Tax Insights

from India Tax & Regulatory Services

District Court upholds prosecution

for delay in deposit of taxes
deducted – reasonable cause not
substantiated by evidence

June 6, 2019

In brief
Recently,1 the Mumbai District Court sentenced the taxpayer for three months rigorous imprisonment
and monetary fine for delay in deposit of taxes that was deducted. The court observed that the
reasonable cause cited by the taxpayer was not substantiated by evidence on record. Further, the court
held that the taxes deducted on behalf of the Government must be deposited to the credit of the Central
Government and not be used for other purposes.

In detail  In view of the taxpayer’s Issue before the District

Facts
 The taxpayer, a film
producer, was under an
obligation to deduct taxes
under the provisions of
Chapter XVII-B of the
Income-tax Act, 1961 (Act).
 The taxpayer, during the
financial year (FY) 2009-
10, had deducted taxes but
failed to deposit it within
the prescribed timelines to
the credit of the Central
Government Treasury.
 However, the taxpayer
deposited the taxes along
with interest and penalty
after a delay of 12 months.
default, the Revenue
issued a notice requiring
the taxpayer to show
cause, as to why
prosecution proceedings
should not be initiated
under section 276B of the
Act on failure to deposit
taxes deducted within the
stipulated time.
 In the absence of a
reasonable cause for delay
in the deposit of taxes, the
Revenue launched
prosecution proceedings
against the taxpayer in
accordance with section
2792 of the Act.
Court
Whether the taxpayer has
committed an offence
punishable under section 276B
of the Act in lieu of delay in
deposit of taxes to the credit of
the Central Government?
Taxpayer’s contentions
 Existence of reasonable
cause3 for delay in deposit
of taxes:
o The complaint is not
maintainable
considering the taxes
along with interest and
penalty have been
deposited to the credit
of the Central
Government.

1
Court case No. 95/ SW/ 2014
2
Section 279 of the Act inter alia provides for obtaining sanction from the Principal Commissioner or Commissioner or
Commissioner (Appeals) or the appropriate authority before launching prosecution.
3
Section 278AA of the Act postulates an express bar on punishment under section 276B of the Act if it is proved that there was
reasonable cause for such failure.

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Tax Insights
o The taxpayer was under
financial constraints
during the period under
consideration, as there
was no active film
production and income
comprised of only sale
receipts of old films.
o First time defaulter.
o Lack of competent staff.
o Accountant’s negligence.
 Reliance was placed upon
Central Board of Direct Taxes
(CBDT) instruction dated 28
May 1980, according to which
prosecution under section
276B of the Act is not
expected to be proposed if the
amount involved is not
significant and the amount of
default has been deposited to
the credit of the Central
Government.
 The default of deposit of taxes
within the stipulated time
was not accompanied by
mens rea.
Revenue’s contentions
 The taxpayer admitted that it
deducted taxes but failed to
deposit them within the
stipulated period.
 The taxes deducted belongs to
the Government and the
payer acts in fiduciary
capacity. Thus, the taxpayer is
bound to remit such taxes to
the credit of the Central
Government once the same is
deducted.
 The taxpayer has failed to
justify reasonable cause by
bringing any documentary
evidence on record.
 Deposit of tax amount along
with interest and penalty will
not exonerate the taxpayer
from liability under section
278B of the Act.
4
Madhumilan Syntax Limited & Ors v. Union of India & Anr. [2007] 290 ITR 199 (SC)
2 pwc
 Reliance was placed on the
Supreme Court’s judgement,4
which inter alia held that
once a statute requires paying
tax and stipulates a period
within which such payment is
to be made, the payment
must be made within that
period. If payment is not
made within that period, it
would tantamount to default
and appropriate action can be
taken under the Act.
 Presence of mens rea is not a
prerequisite ingredient to the
offence under section 276B of
the Act, as the said section
does not contain the word
“knowingly.” The liability to
deposit the taxes deducted is
an absolute liability cast upon
the taxpayer. Further, the late
deposit of taxes does not
absolve the taxpayer from the
rigours of this section.
District court ruling
 There is no material on
record to substantiate the
reasonable cause cited by the
taxpayer.
 Admission is the best form of
evidence to prove the
allegations. In the instant
case, the taxpayer has not
denied the delay in deposit of
taxes to the credit of the
Central Government.
 The Legislature’s wisdom to
provide for prosecution and
dire consequences in spite of
the already existing
provisions with regard to levy
of penalties cannot be
doubted, given the rampant
attitude of defiance displayed
by few affluent sections of the
society, as evidenced by the
recent growth in economic
offences and violations of
income-tax law.
 The main objective of
prosecution provisions is to
punish the offenders found
guilty of tax evasion and
other tax-related offences,
and to instil the fear of law in
those who even contemplate
evading payment of
legitimate taxes.
 The scope and purport of
penalty and prosecutions are
separate and independent.
 The Act contains provisions
dealing with compounding of
such offence. However, the
taxpayer has not availed the
said remedy for no apparent
reason.
 The taxes deducted on behalf
of the Government should be
deposited with the
Government account. The
deductor is not supposed to
finance their business using
Government’s money.
 The court rejected the plea for
leniency and sentenced the
taxpayer to three months
rigorous imprisonment along
with fine of INR 5,000.
The takeaways
The judgement is a clear
indication of the strict approach
of the tax department and the
courts, regarding the stringent
compliance with the provisions of
Chapter XVII-B of the Act.
Therefore, it becomes imperative
for taxpayers to closely monitor
their withholding tax compliance
to avoid any adverse
consequences. Further, in case of
default, the taxpayer must
suitably weigh the remedies
available under the Act.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact your
local PwC advisor
Tax Insights

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