Introduction:
The Supreme Court of India in the case of Vijay Krishnaswami @ Krishnaswami Vijayakumar versus The Deputy Director of Income Tax (Investigation) [2025 LiveLaw (SC) 851], delivered on August 28, 2025, imposed costs of ₹2 lakhs on the Income Tax Department for what it termed as “gross abuse of its position” in continuing prosecution against an assessee despite the absence of confirmed findings of concealment of income and in clear defiance of its own binding circulars. The judgment authored by Justice J.K. Maheshwari and concurred by Justice Vijay Bishnoi quashed the Madras High Court’s order that had earlier refused to interfere with the prosecution initiated by the department. The ruling has become a significant precedent highlighting judicial intolerance towards arbitrary and high-handed actions by revenue authorities that undermine statutory safeguards, fairness, and accountability. The appellant, Vijay Krishnaswami @ Krishnaswami Vijayakumar, had approached the Supreme Court after the High Court refused to quash criminal prosecution launched against him by the Income Tax Department under Section 276C(1) of the Income Tax Act, 1961, alleging willful tax evasion. The Court not only set aside the prosecution but also strongly reprimanded the department for ignoring its own circulars issued by the Central Board of Direct Taxes (CBDT), which made prosecution contingent upon confirmation of penalty by the Income Tax Appellate Tribunal (ITAT). The ruling has far-reaching implications for the interplay between administrative circulars, prosecution powers, and the rights of taxpayers.
Arguments on Behalf of the Appellant:
On behalf of the appellant, senior advocate Mr. Preetesh Kapur assisted by a team of lawyers including Mr. R. Sivaraman, Ms. Vandana Vyas, Mr. Aditya Sharan, and others, argued that the prosecution initiated by the Income Tax Department was not only premature but also illegal, arbitrary, and contrary to the statutory scheme as well as the binding circulars of CBDT. The counsel highlighted that the appellant was subjected to a search operation in 2016, during which unaccounted cash worth around ₹5 crore was allegedly seized. Based on this, the Department alleged tax evasion for the Assessment Year 2017-18 and initiated prosecution under Section 276C(1) of the IT Act. However, the appellant subsequently approached the Income Tax Settlement Commission, which by its order dated November 26, 2019, settled the case after recording that the assessee had made a “full and true disclosure” of income. The Commission also granted him immunity from penalty after finding that there was no suppression of facts. The only reason immunity from prosecution was not granted was that the criminal case had already been filed and was pending. The appellant’s counsel stressed that since the Settlement Commission found no concealment or suppression, the prosecution could not be sustained. More importantly, the binding CBDT circular dated 24.04.2008 and the Prosecution Manual of 2009 explicitly provided that prosecution under Section 276C(1) could only be launched if the penalty for concealment of income was confirmed by the ITAT. In this case, no such penalty had even been imposed, much less confirmed. Hence, the very foundation for initiating prosecution was missing. It was contended that the continuation of prosecution despite these circumstances amounted to blatant disregard of the CBDT’s circulars which have statutory binding effect on the department. The counsel also emphasized that such disregard of circulars violated principles of consistency, fairness, and natural justice. It was further argued that the High Court erred in refusing to quash the prosecution despite these glaring lapses, which amounted to an abuse of the process of law. The appellant prayed for quashing of the prosecution and imposition of exemplary costs on the department for its arbitrary conduct.
Arguments on Behalf of the Respondent:
On the other hand, the respondents represented by senior advocate Mrs. Nisha Bagchi, along with Mr. Raj Bahadur Yadav, Mr. V. Chandrashekhara Bharathi, and others, defended the prosecution initiated by the Department. It was argued that the discovery of unaccounted cash worth nearly ₹5 crore was a strong prima facie indication of willful tax evasion by the assessee. The Department contended that Section 276C(1) of the IT Act criminalizes attempts to evade tax, and the seizure of such a huge amount of unaccounted money could not be brushed aside merely because the Settlement Commission had granted immunity from penalty. The respondents argued that the grant of immunity from penalty did not automatically translate into immunity from criminal prosecution, especially when the Settlement Commission itself had consciously refrained from granting immunity from prosecution. They further contended that the circulars relied upon by the appellant could not override the express provisions of the Income Tax Act, and in any event, the department had the discretion to initiate prosecution if circumstances warranted it. It was also argued that the High Court was correct in refusing to interfere at the threshold, since the matter involved disputed facts regarding the appellant’s intent and conduct, which could only be adjudicated during trial. The respondents maintained that quashing the prosecution at the initial stage would deprive the department of an opportunity to establish its case and would embolden tax evaders.
Judgment of the Supreme Court:
After considering the submissions of both sides, the Supreme Court delivered a strongly worded judgment in favor of the appellant. Justice J.K. Maheshwari, writing for the bench, categorically held that the Income Tax Department had acted in blatant disregard of its own binding circulars. The Court emphasized that the CBDT circular dated 24.04.2008 and the Prosecution Manual of 2009 mandated that prosecution under Section 276C(1) should not be launched unless the penalty for concealment of income was confirmed by the ITAT. Since in this case, no such penalty was ever confirmed, the very initiation of prosecution was arbitrary, unjustified, and unsustainable. The Court also underscored the binding nature of CBDT circulars on revenue authorities, noting that such instructions were meant to ensure uniformity, consistency, and fairness in the administration of tax laws. By ignoring these circulars, the authorities had not only violated statutory instructions but also undermined the rule of law. The judgment took note of the Settlement Commission’s finding that the appellant had made a full and true disclosure and was granted immunity from penalty. The continuation of prosecution despite such findings was held to be a misuse of process and an attempt to harass the assessee without legal basis. The Court further criticized the Department for failing to provide any explanation as to why the prescribed procedure was not followed by the Principal Director of Income Tax (PDIT) or Deputy Director of Income Tax (DDIT) while lodging the prosecution. This non-compliance, according to the Court, reflected a serious lapse and demonstrated willful disregard of procedural safeguards. In scathing observations, the Court held that such conduct by the Revenue amounted to “gross abuse of its position” and could not be condoned. The Court rejected the argument of the Department that circulars could not override statutory provisions, clarifying that in this case, the circulars were consistent with the statutory framework and were binding on the Department. Accordingly, the Court set aside the Madras High Court’s refusal to quash the prosecution and allowed the appeal filed by the appellant. It also imposed exemplary costs of ₹2 lakhs on the Income Tax Department, directing that the costs be paid to the appellant. The ruling sends a strong message that revenue authorities cannot act arbitrarily or in violation of their own binding instructions and that prosecution powers must be exercised responsibly and within the bounds of law.