Prosecution Quashed Where Revenue Ignored Binding Departmental Guidelines and Settlement Commission Order

A bench of Justice J.K. Maheshwari and Justice Vijay Bishnoi heard appeals arising from the dismissal by the High Court of Madras of a quashing petition filed by the appellant against prosecution proceedings initiated under Section 276C(1) of the Income Tax Act. The appeals challenged the competence and continuation of criminal proceedings that followed a settlement order by the Income Tax Settlement Commission which had granted immunity from levy of penalty.

The Supreme Court allowed the appeals, set aside the High Court judgment and quashed the prosecution instituted by the Revenue. The Court held that departmental instructions and CBDT clarifications governing when prosecution should be launched were binding on the revenue authorities and that the Principal Director and the Deputy Director had failed to comply with those instructions before continuing proceedings. The Court noted that while the proviso to Section 245H(1) saved prosecutions already instituted before filing of an application under Section 245C, continuation of prosecution in the face of a settlement order and clear procedural non‑compliance would amount to an abuse of process. The Court, in its reasoning, observed: The Court directed payment of costs of Rs. 2,00,000 by the Revenue to the appellant.

Background The dispute arose after a search on 24 April 2016 at the appellant’s residence where unaccounted cash of Rs. 4,93,84,300 was seized. The Revenue issued a show‑cause notice and, after sanction under Section 279(1), the Deputy Director of Income Tax (Investigation) filed a complaint on 11 August 2018 alleging a wilful attempt to evade tax for assessment year 2017–18 under Section 276C(1). The appellant subsequently filed an application under Section 245C before the Settlement Commission on 7 December 2018. On 26 November 2019 the Settlement Commission partly allowed the application and granted immunity from levy of penalty, but refrained from granting immunity from prosecution because the quashing petition was pending before the High Court.

Before the Supreme Court, the appellant relied on Section 245‑I and the Settlement Commission order, arguing that the order of settlement was conclusive in matters stated therein and that departmental guidelines—including the CBDT circulars of 2008 and 2019 and the Prosecution Manual, 2009—required confirmation by ITAT or collegiate administrative approval before prosecution in cases below specified thresholds. The Revenue argued that the complaint was filed prior to the Section 245C application and was therefore saved by the first proviso to Section 245H(1). The Court examined the statutory scheme, reproduced that “Every order of settlement passed under sub‑section (4) of section 245D shall be conclusive as to the matters stated therein,” and reviewed precedent establishing that CB[DT]/Board circulars were binding on departmental authorities. Finding that sanction and pursuit of prosecution had been undertaken in disregard of binding departmental instructions and that continuation after the Settlement Commission order served no meaningful purpose, the Court concluded that continuation of the prosecution was an abuse of process and ordered quashing. Pending applications were disposed of.

Case Details: Case No.: 2025 INSC 1048 (Arising out of SLP (Crl.) Nos. 3618‑3620 of 2024) Case Title: VIJAY KRISHNASWAMI @ KRISHNASWAMI VIJAYAKUMAR v. THE DEPUTY DIRECTOR OF INCOME TAX (INVESTIGATION) Appearances: For the Petitioner(s): Mr. Preetesh Kapur, Senior Counsel For the Respondent(s): Ms. Nisha Baghchi, Senior Counsel