The Supreme Court on March 19, in a recent judgment held that exoneration in Income Tax proceedings by itself would not become a valid ground for the discharge of an accused under the provisions of The Prevention Of Corruption Act, 1988 (PCA).

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The bench comprising Justice Vikram Nath and Justice KV Viswanathan was sitting in appeal against an order of the Delhi High Court which refused the discharge of offences under PCA. The bench observed that an Order under the Income Tax Act favouring the accused would not be conclusive proof of ‘lawfulness’ of ‘source of income’. The court in its decision dwells into the settled position of law as held in the Case of State of Karnataka v. Selvi J. Jayalalitha & Ors. to understand the probative nature of such orders passed by the income tax tribunals and authorities from the lens of criminal prosecution.

32. Therefore, in the present case, the probative value of the Orders of the Income Tax Authorities, including the Order of the Income Tax Appellate Tribunal and the subsequent Assessment Orders, are not conclusive proof which can be relied upon for discharge of the accused persons. These orders, their findings, and their probative value, are a matter for a full-fledged trial…..

On Facts

The facts of the present case are that the appellant R.C. Sabharwal (an Architect serving the New Delhi Municipal Corporation), Puneet Sabharwal’s father in the case, possessed assets worth Rs. 2,05,63,341. This amount significantly overshadowed his declared income of Rs. 1,23,18,091. The allegations involving his son, Puneet Sabharwal, revolve around the latter securing INR 79 lakhs through the redemption of Special Bearer Bonds. This act contributed to the crime, as R.C. Sabharwal managed to purchase properties in the name of entities such as the M/s Morni Devi Brij Lal Trust and M/s Morni Merchants, among others which affirmed Puneet Sabharwal as the sole beneficiary.

On 21.02.2006 and 28.02.2006 charges were framed by the Special Judge, Delhi. While the charge against the appellant Puneet Sabharwal was under Section 109 IPC read with Section 13(1)(e) and 13(2) of the Prevention of Corruption Act, 1988 (PCA), the charge against appellant R.C. Sabharwal was under Section 13(1)(e) read with 13(2) of the PCA. Put summarily, appellant RC Sabharwal was charged with owning disproportionate assets while his son and second appellant were charged with abetting his father in the said offence.

In the interim, another order by the Income Tax Appellate Tribunal (ITAT) dated 31.8.2007 allowed the appeals of the appellant-assessees and dismissed the cross-appeals of the IT department. These appeals were regarding the reopening of the assessments for the years 1989-1990 to 1995-1996 and 1997-1998 to 2001- 2002.

The Appellate Tribunal broadly held that (1) Appellant R.C. Sabharwal had no obligation to explain the source of investment of the founders of the trust Smt. Morni Devi and Sh. Brij Lal; (2) Trust had been paying its share of the income since its existence and there was no evidence to prove that the appellants were benami owners of the trust; (3) since Morni Devi Brij Lal Trust was a separate entity and since the appellant Puneet Sabharwal was running its business, its income could not be added in the hands of the appellant R.C. Sabharwal

As a consequence, the Assessing Officer (AO) on 30.12.2009 acknowledged and approved the reasoning given by the assessee on the subject being examined. As a result, the income declared by Puneet Sabharwal was fixed at an entire sum of Rs. 67,550.

It was in light of the above developments that the Order framing charges by the Special Judge were challenged before the High Court in a writ petition. Relying upon the finding of the ITAT, it was contended that there existed a case of discharge of the appellants. Since the reopening proceedings were based on the search done by CBI, there was no valid ground to proceed with the trial. With regards to appellant Puneet Sabharwal, it was argued since he was a minor for a large portion of the check period and therefore could not be made an accused.

Refusing to discharge the appellants, the Delhi High Court enunciated the following reasons : (1) Puneet Sabharwal being a minor in the larger period of the check would not undermine the fact he was legally an adult for 7 years of the time frame concerning the crime; (2) Immunities under S. 3(2) of Special Bearer Bonds (Immunities and Exemptions) Act, 1981 do not cover charges framed under the PCA; (3) In State of Karnataka v. Selvi J. Jayalalitha & Ors. (2017) 6 SCC 263 the Supreme Court held that IT orders are apropos tax liability on income and would not mandatorily establish the lawfulness of the sources of income.

The matter then traversed before the Apex Court on the question of whether the Order of the ITAT be relied upon for quashing the proceedings under PCA.

Arguments By The Appellant

Senior Advocate Mr. Mukul Rohatgi and Mr. Siddharth Agarwal, for the appellants, argued on the following points : (1) Throughout the twenty-year review period, Puneet Sabharwal was underage for all but seven years. This fact raises logical doubts about his ability to conspire with his father during that time, suggesting a significant misuse of legal proceedings; (2) The High Court overlooked the exoneration of the appellant’s father by the ITAT and rendered a specific finding his father did not own trust properties as a benami; (3) The High Court misapplied the decision in Selvi Jayalalitha as in the present case the reliance was not on IT returns but returns subjected to an inquisition at the behest of the CBI; (4) Placing reliance on Radheshyam Kejriwal v. State of West Bengal & Anr., (2011) 3 SCC 581, it was argued that exoneration on merits in civil adjudication would disallow criminal trial on same set of facts.

Arguments By The Respondent

Mr. K.M. Nataraj learned Additional Solicitor General (ASG) appearing for the Central Bureau of Investigation (CBI) mainly contended the following – (1) The Criminal prosecution cannot be dependent upon the ITAT order of 2007, and the prosecution could not and has not been part of the proceedings before the Tax Authorities and ITAT; (2) The ITAT Order is only subsequent to the framing of charges ; (3) Reliance was placed on the decision in Selvi Jayalalitha to assert that findings of Tax Authorities are not binding on criminal courts to accept the lawfulness of ‘source of income’.

ITAT Order Exonerating The Accused Not Conclusive Proof Of “Lawfulness” Of Source Of Income

The contention of the appellants that the ruling in Selvi J Jayalalitha would not be applicable herein as the latter involved only an assessment order while the present fact deal with the findings of ITAT after the inquisition. The issue in Selvi Jayalalitha pertained to an appeal against an order of acquittal passed in a case of disproportionate assets under Section 13 of PCA. The accused therein relied upon income tax returns and income tax assessment orders. The Court therein held that IT returns do not suffice as conclusive proofs of the lawfulness of sources of income as mentioned under S.13 of PCA.

S.13 of PCA refers to criminal misconduct by a Public Servant. The provision reads as follows :

[(1) A public servant is said to commit the offence of criminal misconduct,-

  1. if he dishonestly or fraudulently misappropriates or otherwise converts for his own use any property entrusted to him or any property under his control as a public servant or allows any other person so to do; or
  2. if he intentionally enriches himself illicitly during the period of his office.

Explanation 1. – A person shall be presumed to have intentionally enriched himself illicitly if he or any person on his behalf, is in possession of or has, at any time during the period of his office, been in possession of pecuniary resources or property disproportionate to his known sources of income which the public servant cannot satisfactorily account for.

Explanation 2. – The expression “known sources of income” means income received from any lawful sources.] [Substituted by Act No. 16 of 2018, dated 26.7.2018.]

(2) Any public servant who commits criminal misconduct shall be punishable with imprisonment for a term which shall be not less than one year but which may extend to seven years and shall also be liable to fine.

The court addressed the above contention of the appellants and reasoned the following aspects : (1) The decision in Selvi Jayalalitha would be fully applicable, as the Court therein after a detailed examination of previous rulings laid down that IT returns and orders passed in IT proceedings are not conclusive proof; (2) the decision in Selvi Jayalalitha involved a complete criminal trial and the Supreme Court sat in appeal against the order of acquittal passed by the High Court. It was therein held that IT returns or order could at best be considered pieces of evidence which are to be considered along with other materials; (3) Though admissible as evidence, the IT returns or order’s probative value depends on the nature of information furnished and findings recorded; (4) Such IT returns and orders ipso facto do not conclusively prove or disprove a charge.

“32. Therefore, in the present case, the probative value of the Orders of the Income Tax Authorities, including the Order of the Income Tax Appellate Tribunal and the subsequent Assessment Orders, are not conclusive proof which can be relied upon for discharge of the accused persons. These orders, their findings, and their probative value, are a matter for a full-fledged trial. In view of the same, the High Court, in the present case, has rightly not discharged the appellants based on the Orders of the Income Tax Authorities”

The Ratio In Radheyshyam Kejriwal That Exoneration In Civil Adjudication Disallows Criminal Prosecution, Not Applicable To Present Case

The Court rejected the argument of the appellants that when there is an exoneration on merits in a civil adjudication, a criminal prosecution on the same set of facts and circumstances wouldnot be permitted. In contending so, the appellants mainly placed reliance upon the decision in Radheshyam Kejriwal vs State Of West Bengal & Anr.

In Radheyshyam Kejriwal, the petitioner faced both criminal prosecution and civil proceedings under the same act, that was Foreign Exchange Regulation Act(FERA), 1973 for payments made by him in Indian currency in exchange for foreign currency without any general or specific exemption from the Reserve Bank of India. When the adjudicating officer therein did not find any substantial documentary evidence to prove alleged transactions falling foul of the FERA and thus directed to drop the proceedings.

The Supreme Court in the above case observed that both the adjudication proceedings and criminal prosecution would arise on the same facts and under the provisions of the same Act, i.e. FERA. Therefore the court held that exoneration on merits in the civil proceedings would become valid grounds for not criminal trial on the same set of circumstances.

However, the bench distinguished the principle laid in Radheyshyam Kejriwal from the present case, wherein while the criminal prosecution is under the PCA, the civil proceedings which are being relied upon for discharge are through the exoneration under the Income Tax (IT) Act .

37…..The scope of adjudication in both of these proceedings are vastly different. The authority which conducted the income tax proceedings and the authority conducting the prosecution is completely different (CBI). The CBI was not and could not have been a party to the income tax proceeding. Given the said factual background, the decision in Radheyshyam (supra) is not applicable to the present case.

Finding a prima facie case in the present facts, without concerning itself of the merits, the Court acceded to the arguments of the learned ASG in accepting that no valid grounds for discharge have been made by the appellants.

43. We are not to conduct a dress rehearsal of the trial at this stage. The tests applicable for a discharge are well settled by a catena of judgments passed by this Court. Even a strong suspicion founded on material on record which is ground for presuming the existence of factual ingredients of an offence would justify the framing of charge against an accused person [Onkar Nath Mishra & Ors. v. State (NCT of Delhi) & Anr. (2008) 2 SCC 561 Paragraph 11]. The Court is only required to consider judicially whether the material warrants the framing of charge without blindly accepting the decision of the prosecution [State of Karnataka v. L. Muniswamy & Ors. (1977) 2 SCC 699 Paragraph 10]. Applying these principles to the present case, we accept the submission of the learned ASG that the appellants have not made out the case to say that the charge is groundless.

Furthermore, addressing the issue of the minority age of appellant Puneet during the period of the check, the Court stated that since the last 7 years of the check period, the appellant ceased to be a minor and that such a defence will be available before the Trial Court once the trials commences.

Dismissing the appeal, the bench directed the trial to be concluded expeditiously considering its pendency for nearly 25 years now.

46. For all the above reasons, we find no merit in these appeals and the appeals are dismissed. The interim orders stand vacated. All pending applications stand closed. The trial has been pending for nearly 25 years. We direct that the trial be expeditiously concluded and, in any case, on or before 31.12.2024. Needless to mention that the observations made herein are only in the context of the discharge proceedings.

Case Details: Puneet Sabharwal v. CBI SLP (Crl) No 2044/2021; RC Sabharwal v. CBI SLP (Crl) No 2685/2021

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