Facts of the Case

The Income Tax Department filed three criminal leave petitions challenging a common judgment dated 28.10.2021 passed by the Trial Court acquitting MKY Constructions Private Limited (formerly Action Bridge Gap Constructions Pvt. Ltd.) and its principal officer of offences under Sections 276B read with Section 278B of the Income-tax Act, 1961.

The complaints pertained to three different financial years, namely FY 2013–14, FY 2014–15, and FY 2015–16, involving alleged defaults in depositing Tax Deducted at Source amounting to ₹2,01,34,235/-, ₹1,59,72,437/-, and ₹68,78,256/- respectively. Although the TDS amounts were deducted, they were not deposited within the statutory time. The respondents subsequently deposited the entire TDS amounts along with interest before initiation of prosecution.

Issues Involved

Whether delay in depositing TDS, despite subsequent payment with interest, constituted an offence under Section 276B, whether the respondents had established “reasonable cause” under Section 278AA to escape penal liability, and whether interference with the Trial Court’s acquittal was warranted in leave to appeal proceedings.

Petitioner’s Arguments

The Revenue contended that once TDS is deducted, it becomes government property and any failure to deposit the same within time constitutes a serious economic offence. It was argued that financial hardship cannot justify non-deposit of TDS and that the Trial Court erred in accepting photocopies and financial explanations as sufficient evidence of reasonable cause. The Department submitted that the sanction for prosecution was validly granted after rejecting the respondents’ explanation.

Respondent’s Arguments

The respondents submitted that the delay was occasioned by acute financial hardship arising from non-receipt of payments from principal contractors, many of whom were government agencies, leading to a severe liquidity crunch. It was contended that the entire TDS amount along with interest was deposited prior to prosecution and that there was no wilful default or mala fide intent. The respondents relied on Section 278AA, asserting that the existence of reasonable cause was duly established through documentary and oral evidence.

Court Order / Findings

The Delhi High Court examined Sections 276B and 278AA and reiterated that Section 278AA provides a statutory defence where reasonable cause for failure is established. The Court noted that the Trial Court had meticulously examined the evidence, including outstanding receivables, bank correspondence, and admissions by departmental witnesses that the TDS amounts were deposited before initiation of prosecution.

The Court held that the Trial Court’s conclusion that the delay was caused by bona fide financial hardship and not by wilful default was a plausible and legally tenable view. It emphasized that in appeals against acquittal, interference is warranted only where findings are perverse or manifestly illegal, which was not the case here.

Important Clarification

The Court clarified that criminal liability under Section 276B is not automatic upon delay in depositing TDS. Where the assessee successfully demonstrates reasonable cause under Section 278AA and absence of mens rea, penal consequences cannot be sustained notwithstanding the technical default.

Final Outcome

The criminal leave petitions were dismissed. The Delhi High Court upheld the acquittal of MKY Constructions Private Limited and its principal officer, holding that reasonable cause for delayed deposit of TDS was established under Section 278AA and no interference with the Trial Court’s judgment was warranted.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769676546_INCOMETAXOFFICERWARD73.2NEWDELHIVsMKYCONSTRUCTIONSPRIVATELIMITEDANDANR.FORMERLYKMOWNASACTIONBRIDGEGAPCONSTRUCTIONSPVT.LTD.ANR..pdf

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