Holding

Prosecution proceedings are quashed where the Settlement Commission, having been satisfied of full and true disclosure and cooperation, granted immunity before the prosecution was instituted; such immunity may be withdrawn on non‑compliance, reviving the prosecution.

Summary

The Revenue initiated prosecution under Section 276C of the Income Tax Act, 1961 for alleged concealment of income for AY 1988‑89. The assessees filed a petition under Section 482 Cr.P.C. seeking quash of the prosecution, contending that applications for settlement under Section 245C were pending before the Settlement Commission. The High Court refused to quash, holding that no immunity order had been passed. After the High Court judgment, the Settlement Commission granted conditional immunity, having found full disclosure and cooperation, and the matter went to the Supreme Court. The Court held that the proviso to Section 245H bars immunity only where prosecution is instituted before receipt of the settlement application; here the application was filed on 27‑May‑1991 and prosecution commenced on 27‑Feb‑1992, so immunity could be granted and the prosecution was quashed, subject to revival if the conditions of the immunity order are breached. The appeals were allowed and the prosecution proceedings were set aside.

Issues considered

Whether prosecution under Section 276C can continue when a settlement application under Section 245C is pending or when the Settlement Commission later grants immunity.
Whether the proviso to Section 245H(1) precludes granting immunity if prosecution is instituted before receipt of the settlement application.
What is the effect of a conditional immunity order and the consequences of non‑compliance with the Settlement Commission’s conditions.

Legislation cited

Code of Criminal Procedure, 1973s. 482
Income Tax Act, 1961s. 245C, s. 245H, s. 276C

Subjects

Income TaxSettlement CommissionImmunity from prosecutionSection 245CSection 245HSection 276CTax evasionConditional immunityCriminal prosecution

Judgment

A ASHIRWAD ENTERPRISES AND ORS.
..
V.

STATE OF BIHAR AND ANR.

MARCH 22, 2004
B
[DORAISWAMY RAJU AND ARIJIT PASAYAT, JJ.]

Income Tax Act, 1961-Sections 245C, 245H and 276C-Prosecution (._ '

proceedings initiated by Revenue for concealment of income and wilfal attempt
c to evade tax-Petition before High Court under section 482 Cr.P.C. to quash
the proceedings claiming that applications were filed before Settlement
Commission before initiation ofprosecution proceedings and they are pending-
Refusal by High Court to quash the proceedings-Correctness of-Held,
prosecution proceedings cannot be initiated if the applications before Settlement
D Commission were made prior to it-On facts, since immunity ordP.r was passed
by the Settlement Commission after the High Court judgment, the prosecution
proceedings quashed.
1'.
Revenue initiated prosecution proceedings against the appellant-
assessees for concealment of income and wilful attempt to evade tax during
E the period relating to assessment year 1988-89 under Section 276C of the
Income Tax Act, 1961 by instituting a complaint before a Special Court.
The appellants filed a petition before High Court under Section 482 Cr.PC
for quashi_ng the prosecution proceedings before.the Special Court since
the applications made by the appellants under section 245C of the Act
before the Settlement Commission were pending. High Court declined to
F quash the prosecution proceedings on the ground that the Settlement
Commission by then had not passed any order granting any immunity in
favour of the appellants.

In appeal to this Court, the appellant-assessees submitted that after
G the High Court order, the Settlement Commission passed an order
granting immunity to them and hence the prosecution proceedings should
be dropped against them.

Respondent-State contended that the immunity granted by the
.>.
Settlement Commission is a conditional one; and that the prosecution
H 300
ASHJRWAD ENTERPRISES r. STATE OF BIHAR 301
proceedings against the appellai:Jt-assessees would be continued under the A
law till the fulfilment of the conditions stipulated by the Settlement
Commission.

Allowing the appeals, the Court

HELD: 1.1. Proviso to Section 245H (1) of the Income Tax Act, 1961 B
provides that no immunity shall be granted by the Settlement Commission
in cases where the proceedings for the prosecution under the Act or under
the IPC or under any other Central Act have been instituted before the
\ -I. date of receipt of application under Section 245C w.e.f. I.6.1987. This
provision is intended to discourage the filing of belated applications after C
launching the prosecution. (304-C-D(

CIT v. B.N Bhattacharjee, (1979) ITR 461, referred to.

1.2. The gFant of immunity in a given case is to b~ decided by the
Settlement Com mission on the facts· of ea~h case and no straight-jacket D
formula for any universal application can be laid down. In the instant case,
the Settlement Commission has been satisfied that the grant-0f immunity
) )\ is (aikd. for. Since the decision has not been questioned by the Income
Tax Authorities,.-U has attained finality. The conditions required to be
fulfilled before the grant of immunity are that the Commission has to be
satisfied that the applicant has made full and true disclosure of his income E
and the manner in which such in~ome has been derived and that he has
co-operated with the Commission in the proceedings before it. In the
instant case, the records reveal that application for settlement under
Section 245C was filed on 27.5. I 991 and the prosecution was launched on
27.2.1992. Therefore, the application for settlement was filed before
prosecution was launched. (304-E-H( F
1.3. In case there is non-compliance of the Commission's order, then
Section 245H(J A) of the Act will become operative and the appellants
would be rendered liable notwithstanding the earlier immunity granted
as if such immunity had not been granted at all. It shall be open to the G
Income Tax Authorities to ask for restoration of proceedings before the
Special Court if there is non-compliance with Commission's order or
withdrawal of immunity under Section 245H(2). 1305-C-D(

1.4. After the High Court's judgment, final orders have been passed
by the Commission according immunity on an application presented H
•
302 SUPREME COURT REPORTS [2004] 3 S.C.R.

A apparently before the institution of the proceedings for prosecution.
1305-Fl

P. Jayappan v. SK. Perumal, First ITO, (1984) 149 ITR 696, SC
distinguished.

B CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 736-
737 of 1998.

From the Judgment and Order dated 26.9.97 of the Patna High Court
in Cr!. M. Nos. 4307 and 5025 of 1992. i.. .

C S.K. Gupta, D. V. Pathy and Anurag Pandey for the Appellants.

H.L. Agrawal, Kumar, Rajesh Singh and B.B. Singh for the Respondents.

The Judgement of the Court was de! ivered by

D ARIJIT PASA YAT, J. Prosecution was launched against the appellants
for alleged concealment of income 11nd thereby willfully attempting to evade
tax, and for making false statement on verific~tion in terms of Sections 276C
of the Income Tax Act, 1961 (in short the 'Act') relating to the assessment
year 1988-89. Cognizance was taken by the Special Court, Economic
OffenGes~ M11zaffarpur, Bihar in complaint case no. 50 of I 99Z ins.tituted by
E the Income Tax Authorities. Petitions under Section 482 of the Code of
Criminal Procedure, 1973 (in short 'the Code') were filed by appellant no. I
(hereinafter referred to as 'the firm') and L.N. Poddar, a partner of the assessee
firm before the Patna High Court. The specific stand of the petitioners before
the High Court was that the proceedings shoulcf\ not continue as applications
F for settlement were filed and pending before the Settlement Commission,
Income Tax and Wealth Tax (hereinafter referred tn as 'the Commission').
The High Court did not accept the stand as no order granting any immunity
had been passed by the Commission. Referring to the factual position also it
was held that no case for interference was made out at the relevant stage.

G Mr. S.K. Gupta, learned counsel for the appellants submitted fhat in the
meantime Settlement Commission has passed necessary orders in the matter
and, therefore, proceedings should not be continued. Reference was made to
Order No. 3/3/5/91-IT dated 20.9.1999 passed by the Commission.

Mr. H.L. Agrawal, learned senior counsel for the respondents submitted
H that the immunity if granted by the Commission is a conditional one, and
ASHIRWAD ENTERPRISES v. STATE OF BIHAR [PASAYAT. J] 303
unless there is· fulfillment of the conditions stipulated, the proceedings have A
to be continued. According to him, it is open to the appellants to appear
before ·the Trial Court and bring to its notice any order which has relevance
in the matter.

In order to appreciate the rival stands, it would be necessary to take
note of Section 245 (H) of the Act. It reads as under: B
"SECTION 245H: POWER OF .SETTLEMENT COMMISSION TO
GRANT IMMUNITY FROM PROSECUTION AND PENALTY.

(I) The Settlement Commission may, if it is satisfied that any person
who made the application for settlement under section 245C has co- C
operated with the Settlement Commission in the proceedings before
it and has made a full and true disclosure of his income and the
manner in which such income has been derived, grant to such person,
subject to such conditions as it may think fit to impose, immunity
from prosecution for any offence under this Act or under the Indian
Penal Code (45 of 1860) or under aTJy other Central Act for the time D
being in force [and also (either wholly or in part) from the imposition
.x of any penalty] under this Act, with respect to the case covered by
the settlement :

[Provided that no such immunity shall be granted by the Settlement E
Commission in cases where the proceedings for the prosecution for
any such offence have been instituted before the date of receipt of the
application under section 245C.]

[(I A) An immunity granted to a person under sub-section ( 1) shall
stand withdrawn if such person fails to pay any sum specified in the F
or<ler of settlement passed under sub-section (4) of section 2450
within the time specified in such order or within such further time as
may be allowed by the Settlement Commission, or fails to comply
with any other condition subject to which the immunity was granted
and thereupon the provisions of this Act shall apply as if such immunity
had not been granted.] G
(2) An immunity granted to a person under sub-section (I) may, at
any time, be withdrawn by the Settlement Commission, if it is satisfied
that such person had, in the course of the settlement proceedings,
concealed any particulars material to the settlement or had given false
evidence, and thereupon such person may be tried for the offence H
,~-

304 SUPREME COURT REPORTS [2004] 3 S.C.R.

A with respect to which immunity was granted or for any other offence
of which he appears to have been guilty in connection with the
settlement and shall also become liable to the imposition of any penalty
under this Act to which such person would have been liable, had not
such immunity been granted."

B The proviso to sub-section (I) was introduced by Finance Act, 1987
(11 of 1987) with effect from 1.6.1987, excluding grant of immunity in cases
where proceedings for the prosecution have been instituted before the date of
receipt of the application under Section 245C of the Act.
I i •
Section 245C of the Act deals with application of settlement of cases.
C As noted above no immunity can be granted by the Commission in cases
where the proceedings for prosecution under the Act or under the Indian
Penal Code, 1860 (in short 'the IPC') or under any Central Act for the time
being in force have been instituted before the date of receipt of application
under Section 245C after 1.6.1987. There is logic in the prohibition. It is
D intended to discourage filing of belated applications after prosecution is
launched and also reasons envisaged in CIT v. B.N. Bhattachargee, (1979)
ITR 461, wherein it was observed that Section 245H is a magnet which
attracts large ta'x-dodgers, and it was emphasised that power of immunisation ·><..

against criminal prosecution should be used in deserving cases. Whether
grant of immunity is called for in a given case is to be decided by the
E Commission on the facts of each case and no straight-jacket formula for any
universal application can be laid down. In the instant case, the Commission
has been satisfied lhat grant of immunity is called for. Since that decision
has not be~n questioned by the ln'Come Tax Authorities it has attained finality.
Conditions required to be fulfilled before immunity can be granted are that
F the Commission has to be satisfied that the applicant (a) has made full and
true disclosure of his income and !he manner in which such income has been
derived and (b) has co-operated with the Commission in the proceedings
before it. In the instant case as the records reveal the application for settlement
in terms of Section 245C was filed on 2 7.5.1991. The prosecution was launched
on 27.2.1992. Obviously, therefore, application for settlement was filed before
G prosecution was launched. The order of the Commission refers to the immunity
granted in the following terms:

"IMMUNITY:

In view of the full and true disclosure of his income made and the
H cooperation extended by the applicant in the settlement of his income
ASHI RWAD ENTERPRISES v. STATE OF Bl HAR [PASAYA T. J.] 305
' tax liabilities, his prayer for immunity from penalty and prosecution A
under the LT. Act and the corresponding provisions of the !PC in
respect of the assessment years covered by the settlement period is
granted."

Above being the position, the proceedings before the Special Court are
quashed. However, at this stage, the apprehension of Mr. Agrawal, learned B
senior counsel for the respondent no. I about consequences flowing from
non-compliance with Commission's order~eeds to be taken note of. Sub-
' .
section (I A) of Section 245H deals with the consequences of non-compliance
with the orders and sufficiently takes care of such apprehensions. In case,
there is non-compliance of the Commission's order, provision of sub-section C
(I A) of Section 245H shall be operative and the appellants are rendered
liable, notwithstanding the earlier immunity_granted as if such immunity was
not granted at all. It shall be open to the Income Tax Authorities to as.k for
restoration of proceedings before the Special Court if there is non-compliance
with Commission's order or withdrawal of immunity in terms of Section
245H(2). D
It may be noted here that High Court had declined to quash the
proceedings on ground that proceedings were pending before the Commission.
The view of the High Court is on terra firma. This Court in P. Jayappan v.
S.K Perumal, First !. T.O., (1984) 149 !TR 696, SC observed that merely
because the application for settlement is pending before the Commission that E
cannot be a ground to quash the pending prosecution. But the position has
changed in this case as after High Court's judgment final orders have been
passed by the Commission according immunity on an applicationyresented,
apparently before the institution of the proceedings for prosecution.

Appeals are allowed and disposed of accordingly on the above terms. F

RS Appeals allowed

.A.