Crl.rev.p./660/2013 Of Anil Sanghi v. Income Tax Officer

$~20 *IN THE HIGH COURT OF DELHI AT NEW DELHI+CRL.REV.P. 660/2013 & CRL.M.(BAIL) 2319/2013ANIL SANGHI ..... Petitioner Through: Mr. Puneet Mittal, Senior Advocate withMs. Vasudha Bajaj, Adv. versus INCOME TAX OFFICER ..... Respondent Through: Mr. Ruchir Bhatia and Mr. Puneet Rai,Advs. with Mr. Kailash Gautam, ACIT, CentralCircle-32, Delhi. CORAM:HON'BLE MR. JUSTICE NAJMI WAZIRIO R D E R%23.01.2018 1.This petition impugns the judgment dated 13.11.2013 of theAppellate Court in Crl. Appeal No.89/2013 passed by the AdditionalSessions Judge (Central), Delhi. 2.By judgment dated 15.05.2013, the Trial Court had convictedthe appellant for offences punishable under sections 278B read withsection 276C(1) and 277 of the Income Tax Act, 1961 (‘the Act’) andon 20.05.2011, he was sentenced to undergo Simple Imprisonment fora period of six months and to pay a fine of Rs.10,000/- and in defaultof payment of fine, to undergo further Simple Imprisonment for aperiod of one month. 3. The Appellate Court dismissed his appeal, but reduced the quantum of fine to Rs.5,000/- each for offences punishable undersection 276C(1) read with section 278B of the Act and under section277 read with section 278B of the Act respectively, and in default ofpayment of fine, Simple Imprisonment for a period of one week forthe aforesaid offence. 4.In this revision petition, the sentence was suspended on thevery first day when the case was taken up for admission. Immediatelythereafter, on 16.12.2013, the appellant applied for compounding ofthe offences. However, the said application was rejected by a one linecommunication dated 7.3.2014 which inter alia stated: “Since theprosecution proceedings have already resulted in conviction, theCCIT (Central) has directed to convey that the compoundingapplication, cannot be accepted at this stage and may be treated asrejected.” 5.The appellant applied for compounding of the offence again on21.11.2014 to which the respondent by a letter dated 16.12.2016stated that: “Sub.: Application for compounding u/s 279(2) foroffences u/s 276C(1) and 277 of the Income-tax Act interms of order dated 07/10/2015 passed by the Hon'bleHigh Court of Delhi in Crl.Rev.P.No. 660/2013 -Regarding – I am directed to refer to your application dated13/10/2015 filed in this office for compounding of theabove mentioned offence. 2. In this regard, it is stated that prosecution in thiscase was filed against M/s Uikam Investment & FinancePvt. Ltd. and against you (in the capacity of the Director of the Company). Please clarify as to whether anycompounding application has been filed by M/s UikamInvestment & Finance Pvt. Ltd. 3 It is also found that as per records, the followingdemands are outstanding against the company for theassessment year under consideration – 1. A.Y. 1997-98 Rs. 10,94,177/- [u/s 143(3)] 2. A.Y. 1997-98 Rs. 2,07,836/-[u/s 271(l)(c)] The following demands for the A.Y. 1997-98 arealso pending against you- If the above mentioned demands have been paid, theproof of the same should be filed in this office on 28/12/2016. Ifthese demands have not been paid, the same may be paid andthe proof of the payment should be submitted in this office by28/12/2016 to enable this office to process your application forcompounding of offence. 4 You are also given an opportunity of being heard byCCIT(Central), New Delhi in his office on 28/12/2016 at 4PM.” 6.The aforesaid monies demanded towards the outstandingamount was be paid by the appellant to the Income Tax Department;his communication dated 29.12.2016 sought an order of compounding of the offence; but by an order dated 05.01.2017, the appellant wasinformed that his case could not be compounded because he alreadystood convicted. The reasoning is as under: If the above mentioned demands have been paid, theproof of the same should be filed in this office on 28/12/2016. Ifthese demands have not been paid, the same may be paid andthe proof of the payment should be submitted in this office by28/12/2016 to enable this office to process your application forcompounding of offence. 4 You are also given an opportunity of being heard byCCIT(Central), New Delhi in his office on 28/12/2016 at 4PM.” 6.The aforesaid monies demanded towards the outstandingamount was be paid by the appellant to the Income Tax Department;his communication dated 29.12.2016 sought an order of compounding of the offence; but by an order dated 05.01.2017, the appellant wasinformed that his case could not be compounded because he alreadystood convicted. The reasoning is as under: “4. The compounding application filed by ShriAnil Sanghi has been carefully considered in thelight of the guidelines for compounding of offencesissued by the Central Board of Direct Taxes vide F.No. 285/35/2013- IT(Inv.V) /108 dated 23/12/2014.In para 8.1 of these guidelines, various offenceswhich are generally not to be compounded havebeen mentioned. In para 8(vi) of these guidelines, ithas been mentioned as under:- “offence committed by a person for which hewas convicted by the court of law under direct taxlaw." Since Shri Anil Sanghi has been convicted bythe court for offences u/s 275(C)(1) and 277 readwith section 278B of the Income -tax Act, 1961, theoffences cannot be compounded in the light of theCBDT's guidelines dated 23/12/2014. Therefore, therequest of Sh. Anil Sanghi for compounding ofoffences is rejected.” 7.Mr. Puneet Mittal, the learned Senior Advocate for theappellant submits that i) the letter rejecting compounding of theoffence is not sustainable in law, ii) nor is the impugned order.Apropos the latter, he submits that the impugned order of convictionfailed to take into account that for an offence to be made out, theelement of criminality has to be established; that the error ismanifested in assumption of criminality on part of the appellant i.e.his wilfully concealing the interest amount from three persons, andnot paying tax on the total amount of Rs.4,83,340/-; that it further erred in proceeding to punish the appellant. The appellate order tooconsidered the appellant’s conduct as concealment of information. Itreasoned as under: “9. So as per accusation, the accused personswilfully attempted to pay tax penalty and interestchargeable and payable, by not paying tax onRs.4,83,340/-notaccountedforduringtheassessment year 1997-98 and in this way by showingwrong income, false verification was made whilefiling income tax return on 12.11.97. 10. One of the arguments raised by learned counselfor appellants is that this income of Rs.4,83,340/-was not required to be disclosed in the income taxreturn as the accused persons were sure that thisamount of interest would not be realized. Further, ithas been submitted that the accused persons hadswitched over to cash accounting system on accountof raid conducted by the Income Tax Departmentand even on this ground this income which had notactually accrued was not to be depicted in theincome tax return.” 8.The appellant contends that the conviction is erroneous becauseit did not consider the accounting method followed by the appellant.In Schedule B of its Balance Sheet dated 31.03.1997, the appellantassessee had stated, that for preparation of its financial statement, thecompany generally followed the Mercantile System of Accountingand it recognised income and expenditure on accrual basis. Hence,revenue was recognised by the assessee in respect of insurance/otherclaims, interest, commission, etc. only when it was reasonably certainthat ultimately collection of the same would be made. The assessee had also disclosed: 8.The appellant contends that the conviction is erroneous becauseit did not consider the accounting method followed by the appellant.In Schedule B of its Balance Sheet dated 31.03.1997, the appellantassessee had stated, that for preparation of its financial statement, thecompany generally followed the Mercantile System of Accountingand it recognised income and expenditure on accrual basis. Hence,revenue was recognised by the assessee in respect of insurance/otherclaims, interest, commission, etc. only when it was reasonably certainthat ultimately collection of the same would be made. The assessee had also disclosed: “There was a search operation u/s 132 ofthe Income Tax Act, 1961 on the assessee on11.07.96.Consequently balances in Citibank,New Delhi, Pertech Computers, New Delhi.Hamco Minning & Smelting Ltd., New DelhiandAltosIndiaLtd.,NewDelhi,seizedtotalling to Rs. 3,30,30,527/- on 20/09/96 bythe Income Tax Department.” 9.In terms of the assessee’s adopted system of accounting, it isargued that since the appellant was not reasonably certain that theinterest would ultimately be calculated on the aforesaid amount ofRs.4,83,340/-, therefore, there was no occasion to disclose any suchamounts having accrued or been received. The appellant also reliesupon the accounting standard (AS 9- Revenue Recognition) issuedbytheInstituteofCharteredAccountantsaproposRevenueRecognition. Clause 9 of which reads as under: “9.EffectofUncertaintiesonRevenueRecognition. 9.1Recognition of revenue requires that revenue ismeasurable and that at the time of sale or the rendering ofthe service it would not be unreasonable to expect ultimatecollection. 9.2Where the ability to assess the ultimate collectionwith reasonable certainty is lacking at the time of raisingclaim e.g. for escalation of price, export incentive, interestetc., revenue recognition is postponed to the extent ofuncertainty involved. In such cases, it may be appropriateto recognise revenue only when it is reasonably certainthat the ultimate collection will be made. Where there is nouncertainty as to ultimate collection revenue is recognisedat the time of sale or rendering of service even thoughpayments are made by instalments. 9.3When the uncertainty relating to collectabilityarises subsequent to the time of sale or the rendering of theservice, it is more appropriate to make a separateprovision to reflect the uncertainty rather than to adjustthe amount of revenue originally recorded. 9.4An essential criterion for the recognition ofrevenue is that the consideration receivable for the sale ofgoods, the rendering of services or from the use by othersof enterprise resources is reasonably determinable. Whensuch consideration is not determinable within reasonablelimits, the recognition of revenue is postponed. 9.5When recognition of revenue is postponed due tothe effect of uncertainties, it is considered as revenue ofthe period in which it is properly recognised”. 10.From the above, it is evident that wherever there is a lack ofcertainty regarding the ultimate collection of revenue, its recognitionis postponed to the extent of uncertainty involved and amounts wouldbe subsequently open to taxation only when the collection is made. 11.In the present case, although the return was filed on an accrualbasis, the revenue was booked on realisation basis, in terms of theaforesaid accounting standards, and this method of accounting wasduly disclosed in the ITR itself, especially, in Schedule B.In thecircumstances, it could neither be implied nor concluded that therewas a deliberate concealment or false declaration before the IncomeTax Authorities. The appellate order reasoned: “17. Learned counsel for the appellants has contended that when raid was conducted by incomeTax Department oil the premises of appellantcompany on 11.07.1996, instructions were issued bythe Income lax to the borrowers not to make any 11.In the present case, although the return was filed on an accrualbasis, the revenue was booked on realisation basis, in terms of theaforesaid accounting standards, and this method of accounting wasduly disclosed in the ITR itself, especially, in Schedule B.In thecircumstances, it could neither be implied nor concluded that therewas a deliberate concealment or false declaration before the IncomeTax Authorities. The appellate order reasoned: “17. Learned counsel for the appellants has contended that when raid was conducted by incomeTax Department oil the premises of appellantcompany on 11.07.1996, instructions were issued bythe Income lax to the borrowers not to make any payment to the appellants. So it has been urged thatin view of such instructions issued by the IncomeTax Department/officers, the borrowers did notmake any payment towards interest due from themand as such appellants could not be held liable forcommission of any such offence. Learned counsel for the respondent has notdenied that raid was conducted on the appellantscompany on 11.07.1996 (but the submission is thatappellantdidnotproveonrecordthatanyinstructionswereissuedbyIncomeTaxDepartment/officer 10 the borrowers directing themto stop making payment to the appellants. Learned counsel for the appellants submitsthat, the accused-appellants took steps before theTrial Court to bring on record such notice, issued bythe Income Tax Department to the borrowers but nosuch document was produced on record. The contention is that on account non-production of record by the lncome Tax Department,adverse inference should have been drawn by .thecourt against the respondent.” 12.The impugned order further reasoned that there was aconcealment of income tax because the appellant knew the import ofthe tax returns having been filed, therefore he should have taken stepsto see that whatever information was furnished in income tax returnswas correct and that nothing was being concealed therefrom. It reliedupon the judgment in K.P. Builders vs. CIT 2004 Income Tax reportsVol. 268 page 562 which held that: “concealment”habituallycomprises with it, the element of mens rea. Since the Director did notdisclose the income by way of interest from the borrowers, it cannotbe said that it was a mere omission not amounting to “concealment”. 13.The court is unable to see how the judgment in K.P. Builders(supra) supports the conclusion which the impugned order has arrivedat because, concealment in the present case, would be only whenthere was reasonable certainty of the ultimate collection of thefinancial claim. Furthermore, the reasoning is flawed because it doesnot take into account the appellant’s contention that in terms of theaccounting standard employed by them, income tax would be payableon monies only when it was realized.The appellant had disclosedthat it employed the Mercantile System of Accounting and as per theapplicable clause 9 of Accounting Standard – Revenue Recognition, itcould not take cognition of revenue from its creditors because, suchpossible revenue as interest, was not measurable i.e. there was lack ofreasonable certainty of its ultimate collection.All the requisiteinformation had been disclosed.There was no concealment ofinformation. As a corollary therefore, there could be no mens rea toconceal.The accounting system was to be kept in mind andappreciated.Therecouldbenopresumptionofmensrea.Consequently, the impugned orders of conviction and punishmentcannot be sustained.13.In view of the above, the orders of conviction and punishmentare erroneous and are accordingly set aside. The petition is allowed. JANUARY 23, 2018/acm NAJMI WAZIRI, J