C. Sambasiva Rao vs The Deputy Commissioner Of Income Tax on 11 July, 2022

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Telangana High Court

C. Sambasiva Rao vs The Deputy Commissioner Of Income Tax on 11 July, 2022

Bench: D. Nagarjun

           THE HONOURABLE DR. JUSTICE D. NAGARJUN

               CRIMINAL PETITION No.42 OF 2019

ORDER:

This petition is filed by the petitioners/A3 and A4 to quash the proceedings in C.C.No.273 of 2017 which was taken cognizance under Sections 276-C(2) read with 278B of the Income Tax Act, 1961 (for short, "the Act") on the complaint filed by the Deputy Commissioner of Income Tax.

2. The contents of the complaint in brief as under:

3. A1 is a company registered under the Indian Companies Act, 1956 having its registered office at Hyderabad. The petitioners herein are the Directors of A1 company and are shown as A3 and A4, along with another accused. A2 stated to have been died and the same was recorded in the proceedings sheet on 15.12.2017. A1 company has been manufacturing electric home appliances in the name of Vijay Home Appliances Limited.

4. A1 company has filed income tax returns for the assessment year 2014-15 on 10.03.2015 declaring the total income as Rs.3,97,65,300/- and as per the returns filed by it, 2 tax to a tune of Rs.1,58,55,018/- was fell due. However, A1 company has paid only Rs.89,750/- thereby the balance of Rs.1,57,65,230/- has to be paid. A1 company and its Directors evaded to pay the tax assessed as per the self-assessment tax thereby the company and its Directors are liable for punishment under Section 276C(2) read with 278B and 278E of the Act. Respondent/complainant has filed a complaint under Section 200 Cr.P.C., alleging that the accused have committed the offence punishable under Sections 276C(2) and 278 B of the Income Tax Act, which was taken on file by the learned Special Judge for Economic Offences, Hyderabad, as C.C.No.273 of 2017. Aggrieved by the same, the petitioners have filed this petition to quash the same on the following grounds:

5. The petitioners are mere Directors and they are no way responsible for the day to day affairs of the company. There is no averment in the complaint as to a specific and categorical role played by the petitioners to make them vicariously liable. The Directors shall be in-charge of the day to day affairs of the company in order to make them liable. The complaint must 3 specifically allege that at the time of offence, the petitioners were in-charge and were responsible for the conduct of the business.

6. The respondent/income tax department has filed the counter stating that the petitioners' company has failed to pay the self-assessment tax prior to filing of returns of income tax, which is mandatory under Section 140-A of the Act. Whenever an offence is committed by the company, the persons, who are responsible to the company, including the Directors, are liable for prosecution. As per Section 278B of the Act, the Directors are liable to prove that the offence was committed without their knowledge and that they have exercised their due diligence to prevent the commission of offence in order to get the relief from the liability. It is mentioned further that in the trial Court PWs.1 and 2 were examined-in-chief and posted for cross- examination of the accused. At this stage, this petition is filed.

7. As per Section 278-B of the Act, where an offence is committed by a company, every person, who at the time of commission of the offence, was in-charge and responsible for the company for the conduct of the business as well as the 4 company shall be deemed to be guilty of the offence. The petitioners being Directors were responsible for the affairs of the company and for the conduct of the business. The petitioners have not filed any evidence to show the specific role being played by each of the Directors. Therefore, prayed the court to dismiss the petition.

8. The assessee has filed the returns of the income without paying self-assessment tax admitted by the company and not complied with the provisions of Section 140-A of the Act. After receipt of the assessment order, notices under Sections 156 and 271 (1)(c) of the Act were issued, but, the assessee has not paid the demand of tax. Subsequent to that a notice under Section 279(1) of the Act was issued to the assessee, on which the accused has sought for time and accordingly, one more opportunity was given to the assessee by fixing date of hearing as 08.07.2016. In spite of it, the assessee has not availed the opportunity, thereby orders have been passed under Section 279(1) of the Act authorizing the complainant to file the complaint before the trial court.

9. Heard both sides and perused the record.

10. Now, the point for determination is whether the proceedings against the petitioners in C.C.No.273 of 2017 can be quashed?

11. The contention of the respondent/complainant Income Tax Department is that A1 company, which has to pay income tax of Rs.1,58,55,018/-, has paid only Rs.89,750/- keeping a balance of Rs.1,57,65,230/- for the assessment year 2014-15 and thereby committed default under Section 140-A of the Act as A1 company was supposed to pay the self-assessment tax before filing of returns. Admittedly, A1 company has not paid the tax as required under Section 140A. There is no dispute that the petitioners are the Directors of A1 Company.

12. The main ground on which the petitioners have challenged the prosecution is that in order to fasten the liability under Section 276C(2) of the Act, the complainant has to prove that the petitioners being Directors were in-charge and that they are responsible to the day to day activities of the company. According to the petitioners, the respondent/department has not mentioned in the complaint filed before the trial Court that the petitioners being Directors were in-charge and responsible 6 for the conduct of the business of the company. It is further submitted by the learned counsel for the petitioners that the petitioners, being the residents of Chennai, were not participating in the day to day affairs of the company. Therefore, sought for quashment of the complaint.

13. The complaint filed by the respondent/department was taken cognizance against the accused for the offence under Section 276C(2) read with 278B of the Act and numbered as C.C.No.273 of 2017. At the description paragraph i.e., para No.2 of the complaint the petitioners were shown as Directors of the company and that they are responsible for the day to day affairs of the company.

14. Now it is contended by the learned counsel for the petitioners that in order to fasten the liability, the complainant has to prove that the petitioners were not only responsible for the day to day affairs of the company but also prove that they were in-charge. It is submitted further that company must specifically mention that the petitioners were in-charge and responsible for the company.

Section 278B of the Act runs as under:

"278B. 3 Offences by companies (1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub- section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub- section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

(3) Where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or sub-section (2), such company shall be punished with fine and every person, referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (2), shall be liable to be proceeded against and punished in accordance with the provisions of this Act.

Explanation.- For the purposes of this section,-

(a) ' company" means a body corporate, and includes-

(i) a firm; and

(ii) an association of persons or a body of individuals whether incorporated or not; and

(b) "director', in relation to-

(i) a firm, means a partner in the firm;

(ii) any association of per sons or a body of individuals, means any member controlling the affairs thereof."

15. In order to fasten the liability, the person who alleged to have committed the offence must be in-charge of and was responsible for the conduct of the business of the company at the time of commission of offence. In the case on hand, the complainant has specifically mentioned at para 2 of the complaint that the petitioners are the Directors of the company and they are responsible for the day to day affairs of the company.

16. It is mentioned by the learned counsel for the respondent/complainant that the charges have already been framed by the trial Court and PWs.1 and 2 were examined in chief, however, cross examination by the petitioners is deferred and after deferring, this petition is filed for quashment of the complaint.

17. Therefore, the question falls for consideration of the Court is whether absence of a phrase that the petitioners are "in- charge of and were responsible" for the day to day affairs is a fatal to the complainant and the complaint can be quashed under Section 482 Cr.P.C?

18. Learned counsel for the petitioners has relied upon the judgment of the High Court of Andhra Pradesh in Neeta Bhalla Vs. S.M.S. Pharmaceuticals Limited, Hyderabad and another1. This case was decided by this Court when almost similar question came before the Court seeking quashment of a complaint under Section 138 of the Negotiable Instrument Act (for short, "the NI Act"). The issue in the said case was whether the Directors of the company can be made liable when the company has allegedly committed the offence. This Court has ultimately held at paragraphs 32 and 39 as under:

"32. An analysis of the judgments referred to hereinabove would in clear terms reveal the legal position that in order to fasten vicarious liability against a director of the company there must be clear, specific and unambiguous allegations made in the complaint. It is not as if every director of the accused-company can be roped in automatically and be proceeded against for the offence committed by the company under section 138 of the Act. The complainant can proceed against only such persons who at the time the offence was committed by the company were in charge of and were responsible to the company for the conduct of its business. Such persons could be directors, managers, secretary or the other officers of the company. Such persons "in charge" must mean that they were in overall control of the day-to-day business of the company or firm, as the case may be. A complaint based on wild imaginations is not a complaint at all in the eye of law. The accusation against each of the director/person/accused must be specific and unambiguous. The role played by each of the accused must be clearly stated in the complaint. The complaint if read as a whole must clearly disclose the role played by each of the directors of the company in the case of an offence committed by the company under section 138 of the Act. Any inartistic expression used in 1 2002 (1) ALT (Crl.) 127 (A.P.) 10 drafting the complaint cannot by itself be a ground for quashing the proceedings; but, at the same time, no complainant can be permitted to launch prosecution against all the directors of the company without there being a proper foundation in the complaint, itself, about the actual role played by them at the material point of time, when the offence is committed by the company. No prosecution would lie against a person or persons as the case may be on the simple accusation in the complaint that such person or persons were the director, executive director or an officer of the company at the material time when the offence was committed by the company. But at the same time it is equally well settled that this court in exercise of its power under Section 482 of the Criminal Procedure Code would not normally undertake any roving enquiry to find out as to the truth or otherwise of the allegations and accusations made in the complaint. The court cannot undertake any further enquiry if clear specific and unambiguous allegations are made against each of the persons arrayed as accused in the complaint about the role played at the material time when the offence is committed by the company. Mere repetition of the words incorporated in section 141 of the Act would not meet the requirement in law to rope in any and every director, or other officer, manager, secretary of the company as the case may be. There must be something more clearly stated in the complaint. A bald allegation by merely repeating those magic words mentioned in section 141 of the Act would not be enough. But in case where the complaint discloses the factual foundation against the persons arrayed as accused, the High Court in exercise of its inherent jurisdiction cannot interdict the further enquiry and trial.

39. The crucial issue is as to whether the petitioner herein, at the material time, when the offence was committed by the company, was in charge of and responsible to the business of A-1-company. The document upon which reliance is sought to be placed would in no manner advance the case of the respondent/complainant. The same is not at all relevant to decide the question as to whether the petitioner herein was responsible at the material time for the offence committed by the A-1-company."

19. Learned counsel for the petitioners has also relied upon the authority of the Hon'ble Apex Court in S.M.S. 11 Pharmaceuticals Limited vs. Neetha Bhalla and another2, wherein the Hon'ble Supreme Court has decided the issue as to whether the essential averments to be made in a complaint filed under Section 138 of the NI Act, in case if the company is stated to have been committed the offence. Paragraph 8 of the said judgment reads as under:

"8. The officers responsible for conducting the affairs of companies are generally referred to as directors, managers, secretaries, managing directors, etc. What is required to be considered is: Is it sufficient to simply state in a complaint that a particular person was a director of the company at the time the offence was committed and nothing more is required to be said. For this, it may be worthwhile to notice the role of a director in a company. The word "director" is defined in Section 2(13) of the Companies Act, 1956 as under:

"2.(13) 'director includes any person occupying the position of director, by whatever name called:"

There is a whole chapter in the Companies Act on directors, which is Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A perusal of these provisions shows that what a Board of Directors is empowered to do in relation to a particular company depends upon the role and functions assigned to Directors as per the Memorandum and Articles of Association of the company. There is nothing which suggests that simply by being a director in a Company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about day-to-day functioning of the company. As a director he may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may be that a Board of Directors may appoint sub- committees consisting of one or two directors out of the Board of the Company who may be made responsible for day-to- day functions of the Company. These are matters which form part 2 (2005) 8 SCC 89 12 of resolutions of Board of Directors of a Company. Nothing is oral. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its everyday affairs. We have discussed about the position of a Director in a company in order to illustrate the point that there is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon respective roles assigned to the officers in a company. A company may have Managers or Secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department-B regarding a cheque issued by the Secretary of Department-A which is dishonoured? The Secretary of Department-B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in Section 141, which extends the liability to officers of a company, is that such a person should be in charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements ? Not every person connected with a Compnay is made liable under Section 141. Liability is cast on persons who may have something to do with the transaction complained of. A person who is in charge of and responsible for conduct of business of a Company would naturally know why the cheque in question was issued and why it got dishonoured."

20. Learned counsel for the petitioners has also relied upon the judgment in S.M.S. Pharmaceuticals Limited vs. Neetha Bhalla and another3, wherein the provisions of Section 138 of the N.I. Act were challenged and the Hon'ble Court at paragraph 30 held as under:

(2007) 4 SCC 70 13 "30. It is, therefore, an authority for the proposition that the High Court is not completely denuded of its power to exercise inherent jurisdiction for the second time."

21. Learned counsel for the petitioners has submitted that Section 278-B of the Income Tax Act and also Section 141 of the N.I. Act are almost similar, except the fact that in the beginning of the provision so far as Section 278-B of the Act is concerned, it shows where an offence under this Act has been committed by a company, whereas in case of Section 141 of the N.I. Act, it is mentioned that if the person committing an offence under Section 138 is a company, and rest of the provisions are identical. In order to demonstrate that the authority submitted by him decided under Section 138 of the N.I. Act can also be made applicable to the case on hand under the Act, learned counsel has also filed another authority decided by the Madras High Court in K. Subramanyam vs. Income Tax Officer4, wherein it is held at paras 5, 6 and 7 as under:

"5. Therefore, there is no allegation in the complaint that the petitioner at the time of the commission of the offence was in charge of and responsible to the company for the conduct of the business. What is alleged in the complaint is that the second and third accused are responsible to the first accused firm for the conduct of the business. The complaint does not show that at the time the offence was committed, the third 4 1991 SCC Online Mad. 555 14 accused was in charge of and was responsible to the company for the conduct of the business. It is only "and" and not "or".

The prosecution has to make out the allegation first that the third accused was in charge of and was responsible to the firm. But the words "in charge" were absent in the complaint. These two ingredients have to be alleged and then proved by the prosecution. When there is no allegation in the complaint itself, they cannot improve it by letting in evidence later on.

6. Learned counsel for the petitioner cited a decision of the Supreme Court reported in Girdhari Lal Gupta v. D.N. Mehta (1971) 3 SCC 189: AIR 1971 SC 2162, in which their Lordships of the Supreme Court observed in para 6 as follows (at page 2163):

"What then does the expression 'a person in charge and responsible for the conduct of the affairs of a company mean? It will be noticed that the 'company' includes a firm or other association, and the same test must apply to a director-in-charge and a partner of a firm in charge of a business. It seems to us that in the context a person 'in charge' must mean that the person should be in over all control of the day-to-day business of the company or firm. This inference follows from the wording of Section 23C(2)."

7. There is no allegation that the third accuse/petitioner herein had control of the day-to-day business of the company or firm on the particular date. Learned counsel for the petitioner also relied upon the judgment reported in Javer (D.K.) v. State, (1985) L.W. Crl. 45 (Singaravelu J.). The learned Judge in the above-quoted judgment observed that "a perusal of the complaint shows that the allegation so far as these petitioners are concerned are vague and they are impleaded just because they are directors of the company. It is not even averred in the complaint as to the part played by the petitioners in the business. There are not even allegations regarding the part played by these petitioners in the business except that they are mere directors. None of them is managing director, and the managing director, if any, has not been impleaded as an accused. In these circumstances, the prosecution against the petitioners, who are mere directors, is not sustainable."

22. Therefore, the complainant is expected to mention in the complaint the petitioners, being the Directors, "were in-charge 15 and responsible" to the company for the conduct of the business. In the complaint though the second limb of the phrase is mentioned, the first limb of the said phrase that the petitioners were in-charge of is missing.

23. Further, whether the complainant is required to mention both the limbs of the phrase specifically or if he narrates the incidents of involvement of the accused in the day to day affairs of the company to hold that though there is no specific averment that the petitioners were in-charge, the averments made before the Court would reveal that they are in-charge.

24. The rational in the judgments cited above is that in order to fasten the criminal liability against the petitioners, the de- facto complainant must allege that the petitioners are in-charge and responsible for the day to day affairs of the company. Paragraphs 2 and 6 of the complaint filed before the Court by respondent No.1, disclose that the accused are the Directors of the company and they are responsible for the day to day affairs of the company for conducting of the business. If these averments in the complaint are taken into consideration, the 16 contention of the learned counsel for the petitioners can be accepted.

25. However, it is to be noted that this petition is filed in the year 2019, whereas the de-facto complainant has filed the complaint before the trial Court in 2017. After filing of the case, cognizance was taken, summons were issued, after accused made their appearance, charges were framed and evidence of the respondent/complainant was also commenced, PWs.1 and 2 were examined-in-chief and at the time of cross- examination, the petitioners have filed this complaint before this Court seeking quashment of proceedings.

26. The petitioners are expected to approach this Court without any delay i.e., at the initial stages of filing of the complaint. Then this Court would have considered the pleadings available basing on the complaint filed by the de-facto complainant in the trial Court, but, as observed above, as on the date of filing of this complaint, the material available before the Court, as filed by the complainant themselves are the complaint, charges framed by the trial Court and examination- in-chief of PWs.1 and 2. All these documents are required to be 17 considered now to consider the case of the petitioners. As already observed, the averments of the complaint though disclose that the accused persons are responsible for the day to day affairs of the company, what is missing is that they are "in- charge of the company". However, the charges framed by the trial Court are relevant to consider at this stage. The trial Court has framed charge in respect of the petitioners also. Charge No.2 runs as under:

"SECONDLY:

That you A3 and A4 being the Directors of A1 company was in-charge of and was responsible for the conduct of the business of A1 company willfully and deliberately failed to pay the tax liability on the admitted income for the assessment year 2014-15 in spite of show cause notice and that you have committed an offence punishable under Section 276C(2) r/w. 278B of Income Tax Act, 1961 and within my cognizance.

And I direct that you shall be tried before this Court for the aforementioned charges."

27. Therefore, the trial Court has framed the charge that the petitioners were in-charge of and responsible for the conduct of the business and that charge was put to trial. Therefore, considering the fact that the charges are specifically framed as required under Section 278B of the Act and trial has also commenced, this Court is of the opinion that at this stage, the petitioners request for quashment of the complaint cannot be 18 considered and the petitioners are at liberty to take all the defences that they have taken here before the trial Court and the trial Court basing on the material available before it would pass appropriate order.

28. In the result, the criminal petition is dismissed.

Miscellaneous petitions, if any, shall stand closed.

_____________________ Dr. D. NAGARJUN, J Date: 11.07.2022 ES

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