Supreme Court slaps Rs 2 lakh fine on Income Tax Department for defying its own circulars, holding Revenue acted in blatant disregard to binding statutory instructions and fairness.
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NEW DELHI: The Supreme Court on August 28, 2025, quashed prosecution proceedings against assessee Vijay Krishnaswami @ Krishnaswami Vijayakumar and imposed Rs 2 lakhs as costs on the Income Tax (IT) Department for blatantly disregarding its own binding circulars.
A Bench of Justice JK Maheshwari and Justice Vijay Bishnoi strongly criticized the Revenue for “wilful non-compliance” of statutory instructions, calling it a serious lapse undermining fairness, consistency, and accountability.
Background of the Case
In April 2016, the Income Tax Department conducted a search under Section 132 of the Income Tax Act, 1961, seizing unaccounted cash worth Rs 4.93 crores from the assessee. Following this, a show-cause notice was issued in October 2017, and in June 2018, the Principal Director of Income Tax (Investigation) sanctioned prosecution, pursuant to which the Deputy Director filed a complaint in August 2018 under Section 276C(1) for alleged wilful attempt to evade tax.
Subsequently, in December 2018, the assessee approached the Settlement Commission under Section 245C, making additional income disclosures. By November 2019, the Settlement Commission granted immunity from penalty, observing that there was no wilful attempt to evade taxes, although it refrained from granting immunity from prosecution in view of pending proceedings before the High Court.
However, the Madras High Court dismissed the assessee’s plea to quash the prosecution, compelling him to approach the Supreme Court.
Issue Before the SC
The core question before the Supreme Court was:
Can prosecution under Section 276C(1) be sustained when the Revenue ignored binding CBDT circulars and when the Settlement Commission had already granted immunity from penalty?
Court’s Findings
- CBDT Circulars are Binding:
The Court highlighted three key directives binding on Revenue authorities:
- CBDT Circular (24.04.2008): Prosecution can be initiated only after confirmation of concealment penalty by the ITAT (if exceeding Rs 50,000).
- Prosecution Manual, 2009: Reinforced that prosecution under Section 276C(1) should follow ITAT confirmation.
- CBDT Circular (09.09.2019): For cases below Rs 25 lakhs, prosecution requires approval of a Collegium of senior officers, and again only after ITAT confirmation.
The Court reiterated earlier rulings (K.C. Builders Ltd. v. CIT, UCO Bank v. CIT), which made it clear that circulars tone down the rigour of law and are binding on tax authorities.
- Revenue Acted in Blatant Disregard:
- No ITAT order confirming concealment existed when the prosecution was launched.
- The Department failed to justify why it ignored its own procedure.
- The Settlement Commission had already found no wilful attempt to evade tax.
“Such wilful non-compliance of their own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability, which in any manner cannot be treated to be justified or lawful.”
– Supreme Court
- High Court’s Error
- The Madras High Court failed to assess whether continuing prosecution served any meaningful purpose.
- It overlooked the binding nature of the Settlement Commission’s findings and CBDT circulars.
Final Verdict:
- The Supreme Court set aside the Madras High Court order.
- Prosecution against the assessee was quashed.
- The Income Tax Department was directed to pay Rs 2,00,000 as costs to the assessee.
Appearance:
For the assessee: Senior Advocate Preetesh Kapur and Advocates Ravi Raghunath, R Sivaraman and Namanjeet Singh Bhatia
For the Income Tax authorities: Additional Solicitor General N Venkatraman, Senior Advocate Nisha Bagchi, and Advocates Raj Bahadur Yadav, V Chandrashekhara Bharathi, Udai Khanna and Navanjay Mahapatra
Case Title:
Vijay Krishnaswami @ Krishnaswami Vijayakumar vs. The Deputy Director of Income Tax
READ JUDGMENT HERE
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