. Effect of Settlement Commission’s order (Sections 245D(4) and 245-I): The Settlement Commission found that the assessee had made full and true disclosure, with no suppression of material facts, and granted immunity from penalty. By virtue of Section 245-I, the settlement order is conclusive as to the matters stated therein. This factual conclusion significantly undercuts the possibility of proving “wilful attempt” (mens rea) for Section 276C(1).
4. Reconciling the first proviso to Section 245H(1): The first proviso says the Settlement Commission cannot grant immunity from prosecution where proceedings were instituted before the settlement application. The Court gives this proviso its literal place, but clarifies that it does not override fundamental criminal law principles or legitimise prosecutions that are (a) contrary to binding CBDT instructions, and (b) untenable in light of conclusive settlement findings negating mens rea. Hence, even a saved prosecution may be quashed as an abuse of process.
5. Abuse of process and Section 482 CrPC: Having found a lack of mens rea indicators and clear non‑compliance with binding procedural safeguards for launching prosecution, the Court held continuation of proceedings to be futile and abusive. The High Court’s refusal to quash (on the basis that defences can be raised at trial) was criticised as misdirected; courts must intervene at the threshold where continuation would serve no “meaningful purpose” in proving the alleged guilt.

C. Impact and Prospective Reach

• Recalibration of prosecution practice under Section 276C(1): Revenue authorities must now treat CBDT circulars and manuals as binding constraints, not discretionary guides. Launching or continuing prosecutions sans ITAT-confirmed concealment penalty and, where applicable, without Collegium approval for low‑tax cases, risks quashment with costs.
• Strengthening the settlement mechanism’s finality: While the first proviso to Section 245H(1) remains intact, this judgment elevates the practical effect of a Section 245D(4) order. Findings of “full and true disclosure” and “no suppression” in a settlement order carry heavy weight in assessing mens rea for Section 276C(1). Prosecutions that ignore such findings are vulnerable.
• Mens rea threshold sharpened: The Court’s separation of Section 276C(1) from (2) reinforces that not every non‑disclosure is criminal. Prosecutors must marshal evidence of a “wilful attempt” to evade the imposition of tax/penalty/interest—mere presence of seized cash or disagreement on the relevant assessment year will not suffice.
• Institutional discipline and accountability: The imposition of costs for disregarding binding instructions signals stricter judicial scrutiny of prosecutorial diligence, fairness, and consistency. Expect more defence challenges founded on CBDT non‑compliance and settlement findings.
• Effect on legacy and pending cases: Ongoing Section 276C(1) prosecutions launched without adherence to the 2008/2009/2019 CBDT frameworks, particularly where settlement orders record full disclosure and no suppression, may be prime candidates for quashment under Section 482 CrPC.

Complex Concepts Simplified

• Section 276C(1) vs 276C(2):
  • 276C(1): Punishes wilful attempts to evade the imposition of tax/penalty/interest (i.e., at the stage of chargeability/imposability), including under-reporting of income. Requires proof of mens rea (a conscious, intentional attempt).
  • 276C(2): Targets wilful attempts to evade the payment of tax/penalty/interest already due. Operates at a different, later stage.
• Mens rea in tax offences: For Section 276C(1), the prosecution must show intentional evasion—not mere negligence, computational error, or interpretational disputes. Settlement findings of full disclosure, no suppression, and penalty immunity strongly negate mens rea.
• Settlement Commission (Sections 245C, 245D, 245H, 245‑I):
  • Assessee applies under 245C with full and true disclosure.
  • Under 245D(4), the Commission passes a settlement order; per 245‑I, it is conclusive as to matters stated and cannot be reopened except as provided (e.g., fraud/misrepresentation under 245D(6)).
  • Under 245H(1), the Commission may grant immunity from penalty and prosecution, but the first proviso bars immunity from prosecution if proceedings were already instituted before the 245C application.
• CBDT circulars and manuals: Issued under Section 119, these are binding on tax authorities and can mitigate the rigour of the law for fair administration. The 2008 circular, 2009 Prosecution Manual, and 2019 circular collectively make ITAT confirmation of penalty a precondition to launching Section 276C(1) prosecutions and require Collegium approval for low‑tax cases.
• Section 279 (sanction and compounding): Prosecutions under Chapter XXII offences, including Section 276C, require previous sanction of the Principal Commissioner/Commissioner. Section 279(2) allows compounding. Section 279(1A) restricts prosecution for Section 276C/277 where penalty is reduced/waived under Section 273A. The present case turned less on Section 279 and more on circular compliance and settlement conclusiveness.
• Abuse of process and Section 482 CrPC: High Courts can quash criminal proceedings to prevent abuse of process or secure the ends of justice. When departmental binding instructions are flouted and continuation of prosecution is futile (e.g., no mens rea can be shown), quashment is appropriate.

Why the High Court’s Approach Was Rejected

The High Court treated the assessee’s argument—that the cash pertained to AY 2016–17 and that settlement had addressed the issue—as a trial defence. The Supreme Court found this approach flawed for two reasons:

• Normative non‑compliance: The prosecution was launched contrary to binding CBDT instructions requiring ITAT penalty confirmation and (for low-tax cases) Collegium approval; this is a threshold defect, not a matter for trial.
• Conclusive settlement findings: The Settlement Commission’s order (245D(4), 245‑I) recorded full disclosure and no suppression, severely undermining the mens rea component of Section 276C(1). Continuation served no meaningful purpose.

Practical Guidance

• For Revenue:
  • Before launching Section 276C(1) prosecutions, ensure: (a) ITAT has confirmed concealment penalty; (b) where tax sought to be evaded ≤ Rs. 25 lakhs, prior Collegium approval is obtained; and (c) reasons are recorded if any deviation is contemplated (bearing in mind binding nature of circulars).
  • Upon a 245D(4) order recording full disclosure/no suppression, reassess the sustainability of mens rea allegations; avoid pursuing prosecutions that would be futile or abusive.
• For Assessees:
  • In quash petitions under Section 482 CrPC, specifically plead and prove CBDT circular non‑compliance (2008, 2009 Manual, 2019) and rely on the conclusive effect of any favourable 245D(4) settlement order.
  • Demonstrate absence of mens rea through settlement findings and contemporaneous disclosures.

Conclusion

This decision sets a robust precedent at the intersection of tax administration and criminal law. The Supreme Court establishes that:

• CBDT circulars and prosecution manuals are binding on tax authorities and function as enforceable procedural safeguards;
• Initiation or continuation of Section 276C(1) prosecutions contrary to these safeguards is liable to be quashed; and
• Settlement Commission orders are conclusive as to the matters stated and, where they negate suppression and record full disclosure, they weigh strongly against the mens rea required under Section 276C(1).

By quashing the prosecution and imposing costs, the Court underscores the imperatives of fairness, uniformity, and accountability in tax prosecutions. The ruling will likely reshape prosecution strategies under the IT Act, fortify respect for settlement outcomes, and curb overreach where evidence fails to meet the high bar of “wilful attempt” required by Section 276C(1).