ORDER
J. Eswara Prasad, J.
1. The first petitioner in both the revision is a firm. The second petitioner is a partner of the firm, in charge of its affairs. The petitioners are the accused Nos. 1 and 2 in CC. No. 50/87 on the file of the Court of the Special Judge for Economic Offences at Hyderabad, relating to the asst. yr. 1982-83 and in CC. No. 51/87 relating to the asst. yr. 1983-84, along with three others. They were charged with offences punishable under ss. 276C(1), 277 and 278 of the IT Act, 1961. Pending trial, A5 died. A1 (the first petitioner) was found guilty under s. 276C; A2 was found guilty under ss. 277 and 276C read with s. 278 and was sentenced to pay a fine of Rs. 1,000 in default to undergo R1 for one month. He was also sentenced to R1 for 3 months and was directed to pay a fine of Rs. 1,000 in default to undergo R1 for one month on the second charge. A3, another partner of the firm, was acquitted. A4 was found guilty under s. 278 and was sentenced to undergo imprisonment till rising of the Court and to pay a fine of Rs. 1,000, in both the matters by the learned Special Judge.
2. Appeals filed by the petitioners and A4 were partly allowed by the learned Metropolitan Sessions Judge, Hyderabad, and the conviction of A4 was set aside and was acquitted. The convictions and sentences imposed against the petitioners was confirmed and their appeals were dismissed. These revisions arise out of the conviction and sentences imposed against the petitioners.
3. The first petitioner is an assessee under the IT Act, 1961 (‘the Act’, for short). For the asst. yr. 1982-83, the firm returned an income of Rs. 19,710 and for the asst. yr. 1983-84, Rs. 21,080. The said returns were signed and verified by the second petitioner. The ITO found that the debit made in the names of two brothers of the second petitioner, namely, G. Ramarao and G. Mallikharjunarao, towards their remuneration is not allowable, as they were not the employees of the firm. He included the debit amount in the income of the first petitioner-firm. Appeals were preferred against the orders of the ITO and were dismissed by the AAC, confirming the assessment orders. The firms filed appeals before the Tribunal which were partly allowed. The learned Special Judge, as well as the learned Metropolitan Sessions Judge held that only accused No. 4, the father of the second petitioner was rendering assistance to the firm and that the brothers, G. Ramarao and G. Mallikharjunarao did not render any assistance at all.
4. Sri Venkataiah, learned counsel appearing for the petitioners, first contended that both the Courts have not properly considered the effect of Ex. P10 which clearly shown that the second petitioner asserted that his father and brothers were assisting the firm by making purchases after verifying the stock position at the time of booking orders and were also assisting in making sales. He further contended that the Court below ignored the income-tax returns submitted by M/s. Ramarao and Mallikharjunarao showing their income from salaries paid by the first petitioner-firm, though the said statements were accepted by the Department. The further submission of the learned counsel is that the prosecution failed to establish mens rea on the part of the petitioners and without a finding that the petitioners have debited the amounts of salaries wilfully, the finding of guilt cannot be sustained. It is, therefore, necessary to notice the relevant provisions of the Act, for the violations of which the petitioners were found guilty.
“Section 276C. (1) If a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable –
(i) …….. ……… ……. ……
(ii) …….. ……… ……. ……
(2) If a person wilfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and shall, in the discretion of the Court, also be liable to fine.
Explanation : For the purpose of this section, a wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof shall include a case where any person –
(i) ……. ………. ………. ……….
(ii) makes or causes to be made any false entry or statement in such books of account or other documents; or
(iii) wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or
(iv) causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof.”
“Section 277 : If a person makes a statement in any verification under this Act or under any rule made thereunder, or delivers an account or statement which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable,
(i) …….
(ii) …….
“Section 278 : If a person abets or induces in any manner another person to make and deliver an account or a statement declaration relating to any income chargeable to tax which is false and which he either knows to be false or does not believe to be true or to commit an offence under sub-s. (1) of s. 276C, he shall be punishable,
(i) ……. …….. …….
(ii) ……. …….. ……..”
“Section 278B : (1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly :
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offerce was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.”
5. As observed earlier, the first petitioner was found guilty for the offence punishable under s. 276C. The second petitioner was found guilty under s. 277 for verifying the return and also under s. 276C r/w s. 278B of the Act. From a reading of s. 276C, it is seen that in order to be found guilty under the said provision, the accused person must be found to have made wilful attempts to evade tax, penalty or interest. Explanation to s. 276C enumerates instances of wilful attempts. Clause 3 of the Explanation dealing with omission of any relevant entry or statement in account books or other documents, again refers to wilful omission. The allegation against the second petitioner was that he verified the income-tax returns which alone cannot be held to be wilful, unless positive evidence is let in to prove the state of mind of the second petitioner while filing the return. In other words, it has to be established by the prosecution that the second petitioner filed the return with an intention to evade tax.
In order to bring home guilt under s. 277, it is necessary for the prosecution to prove that the accused either knows or believes to be false or does not believe to be true that, the statement he makes or the verification he made under the Act, is false. Similarly, s. 278 deals with abetment or inducement of a person to make and to deliver an account or statement or declaration, relating to any income chargeable to tax with the knowledge that it is false or does not believe to be true. The element of knowledge has to be proved by the presecution in order to hold the accused person guilty of the offence under s. 278.
Section 278B deals with offences by companies and throws the burden of proof on the person in charge of the company to prove that the offence committed by the company was not with his knowledge or that he had exercised all due diligence to prevent the commission of such offence. In order to sustain conviction of the person in charge of the affairs of the company, it is necessary for the prosecution to first establish the guilt of the company and then the burden shifts to the person in charge of the company to prove that he did not have the knowledge of such offence and that he had exercised all due diligence to prevent the commission of such offence.
6. In Thakasi Satyanarayana vs. State of A.P. this Court held that mere possession or control of books and documents containing false entries is not punishable under s. 276C, unless the prosecution establishes a wilful attempt on the part of the accused to evade tax and that it is essential that mens rea must be established. The learned Judge observed :
“that is was not difficult to visualise that a person could come into possession of books of account containing false entries or statements without knowledge of the same. The requisite mens rea, viz., knowledge on the part of a person of a false entry or statement in any books of account or other document in his possession or control, must be established before he is sought to be visited with the penalty prescribed by s. 276C.”
7. This Court had an occasion to consider the meaning of the word ‘wilful’, while dealing with s. 276CC of the Act in ITO vs. Authofil & Ors. . It was held that the word ‘wilful’, generally means an act done with a bad purpose, with an evil motive as a constituent element of the crime and that it should be established beyond all reasonable doubt and there should be presence of mens rea, a bad motive and a guilty mind. Dealing with s. 276C, the Supreme Court in Gujarat Travancore Agency vs. CIT held :
“that there can be no dispute that having regard to the provisions of s. 276CC, which speaks of wilful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established. In most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent.”
A Division Bench of this Court in Addl. CIT vs. China Krishna Murthy held that even in the case of penalty proceedings, which are penal in nature, the onus is on the Department to show that a particular receipt or amount is of revenue nature and merely because the explanation offered by the assessee has been found to be false, it is no ground for imposition of penalty. The cumulative effect or the entirety of the circumstances of the case, should lead to the only reasonable inference that the amount in question represents income and that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars thereof, should be considered. Where there is no positive evidence of concealment, no penalty is imposable. The Rajasthan High Court in Shree Singhvi Bros. vs. Union of India (1990) 187 ITR 219 (Raj) held that a partnership firm cannot be prosecuted for offences under ss. 276C, 277 and 278, inasmuch as for the commission of the offence to evade any tax or penalty, a minimum sentence has been provided for in the statute. It was further held that for the commission of offence mens rea is an essential ingredient and the company being a juristic personality, cannot have any mens rea to commit any offence. It is only the partners or the Directors of the company who can be held to be guilty by making false statements. I am in entire agreement with the view expressed as above.
From the legal position emerging out of the above decisions, it is necessary to examine the facts of this case. The contention of the petitioners is that the brothers of A2, namely, G. Ramarao and G. Mallikharjunarao rendered assistance to the firm for which they were paid remuneration. The hierarchy in the Department rejected the plea of the petitioners. It is, therefore, essential to see whether there is mens rea present in the mind of the second petitioner when he submitted the returns, to evade payment of tax by making false claims based on debit entries. Ex. P1 clearly shown that the second petitioner had asserted that his brothers assisted the firm in the business in making purchases after verifying the stock position at the time of booking orders and also assisted in making sales. Exs. D1 to D8 also show that the receipt of remuneration by the said two persons was reflected in their income-tax retuns which were accepted by the authorities. In such circumstances, no inference can be drawn that mens rea was present in the mind of the second petitioner when he filed the returns. It is also to be noted that the statement of the accountant that he wrote the accounts at the instance of the father of the 2nd petitioner, namely, A4 and that it was not at the instance of the second petitioner. It has, therefore, to be held that, in the abasence of any evidence adduced by the prosecution to show that there was a wilful attempt to evade tax or that the statement in the verification of the returns was with the knowledge that it is false, the convictions and sentences cannot sustain. The convictions and sentences are accordingly set said and the revisions are allowed. The time period (sic-fine-paid) by the petitioner will be refunded.