The department wants to prosecute me for two years I never filed. I filed as soon as they asked, and all the tax was already paid by deduction and advance tax. How much trouble am I actually in?
The client is a resident individual assessed at a ward in Lucknow, with salary from an employer, commission from two principals and bank interest. He did not file a return for AY 2021-22 or for AY 2022-23. Notices under s.142(1) were issued for both years on 12 September 2023 and returns were filed on 20 November 2023, declaring total income of Rs 41,80,000 and Rs 46,20,000. For AY 2021-22 the tax was more than covered by deduction at source of Rs 11,90,000 and advance tax of Rs 1,40,000, and a refund of Rs 62,000 was due; for AY 2022-23 deduction and advance tax together came to Rs 13,10,000 against a returned liability of Rs 13,28,400, and the balance of Rs 18,400 was paid with the return. Assessments under s.143(3) were completed on 15 March 2024. AY 2021-22 was accepted as returned. For AY 2022-23 the officer added Rs 3,20,000 of unreconciled commission, initiated penalty under s.270A for under-reporting, and raised a demand of Rs 96,000 of tax with interest, which the client paid; an appeal against that addition was filed on 10 April 2024 and is still pending. He is also a director of a small private company which did not file for AY 2022-23. On 6 July 2026 two show-cause notices under s.276CC arrived, one naming him for both his personal years and one naming the company for its year, and the sanction placed on the file with the company's notice names only the company. He is frightened, has not slept, and wants to know whether he is going to prison.
Before answering either notice, do the arithmetic the proviso to s.276CC requires, year by year, because on these facts it very probably takes one of the two personal years out of the section altogether. The proviso keeps a person out of prosecution for a failure to file under s.139(1) in two situations and only two: where the return was furnished before the expiry of the assessment year, or where the tax payable on the total income determined on regular assessment, as reduced by advance tax paid and tax deducted at source, does not exceed the figure the section names. Limb one fails for both years, because both returns went in in November 2023. Limb two is where the client lives: for AY 2021-22 the assessed figure produced a refund, so nothing exceeds the threshold and the year is outside the section; for AY 2022-23 the addition took the net figure to Rs 96,000 and the year is squarely inside it. That single computation converts an undifferentiated fear of prison into one exposed year with a live appeal attached to it, and it is what the first reply should lead with.
The proviso is a computation rather than a plea, and it is measured on the total income determined on regular assessment, not on the returned income, and net of advance tax and deduction at source. That is why the Supreme Court held that the pendency of the assessment does not make a prosecution premature: the assessment supplies the measure rather than standing in the way of it. Two points follow for this file. First, the fact that the tax was fully paid is not by itself a defence, but it is the arithmetic that feeds the proviso, which is a much stronger way of putting the same fact. Second, the threshold figure has to be checked against the section for the year in question before it is relied on: the library records that the departmental rendering of the section still carries spent material and prints a figure of three thousand rupees, and warns that it should be verified against the Act before it is used in a computation.
The offence is committed on the day immediately following the due date prescribed by s.139(1), and not on the day the return is eventually filed; the Supreme Court read the words in due time as referring only to the period prescribed by that sub-section and not to the extended window for a belated return. So filing in November 2023 did not undo anything, and a reply built on the filing having happened will be read as a concession. The same reasoning has a benefit attached to it, which is worth taking now: because each year's offence crystallises on its own date, the dates have to be set against the date of the first show-cause notice, and that comparison matters when the compounding application is made. A separate limb of the charge is also in play here. The proviso protects a failure to furnish the return under s.139(1); a failure to answer a notice under s.142(1) is not within it. Since the returns went in about two months after the s.142(1) notices, the reply should establish that the notices were in fact complied with, because that limb has no statutory escape at all.
The whole of the client's exposure for AY 2022-23 is created by that addition, because it is what carries the net figure over the proviso threshold. If it goes in appeal, the arithmetic that puts the year inside the section goes with it. The route from a favourable tax finding to the criminal court is not automatic, and it is important to say so to the client. The Supreme Court has held that the criminal court judges the case on the evidence before it, so a favourable outcome in the tax proceedings does not by itself end a prosecution; it has to be taken to that court and acted on. But where the appellate authority records a finding that destroys the factual basis of the charge, the Supreme Court has treated that finding as conclusive and the continuation of the prosecution as an abuse of process. So the appeal should be pressed towards a finding on the merits rather than allowed to settle into a reduction, and every order in it should be placed on the criminal record as it is made.
No person may be proceeded against for these offences except at the instance of the authority named in s.279(1), the sanction is a separate act from the complaint, it must exist before the complaint is filed, and it must be directed at the person to be prosecuted. A High Court has quashed a complaint against a director on exactly this ground, holding that a sanction naming only the company was no sanction against him as a person, as a director, or as someone responsible for the conduct of the company's business. There is a second document to ask for alongside it: before a director is prosecuted as the company's principal officer he should have been served with notice of the department's intention to treat him as such, and reported criminal appellate authority holds that in the absence of that notice the prosecution against him cannot continue. On this file the sanction on record names only the company, which is the strongest single point the client has.
All three are the arguments a frightened client asks for and all three fail. The Supreme Court has held there is no provision barring a prosecution until reassessment or appeal is complete, and that a mere expectation of success in an appeal cannot stand in the way of the complaint being instituted. It has separately held that the offence is complete on the failure to file and is unrelated to the pendency of the assessment, and that a plea about why the return could not be filed does not obtain a discharge, because the court has to presume the culpable mental state and the assertion does not displace it. The presumption operates from the start of the prosecution and not only after evidence is led. Taking these points and losing them costs credibility that the client will need later on the sanction and on the proviso, which are the points that actually work.
The statute presumes the culpable mental state and makes it a defence for the accused to prove he had none, and it then sets the standard for that proof at beyond reasonable doubt rather than the balance of probabilities. That is an unusual burden and it is not discharged by denial or by blaming somebody else: a High Court upheld a conviction where the accused pleaded illiteracy and blamed his office clerk, holding that generic excuses do not displace the presumption. What does work is documentary, and it has to be gathered while it still exists: the correspondence with the accountant who held the papers, the reason the returns were not filed, medical records, evidence of the deduction certificates arriving late, anything showing that the client was chasing the very thing he is charged with not doing. The other half of the work is on the act itself rather than the intent, because the presumption cannot supply an act: a High Court quashed a prosecution where the material showed a claim the revenue disliked rather than an attempt to evade, and that decision was affirmed on the department's petition being dismissed.
The one provision in this library that bars a prosecution under s.276CC outright is the immunity available where the penalty proceeding is for under-reporting and not for under-reporting in consequence of misreporting. It requires the tax and interest in the assessment order to have been paid within the period specified in the demand notice, no appeal against that order to have been filed, and an application in the prescribed form within one month from the end of the month in which the order was received. The client paid the demand, which satisfies the first condition, but the appeal filed on 10 April 2024 is fatal to the second and the one-month window has long gone. This is worth writing down for two reasons: it explains to the client why an option that existed in March 2024 does not exist now, and it is the point to get right for anyone else who receives a s.270A notice for under-reporting, where filing a protective appeal is precisely what kills the immunity.
Compounding is now governed by the Board's guidelines of 17 October 2024, which supersede the four earlier sets and apply to pending applications as well as new ones. They abolish the categorisation of offences, remove the cap on the number of applications and the thirty-six month outer time limit, dispense with the requirement that the main accused apply where a company is involved, and allow an application to be made at any time after the offence is committed, whether or not it has come to the department's notice and whether or not proceedings have been instituted. All outstanding tax, interest and penalty relating to the offence has to be cleared first, the competent authority is at Chief Commissioner or Director General level, and it is expressly not a matter of right. On limitation, the instinct that an old default must be too old to prosecute is wrong for the wrong reason: nothing in the Act fixes a period, the criminal procedure bar reaches only offences punishable with three years or less, and the analysis in this library is worked out for a different offence with a seven-year maximum. Whether it produces an answer for a s.276CC charge depends on which punishment slab the year falls in, and that has to be computed before the point is pleaded.
On these facts the realistic answer to the client's question is that he is not going to prison, and he should be told that in the first meeting with the reasoning attached. For AY 2021-22 the proviso computation is likely to end the matter at the show-cause stage, because the department would have to record that the net figure exceeds the threshold when it does not. For AY 2022-23 the year survives on paper while the addition stands, and the two realistic outcomes are that the appeal removes the addition and takes the arithmetic with it, or that the matter is compounded. The company's charge and his exposure as its director usually improves most of all, because the sanction on the file does not name him. The residual risk is the limb built on the s.142(1) notices, which has no statutory escape and is answered on the facts of compliance rather than on the proviso.
