Delhi HC Upheld Acquittal Order of Offence u/s 276B of Income Tax Act on Finding Committed Bonafide Mistake, Dismisses Income Tax Officers Appeal [Read Order]

In a recent case, the Delhi High Court has upheld the acquittal order of the offence under section  276B of the Income Tax Act, 1961 on finding a committed bona fide mistake and dismissing the Income Tax Officer's Appeal.

The Income Tax Officer, New Delhi., the petitioner challenged the judgment dated 28.10.2021 (‘the impugned judgment’) passed by the Trial Court in CC Nos. 6212/2018, 6214/2018, 6215/2018, whereby the respondents, MKYConstructions Private Limited and Anrwere acquitted of the offences under Sections 276B read with Section 278B of the Income Tax Act, 1961 (‘Income Tax Act’).

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The complaints related to failure to deposit Tax Deducted at Source (TDS) within the time prescribed under law. Each complaint pertains to a distinct financial quarter.  The petitioner alleged that the respondent company had deducted TDS but failed to deposit the same with the Central Government within the prescribed period.

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It was alleged that for the financial year 2015-16, the respondent company had made payment to various persons and had deducted Tax Deducted at Source (TDS) amounting to ₹68,78,256/- but failed to deposit the same to the credit of the Government Treasury, within the stipulated time as required under the Income Tax Act.   The delay in deposit of the tax led the petitioner to initiate a separate prosecution in line with departmental policy treating every quarterly default as a distinct offence.

Admittedly, the defaults were later remedied by depositing the amount which was deducted as Tax Deducted at Source with interest in the Government Treasury; however, the department proceeded with prosecution on the ground of initial failure. The  Trial Court framed charges for offence under Sections 276B read with Section 278B and 278E of the Income Tax Act. After considering the evidence and the material on record, the Trial Court dismissed all three complaints and acquitted the respondents.

The Senior Standing Counsel appearing for the petitioner–Income Tax Department submitted that the respondents, being a company and its principal officer, were under a statutory obligation to deposit TDS deducted from payments made to third parties within the prescribed period.

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He submitted that in each of the three cases, substantial TDS amounts—₹68,78,256/-, ₹1,59,72,437/-, and ₹2,01,34,235/- respectively—were deducted by the respondents but not deposited with the Government treasury within the stipulated time. He submitted that the prosecution was sanctioned after due consideration of the respondents’ replies, which sought to justify the delay on the ground of financial hardship and pending income tax refunds. However, these reasons were specifically rejected in the sanction order as untenable and not amounting to ‘reasonable cause’.

It was argued that the Trial Court erroneously accepted photocopies and vague justifications as sufficient evidence to acquit the respondents, holding that they had demonstrated a ‘reasonable cause’ under Section 278AA of the Income Tax Act. It is contended that this interpretation dilutes the mandatory nature of TDS compliance and sets a precedent for evading statutory obligations. He emphasized that once TDS is deducted, it becomes government property and cannot be withheld on the plea of financial difficulty. The deductor acts as a trustee of public revenue, and failure to deposit deducted TDS constitutes a serious economic offence.

A perusal of the record discloses that in all three complaint cases—C.C. Nos. 6212/2018, 6214/2018, and 6215/2018—the learned Trial Court passed a common judgment dated 28.10.2021 acquitting the respondents primarily on the ground that the respondents had satisfactorily demonstrated the existence of a ‘reasonable cause’ for the delay in depositing tax deducted at source (TDS), within the meaning of Section 278AA of the Income Tax Act.

The defense advanced by the respondents was that during the relevant assessment years, the company was undergoing an acute financial crisis, including non-receipt of substantial dues from clients, particularly government agencies, which led to a severe cash flow shortage and hindered timely TDS compliance.

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Further, the testimony of CW-1, the Income Tax Officer, during cross-examination at the post-charge stage, is of considerable significance. He candidly admitted that the entire amount constituting the alleged TDS default had been deposited by the assessee even prior to the issuance of the show cause notice under Section 279 of the Income Tax Act, 1961. This admission undermines the prosecution’s narrative of wilful default and supports the respondents’ claim that the delay in deposit was not motivated by any dishonest intent, but arose from circumstantial financial hardship.

The trial court, after carefully weighing this material fact, rightly concluded in the impugned judgment that the respondents’ conduct reflected a responsible and remedial disposition. The respondents not only acknowledged the default but also took proactive steps to regularize it before the initiation of prosecution, thereby evidencing the absence of mens rea—a critical ingredient in sustaining criminal liability under Section 276B of the Income Tax Act. 

A single bench of Justice Amit Mahajan  viewed that the Trial Court  rightly observed that the financial difficulty stemmed from the fact that substantial, legally recoverable payments due to the respondent company from contracting parties had remained unpaid, resulting in a liquidity crunch. This root cause was adequately substantiated by the documents and explanations placed on record, and provided the reasonable cause envisaged under Section 278AA of the Income Tax Act.

The  Trial Court’s finding that the default was not deliberate but compelled by external financial constraints is neither perverse nor legally infirm. Rather, it reflects a balanced application of the statutory framework that distinguishes between culpable inaction and excusable delay backed by bona fide efforts at compliance.

The court found that the Trial Court has adopted a legally tenable interpretation of Section 278AA of the Income Tax Act and rendered findings which are not only supported by the record but also resonate with the underlying objective of the provision— namely, to shield individuals from criminal prosecution where non-compliance is neither wilful nor mala fide. No perversity or material irregularity has been demonstrated by the petitioner.

The prosecution’s case hinges more on the occurrence of default than on the requisite mental element necessary to sustain conviction under Section 276B, read with Section 278E of the Income Tax Act. However, the latter stands neutralized by the substantiated defence under Section 278AA of the Income Tax Act. In light of observation, the court upheld the order of acquittal passed by the Trial Court.

To Read the full text of the Order CLICK HERE

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