Kerala High Court
M.A. Unneerikutty And Ors. vs Deputy Commissioner Of Income-Tax ... on 18 March, 1994
Equivalent citations: [1996]218ITR606(KER)
JUDGMENT B.M. Thulasidas, J.
1. These petitions filed under Section 482 of the Code of Criminal Procedure, 1973, are to quash the complaints and related proceedings in C. C. Nos. 50, 51, 52, 54, 53 and 55 of 1991 of the Additional Chief Judicial Magistrate (Economic Offences), Ernakulam. Kalpaka Tourist Home, Kozhikode, a firm, is an assessee to income-tax with P. A. 46-018-FV-4469/DC(A)/TCR. The respondent-complainant is the Deputy Commissioner of Income-tax, (Assessment), Special Range, Trichur. Annexure-A in these cases is a copy of the complaint laid against the firm and the petitioners as its partners. In the complaints it is alleged that the first accused-firm failed to deduct income-tax at source during the assessment years 1983-84 to 1988-89 as required under Section 194A(1) in respect of interest credited to the accounts of the firm without reasonable cause or excuse and that the firm as also the petitioners as partners who were in charge of and responsible for the conduct of the business of the firm have committed offences punishable under Section 276B(ii) read with Section 278B of the Income-tax Act, 1961. But then it is submitted by the petitioners that though they are partners of the firm they are not in charge of and responsible for the conduct of its business. Nothing had been alleged in the complaints specifically to that effect or to show that they were involved in the commission of the alleged offence. Reliance has been placed upon Section 204(iii) of the Act. It is also urged that they had not been served with any notice by the Income-tax Officer as to his intention to treat them or any one of them as the "principal officer" connected with the management or administration of the firm. According to them, the prosecution is an abuse of the process of the court and, therefore, the complaints and related proceedings in the above cases deserve to be quashed.
2. Heard.
3. The basic facts are not in dispute. The question for consideration in these petitions is whether there is now a case for this court's interference under Section 482 of the Code of Criminal Procedure for the reasons stated in the petitions. It has been alleged that tax was not deducted at source oh the interest credited to the accounts of the firm during the relevant period and that the petitioners as partners in charge of and responsible for the conduct of its business committed offences under Section 276B(ii) read with Section 278B of the Income-tax Act. Under Section 278B of the Act,--
"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. "
Under the proviso to Sub-section (1), no person shall be liable for any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence with respect to commission of the offence. Under Sub-section (2),--
". . . 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."
A director in relation to a firm is also a partner. Under Section 204,--
"For the purposes of Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D and Sections 195 to 203 and Section 285, the expression 'person responsible' for paying means,--
(iii) in the case of credit or, as the case may be, payment of any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof."
Under Section 2(35) of the Act,--
"'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 or 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."
It is evident that the words "any person responsible for paying" mentioned in Section 194A of the Act must be understood in the context of Section 204 of the Act, which makes it clear that the responsibility for paying the tax in a case where the company is a firm is that of the company itself including its principal officer. By virtue of Section 2(35) of the Act, partners do not come within the definition of "principal officer" unless the Income-tax Officer had served notice of his intention to treat them or any one of them as the principal officer of the firm connected with the management or administration. It seems necessary that the complainant must allege and show by some acceptable materials that the partners concerned were in charge of and responsible for the conduct of the business of the firm to make them also vicariously responsible along with it. A mere allegation to that effect will not be sufficient. There should be credible materials to show their active involvement in the conduct and management of the business of the firm. Short of stating that they were in charge of and responsible for the conduct of the business of the firm nothing had been mentioned in the complaints either about their role or as to the extent of their liability, which should not have been left to be inferred, At any rate the allegations seem to be insufficient to make them liable for the impugned act for which perhaps the firm and the principal officer, if any, alone would be liable.
4. Reliance was placed upon the decision of the Supreme Court in Municipal Corporation of Delhi v. Ram Kishan Rohtagi, AIR 1983 SC 67. In the complaint which was filed by the Food Inspector against the manufacturer of adulterated Morton Toffees, it was specifically alleged that accused No. 3 is the manager of accused No. 2 and accused Nos. 4 to 7 are the directors of accused No. 2 and as such they were in charge of and responsible for the conduct of business of accused No. 2 at the time of sampling. The Supreme Court observed (at page 70) :
"So far as the manager is concerned, we are satisfied that from the very nature of his duties it can be safely inferred that he would undoubtedly be vicariously liable for the offence ; vicarious liability being an incident of an offence under the Act. So far as the directors are concerned, there is not even a whisper nor a shred of evidence nor anything to show, apart from the presumption drawn by the complainant, that there is any act committed by the directors from which a reasonable inference can be drawn that they could also be vicariously liable. In these circumstances, therefore, we find ourselves in complete agreement with the argument of the High Court that no case against the directors (accused Nos. 4 to 7) has been made out ex facie on the allegations made in the complaint and the proceedings against them were rightly quashed."
The order of the High Court relating to the directors was quashed. The proceedings were ordered to continue against the company and the manager.
5. In Municipal Corporation of Delhi v. Purshotam Dass Jhunjunwala, AIR 1983 SC 158, the facts were slightly different. The Food Inspector, Municipal Corporation of Delhi, purchased samples of milk toffees for analysis and they were found adulterated by the public analyst. They were manufactured by the Hindustan Sugar Mills, Bombay. In the complaint, it was alleged, that "accused Ram Kishan Bajaj is the chairman, accused R.P. Neyatia is the managing director and accused Nos. 7 to 12 are the directors of the Hindustan Sugar Mills Ltd. and were in charge of and responsible to it for the conduct of its business at the time of Commission of offence". Reliance was placed upon the decision in Municipal Corporation of Delhi v. Ram Kishan Rohtagi, AIR 1983 SC 67. But the Supreme Court observed (at page 159) :
"Unlike the other case, paragraph 5 of the complaint of this case gives complete details of the role played by the respondents and the extent of their liability. It is clearly mentioned that Ram Kishan Bajaj is the chairman and R.P. Neyatia is the managing director and respondents 7 to 11 are the directors of the mill and were in charge of and responsible for the conduct of its business at the time of the commission of the offence whereas in the other case the complaint has merely drawn a presumption without any averment."
The decision of the Madras High Court in Shital N. Shah v. ITO [1991] 188 ITR 376, seems to be in point. The learned judge referred to the above decisions of the Supreme Court and observed (headnote) :
"The words 'any person who is responsible for paying' found in Section 194A of the Income-tax Act, 1961, have to be read in conjunction with Section 204 of the Act which furnishes the meaning of 'person responsible for paying'. 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 were 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. Section 2(35) makes it 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. Under Section 278B, the basic requirement is that the prosecution must prove that the persons concerned were in charge of, and were responsible to, the firm for the conduct of the business of the firm. It is only then that they can be vicariously prosecuted along with the firm. 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."
I am in respectful agreement with the above observations, which seem to lay down the correct law.
6. The petitioners' counsel referred to me the decisions reported in Jaswant Rai Mittal and Co. v. ITO [1992] 196 ITR 414 (P & H) ; Sushila Industries v. Deputy CIT [1992] 198 ITR 332 (Orissa) and Greatway (P.) Ltd. v. Asst. CIT [1993] 199 ITR 391 ; [1993] 76 Comp Cas 259 (P & H) and [1993] KLJ (Tax Cases) 249, which in my view are not relevant here and, therefore, are not referred to.
7. It is well to remember the observations of the Supreme Court in Sham Sunder v. State of Haryana [1990] 67 Comp Cas 1 (at page 4) :
"More often, it is common that some of the partners of a firm may not even be knowing 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 any part in the business of the firm. There may be ladies and minors who were admitted only 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) that the offence was committed without their knowledge. It is significant to note that the obligation of the accused to prove under the proviso 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."
I agree as submitted that the complaints marked as annexure "A" and the proceedings in C. C. Nos. 50, 51, 52, 54, 53 and 55 of the Additional Chief Judicial Magistrate (Economic Offences), Ernakulam, as against the petitioners are unsustainable and are quashed, as prayed for. The proceedings against the first accused-firm, however, shall continue in accordance with law.
8. The criminal miscellaneous cases are allowed as above.