Direct Tax Alert

BACKGROUND

Over time, the Central Board of Direct Taxes (CBDT) has issued detailed guidelines to ensure that prosecution is invoked in a calibrated and proportionate manner, distinguishing between minor, technical defaults and cases involving substantial tax implications or evidence of deliberate concealment. As the Income Tax Department continues to strengthen its enforcement mechanisms, particularly in cases involving large-scale financial irregularities, the threshold for initiating prosecution and the safeguards available to taxpayers have emerged as important areas of debate. Questions relating to the timing of prosecution, the role of administrative approvals, and the balance between revenue protection and taxpayer rights frequently come to the forefront, requiring careful examination of statutory provisions, departmental policies, and broader principles of fairness and due process.

In this regard, recently, the Delhi High Court¹ had an occasion to analyse the validity of Circular No.24 of 2019, dated 9 September 2019, and Circular No.05 of 2020, dated 23 January 2020² issued by the CBDT and the validity of the notice issued in case of prosecution.

We, at BDO India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• A search and seizure operation was carried out in February 2020 at the residence of the taxpayer in connection with unaccounted liquor sales and related financial irregularities.

• The tax officer initiated assessment proceedings and issued notices under Section 153C³ of the Income Tax Act, 1961 (IT Act). Multiple criminal investigations/FIRs and Enforcement Directorate (ED)/State arrests followed between FY 2022–2024. The tax officer passed assessment orders raising an aggregate demand of over INR 3480 million for several FYs.

• The Principal Commissioner of Income Tax (PCIT) issued sanction notices under section 279(1)⁴ of the IT Act authorising prosecution under section 276C⁵ and section 278E⁶ of the IT Act. Complaints were filed by the tax authorities under the Bhartiya Nagarik Suraksha Sanhita, 2023 (BNSS), before the Additional Chief Judicial Magistrate seeking a trial and conviction of the taxpayer under Section 276C of the IT Act.

• The taxpayer challenged the validity of notices authorising prosecution. She argued that in cases where the amount of tax evaded is more than INR 2.5 million, as per the CBDT circular no.24 of 2019 dated 9 September 2019, prosecution would be initiated by the sanctioning authority only after imposition/ confirmation of penalty by the Tax Tribunal. She contended that the orders were contrary to Circular No.24 of 2019 dated 9 September 2019 and Circular No.05 of 2020 dated 23 January 2020, and preferred a writ petition before the Hon’ble Delhi High Court.

DELHI HIGH COURT RULING

The Hon’ble Delhi High Court, while dismissing the taxpayer’s writ, made the following observations:

• As per the provisions of section 276C of the IT Act, the mandate of approval of a collegium of two Chief Commissioners of Income Tax (CCIT) /Director General of Income Tax (DGIT) rank officers is only required in cases where the threshold limit is INR 2.5 million.

• Where the tax sought to be evaded exceeds INR 2.5 million, the approving authority is the sanctioning authority. Since the case of the taxpayer involves an amount exceeding the threshold limit, the sanctioning authority for such offences under Chapter XXII is the PCIT. The PCIT has already given his consent in the taxpayer's case.

• Section 275 of the IT Act does not bar any initiation of prosecution proceedings in cases where appeals are pending. Further, as per reading of Section 276C(1) of the IT Act, there is no precondition for imposition of penalty, which is a prerequisite for initiation of prosecution proceedings.

• Circular No.5/2020 dated 23 January 2020 provides that prosecution before this Court ought to be launched ordinarily after the confirmation of imposition of penalty by the Tax Tribunal.

• Further, prosecution in other cases, including cases under Section 132/132A/133A of the IT Act, may be launched at any stage of the proceedings before the tax authority with the approval of the collegium of two CCIT/DGIT rank officers. This amendment primarily relates to the offences where the amount sought to be evaded is less than INR 2.5 million. The annexure to the said circular is very clear that where tax which would have been evaded is more than INR 2.5 million, in such cases, the approving authority is the sanctioning authority.

• No pre-conditions have been attached while taking action in cases where the evasion is more than INR 2.5 million.

• The intent behind Circular No. 24/2019 dated 9 September 2019, as amended by Circular No. 5/2020 dated 23 January 2020, is that the CBDT was of the view that prosecution should not be launched in small cases. Therefore, the cases where the non-payment of tax is INR 2.5 million or below, in those exceptional cases like those of habitual defaulters, based on particular facts and circumstances of each case, prosecution may be initiated only with the previous administrative approval of a collegium of two CCIT/DGIT rank officers.

• However, the case at hand differs to the extent that the amount demanded is more than INR 3480 million, for which the approval of the sanctioning authority would be adequate as per the aforementioned circulars.

• Therefore, the decision of the sanctioning Authority granting approval would suffice the requirement, which in this case is PCIT.

• Further, the plea of the taxpayer, regarding the constitutional validity of the circulars that they are contrary to Article 14 of the Constitution of India, cannot be accepted, as there is a clear demarcation contemplated in terms of the circular dated 9 September 2019, as followed by the circular dated 23 January 2020. The circular dated 23 January 2020 has to be considered as a clarification to be read as part of the circular dated 9 September 2019. The circulars have been issued by the CBDT within its power as per the procedures established by law.

• Reliance placed by the taxpayer on various decisions, including the Supreme Court’s decision in the case of Vijay Krishnaswani⁷ are misplaced due to distinguishable facts.

BDO INDIA COMMENTS

This ruling significantly strengthens the tax authority’s ability to move swiftly with prosecution in high-value cases, particularly those arising from search and seizure operations. The Delhi High Court has upheld the validity of CBDT’s prosecution policy and confirmed that cases involving tax demands exceeding INR 2.5 million do not require collegium approval or prior confirmation of penalty by appellate authorities. This ruling has effectively negated a common defensive shield used by taxpayers to delay prosecution proceedings. The decision tilts the balance towards stronger and earlier enforcement, signalling that the tax authorities can pursue prosecution in major cases without waiting for the tax dispute to reach finality.