They have launched a prosecution for evasion while my appeal is pending - can they do that, and what happens to the complaint if the addition is deleted later?
The clients are a private limited company trading in fabric at Surat and two of its directors. For AY 2016-17 a reassessment under s.143(3) read with s.147 was completed on 30 March 2022 adding Rs 1,42,00,000 as bogus purchases from three suppliers named in an investigation report. The order works the tax sought to be evaded at Rs 49,20,000 and the demand with interest at Rs 78,40,000, and a penalty under s.271(1)(c) of Rs 49,20,000 was imposed on 26 September 2022. The Commissioner (Appeals) dismissed the quantum appeal on 19 January 2025, the second appeal was filed on 14 March 2025 and is pending before the Tribunal, and the penalty appeal is still before the Commissioner (Appeals), undecided. A show-cause for prosecution issued on 11 June 2026. Sanction under s.279(1) was granted by the Principal Commissioner on 21 August 2026, reciting that the assessee wilfully attempted to evade tax and that the approval of the collegium was obtained. A complaint under s.276C(1) and s.277 read with s.278B was filed before the Special Court on 2 September 2026 against the company, the managing director, and a second director appointed to the board on 12 August 2019 who holds no executive office and draws no remuneration; the only averment against him is that he was in charge of and responsible to the company for the conduct of its business. Summons are returnable on 30 September 2026. The company holds the purchase invoices, e-way bills, cheque payments, the stock register, GST returns and lorry receipts.
Get certified copies of the sanction order under s.279(1), of the collegium approval it recites, and of the complaint with its list of documents, before the returnable date, and read the sanction against the array of accused name by name. Sanction under this Act is person-specific and cognizance can be taken only on a complaint by the authorised authority after previous sanction. If the sanction names the company alone, the complaint against a director has no foundation at all, and that is a point available at the threshold rather than after a trial. Everything else in this file is slow; this is the one thing that can be decided on the paper already filed.
No person may be proceeded against for these offences except at the instance of the Commissioner-level authority named in s.279(1), and the sanction has to be directed at the person to be prosecuted. A High Court has quashed the complaint against a director because the sanction placed on record identified only the company, with no sanction against him as a person, as a director, or as someone responsible for the conduct of the company's business. Reading s.279 with the provision on cognizance, a High Court has held that an offence under the prosecution chapter can be taken cognizance of only on a complaint by an authority authorised in that behalf after the previous sanction of the competent authority, and that a magistrate cannot take cognizance on a police report. Do not, however, expect a rank objection to work: a High Court has held that the word Commissioner in s.279 read with the definition provision and the hierarchy provision means and includes the Director and the Principal Director, so a sanction signed by a Principal Director (Investigation) is by a competent authority under a different name.
The Supreme Court has held that there is no provision barring a prosecution until reassessment proceedings are completed, that the criminal court judges the case on the evidence before it, and that an expectation of success in an appeal or a reference does not stand in the way of the complaint being instituted. That decision is good law in this library and it is the first thing the prosecutor will read out. The Supreme Court has said the same thing in a different form about the failure-to-file offence, holding it complete on the default and unrelated to the pendency of the assessment. So the submission that the complaint is premature will not succeed as a general proposition, and putting it at the head of the application signals that there is nothing better behind it.
This is the one ground on which a complaint filed during a pending appeal has actually been quashed. A High Court held that the Board's guidelines require a case under s.276C(1) to be processed for prosecution where the penalty under s.271(1)(c) exceeding Rs 50,000 has been imposed and confirmed by the Tribunal, and that launching the prosecution before that confirmation was bad; it quashed the complaint. But another High Court, reading the 2019 circular as clarified in 2020, has held that where the amount sought to be evaded exceeds Rs 25 lakh what is required is the prior administrative approval of a collegium of two officers of Chief Commissioner or Director General rank, and the direction to await the Tribunal is not the answer. The order here puts the amount at Rs 49,20,000 and the sanction recites collegium approval, so this file meets the second line, not the first. The ground is still worth taking, in the narrow form that a recital is not an approval: call for the collegium's record and see whether two officers of that rank in fact applied their minds and when.
The Supreme Court has held that the concealment penalty and the s.276C prosecution rest on the same fact, that once the Tribunal as the final fact-finding authority holds there was no concealment and cancels the penalty the substratum of the complaint disappears, and that quashing follows. It has set aside a conviction on the footing that the offence needs a wilful attempt to evade, a positive act that must be proved, and acquitted where the Tribunal's finding removed the factual basis; and in an older matter it held that on a Tribunal finding that the firm was genuine it did not see how the assessee could be prosecuted for filing false returns. A High Court in 2025 quashed complaints under s.276C(1), s.277 and s.276D on that reasoning where the Tribunal had set aside the additions and the penalty had been cancelled. Another High Court in 2025 held that the mere pendency of the department's own appeal under s.260A, even one admitted on substantial questions of law, does not resurrect factual findings the Tribunal has deleted, absent a stay. And the Supreme Court's decision on exoneration in an adjudication is the wider principle behind all of this.
The Supreme Court has held that the concealment penalty is a civil liability enacted to remedy loss of revenue and that wilful concealment is not an essential ingredient of it, while the prosecution needs a mental element and stands on a different footing. That is the answer to the argument that the first appellate order has already decided the question. On the presumption, the position is that the court shall presume the culpable mental state and it is for the accused to prove he had none, to the standard of the court believing it beyond reasonable doubt and not on a preponderance. Two things displace it. The presumption attaches only once the basic ingredients are there: a High Court has held that a mere failure to pay, later made good with interest, is not a wilful attempt where there was no concealment of a source, no false particulars and no circumstance created to enable evasion. And it has been held rebutted on evidence: a High Court let an acquittal stand on the footing that the presumption was displaced, and another dismissed the department's appeal against an acquittal, holding that even with the presumption the complainant must bring home the mens rea.
A High Court has held that a bare averment reciting the words of s.278B, with no material showing that the director was in fact in charge of the company's affairs and responsible for the conduct of its day to day business, does not disclose a prima facie case and that process should not have issued. That is exactly the averment made here. But the point is documentary rather than doctrinal: another High Court in 2025 set aside a discharge where the specific averment was made and the notices treating the director as principal officer were on the record as exhibits, holding that whether he was really at the helm is a matter of evidence for the trial. And the Supreme Court has held that directors identified as principal officers were properly arrayed with the company. So the two questions to answer from the file are whether a notice treating this director as principal officer exists, and whether the complaint says anything beyond the statutory formula. His appointment on 12 August 2019, three years after the year charged, is the strongest fact available and should go in through the company's filings annexed to the application.
The guidelines of 17 October 2024 changed the shape of this route: they abolish the earlier category classification, remove the cap on the number of applications and the thirty-six month outer time limit, and allow a co-accused to apply on behalf of a company, which matters where the object is to get the directors out. Where an application is refused on a bad ground the High Court has intervened. One set aside a rejection made purely because the application was beyond thirty-six months, holding that the Chief Commissioner had treated the guidelines as a binding statute and exercised no discretion at all, and that the Act itself prescribes no limitation for a compounding application. Another set aside a refusal where both reasons given had fallen away. What the writ produces is reconsideration, not compounding.
There is no limitation to run. The Act fixes no period for launching a prosecution and the criminal procedure bar does not supply one, because the offences under this Act are taken out of it by the 1974 statute on the inapplicability of limitation to economic offences. On discharge, the pattern in this collection is discouraging: a High Court refused to interfere where the accused argued that no tax was in fact payable, holding that wilfulness, the entitlement and the validity of service were all matters to be decided only after a full trial; and a High Court held that an argument that revised returns had been filed after discussion with the officer and accepted belongs to the realm of appreciation of evidence and must be negatived at the quashing stage. Apart from a merits deletion, the one thing in this collection that has ended a prosecution outright is a settlement recorded as a full and true disclosure, which the Supreme Court held conclusive so that the factual foundation for a wilful attempt was gone and continuing the prosecution was an abuse of process.
The complaint against the company almost always survives the first round, and the realistic outcome is a trial that runs alongside the Tribunal appeal for several years. Where the sanction is defective as against a particular accused, that accused usually comes out early, and a non-executive director on a bare formulaic averment has a real chance at the process stage. The circular ground quashes a complaint in the minority of cases where the amount sought to be evaded is under the threshold or the collegium approval cannot be produced. The event that actually ends the prosecution is a Tribunal order deleting the addition on the merits with a finding of genuineness, and where that happens quashing generally follows without much argument. The bad outcome practitioners see most is a Tribunal order restricting the addition to a percentage of the purchases: it saves most of the tax and leaves the prosecution standing, because there is still a finding that the purchases were not what they were shown to be.
