Summary and Analysis of Vijay Krishnaswami @ Krishnaswami Vijayakumar vs Deputy Director of Income Tax (Investigation) 2025 INSC 1048

1. Heading of the Judgment

Supreme Court Quashes Prosecution for Tax Evasion Due to Non-Compliance with Departmental Guidelines and Conclusive Settlement Order.

2. Related Laws and Sections

The judgment extensively discusses the following provisions of the Income Tax Act, 1961:

• Section 276C(1): Deals with the offence of wilful attempt to evade tax, penalty, or interest. It is a criminal provision.

• Section 279(1): Mandates that prosecution for offences like under Section 276C can only be initiated with the previous sanction of a high-ranking income tax authority (like a Principal Director of Income Tax - PDIT).

• Chapter XIX-A (Sections 245A to 245L): Pertains to the 'Settlement of Cases'.
  Section 245C: Allows an assessee to make an application to the Income Tax Settlement Commission.
  Section 245D(4): Empowers the Settlement Commission to pass a final order on the application.
  Section 245H: Grants the Settlement Commission the power to grant immunity from prosecution and penalty.
  Section 245-I: States that every order of settlement passed shall be conclusive as to the matters stated therein and cannot be reopened in any other proceeding.

• First Proviso to Section 245H(1): States that immunity from prosecution cannot be granted if prosecution proceedings have already been instituted before the date of receiving the settlement application.

The judgment also analyzes key departmental circulars:

• CBDT Circular dated 24.04.2008: Stipulated that prosecution under Section 276C(1) should be launched only after a penalty exceeding ₹50,000 is confirmed by the Income Tax Appellate Tribunal (ITAT).

• Prosecution Manual, 2009: Advised that prosecution should be initiated only after confirmation of concealment penalty by the ITAT.

• CBDT Circular dated 09.09.2019: Stated that for tax evasion below ₹25 lakh, prosecution should not be processed without the approval of a high-level collegium and only after confirmation of penalty by the ITAT.

3. Basic Judgment Details

• Case Name: Vijay Krishnaswami @ Krishnaswami Vijayakumar vs. The Deputy Director of Income Tax (Investigation)

• Court: Supreme Court of India

• Judges: Justice J.K. Maheshwari and Justice Vijay Bishnoi

• Result: The appeal was allowed. The prosecution against the appellant was quashed, and the Revenue was ordered to pay costs of ₹2,00,000 to the appellant.

4. Explanation of the Judgment

Background Facts

1. A search was conducted at the appellant's residence, and unaccounted cash of nearly ₹4.94 crore was seized.

2. The Income Tax Department (Revenue), after obtaining sanction from the Principal Director (PDIT), filed a criminal complaint (prosecution) against the appellant before a Magistrate for the offence of "wilful attempt to evade tax" under Section 276C(1) of the Income Tax Act.

3. After this prosecution was launched, the appellant filed an application before the Income Tax Settlement Commission. He disclosed additional income and sought immunity from penalty and prosecution.

4. The Settlement Commission, in its order, granted him full immunity from penalty because he had cooperated and made a full disclosure. However, it refused to grant immunity from prosecution because the criminal case was already pending in the High Court (as per the first proviso to Section 245H(1)).

5. The appellant's petition before the Madras High Court to quash the criminal prosecution was dismissed. He then appealed to the Supreme Court.

Core Issues Before the Supreme Court

1. Whether continuing the criminal prosecution after the Settlement Commission's order would be an abuse of the court's process?

2. Whether the High Court was right in dismissing the quashing petition?

The Supreme Court's Reasoning and Decision

The Supreme Court allowed the appeal and quashed the prosecution for the following key reasons:

1. Binding Nature of Departmental Circulars:

• The Court emphasized that circulars issued by the CBDT are binding on the Income Tax Department. Their purpose is to ensure uniform and fair administration of the law and to protect assessees from arbitrary action.

• The 2008 Circular and the 2009 Manual were very clear: prosecution for tax evasion under Section 276C(1) should be launched only after a penalty for concealment is confirmed by the ITAT.

• In this case, the Department filed the prosecution without waiting for any penalty order from the ITAT. This was a blatant violation of their own binding guidelines.

2. Conclusive Nature of Settlement Order (Section 245-I):

• The Court noted that the Settlement Commission's order is conclusive under Section 245-I. The Commission had specifically found that the appellant had:
  Cooperated fully.
  Made a true and full disclosure of his income and how it was earned.
  Not suppressed any material facts.

• This finding destroyed the very foundation of the prosecution's case, which required proving a "wilful attempt to evade tax" (mens rea or guilty mind). If there was no suppression, there could be no wilful evasion.

3. Proviso to Section 245H is Not an Absolute Right to Prosecute:

• While the first proviso to Section 245H(1) technically saves a prosecution that was filed before the settlement application, it does not grant the Department an absolute right to continue it blindly.

• The Court held that continuing a prosecution that violates binding circulars and is based on allegations conclusively negated by the Settlement Commission would be a gross abuse of the process of law.

4. Duty of the Department and the High Court:

• The Court criticized the Department for persisting with the prosecution even after the Settlement Commission's favourable order and for not informing the High Court about this development.

• It also held that the High Court failed to appreciate the significance of the Settlement Commission's conclusive findings and the Department's non-compliance with its own circulars.

Final Outcome

The Supreme Court set aside the High Court's order. It quashed the criminal prosecution against the appellant entirely. Furthermore, noting the Department's "blatant disregard" for its own rules and the unnecessary hardship caused to the appellant, the Court imposed costs of ₹2,00,000 on the Revenue, payable to the appellant.