Is Continuation of Prosecution Meaningful Without Finding of Wilful Tax Evasion?

The Indian Income Tax Act, 1961 empowers tax authorities not only to levy penalties but also to initiate criminal prosecution against taxpayers who attempt to evade tax. However, the Act also provides a settlement mechanism under Chapter XIXA, allowing assessees to disclose income, pay tax, and seek immunity from penalty and prosecution.

The Supreme Court in Vijay Krishnaswami @ Krishnaswami Vijayakumar v. Deputy Director of Income Tax (Investigation) (2025 INSC 1048, decided on 28 August 2025) clarified the binding effect of Settlement Commission orders, the role of departmental circulars in regulating prosecution, and the need to prevent abuse of process where prosecution serves no meaningful purpose.

Factual Background

• A search under Section 132 IT Act was conducted at the appellant’s residence on 24.04.2016, seizing ₹4.93 crore unaccounted cash.
• A show-cause notice was issued (31.10.2017) proposing prosecution under Section 276C(1) (wilful attempt to evade tax).
• On 21.06.2018, the Principal Director of Income Tax (Investigation), Chennai sanctioned prosecution under Section 279(1). Accordingly, the Deputy Director (Investigation) filed a complaint on 11.08.2018.
• Meanwhile, the appellant approached the Settlement Commission under Section 245C (07.12.2018).
• The Settlement Commission (26.11.2019) granted immunity from penalty, holding that the income disclosure was complete and without suppression, but refrained from granting immunity from prosecution as a quashing petition was pending before the Madras High Court.
• The Madras High Court dismissed the quashing petition, observing that whether the seized cash related to AY 2016–17 or 2017–18 could be determined during trial.
• The matter reached the Supreme Court.

Issues Before the Court

• Whether the continuation of prosecution under Section 276C(1) after an order of the Settlement Commission would amount to abuse of process.
• Whether the High Court erred in dismissing the quashing petition despite the Settlement Commission’s findings.

Arguments

Appellant’s Submissions

• The order of the Settlement Commission under Section 245D(4) is conclusive under Section 245-I unless reopened under Section 245D(6).
• CBDT Circulars (2008, Prosecution Manual 2009, and 2019 Circular) mandated prosecution only:

after ITAT confirmation of concealment penalty; and

only if evaded tax exceeded ₹25 lakhs (2019).

• Since tax liability was below ₹25 lakhs and immunity from penalty was granted, prosecution lacked competence.

Revenue’s Submissions

• The complaint was filed before the Settlement Commission application, thus the first proviso to Section 245H(1) barred immunity from prosecution.
• Unaccounted cash was not disclosed in AY 2017–18 returns, showing wilful attempt to evade tax.

Court’s Analysis

1. Nature of Section 276C

• Section 276C(1) punishes wilful attempts to evade imposition of tax/penalty/interest, whereas 276C(2) deals with wilful evasion of payment.
• Mens rea (guilty intent) is essential to sustain prosecution.

2. Competence of Prosecution

• Section 279 requires sanction from high-level officers (PDIT/Commissioner).
• However, departmental circulars are binding on the Revenue (citing Ranadey Micronutrients v. CCE (1996), Paper Products Ltd. v. CCE (1999), UCO Bank v. CIT (1999), CCE v. Ratan Melting & Wire Industries (2008)).
• The 2008 Circular & 2009 Manual mandated that prosecution under 276C(1) be initiated only after ITAT confirms concealment penalty.
• The 2019 Circular required approval from a collegium for cases below ₹25 lakhs.

3. Role of Settlement Commission

• Under Section 245H, immunity from prosecution cannot be granted if prosecution is already instituted before application.
• However, the Settlement Commission’s findings (Section 245-I) are conclusive: here, it found full disclosure, no suppression, and granted immunity from penalty.
• Continuation of prosecution, despite such findings, was held to be an abuse of process.

4. High Court’s Error

• The High Court failed to consider the binding effect of the Settlement Commission’s order and the mandatory nature of CBDT circulars.
• It should have quashed the proceedings once the prosecution served no meaningful purpose.

Decision

The Supreme Court quashed the prosecution, holding that:

• It violated binding CBDT guidelines.
• No mens rea or wilful attempt to evade tax was proved.
• The Settlement Commission’s order under Section 245D(4) was conclusive.
• Costs of ₹2 lakhs were imposed on the Revenue for pursuing prosecution in blatant disregard of its own circulars.

Highlights of the Decision

“It must also be noted that, in terms of Section 245-I, the findings of the Settlement Commission are conclusive with respect to the matters stated therein. Once such an order was passed, it was incumbent upon the authorities to inform the High Court that continuation of the prosecution would amount to an abuse of the process of law, in particular when the Settlement Commission did not record any finding of wilful evasion of tax by the appellant.

Even otherwise, it was the duty of the High Court to examine the facts of the case in their right context and assess whether, in light of the above circumstances, the continuation of the prosecution would serve any meaningful purpose in establishing the alleged guilt. Upon a holistic consideration of the matter, we are of the view that the conduct of the authorities lacks fairness and reasonableness, and the High Court’s approach appears to be entirely misdirected, having failed to appreciate the factual and legal position in right earnest.”

Key Takeaways

1. Binding Nature of CBDT Circulars – Revenue authorities are strictly bound by departmental circulars regulating prosecution; non-compliance renders action invalid.
2. Settlement Commission Orders Are Conclusive – Once the Commission finds full disclosure and grants immunity from penalty, continuation of prosecution is an abuse of process.
3. Mens Rea Essential Under Section 276C(1) – Mere non-disclosure is insufficient; prosecution must prove wilful intent to evade.
4. Judicial Duty – High Courts must carefully assess whether prosecution serves any purpose where immunity or settlement findings exist.
5. Revenue Accountability – The imposition of costs reflects judicial disapproval of unfair and unreasonable conduct by tax authorities.

Conclusion

The Supreme Court’s ruling in Vijay Krishnaswami makes it clear that continuation of prosecution without a finding of wilful tax evasion serves no meaningful purpose and amounts to an abuse of process of law. Since the Settlement Commission had already recorded full and true disclosure with no suppression of facts, the prosecution lost its legal foundation.

By quashing the proceedings and imposing costs on the Revenue, the Court reaffirmed that tax prosecution must be guided by fairness, compliance with CBDT circulars, and proof of mens rea, ensuring that prosecution is not misused as a tool of harassment but reserved for genuine cases of deliberate evasion

Important Link

Law Library: Notes and Study Material for LLB, LLM, Judiciary, and Entrance Exams