Sanction for Prosecution under Section 276B r/w Section 278B — Requirement of Application of Mind, Reasonable Cause, and Limits of Criminalisation of TDS Defaults

 

Karnataka High Court:-M/s GM Infinite Dwelling India Pvt. Ltd. & Ors.

VersusThe Commissioner of Income Tax (TDS), Bengaluru & Anr.

Writ Petition No. 21787 of 2024 (T-IT)

Decision dated: 17 December 2025

 

Statutory Framework Involved

1. Section 276B — Failure to Pay Tax Deducted at Source

 

Section 276B provides for criminal prosecution where a person fails to pay to the credit of the Central Government:

 

tax deducted at source under Chapter XVII-B, or

 

tax payable under section 115-O(2).

 

The offence is punishable with:

rigorous imprisonment ranging from three months to seven years, and

fine.

 

The provision is penal in nature and therefore must be strictly construed.

 

2. Section 278B — Offences by Companies

 

Section 278B creates vicarious criminal liability by deeming every person who was:

  

in charge of, and

responsible for the conduct of the business of the company

 

to be guilty of the offence, unless such person proves that the offence was committed without his knowledge or despite due diligence.

 

This section enlarges criminal exposure to directors and officers, making compliance with procedural safeguards critical.

 

3. Section 279(1) — Sanction for Prosecution

 

Section 279(1) mandates that no prosecution for offences under Chapter XXII shall be instituted except with prior sanction of the Principal Commissioner / Commissioner of Income-tax.

 

Judicially settled principles require that:

sanction must be preceded by independent application of mind,

 

all relevant facts and explanations must be considered, and

 

sanction must not be mechanical or routine.

 

Sanction under section 279(1) is therefore a jurisdictional safeguard, not an administrative formality.

 

4. Section 201(1A) — Interest for Delay in Remittance of TDS

 

Section 201(1A) provides for levy of mandatory interest where TDS is remitted belatedly.

Legislatively, this provision recognises that delay and default are distinct concepts, and interest is the primary civil consequence for delay.

 

Factual Background

For Assessment Year 2016–17, the petitioner-company deducted tax at source in accordance with law. However, due to financial stress, the TDS amount was remitted to the credit of the Central Government on 17.08.2016, with a delay of approximately seven months, along with statutory interest.

 

Nearly four years later, on 14.01.2020, the TDS authorities issued notices proposing prosecution under section 276B. The petitioners submitted replies explaining that:

 

the period coincided with demonetisation,

 

there was significant disruption due to GST implementation, and

 

the financial distress was further aggravated by COVID-19, resulting in acute cash-flow constraints.

 

The petitioners highlighted that:

the TDS amount was fully paid,

interest was discharged, and

there was no element of willful or contumacious default.

 

Subsequently, fresh show-cause notices were issued in March and April 2024. Detailed replies were filed again, along with a request for time to submit additional supporting documents.

 

Ignoring these explanations, the first respondent granted sanction for prosecution on 31.05.2024 under section 279(1), pursuant to which criminal complaints were filed before the Special Court for Economic Offences, Bengaluru, arraying both the company and its directors as accused.

 

Core Issue Before the High Court

Whether sanction for prosecution under section 276B read with section 278B is legally sustainable where:

 

TDS has been fully remitted with interest,

 

delay is supported by bona fide and documented reasons, and

 

the sanctioning authority fails to consider explanations and mitigating circumstances before according sanction under section 279(1).

 

Judicial Analysis and Reasoning

The High Court undertook a limited but critical judicial review of the sanction order. It held that:

   1.    Sanction is a condition precedent

The Court reaffirmed that sanction under section 279(1) is a jurisdictional requirement. Absence of proper consideration vitiates the entire prosecution.

   2.    Non-consideration of “reasonable cause” is fatal

The petitioners had specifically pleaded reasonable cause arising from macro-economic disruptions. The impugned sanction order failed to examine whether the delay was deliberate or merely circumstantial.

   3.    Mechanical sanction defeats statutory safeguards

The Court observed that merely reproducing facts without analysing replies amounts to non-application of mind, rendering the sanction vulnerable.

   4.    Justice-oriented approach in economic offences

While recognising the seriousness of TDS compliance, the Court emphasised that criminal law should not be invoked mechanically, especially when civil consequences have already been discharged.

   5.    Opportunity to produce additional material

The petitioners’ request for additional time to file documents was not frivolous. Denial of such opportunity violated principles of natural justice.

 

Final Decision

The High Court passed the following operative directions:

   1.    The writ petition was allowed.

   2.    The sanction order dated 31.05.2024 was set aside.

   3.    The matter was remanded to the sanctioning authority for fresh consideration.

   4.    Liberty was granted to the petitioners to file additional replies and documents.

   5.    The authority was directed to grant reasonable opportunity of hearing, including personal hearing, and thereafter pass a reasoned order in accordance with law.

 

Ratio Decidendi:Sanction for prosecution under section 276B r/w section 278B must reflect conscious and informed application of mind. Where TDS is ultimately remitted with interest and delay is supported by plausible and bona fide reasons, failure to consider such explanations vitiates the sanction and renders prosecution unsustainable.

 

 

Practical and Precedential Value

 

Reinforces procedural discipline in TDS prosecutions

 

Protects directors from routine criminalisation

 

Recognises economic realities such as demonetisation and pandemic-related disruptions

 

Strengthens the jurisprudence that penal provisions must not be invoked mechanically

 


Editorial DisclaimerThis article is prepared exclusively for professional and academic publication in tax journals and legal periodicals. It is intended for use by advocates, chartered accountants, tax practitioners, and revenue officials. The summary does not constitute legal advice. Readers are advised to consult the full judgment and applicable statutory provisions before forming any opinion or taking action.