Shital N. Shah and Others Vs. Income-tax Officer - Court Judgment

Excerpt:
direct taxation - assessment - sections 2 (2), 2 (31), 2 (35), 10, 194a, 204, 276b, 276bb and 276bb (1) of income tax act, 1961 - petitions filed to quash proceedings initiated against petitioners - company itself including principal officer thereof will be person responsible for paying if payer is company - company itself including principal officer thereof liable for prosecution for alleged contravention - section 2 (35) useful to find out as to who is principal officer - under section 278b basic requirement which prosecution must prove - petitioners were in charge of and were responsible to firm for conduct of business of firm and petitioners can be vicariously prosecuted along with company - proviso to section 278b (1) comes into operation only after initial onus cast on prosecution under section 278b gets discharged - allegations in complaint only mere repetition and no details given about role played by any of petitioners and extent of their liability - prosecution cannot be allowed to be proceeded with - proceedings quashed. - - 2. the petitioners in each one of these petitions are being prosecuted at the instance of the respondent who is the income-tax officer, for the alleged commission of offences punishable under section 276b read with section 278b of the income-tax act, 1961. the allegation against them is that they had failed to deduct and remit the tax deducted at source under section 194a of the income-tax act and credit the same to the government of india within the time prescribed under the rules. 7. the supreme court had considered an analogous provision under the prevention of good adulteration act in municipal corporation of delhi v. there may be partners, better known as sleeping partners who are not required to take part in the business of the firm.arunachalam, j.1. the petitioners in criminal miscellaneous petitions nos. 10575 of 1986, 10577 of 1986 and 10579 of 1986 are the same. these petitioners are accused nos. 2 to 7 in c. c. nos. 968 of 1986, 969 of 1986 and 960 of 1986, pending on the file of the additional chief metropolitan magistrate (e. o. ii), egmore, madras. the first four petitioners in criminal miscellaneous petition no. 10581 of 1986 are petitioners nos. 1 to 4 in the other three petitioners. the fifth petitioner in criminal miscellaneous petition no. 10581 of 1986 is not concerned with the other calendar cases. the petitioners in criminal miscellaneous petition no. 10581 of 1986 are the accused in c. c. no. 1971 of 1986 pending on the file of the same magistrate. 2. the petitioners in each one of these petitions are being prosecuted at the instance of the respondent who is the income-tax officer, for the alleged commission of offences punishable under section 276b read with section 278b of the income-tax act, 1961. the allegation against them is that they had failed to deduct and remit the tax deducted at source under section 194a of the income-tax act and credit the same to the government of india within the time prescribed under the rules. these four prosecutions have been initiated for different assessment years. 3. in these petitions filed under section 482, criminal procedural code, to call for the records and quash the pending proceedings in so far as they relate to the petitioners. mr. v. gopinath, learned counsel appearing on behalf of the petitioners, contended that, in the complaint, except stating that, at the material time, the petitioners, who were partners of the firm were in charge of, and responsible for, the conduct of the business of the firm, nothing more had been alleged by reference to any act performed by them, even to remotely connect them with the offences alleged. he further contended that, under section 204(iii) of the income-tax act, the 'person responsible for paying' meant, in the case of credit or, as the case may be, payment of any other sum chargeable under the provisions of the act, 'the payer' himself, or, if the payer is a company, 'the company' itself including the principal officer thereof.'principal officer' has been defined under section 2(35) of the act, as hereunder :- 'section 2(35) 'principal officer' used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means - (a) the secretary, treasurer, manager, or agent of the authority, company, association or body, or (b) any person connected with the management of administration of the local authority, company, association or body upon whom the income-tax officer has served a notice of his intention of treating him as the principal officer thereof.' 4. learned counsel, therefore, contended that the petitioners, stated to be partners, do not, fall within the category of the secretary, treasurer, manager, or agent of the authority, company, or body, and further, they had also not been served with any notice by the income-tax officer divulging his intention of treating any one of them as the principal officer connected with the management or administration of the firm. it was his further submission that, under section 276b of the income-tax act, the term 'person : mentioned therein would take in its fold only those persons contemplated by section 204(iii) and section 2(35) of the act. it will be relevant, he urged, to note at this stage that section 194a casts the responsibility on any person not being an individual or a hindu undivided family 'who is responsible for paying' to a resident any income by way of interest other than income chargeable under the head 'interest on securities'. he finally contended that the provisions of section 278b relating to offences by companies would not also be attracted, since the provisions will have to be taken as a whole and, even if the section were to be applicable, the allegations in the complaint do not warrant survival of the prosecution any longer. 5. countering the arguments of learned counsel for the petitioners, mr. ramaswami k., appearing on behalf of the income-tax officer in all these petitioners, contended that paragraph 7 of the complaint specifically avers that the petitioners who were partners of the firm at the material time were in charge of and responsible to the firm for the conduct of the business of the firm and, d therefore, were equally punishable for the offences under section 276b read with section 278b of the income-tax act. he further contended that the actual responsibility exercised by each one of the partners would relate to the stage of evidence and the complaint need not contain such details and, therefore, it will not be open, in the exercise of inherent powers, to quash the pending proceedings without affording an opportunity to the prosecution to let in evidence about the individual liability of each one of the partners of the firm. 6. i have carefully considered the rival contentions of either counsel. the words 'any person who is responsible for paying' found in section 194a of the act have to be read in conjunction with section 204 of the act which furnishes the meaning of 'person responsible for paying'. the contravention alleged in these prosecutions relates to section 194a of the act and this contravention is covered under section 204(iii) of the act. this provision makes it abundantly clear that if the payer is a company, the company itself including the principal officer thereof will be the 'person responsible for paying'. if that be so, it is fairly apparent that the company itself including the principal officer thereof was liable for prosecution for the alleged contravention. section 2(35) would then step in to find out as to who the principal officer would be. this section has been extracted earlier and it appears to be clear that the partners of the firm do not fall within that fold unless the income-tax officer had served a notice on any of them of his intention of treating them as the principal officer of the firm, connected with the management or administration thereof. that not being the prosecution case, the present prosecution against the partners appears to be not sustainable at all. it is no doubt true that section 276b of the act reads, 'if a person fails to deduct, etc., etc., ' and 'person : has also been defined under section 2(31) of the act. but, the provisions of the act will have to be read as whole if the significance is of the provisions to be meaningful. under section 278b of the act, the basic requirement which the prosecution must prove will be that the petitioners were in charge of, and were responsible to, the firm for the conduct of the business of the firm, and it is only then that they can be vicariously prosecuted along with the company. the proviso to section 278b(1) of the act will come into operation only after the initial onus cast on the prosecution under the main section gets discharged. 7. the supreme court had considered an analogous provision under the prevention of good adulteration act in municipal corporation of delhi v. rama kishan rohatagi, : 1983crilj159 . the appex court, while agreeing with the high court that the proceedings initiated against the directors had to be quashed since the complaint, which averred that accused nos. 4 to 7 therein were in charge of, and responsible for, the conduct of the business of the company, was based on mere presumption on the ground that they were holding a particular office. it was further stated that, except that allegation, so far as the directors were concerned, there was not even a whisper, nor even a shred of evidence, nor anything to show, apart from the presumption drawn by the complaint, that there was any act committed by the directors from which a reasonable inference could be drawn that they could also be vicariously liable. 8. in yet another case decided by the supreme court in municipal corporation of delhi v. purshotam dass jhunjhunwala, : 1983crilj172 , a distinction was drawn while referring to rama kishan's case,, : 1983crilj159 . in the latter case, apart from the general allegation of the directors being in charge of, and responsible for, the conduct of the business of the company, at the time of the commission of the offences, the complaint had given complete details of the roles played by the respondents and the extent of their liability. it was not a case of merely drawing a presumption without any averment, for clear averments were made regarding the active role played by the respondents and the extent of their liability. in purshotam das jhunjhunwala's case, : 1983crilj172 , the trial was allowed to be proceeded with. applying the law laid down by the supreme court in both these cases, it is clear to my mind that the allegations in the complaint are only a mere repetition of the section and no details have been given about the role played by any of the petitioners and the extent of their liability. if that be so, the prosecutions cannot be allowed to be proceeded with. 9. it must also be noticed that the supreme court in sham sunder v. state of harayana : 1989crilj2201 , had the following observations to make (headnote of air) : 'more often it is common that some of the partners of a firm may not even be knowing of what is going on day-to-day in the firm. there may be partners, better known as sleeping partners who are not required to take part in the business of the firm. there may be ladies and minors who were admitted for the benefits of partnership. they may be ladies and minors who were admitted for the benefits of partnership. they may not know anything about the business of the firm. it would be a travesty of justice to prosecute all the partners and ask them to prove under the proviso to sub-section (1) of section 10 that the offence was committed without their knowledge. the obligation on the accused under the provisio to prove that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence, arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. the requisite condition is that the partner was responsible for carrying on the business and was, during the relevant time, in charge of the business. in the absence of any such proof, no partner could be convicted. thus, where the documents produced by the prosecution do not indicate even remotely that all the partners were doing the business of the firm and there was no other evidence on record on this aspect, it could not be said that when the offence was committed, all the partners were conducting the business of the firm.' 10. before closing this case, i must refer to the authorities cited by learned counsel for the respondent. in m. r. pratap v. v. m. muthukrishnan, ito : [1977]110itr655(mad) , ratnaval pandian j. (as he then was) held that 'a conjoint reading of sections 2(35) and 2(20) of the income-tax act, 1956, as they stood in 1965-66, would make it abundantly clear that the term 'principal officer' included the managing director in the case of a company. the subsequent amendments will not, in any way, alter the position with regard to the operation of the provisions of the income-tax act as against a managing director of a company when he has signed the return of the company in such capacity. the effect of section 278b introduced by the taxation laws (amendment) act, 1975, with effect from october 1, 1975, is only to make every person connected with the affairs of the company, apart from the managing director who had signed the return, also liable to be proceeded against the punished.' it is clear that the learned judge had no occasion to consider the issue involved in these prosecutions. we are not even concerned with a managing director, and all that the complaint states is that the petitioners were the partners of the firm, shown as the first accused, at the relevant time. 11. in bhagat singh v. ito , k. p. s. sandhu j. stated that a complaint against all partners was valid, if false statements concealing income had been made in the return submitted by the firm signed by one of the partners only, if the balance-sheet annexed thereto had been signed by all the partners. obviously, even that contingency does not arise on the facts of the present cases. 12. a decision of the supreme court in agrawal trading corporation v. assistant collector of customs : 1973crilj474 , was then relied upon for the proposition that once it was found that there had been a contravention of any of the provisions of the foreign exchange regulation act read with the sea customs act by a firm, the partners who were in charge of the firm's business and were responsible for the conduct of the same could not escape liability unless it was proved by them that the contravention took place without their knowledge or in spite of their having exercised all due diligence to prevent such contraventions. the case of girdhari lal gupta v. d. n. mehta, assistant collector of customs : 1971crilj1 , was also cited for the same proposition. the case in girdhari lal gupta v. d. n. mehta, assistant collector of customs : 1971crilj1 was taken note of by the apex court in the later case in agrawal trading corporation v. assistant collector of customers [1972] 42 comp cas 532 and there is no controversy whatsoever that the partners will be liable if there is material to show, by allegations referable to acts done by them, to hold them prima facie in charge of, and responsible for, the conduct of the affairs of the company. as observed by the supreme court in the later cases referred to earlier, if those minimum averments were not to be found in the complaint, the prosecution can be quashed in exercise of inherent powers. 13. the decision of s. natarajan j. (as he then was), in rayala corporation pvt. ltd. v. v. m. muthuramalingam, ito : [1981]129itr675(mad) , also relates to a managing director and the possibility of his being proceeded against as a principal officer. the law laid down therein will not be attracted to the facts of the present cases. i am unable to agree with learned counsel for the respondent that the allegations in the complaint are sufficient and only evidence may have to be let in further, to indicate the roles played by each one of the partners to connect them with the responsibility they owned to the firm in its day to day activity. as has been observed by the supreme court in municipal corporation of delhi v. ram kishan rohatagi, : 1983crilj159 , in deserving cases where evidence is brought on record against persons not being accused, the provisions of section 319, cr. p. c., will always be available. 14. on the aforestated reasoning, the prosecutions in c. c. nos. 968, 969, 970 and 971 of 1986, deserve to be quashed in so far as they relate to the petitioners herein and, accordingly, to that limited extent, these proceedings shall stand quashed.