Tax on shareholders income

This article is written by Smaranika Sen from Kolkata Police Law Institute. This article exhaustively states whether every tax evasion or false verification is punishable under the Income Tax Act, 1961 or not.

Introduction

The word ‘tax’ originated from the word ‘taxation’ which means an estimate. The concept of income tax was prevalent in India for many years but it was James Wilson who was the first person to introduce the Modern Income Tax Act in the year 1860 in India during the period of pre-independence. Classical India’s master poet and dramatist Kalidas in his epic poem Raghuvamsha stated that “It was only for the good of his subjects that he collected taxes from them, just as the sun draws moisture from the earth to give it back a thousandfold”. 

Income tax is a tax that is paid to the government based on one’s income or profit in the case of companies or businesses. The tax is used by the government for various beneficial purposes like developing the infrastructure, establishing efficient public services, etc. Like a coin has two sides, some people commit offences like tax evasion or false verification or false documentation, etc. Through this article, we will try to analyze whether every offence related to tax is punishable under the Income Tax Act, 1961 or not. 

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History of taxation laws

The system of direct taxation originates from ancient times. In Manusmriti, Arthashastra the concept of direct taxation can be traced. Manu had stated that the king could impose taxes. Author K.R. Sarkar in his book, “Public finance” in ancient India stated that most of the taxes at that time were highly productive. The mixture of direct taxes and indirect taxes were elastic and more emphasis was put on the direct tax. The concept of taxes was also provided during the Mauryan empire. 

The Central Board of Revenue in 1924 constituted a statutory body with functions and responsibilities for the administration of the Income Tax Act. In 1939, there were some amendments made to the Income Tax Act. Lastly, in 1961, the revenue audit was introduced and the Income Tax Act, 1961 came into force on April 1, 1962.

Income Tax Act, 1961 – an overview

The Income Tax Act is a comprehensive statute. It consists mainly of different rules and regulations that govern taxation in the country. The statute mainly provides provisions for levying, administering, collecting and recovering income tax. It contains a total of 23 Chapters and 298 Sections. The fundamentals on which one needs to pay income tax are salary, income from house property, capital gains, profits from any businesses, and income from any other sources. The amendments to the Income Tax Act are done under the influence of the financial budget of every year presented by the Central Government. The income-tax mainly depends on one’s annual income. 

Latest changes to the Income Tax Act 

Union Finance Minister Nirmala Sitharaman stated the budget for 2021-2022. Some of the changes that are brought by the Union Budget 2020 are:

  • There is no requirement for income tax filing for senior citizens who are above the age of 75. The senior citizens who are above the age of 75 years and have only pension and interest as a source of income will be exempted from filing their income tax return. However, it has to be kept in mind that they are only exempted from filing income tax returns and not exempted from paying taxes.
  • In regard to the above-stated point, few banks will be notified by the government which account holders will be eligible for this exemption and thereby they will have to provide a declaration to the specified bank. 
  • ITR form will have from now on pre-filled information on dividend, interest, capital gains to make it easy for individual taxpayers. 
  • If there is any share of contribution on the interest on employees provident fund, then it will be taxable at the stage of withdrawal if it exists Rs 2.5 lakh in any year on or after April 1, 2021.
  • The government has proposed to insert Section 206AB in the Income Tax Act as a special provision providing for a higher rate for TDS for the non-filers of an income tax return.

Offences under the Income Tax Act

Certain offences are provided under the Income Tax Act, 1961. Chapter XVII and XXI of the Income-Tax Act contains various provisions to levy a penalty in case of certain offences. Some of the provisions like Section 275A, Section 276 , Section 276A, Section 276AB, Section 276B, Section 276BB, Section 276C(1), etc state punishments of offences under Income Tax Act. Some of the important and most common penalties of the Income Tax Act are:

  • Default in making payment of taxes.
  • Underreporting of income.
  • Failure to maintain books of accounts and other documents.
  • Penalty for false entry status fake invoices.
  • Undisclosed income.
  • If the assessee failed to acquire his accounts audited, obtain an audit report of furnish report.
  • If a person fails to deduct tax at source.
  • If any person is found using modes other than account payee cheque or draft or electronic clearing services.
  • Failure to furnish any information.
  • Any other grounds.

Tax evasion : an overview

Tax evasion is considered a criminal offence in India. Chapter XXII of the Income Tax Act, 1961 states hefty penalties for tax evasion. Tax evasion is an illegal activity in which a person or a firm or a company intentionally avoids pay through tax liability. If there is any abetment of false file return it might land the accused in big trouble and the person might also face imprisonment for a minimum period of three to six months along with a fine. If any such offence is executed by a form or a company partner or any office including the directors of the company, they might be held responsible unless they can prove that the offence was committed without their knowledge even after due diligence on their part. If any offence is committed in the ‘Hindu Undivided Family’, the Karta of the family besides all members is deemed to be guilty unless such members can prove that the offence was committed without their consent.

The Finance Act of 2016 inserted Section 270A in the Act. The provision was inserted with the view of substituting Section 271(1)(c) of the Act which used to deal with the levying of penalty for concealment of income. Section 270A states that the penalties for ‘under-reporting of income’ and ‘misreporting of income.’ The main aim of inserting this provision was to bring clarity and certainty to the penalty provisions. 

False verification : an overview

Verification is required to check whether a document is genuine or not. In regard to income, tax documents are required for various purposes. Documentation is required for verifying the income status of a person or the profit of a company or a business. It is also required to verify if the tax is paid properly or the income tax return is filed, etc. False verification means when fake documentation is used in the process of verification. It is an offence. Under the Income Tax Act, the punishment is prescribed for false verification.

Prosecution for the offence of tax evasion and false verification under the Income Tax Act, 1961

Section 276C all the Income Tax Act, 1961, states willful attempt to evade tax, etc. The Section states that if any person willfully in any matter tries to evade any tax, penalty or interest chargeable impossible and reports his income under the Income Tax Act, then such a person without any prejudice to any penalty that may be impossible on him under any other provisions of the Income Tax Act, will be held punishable with rigorous imprisonment for a term up to 6 months which main event extent up to seven years along with the fine if the amount involved is more than Rs 25 lakhs. In other cases, the rigorous imprisonment will be not less than a term of 3 months which we also extend up to two years along with the fine. 

From Section 276C of the Income Tax Act, it can be observed that a person can only be prosecuted under the provision of the said statute, only if a person had willfully attempted to evade any tax, penalty or interest chargeable or imposable under the Income Tax Act. It is to be noted that what is punishable here is not a near failure to disclose correct income but a dishonest or malafide intention in committing an offence like tax evasion.

Section 277 of the Income Tax Act states the false statement in verification, etc. The Section states that if any person tries to make a statement in any verification under the income tax act or any rule made thereunder and delivers an account or statement which is false and the person either knows or believes it to be false or does not believe it to be true shall be held punishable with rigorous imprisonment for a term of not less than six months which may extend up to seven years along with the fine if the amount involved is more than Rs 25 lakhs. In other cases, the rigorous imprisonment will be for a term of three months which may extend up to two years along with the fine.

From the reading of Section 277 of the Income Tax Act, it can be observed that a person can only be prosecuted under the said provision only if a person had intentionally and willingly made a wrong statement in verification to fulfil his/her motive. 

After reading Section 276C and Section 277, it can be stated that any bonafide mistake on the part of the person which eventually leads to tax evasion or attempt to evade tax or false verification cannot be identified as an offence under the Income Tax Act, 1961.

Case laws 

In the case of Prem Dass v. Income Tax Officer (1999), the honourable Supreme Court of India examined the objectivity and necessity of initiating a criminal action under Section 276C of the Income Tax Act. It was found that there was no act of concealment on the part of the assessee. The Supreme Court stated that a willful attempt to evade any tax under Section 276C is a positive act on the part of the accused which is required to be proved to bring home the charge against the accused as per the circumstances of the case. The court further stated that the prosecution is required to establish that the statement made by a person in a verification under Section 277 is false, then only this provision can be attached to the case. The honourable judges stated that after analyzing the case they could not see anything which would establish the ingredients of the two criminal offences contemplated under Sections 276C and 277 of the Income Tax Act. Therefore, the ingredients of the offence as shown under Sections 276 and 277 of the Income Tax Act could not be attached to the case.

In another case of Jyoti Traders and Ors. v. S.M. Gore and Ors. (1986), the honourable Bombay High Court quashed a petition in the favour of the assessee which was filed under Sections 276C, Section 277 and Section 278 of the Income Tax Act, 1961. The honourable Bombay High Court held that the interpretation of Section 276C is that there must be a willful attempt to evade the tax and only there will be punishment. This Section stresses the fact ‘wilful attempt’. The term has a peculiar characteristic which indicates the guilty mental state of the accused. On the other hand, Section 277 is about false verification. This Section not only stresses the fact that the statement is false but also observes that whether the person ‘knows or believes such statement to be false or does not believe it to be true.’ An accused under this provision can only be held liable if such a statement is made deliberately with full knowledge or belief of its falsity. 

In the case of J.M. Shah v. Income Tax Officer (1995), the honourable Madras High Court recognised an offence under Section 277 of the Income Tax Act. The honourable Madras High Court stated that the characteristics of Section 277 of the Income Tax Act are that the assessee must know or believe the statement of account is false or does not believe it to be true. The criminal intention can be very well observed by the person filing such a statement for delivering the account. It clearly shows mens rea on the part of the assessee. The court further stated that no person can be held liable under Section 277 of the Income Tax Act if such a person files a statement to deliver an account with incorrect particulars due to negligence or lack of knowledge. However, in the present case, mens rea was observed, therefore, the court decided to consider the offence under Section 277 of the Income Tax Act. 

Conclusion

From various judgments, it can be manifested that there must be ‘wilful or deliberate intention’ to evade tax, to attempt to evade tax, to produce any false documents during verification, or presence of ‘mens rea’ to be held liable under Section 276C or Section 277 of the Income Tax Act, 1961. There cannot be any punishment under Section 276C or Section 277 if the terms mentioned above are found missing. Negligence, lack of knowledge, a mere mistake cannot be held as an ingredient for offences under those Sections. The Income Tax department is very essential for conviction under the Income Tax Act. 

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