The Supreme Court delivered a judgment on August 28, imposing a cost of ₹2 lakhs on the Income Tax Department for prosecuting an individual in contravention of its own established circulars in the case of Vijay Krishnaswami Krishnaswami Vijayakumar vs. The Deputy Director of Income Tax.
A Bench comprising Justices JK Maheshwari and Vijay Bishnoi observed that the Revenue’s failure to comply with its own directives represents a significant lapse.
“The Revenue’s actions cannot be viewed from a proper perspective, demonstrating a blatant disregard for binding statutory instructions. Such willful non-compliance undermines the core principles of fairness, consistency, and accountability, which cannot be justified or deemed lawful,” the judgment stated.
The Court ordered the Income Tax authority to pay ₹2 lakhs in costs to the appellant while quashing the prosecution against him.
“The prosecution launched by the Revenue against the appellant is hereby quashed. Given the circumstances discussed, we find it appropriate to impose costs against the Revenue, amounting to ₹2,00,000/- payable to the appellant,” the Court declared.
This ruling came while considering an appeal against a decision from the Madras High Court, which had previously refused to dismiss the prosecution initiated by the Revenue against Vijay Krishnaswami, on charges of attempted tax evasion under Section 276C(1) of the Income Tax Act, 1961.
In April 2016, a search was conducted at the residence of the assessee under Section 132 of the Income Tax Act, leading to the discovery of unaccounted cash totaling ₹4.93 crores. In October 2017, a show-cause notice was issued, which then motivated the Principal Director of Income Tax (Investigation), Chennai (PDIT), to authorize prosecution in 2018.
As a result, a complaint was filed by the Deputy Director of Income Tax (DDIT) in August 2018, accusing the assessee of intentionally attempting to evade tax for the Assessment Year (AY) 2017–18.
In December 2018, the assessee sought resolution through the Settlement Commission under Section 245C of the Income Tax Act, disclosing additional income and requesting immunity. The Settlement Commission granted immunity from penalties in November 2019, concluding that there was no willful tax evasion, but declined to provide immunity from prosecution due to an ongoing quash petition with the Madras High Court.
The High Court’s dismissal of the petition prompted an appeal to the Supreme Court. The Supreme Court pointed out that Revenue guidelines stipulate that prosecution for tax evasion can only proceed once the Income Tax Appellate Tribunal (ITAT) verifies the penalty for any alleged concealment of income.
This requirement was established in a circular dated April 24, 2008, by the Central Board of Direct Taxes (CBDT) for cases where the penalty exceeds ₹50,000, and echoed in both a 2009 Prosecution Manual and a 2019 CBDT circular.
The Court observed that the IT Department failed to provide evidence as to why the PDIT or DDIT neglected to adhere to this procedure before pursuing prosecution in this instance. Moreover, the Supreme Court affirmed that departmental circulars and prosecution manuals are obligatory for Revenue authorities to follow without exception. Citing precedents such as M/s KC Builders Ltd. v. CIT and UCO Bank v. CIT, it emphasized the necessity of adhering to such circulars to avert arbitrary actions.
The Court concluded that the prosecution was untenable since, at the time of sanction, there was no ITAT confirmation of income concealment or penalty imposition as mandated by CBDT circulars. Additionally, it pointed out that the Settlement Commission had already determined that there was no indication of willful tax evasion.
Therefore, the Supreme Court criticized the Madras High Court for failing to consider these relevant factors in its judgment.
“The High Court should have assessed the particulars of the case contextually and determined whether the continuation of prosecution would meaningfully serve to substantiate the alleged wrongdoing. A comprehensive evaluation indicates that the authorities acted in a manner lacking in fairness and reasonableness, and the High Court’s judgment seems significantly misguided, lacking an earnest consideration of both factual and legal circumstances,” the Supreme Court remarked.
Consequently, the Supreme Court nullified the order from the Madras High Court, quashed the prosecution, and imposed a cost of ₹2 lakhs on the Revenue authority, to be awarded to the appellant.
Senior Advocate Preetesh Kapur along with Advocates Ravi Raghunath, R. Sivaraman, and Namanjeet Singh Bhatia represented the assessee, while the Income Tax authorities were represented by Additional Solicitor General N. Venkatraman, Senior Advocate Nisha Bagchi, and Advocates Raj Bahadur Yadav, V. Chandrashekhara Bharathi, Udai Khanna, and Navanjay Mahapatra.
For further details, refer to the case document: Vijay_Krishnaswami___Krishnaswami_Vijayakumar_vs__The_Deputy_Director_of_Income_Tax Download