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Assistant Commissioner Of Income-Tax v. Yerra Nagabhushanam.
Factual and Procedural Background
This appeal is preferred by the Assistant Commissioner of Income-tax, Investigation, challenging the acquittal of A-2, the managing partner of A-1 firm, Visakha Medical Stores, by the Special Judge for Economic Offences at Hyderabad. The firm A-1 was convicted under sections 276C and 277 of the Income-tax Act for filing a false return and making false statements, while A-2 was acquitted. The prosecution arose from a search and seizure conducted on December 3, 1986, where certain books and documents were seized from A-2’s premises. The Income-tax Department alleged that the firm underreported its income, filing a return showing Rs. 26,010 against an assessed net income of Rs. 1,00,000, later modified to Rs. 50,000 by the Commissioner of Income-tax. The prosecution was launched under sections 276C and 277 of the Income-tax Act, resulting in the conviction of the firm but acquittal of A-2, which is the subject of this appeal.
Legal Issues Presented
- Whether A-2, as the managing partner who filed the return, had the requisite mens rea or wilful intent to evade tax under sections 276C and 277 of the Income-tax Act.
- Whether the statement made by A-2, relied upon under section 132(4) of the Income-tax Act, was admissible evidence to establish his guilt.
Arguments of the Parties
Appellant's Arguments
- A-2 filed the return, which was false, and thus should be held liable under sections 276C(1) and (2) for wilful attempt to evade tax.
- Wilful attempt includes possession or control of false books or documents or making false statements, as explained in section 276C.
- Section 277 punishes knowingly making false statements in verification; hence, A-2’s filing of a false return implies knowledge and wilfulness.
- The filing of a revised return by A-2 indicates an admission of wilful evasion.
- The statement in exhibit P-13, where A-2 admitted being in charge of the firm, should be admissible under section 132(4) of the Income-tax Act and proves his guilt.
Respondent's Arguments
- There was no wilful attempt or mens rea on the part of A-2; the false return was due to mistakes by the accountant working under A-2.
- For conviction under section 277, the false statement must be knowingly made; no such knowledge or belief existed with A-2.
- The acceptance of mistakes by A-2 was to maintain peace with the Department, not an admission of guilt.
- Exhibit P-13 is not admissible evidence as it was not recorded on oath by an authorised officer during the search, as required under section 132(4).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Thakasi Satyanarayana v. State of A.P, [1985] 1 Crime 60 (AP) | Requirement of mens rea (wilful knowledge) to constitute offence under section 276C of the Income-tax Act. | The court relied on this precedent to emphasize that mere possession of false books is not punishable without knowledge; mens rea must be proved against A-2. |
| B.T.X Chemicals (P.) Ltd. v. Suraj Bhan, [1989] 177 ITR 425 (Gujarat High Court) | Reinforces the necessity of proving mens rea for offences under section 276C. | Supported the principle that knowledge of false entry is essential for conviction, aligning with the court’s view in this case. |
| Sri Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705 (Supreme Court) | Acceptance of additions to income does not imply admission of deliberate concealment or mens rea. | The court applied this to reject the appellant’s argument that filing a revised return established wilfulness. |
| R.R Gaviti v. Sherbanoo Hasan Daya (Smt.), [1986] 161 ITR 793 (Bombay High Court) | Requirements for admissibility of statements recorded under section 132(4) of the Income-tax Act. | Used to hold that exhibit P-13 was inadmissible evidence as it was not recorded on oath by an authorised officer during the search. |
Court's Reasoning and Analysis
The court focused on the element of mens rea or wilfulness required under sections 276C and 277 of the Income-tax Act. It noted that the Department’s own witness, the Assessing Officer, admitted inability to assert that A-2 had knowledge of the false entries or control over the accounts maintained by the part-time accountant. The court observed that the return was filed on an estimated profit basis without reflecting actual earnings, negating wilful intent. The court examined the Explanation to section 276C and emphasized that mere possession of false documents does not establish guilt unless knowledge of falsity is proven. This interpretation was supported by the precedent in Thakasi Satyanarayana, which requires proof of mens rea. The court rejected the appellant’s argument that filing a revised return implied wilfulness, citing the Supreme Court’s ruling in Sri Shadilal Sugar and General Mills Ltd. that acceptance of additions does not prove deliberate concealment. Additionally, the court found exhibit P-13 inadmissible as evidence under section 132(4) because it was not recorded on oath by an authorised officer during the search, as mandated by law. Given the absence of evidence establishing mens rea, the court upheld the acquittal of A-2.
Holding and Implications
The appeal is dismissed, and the acquittal of A-2 is upheld.
The direct effect of this decision is the confirmation that A-2, the managing partner, cannot be held criminally liable under sections 276C and 277 of the Income-tax Act without proof of wilful intent or knowledge of falsehood. The court’s ruling reinforces the principle that mens rea is essential for conviction in tax evasion cases under these sections. No new precedent was established beyond affirming existing legal standards concerning mens rea and evidentiary requirements under the Income-tax Act.
B.S Raikote, J.:— This appeal is preferred by the Assistant Com-) missioner of Income-tax, Investigation, being aggrieved by the judgment of the Special Judge for Economic Offences at Hyderabad, dated August 30, 1994, on his file in C.C No. 96 of 1992.
2. By the impugned judgment, the court below convicted A-1, Visakha Medical Stores, Main Road, Kancharapalam, Visakhapatnam, of the offence under section 276C of the Income-tax Act, by imposing a fine of Rs. 5,000 and in default A-2 to undergo rigorous imprisonment for a period of six months. A-1 was further convicted and sentenced to pay a fine of Rs. 5,000 for the offence under section 277 of the Income-tax Act and in default A-2 to undergo rigorous imprisonment for a period of six months. By the same judgment, the court below acquitted A-2 of the offence under section 276C and under section 277 of the Income-tax Act. This appeal is preferred in so far as it relates to the acquittal of A-2. The conviction of A-1-firm is not challenged in this appeal and the same has become final.
3. From the facts narrated above, it is clear that I have to consider this appeal only in relation to A-2 who was said to be the managing partner of A-1-firm, Visakha Medical Stores.
4. In order to appreciate the rival contentions of both the parties, it is necessary to briefly state the facts in this case. On the basis of the search and seizure conducted on December 3, 1986, certain books and other materials were seized from the house-cum-shop of A-2. On the basis of search, it was alleged on behalf of the Income-tax Department that the net income of A-1-firm would come to Rs. 1,00,000, whereas the return was filed only regarding the income of Rs. 26,010. The accused firm has not accounted for certain commission received by it. On that basis, the Department determined the income of A-1 firm at Rs. 1,00,000 and tax was also determined at Rs. 11,250. Against the said order, the assessee preferred ah appeal, but the same was disposed of by the Commissioner of Income-tax with certain modifications by reducing the quantum to Rs. 50,000 under exhibit P-45. However, the present prosecution is also launched under sections 276C and 277 of the Income-tax Act.
5. In support of the case, the Department examined P. Ws. 1 and 2 and got marked exhibits P-1 and P-46. On a consideration of the entire material placed on record, the court below convicted the firm A-1. However, the court below acquitted A-2 on the ground that there was no mens rea on the part of A-2 in filing the return on an estimated profit basis. The court below observed that it was not a return reflecting the actual earnings but it is only the estimated earnings, therefore, A-2 cannot be said to have committed the offence and accordingly acquitted accused No. 2. It is against this order of acquittal of A-2, that the present appeal is preferred.
6. Learned counsel appearing for the Department contended that it is the accused who filed the return and the return was a false return. On that basis, A-1-firm has been convicted and the court below was in error in acquitting A-2. Learned counsel for the appellant further submitted that under section 276C(1) and (2) of the Income-tax Act, if a person wilfully attempts, in any manner whatsoever, to evade any tax, penalty or interest chargeable or imposable under this Act, he shall be liable for conviction, without prejudice to any penalty that may be imposed on him under any other provision of the Act. He further submitted that “wilful attempt” also has been clarified in the Explanation to section 276C stating that a wilful attempt shall include a case where any person has in his possession or control any books of account or other documents or makes or causes to be made any false entry or statement in such books of account or other documents or wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents, or causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under the Act or the payment thereof. Learned counsel invited the attention of the court to section 277 of the Income-tax Act regarding false statement in verification. Under that section if a person makes a statement in any verification under the Act which is false and which he either knows or believes to be false, or does not believe to be true, he shall be punishable. Relying on these two sections, i.e, sections 276C and 277 of the Act, learned counsel for the appellant strenuously contended that A-2 wilfully evaded the tax. On the other hand, learned counsel for the respondent supported the order of acquittal contending that as per the sections that there should be wilful attempt on the part of the assessee to evade tax. In the instant case, there was no wilful attempt to evade the tax on the part of the assessee and it was due to the mistake committed by the accountant working under the assessee. Under section 277 hot only such statement should be false but also he must also know or believe it to be false. Having regard to the circumstances of this case, no knowledge can be imputed to A-2. He submitted that at any rate there was no mens rea on the part of A-2 for filing a false return. When the Department pointed out certain mistakes, the accused accepted the mistakes only to buy peace with the Department. It was contended, on that basis, that there was no intention on the part of A-2 to commit the offence under the Act.
7. I have given anxious consideration to the facts of this case. Regarding mens rea or wilfulness on the part of the accused, P.W 2, the Assessing Officer, in the cross-examination admitted to the effect that “I cannot say whether A-2 has knowledge of the maintenance of the accounts by the accountant and entries thereof.” From this fact, it is clear that the department itself is not asserting that there was any mens rea on the part of the accused and whatever irregularities pointed out by the department are accepted by the accused only to buy peace. Further, P.W 1 stated in his deposition that the statement of A-2 was recorded as per exhibits P-34 and P-38. He admitted that A-2 stated before the Department that he is running the business and books are written by one Mr. Surender, a part-time accountant, and sales bills are written by one Mr. Easwararao, salesman at his instance. He also admitted that A-2 further stated that he proposed to get his turnover and income assessed after getting the books written by the part-time accountant after his recovery from ill-health. In those statements, the accused also submitted before the Department that the purchases and sales bills and stock particulars are with the accountant at present and he would produce them in the office in a few days time. As per exhibits P-16, dated December 3, 1986, A-2 stated that the current bill books are with the accountant. P.W 1 further admitted that A-2 filed the profit and loss account and balance-sheet along with the return of income for the relevant assessment year on an estimate basis. From these facts, it is clear that the Department itself is not asserting that there was any mens rea or knowledge or wilfulness on the part of A-2 in filing the alleged false return.
8. From the evidence of P.W-1, it is clear that the Department is not asserting that there was any mens rea on the part of the accused. This court in a decision in Thakasi Satyanarayana v. State of A.P, [1985] 1 Crime 60 (AP), has held that to constitute an offence under section 276C of the Income-tax Act, the Department has to necessarily prove the requisite mens rea, namely, knowledge on the part of a person who made the alleged false statement. The court observed as under:
“10. The crucial question which, however, falls for determination is the scope of the Explanation appended to section 276C of the Income-tax Act. The Explanation has to be read with both the clauses of the section. The opening words of section 276C(1) imply the existence of a particular guilty state of mind in the person sought to be punished. The requisite mens rea is defined by the expression ‘wilfully’.
9. The Explanation runs thus:
‘For the purposes of this section, a wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof shall include a case where any person—
(i) has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement:
The Explanation does not in any way restrict or cut down the ambit of the expression ‘wilfully’ occurring either in clause (i) or (ii) of section 276C(1) of the Act. Mere possession or control of any books of account and other documents containing a false entry or statement is not punishable. It is only where a person in possession or control of such books of account or other document has knowledge of the false entry or statement that he renders himself punishable. Any other interpretation would sometimes lead to disastrous results. To take an example, if X carries on several businesses and maintains duplicate sets of accounts in relation thereto and preserves the incriminating set of accounts in the house of his innocent father-in-law and if the same are seized during a raid conducted by the income-tax authorities, can the innocent father-in-law of X be successfully prosecuted under section 276C(1), clause (ii), read with the Explanation of the Income-tax Act? The answer to my mind is emphatically in the negative. It is not difficult to visualise that a person can come into possession of books of account containing false entries or statements without knowledge of the same. The requisite mens rea, namely, knowledge on the part of a person of a false entry or statement in any books of account or other documents in his possession or control must be established before he is sought to be visited with the penalty prescribed thereunder.”
10. To the same effect also is the law declared by the High Court of Gujarat in B.T.X Chemicals (P.) Ltd. v. Suraj Bhan, [1989] 177 ITR 425. However, learned counsel for the appellant submitted that the very fact that A-2 filed a revised return would ipso facto prove the means rea or wilfullness on the part of A-2. But the explanation offered by A-2 before the Department was that when the Department pointed out certain mistakes, he (A-2) accepted the mistakes only to buy peace with the Department. This explanation offered by A-2 was accepted by the court below. What is to be noted, in this context, is whether by filing a revised return as suggested by the Department the accused accepted also the fact that he filed a false return. As held by the hon'ble Supreme Court in Sri Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705, from the mere acceptance that certain amounts are taxable it cannot be further held that the accused accepted the fact, that he deliberately furnished inaccurate particulars or concealed any income. The hon'ble Supreme Court pointed out that (headnote):
“From the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e, when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi-criminal offence.”
11. In the instant case, P.W-1 admitted in the cross-examination that he cannot say whether A-2 had the knowledge of the maintenance by the accountant and the entries thereof. From the evidence of this official witness, it is clear that the Department itself is not asserting that there was any means rea on the part of accused No. 2 in filing the return. Therefore, as held by the court below, the Department has not brought home the guilt against the accused for the offences under sections 276C and 277 of the Income-tax Act.
12. Lastly, learned counsel for the appellant submitted that in exhibit P-13 the accused has admitted that he was in charge of the firm and his father was not in charge of the firm and he was looking after the affairs of the firm, and in view of exhibit P-13 it is established that it was the accused who was in charge of the firm and he is guilty of the offences charged. It is further submitted that this statement made in exhibit P-13 could be used as evidence in terms of section 132(4) of the Income-tax Act. Therefore, the court below is in error in acquitting him. In order to appreciate this contention of the appellant I am extracting section 132(4) of the Income-tax Act which is as under:
“(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.
Explanation.— For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.”
13. From a reading of this section it is clear that the authorised officer during the course of search or seizure may examine on oath any person who is found to be in possession or control of books of account, documents, etc., and any statement made by such person during such examination may thereafter be used in evidence in any proceedings under the Income-tax Act. From this it follows that for a statement to be admissible in evidence in terms of section 132(4) of the Income-tax Act it must be one recorded by the authorised officer during the search and such a statement should have been obtained on oath. Unless these two basic requirements are fulfilled such a statement cannot be used as evidence in subsequent proceedings under the Income-tax Act. To the same effect is also the law declared by the High Court of Bombay in R.R Gaviti v. Sherbanoo Hasan Daya (Smt.), [1986] 161 ITR 793. In the instant case, from the material on record, it is not clear as to who has recorded that statement, vide exhibit P-13. That statement is dated March 11, 1988. Exhibits P-34 and P-38 statements were dated March 11, 1988. Admittedly, the search was conducted on December 3, 1986. If that is so, from the statement vide exhibit P-13 dated March, 11, 1988, it is not known as to who has recorded it. At any rate, exhibit P-13 has not been proved by examining the person who recorded the said statement. The signature of the person found at exhibits P-34 and P-38 is entirely different from the one found at exhibit P-13. Thus, exhibit P-13 is not one such statement recorded on oath under section 132(4) of the Income-tax Act. Therefore, exhibit P-13 is not admissible in evidence. Moreover, the court below, having examined the entire evidence on record, found that there was no mens rea on the part of the accused in filing the alleged return and accordingly acquitted A-2. In the light of the admissions made by PW-1 that he cannot say whether there was any knowledge on the part of A-2 in filing the false return, I am of the opinion that the order of the lower court does not call for interference. Accordingly, the appeal is dismissed.
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