Introduction
The Hon’ble High Court of Karnataka (‘HC’) delivered a significant decision in Smt. Dhanashree Ravindra Pandit v. Deputy Director of Income Tax (Investigation)[i], ruling that non-disclosure of a tax return for the years 2007-08 or 2009-2010 could not be used to criminally prosecute a person under the Black Money (Undisclosed Foreign Income and Assets) Imposition of Tax Act, 2015 (‘Act’), by its retrospective application. A. 20 of the Constitution of India (‘Constitution’) prohibits initiating criminal proceedings based on ex post facto laws.
Brief Facts
During the financial year (‘FY’) 2007-2008, on 17.03.2008, a British Virgin Islands (‘BVI’) company named Gleaming Snow Worldwide Limited (‘GSW’) was incorporated. Following this, Oriental Success Universal Corporation (‘OSUC’) was incorporated as a BVI on 12.05.2009. The following month, on 12.06.2009, a bank account belonging to OSUC was opened in UBS, Singapore. The legitimacy of the bank account under the prevailing laws of Singapore was established through relevant know your customer (‘KYC’) documents and the declaration of the beneficial owner’s identity furnished at the time.
On 17.03.2008, GSW was struck off as a BVI company. During FY 2010-11, US$16,000 and US$40,000 were credited to the OSUC bank account on 08.01.2010 and 16.03.2010, respectively. OSUC was struck off the BVI register on 02.11.2010, and its bank account was closed at the end of FY 2010-11. All petitioners belonged to the same family.
On 01.04.2016, the Government of India enacted the Act. The assessing officer (‘AO’) issued a summons to the petitioner under s. 8 of the Act, and on 25.06.2018, proceedings under the Act commenced with issuing a notice under s. 10(1) of the Act for FY 2018-19 and assessment year (‘AY’) 2019-20. Furthermore, two show cause notices were issued to the petitioners seeking to know why prosecution should not be initiated against them under ss. 50 and 52 of the Act. Upon receiving the interim reply of the petitioners, sanction to prosecute them under the Act was granted.
The petitioners, who were office bearers of the business establishments, were retrospectively charged with violating the provisions of the Act. Consequently, they filed criminal petitions seeking the quashing of criminal proceedings initiated against them.
Held
The HC ruled in favour of the petitioners by allowing the criminal petitions and quashing the criminal complaints pending before the IV Additional Magistrate First Class, Belgavi. The HC held that the law at the alleged time did not require the disclosure of assessment as mandated under the Act, which was enacted five years later. Therefore, non-disclosure of a tax return assessment for 2007-08 or 2009-10 could not be used to initiate criminal prosecution against the petitioners.
Furthermore, while examining the provisions of the Act, particularly ss. 2(11), 2(12), 3, 10, 50, 51, 52, and 72, the HC held that the criminal proceedings initiated against the petitioners did not pass muster under a. 20 of the Constitution; criminal law could not be set into motion against them.
Addressing the question of the tenability of alleged offences under the law, the HC examined the deeming fiction created under s. 72(c) of the Act and observed that legal fiction or deeming fiction should not be extended beyond its intended purpose or the language of the section by which it is created. It was further noted that once the purpose of the legal fiction is ascertained, it can be given effect to and should be carried to its logical conclusion. The HC recalled the celebrated passage from East End Dwellings Co. Ltd. V. Finsbury Borough Council[ii], which noted that:
“if the statute says that you must imagine a certain state of affairs, it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”[iii]
Examining the prosecution’s actions on the grounds of constitutional validity, the HC held that s. 72(c) of the Act fell foul of a. 20 of the Constitution and remarked that the Constitution is the fountainhead of all statutes, including special statutes. Therefore, the rigour of any provision of the Act must pass muster under a. 20 of the Constitution.
Our Analysis
The HC’s ruling emphasises the principle of non-retroactivity in criminal law, reinforcing that individuals cannot be prosecuted under laws enacted after the alleged offence. By quashing the criminal complaints, the HC upheld that non-disclosure of tax return assessments for 2007-08 or 2009-10 could not justify criminal prosecution, as the relevant law was not in effect then. This decision underscores the protection against ex post facto laws provided by a. 20 of the Constitution, ensuring that legal requirements cannot be applied retroactively to the disadvantage of individuals. Additionally, the HC’s interpretation of s. 72(c) of the Act highlights the importance of confining legal fiction to its intended scope, preventing its misuse. By aligning its judgment with constitutional principles, the HC reinforced the supremacy of the Constitution as the foundation of all statutes. This ruling serves as a significant reminder of the judiciary’s role in safeguarding individual rights against retrospective legal actions.
The HC did not dismiss the role and importance of the Act, acknowledging the menace of tax-evaded income, or what is popularly called black money, and its detrimental effect on society and the economy. However, it emphasised that using the cause of black money to proceed in an arbitrary fashion contrary to the Constitution cannot be excused.
End Notes
[i] 2024 SCC OnLine Kar 58
[ii] East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1951] 2 All ER 587.
[iii] Ibid.
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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