The Supreme Court examined the legality of continuation of prosecution under Section 276C(1) of the Income Tax Act, 1961, after the Income Tax Settlement Commission had passed an order granting immunity from penalty upon recording that there was no concealment of income or wilful attempt to evade tax.

In the present case, prosecution was initiated alleging wilful tax evasion prior to the assessee approaching the Settlement Commission under Section 245C. The Settlement Commission, in its order under Section 245D(4), categorically recorded that the assessee had made a full and true disclosure of income, cooperated with the proceedings, and that the additional income was not the result of suppression or concealment. On this basis, immunity from penalty was granted.

The Supreme Court held that the findings of the Settlement Commission are conclusive under Section 245I and negate the essential ingredient of mens rea required for prosecution under Section 276C(1). The Court further emphasized that CBDT circulars, the Prosecution Manual, and departmental guidelines governing initiation of prosecution are binding on the tax authorities. Prosecution in the present case was initiated and continued in clear violation of these binding instructions.

Relying on settled law, including K.C. Builders Ltd. v. CIT, the Court held that where proceedings relating to concealment fail, criminal prosecution based on the same allegations cannot survive. Continuation of the prosecution was therefore held to be an abuse of the process of law, and the criminal proceedings were quashed. 

Source Link  - https://api.sci.gov.in/supremecourt/2024/7093/7093_2024_2_1503_63690_Judgement_28-Aug-2025.pdf

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