Income Tax Department finds Rs 5 crore cash in his house;
Know how a 2008 circular saved him from prosecution
Sep 11, 2025
Synopsis
The Supreme Court overturned Krishnaswami's tax evasion prosecution, citing the Income Tax Department's violation of its own circulars. The court emphasized that CBDT circulars are binding and the department failed to prove willful tax evasion. This ruling reinforces the importance of procedural compliance and the conclusiveness of Settlement Commission findings, setting a precedent for future tax prosecution cases. Read more.
On April 2016, the income tax department conducted a search raid operation in Krishnaswami’s residence and found Rs 5 crore (4,93,84,300) cash which they considered as unaccounted and thus seized it. This raid was conducted under Section 132 of the Income Tax Act, 1961 and after the raid, Krishnaswami's statement under Section 132(4) was taken. Later on, in 2017, he was issued a show-cause notice asking why the tax department shouldn’t initiate prosecution proceedings against him.
In 2017, he appealed against this show-cause notice in Madras High court, but it got dismissed the same year. He then filed a second appeal with the High Court, and this legal tussle dragged on for several years.
While this High Court battle was going on, Krishnaswami filed an application under Section 245C in 2018 before the Chennai Income Tax Settlement Commissioner , where he disclosed all his additional income and requested immunity from penalties and prosecution regarding the alleged evasion of proposed tax.
In 2019, the Income Tax Settlement Commission, partly allowed his application, granting him immunity from penalties, but refrained from granting immunity from prosecution due to pendency of quashing petition (the 2017 2nd appeal) before the Madras High Court. The Settlement Commission partly allowed his application because he could prove the source for most of the Rs 5 crore cash, except for Rs 61.5 lakh in undisclosed income.
In 2020, the Madras High Court dismissed his petition once more, and observed that for the assessment year 2017-2018, the amount of cash seized has not been shown in his earnings, which may amount to evasion of proposed tax.
Due to the Madras High Court dismissing his second petition, he ended up facing trial for an offence where settlement was entered by the Income Tax Department (Settlement Commission) with him, granting him immunity from levy of penalty. After that, he appealed to the Supreme Court of India.
On August 28, 2025, the Supreme Court said that the prosecution initiated by the Income Tax Department was in violation of a tax circular dated April 24, 2008. They said that the circulars issued by the tax department are binding on the authorities and can tone down the rigour of the statutory provision. While giving relief to Krishnaswami in this case, the Supreme Court ordered the income tax department to pay him a cost of Rs 2 lakh.
The Supreme Court also said that such willful non-compliance of the income tax department’s own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability. (This judgement –2025 INSC 1048 arising out of special leave petition (SLP) number 3618-3620 of 2024 is a reportable judgement meaning that it sets a binding precedent for other cases).
Check out the details below to find out how Krishnaswami won this case and how a circular from 2008 , a prosecution manual from 2009 and six legal precedents in Supreme Court judgements played a key role in his victory.
Supreme Court says it will answer the following two questions of law
The judgment was delivered by a Bench of Justice J.K. Maheshwari and Justice Vijay Bishnoi. The Justice(s) said that the following questions fall for consideration:
1.Whether continuation of the prosecution initiated by the revenue under Section 276C (1) against the appellant after passing an order by the Settlement Commission, would amount to abuse of process of Court?
2.Whether in the facts of the present case, the High Court was justified to dismiss the quashing petition filed by the appellant, and if not, what relief can be granted?
Analysis of the Supreme Court about Section 276C
The Supreme Court said that both the questions of law are inter-connected and the facts and legal points have to be read simultaneously thus Section 276C of the Income Tax Act, 1961 needs to be analyzed.
The Supreme Court said that Section 276C deals with two situations:
Sub-section (1) pertains to a wilful attempt to evade tax, penalty, or interest that is ‘chargeable’, ‘imposable’, or related to ‘under-reporting of income’.
In contrast, sub-section (2) addresses the wilful attempt to evade the ‘payment’ of any tax, penalty, or interest under the Act.
The Supreme Court said that thus both sub-sections (1 & 2 of 276C) operate in separate spheres and different stages.
The Supreme Court said that the fundamental distinction between the applicability of sub-section (1) and sub-section (2) lies in the stage at which the offence allegedly occurs.
Section 276C (1) is primarily intended to deter and penalize wilful and deliberate attempts by an assessee for evasion of taxes, penalties and interest prior to their imposition or charging. The provision applies where there is a conscious and intentional effort to evade tax liability, distinguishing such conduct from bona-fide errors or differences in interpretation.
The gist of the offence under sub-section (1) of Section 276C lies in the wilful attempt to evade the very imposition of liability, and what is made punishable under this sub-section is not the ‘actual evasion’ but the ‘wilful attempt’ to evade as described in the proviso to Section 276C.
The Supreme Court said that for the allegations as alleged against Krishnaswami, prosecution under Section 279(1) was initiated by the respondent-Deputy Director of Income-tax (DDIT) in accordance with sanction given by PDIT. Krishnaswami also challenged the jurisdiction of the DDIT before the High Court, contending that she was not competent to initiate prosecution under Section 279(1) of the Income Tax Act, 1961.
The Supreme Court said that in addition to the other offences, looking at the allegations of the present case, the prosecution under Section 276C may be lodged with permission of the PDIT. Sub-section (1) (a) creates a bar that the person shall not be proceeded under Section 276C in relation to the assessment for the assessment year of which penalty imposed or imposable on him, has been reduced or waived.
Supreme Court: Wanchoo Committee’s recommendations resulted in an amendment which specified the power of Settlement Commission
The Supreme Court said that the Income Tax Department envisages a robust settlement mechanism under Chapter XIXA, which is titled – ‘Settlement of Cases’. It was inserted by means of the Taxation Laws (Amendment) Act, 1975 (41 of 1975) w.e.f. April 1, 1976.
The Supreme Court said that this amendment was brought pursuant to the recommendations of the ‘Direct Taxes Enquiry Committee’, popularly known as the ‘Wanchoo Committee’, report of December, 1971.
The Supreme Court said: “In furtherance to recommendations of the Wanchoo Committee, an amendment was brought adding Section 245H, specifying the power of the Settlement Commission to grant immunity from prosecution and penalty.”
The Supreme Court said that upon bare reading of the Wanchoo Committee’s recommendations it is clear that the assessee from whom the recovery of the unaccounted money has been allegedly reported, may apply before the Settlement Commission disclosing full and true income and the manner in which such income was derived.
The Supreme Court said that on such application, the Settlement Commission as it thinks fit, may grant immunity from penalty and prosecution of any offence under the Income Tax Act, 1961 or under the Indian Penal Code or under any other Central Act on such terms and conditions with respect to the subject matter covered under the settlement.
The Supreme Court said:
“Indeed, the proviso to Section 245H(1) is an exception from granting immunity in case where the complaint has been lodged before the date of receipt of application for settlement. At the same time, we cannot lose sight that the prosecution in either situation of Section 276C(1) ought to be for wilful attempt to evade or pay tax.”
“On literal construction of the first proviso, the prosecution initiated before the date of receipt of the application under Section 245C is saved, and the second proviso restrict the Settlement Commission to grant immunity from the prosecution as specified therein.”
The Supreme Court said that these provisions mentioned above do not, in any manner, affect the basic principles of criminal law that the prosecution has to prove the case on its own.
The Supreme Court said: “In the facts, for an offence under Section 276C(1), for which a prosecution was lodged, wilful attempt to evade tax or penalty, which may be imposable or chargeable, mens rea of the assessee is required to be proved.”
The Supreme Court also said that in absence, lodging such prosecution would result in futility. Therefore, the ancillary question which arises is about the efficacy of the continuation of the complaint lodged, even though saved under the first proviso to Section 245H, hampering the power of the Settlement Commission to grant immunity from prosecution.
2008 tax circular was issued in backdrop of Wanchoo Committee report
The Supreme Court deep dived into why the 2008 tax circular came into existence.
The Supreme Court said that from the perusal of the background from the recommendations of Wanchoo Committee till the date amendment was brought introducing Section 245H in the Income Tax Act, 1961 granting power of immunity to Settlement Commission, the Income Tax department was facing the challenge of minimal prosecution and also for effectively proving the prosecution, what recourse ought to be taken was an issue before them.
The Supreme Court said that simultaneously, the assessee who in a bona-fide manner had disclosed the excess earnings specifying the source without any suppression, were facing unnecessary prosecution. Therefore, to streamline the said situation the revenue has issued guidelines time and again. In the guidelines, it was specified that when an assessee is making an attempt to evade tax or its payment or penalty, if established, it is incumbent on the officers of the revenue to lodge the prosecution. In this regard, a circular dated April 24, 2008 was published.
The Supreme Court said the intent of this settlement scheme is indicative of the fact that the Income Tax Department shall proceed to file prosecution/complaint only in those cases wherein penalty exceeding Rs 50,000 has been imposed by Income Tax Appellate Tribunal (ITAT), within 60 days from the date of order of ITAT. The Directorate of Income Tax, (PR PP & OL) has also published the Prosecution Manual, 2009, prescribing the ‘procedure for launching prosecution’. In Clause 1.4 of Chapter III, specifying when the prosecution can be initiated.
Tax dept’s 2008, 2009 circular and 2009 manual is binding in prosecution cases
The Supreme Court said that on September 9, 2019 the Central Board of Direct Taxes (CBDT) issued clarification about the criteria to be followed for launching prosecution in respect of certain categories of offence under the Income Tax Act, 1961 including Section 276C(1).
The Supreme Court said that the tax department’s 2008 circular and prosecution manual of 2009 and CBDT’s 2009 circular provide when the prosecution ought to be lodged by the tax department.
The Supreme Court said that these circulars have been issued to regulate the lodging of prosecution in genuine cases and to weed out the problems of the tax payers, and also to understand when the prosecution for Section 276 ought to be lodged and continued. The said circular and clarification have been brought after the statutory scheme of Section 245H(1) and the appended proviso.
The Supreme Court said that in multiple other cases, the court unambiguously held that the circulars issued by the Income Tax Department are binding on the authorities, and can tone down the rigour of the statutory provision. Therefore, it can be concluded that the circulars as discussed above are binding on the authorities who are administering the provisions of the Income Tax Act, 1961.
The Supreme Court said that simultaneous reading of the precedents set by other cases and various circulars issued by the department, it can be safely culled out that if an assessee has made suppression of income without disclosing the manner in which the excess amount was earned and concealed the account making wilful attempt to evade the tax which may be imposable and chargeable or payable, he/she is required to be prosecuted.
The Supreme Court said that therefore the recourse to lodge prosecution was made permissible subject to the department’s circular dated April 24, 2008 which provided for confirmation by ITAT in case the penalty imposed under Section 276C(1) is exceeding Rs. 50,000.
The Supreme Court said that It is relevant here to note that the said circular was in vogue on the date of the grant of sanction by PDIT to DDIT for lodging the prosecution against the appellant. The said circular has been reaffirmed by the Prosecution Manual, 2009 and the clarification issued by the CBDT in 2019.
The Supreme Court said: “As such, the circulars discussed above, were binding on the authorities and required to be adhered to while lodging the prosecution by the Revenue.”
Precedents referred to:
1.‘Ranadey Micronutrients Vs. CCE
2.‘Paper Products Ltd. Vs. CCE
3.‘UCO Bank Vs. CIT
4.‘Commissioner of Central Excise, Bolpur Vs. Ratan Melting & Wite Industries
5.J.K. Lakshmi Cement Limited Vs. Commercial Tax Officer, Pali
6.Commissioner of Central Excise and Service Tax, Rohtak Vs. Merino Panel Product Limited
How do these 2008 circulars and 2009 manual apply to Krishnaswami’s case?
The Supreme Court said that in the present case, the complaint was filed by DDIT after sanction of PDIT before the Additional Chief Metropolitan Magistrate (E.O.II), Egmore, Chennai, on August 11, 2018.
The Supreme Court said that after this an application under Section 245(C) was filed by Krishnaswami before the Settlement Commission later. On the date of lodging the prosecution, the finding of concealment of income or imposition of the penalty of more than Rs 50,000 has not been recorded by the ITAT. Nothing has been brought on record to show that any wilful attempt to evade the payment of tax by assessee was made.
The Supreme Court also said that no explanation has been put forth by the income tax department to demonstrate as to why PDIT or DDIT did not comply with the procedure while lodging prosecution in this case.
The Supreme Court said: “Therefore, in our view, the act of the authority in continuing prosecution is in blatant disregard to their own binding circular dated April 24, 2008 and in defiance to the guidelines of the Department.”
Settlement Commission’s order recorded a finding that the overall additional income is not on account of any suppression of any material facts
The Supreme Court said that when the Settlement Commission’s 2019 order is read it is clear that in the settlement proceedings, Krishnaswami has disclosed all the facts material to the computation of his additional income and fully satisfied the provisions of Section 245H.
The Supreme Court said that the Settlement Commission recorded a finding that overall additional income is not on account of any suppression of any material facts and it does not disclose any variance from the manner in which the said income had been earned. As such the immunity from penalty under Income Tax Act, 1961 was granted in exercise of powers under Section 245H.
The Supreme Court said: “From perusal of Section 245-I, it is clear that every order of settlement shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided, be reopened in any proceeding under the Act or under any other law for the time being in force.”
Supreme Court says: The Income Tax department willfully ignored its own directives
The Supreme Court said that in conclusion they can safely hold that the prosecution lodged with the help of proviso to sub-section (1) to Section 245H was in defiance to the circular dated 24.04.2008, which was in vogue.
The Supreme Court said:
“It was the duty of the PDIT and DDIT to look into the facts that in absence of any findings of imposition of penalty due to concealment of fact, the said prosecution cannot be proved against the assessee.”
“It seems, even after passing the order by the Settlement Commission on 26.11.2019, it was brought to the notice of the High Court, but the authorities were persistent to pursue the prosecution without looking into the procedural lapses on their part.”
“Such an act cannot be construed in the right perspective and the Revenue have acted in blatant disregard to binding statutory instructions.”
The Supreme Court said: “Such willful non-compliance of their own directives reflects a serious lapse, and undermines the principles of fairness, consistency, and accountability, which in any manner cannot be treated to be justified or lawful.”
Supreme Court final judgement
The Supreme Court of India in its order dated August 28, 2025 said that in terms of Section 245-I, the findings of the Settlement Commission are conclusive with respect to the matters stated therein.
The Supreme Court said that once such an order was passed, it was incumbent upon the authorities to inform the High Court that continuation of the prosecution would amount to an abuse of the process of law, in particular when the Settlement Commission did not record any finding of wilful evasion of tax by the Krishnaswami.
The Supreme Court said that even otherwise, it was the duty of the High Court to examine the facts of the case in their right context and assess whether, in light of the circumstances, the continuation of the prosecution would serve any meaningful purpose in establishing the alleged guilt.
Judgement:
“Upon a holistic consideration of the matter, we are of the view that the conduct of the authorities lacks fairness and reasonableness, and the High Court’s approach appears to be entirely misdirected, having failed to appreciate the factual and legal position in right earnest.
In view of the foregoing discussions, we are constrained to allow these appeals setting aside the order impugned passed by the High Court.
It is directed that prosecution lodged by the Revenue (Income Tax Department) against the appellant (Krishnaswami) shall stand quashed.
In the facts and circumstances of the case as discussed hereinabove, we are inclined to impose costs against the Revenue (Income Tax Department) which is quantified at Rs 2,00,000 payable to the appellant (Krishnaswami). Pending application(s), if any, shall stand disposed of.
What is the significance of this judgement?
ET Wealth Online reached out to a number of experts about the significance of this judgement for taxpayers. Here’s what they said:
Chartered Accountant Ashish Karundia, says: “The Supreme Court’s ruling serves as a strong reminder that the Income Tax Department is bound to follow its own prescribed procedures and legal safeguards before initiating criminal prosecution. The Court’s decision to quash the proceedings and impose costs on the Department reinforces the principle that a mere recovery during a search is not sufficient ground for prosecution, particularly in cases where the assessee has voluntarily approached the Settlement Commission, made full and true disclosure, and where no attempt to conceal income has been established.”
Chartered Accountant (Dr.) Suresh Surana, says: The Supreme Court’s decision in this case resulted in the Income Tax Department losing the case primarily because it failed to follow mandatory procedural requirements and could not establish willful tax evasion under Section 276C(1) of the Income-tax Act, 1961. The Supreme Court quashed the prosecution because:
Settlement Commission findings are conclusive: The Commission found that the assessee had fully disclosed all facts, that the additional income was not from suppression of material facts, and therefore granted immunity from penalty. Under section 245-I, such findings are final and binding.
No finding of wilful evasion (‘mens rea’): Prosecution under Ssection 276C(1) requires proof of a “wilful attempt” to evade tax. Since the Commission did not record any finding of wilful evasion, prosecution could not be sustained.
Procedural lapses: The rRevenue pursued prosecution despite knowing that the Settlement Commission order was conclusive and despite its own procedural rules, which the Supreme Court held to be an “abuse of process of law”.
This landmark judgment establishes several crucial precedents that will significantly impact tax prosecution practices in India. Some of which are as follows -
The tax department must strictly adhere to all procedural requirements specified in CBDT circulars before initiating prosecution. Any deviation will result in quashing of proceedings.
Settlement proceedings gain enhanced sanctity, encouraging voluntary disclosure while preventing revenue authorities from subsequently questioning the Commission's findings in criminal cases.
Kritika Seth, Founding Partner, The Victoriam Legalis (TVL), says: The case emphasizes on the importance that departmental circulars issued by the CBDT are binding on tax authorities and must be strictly adhered to while initiating prosecution under the Income-tax Act. The Supreme Court held that continuation of prosecution, despite the Settlement Commission granting immunity from penalty and in defiance of the CBDT circular, amounted to abuse of process. It reaffirmed that orders of the Settlement Commission under Section 245-I are conclusive, and prosecution cannot be sustained without proof of ‘mens rea’ or wilful tax evasion. Authorities disregarding binding circulars undermine fairness, consistency, and accountability.
Soayib Qureshi, Partner, PSL Advocates & Solicitors, says: As the prosecution was instituted in contravention of CBDT's binding Circular dated 24 April 2008 and ensuing Prosecution Manual/2019 directives. These instructions require that a prosecution under Section 276C(1) be pursued only after concealment penalty is imposed and confirmed by ITAT (and, post-2019, subject to Collegium approval below Rs 25 lakh). The department disregarded this and instituted the case prematurely.
Independently, the order of the Settlement Commission noted full and true disclosure and released immunity from penalty; a conclusion conclusive under Section 245-I. True, the Commission itself could not grant immunity from prosecution (as the case pre-dated the settlement application), but once the Hon’ble Apex court realized departmental officers had acted in flagrant disregard of binding directions and that mens rea for "wilful attempt to evade tax" was knocked out by the findings of the settlement, the prosecution was held to be an abuse of process.
The judgment solidifies two important principles:
a) CBDT circulars are binding on the Revenue; prosecutions instituted under procedures that are contrary to them can be quashed as having failed to comply with legally mandated process.
b) Settlement Commission findings are compelling. If the Commission acknowledges full disclosure and immunity from penalties, continued prosecution of a criminal tax case is oppressive, notwithstanding the fact that the Commission had no power to quash the case under Section 245H.
Alay Razvi, Managing Partner, Accord Juris, says: The case sets a precedent that CBDT circulars and departmental manuals regulating prosecution are binding: tax authorities must strictly comply with these directions, and prosecutions launched in defiance can be quashed for procedural abuse. Even if immunity from prosecution is not available under settlement law, procedural lapses, especially ignoring requirements like prior ITAT confirmation, can nullify prosecutions.
[The Economic Times]
