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Calcutta HC rejects prosecution for willful tax evasion in case of waiver of exemption by taxpayer to buy peace from litigation
In the case of Kali Pradip Chowdhuri & Ors[1] , Taxpayer was a charitable trust engaged in running a medical college and hospital and was eligible to claim exemption under the Income Tax Laws (ITL) on its income. Accordingly, taxpayer filed a return for the tax year 2010-11, declaring all incomes as exempt from tax. Such return also included donations received from certain companies, which were also claimed as exempt.
The Taxpayer was subjected to survey action under the ITL based on statements from two directors of donor companies[2] from whom donations were purportedly received, stating that the donations were in fact accommodation entries. However, one director retracted his statement which was not contested by tax authority, while the other director passed away and hence could not be cross-examined in the course of trial proceedings against the Taxpayer.
Given that donor companies were dissolved by way of voluntary liquidation, the Taxpayer, in order to buy peace from possible long-drawn litigation, subsequently filed a revised return declaring the amount of donations received as taxable income by forfeiting exemption under the ITL. The tax authority levied concealment penalty on income so declared which was also confirmed by the Tribunal.
Basis above, the tax authority further initiated proceedings for prosecution against the Taxpayer and its principal officers on the count of willful evasion of taxes. The tax authority relied on the relevant provision of the ITL[3] which places a rebuttable presumption of existence of culpable mental state of the taxpayers (mens rea).
Accepting the Taxpayer’s contention, the Calcutta High Court (HC) noted that the donations would ordinarily not be taxed in the hands of the Taxpayer whose exemption status remained undisputed. The onus of justifying the source of funds, if at all, was on the donor companies, failing which taxation also could arise only in the hands of the donor companies. Further, the HC also noted that the Taxpayer had not suppressed any income in the original return but had only disclosed the same as exempt which was withdrawn vide the revised return to buy peace. Nowhere did the Taxpayer admit that the money was undisclosed income. Accordingly, the Taxpayer could not be prosecuted.
Further, the HC also noted that while the presumption of mens rea on the part of a taxpayer-in-default is the general rule under the ITL, such presumption can be invoked only once a prima facie case is made out against such taxpayer by the tax authority. In other words, the HC opined that there must be some material to justify invoking the presumption. Giving any other interpretation would mean that every taxpayer on whom penalty is levied would also be subjected to prosecution — leaving the taxpayer dependent on the generosity of the tax authority to not press charges. This is not what the law envisages. The HC held that the facts in the present case are grossly insufficient for making out a prima facie case of prosecution on the count of willful attempt to evade tax. Accordingly, the prosecution proceedings were dismissed.