Prosecution under section 276B – Name appearing in Traces module not make accountant director or principal officer

Prosecution under section 276B – Name appearing in Traces module would not make accountant a director or principal officer u/s 2 (35) of Income Tax Act.

To invoke Section 276B mere fact that accused was working in accounts department would not mean that he automatically becomes person liable for TDS deposit default.

An employee of Accounts Department at middle level, without any extra material to show to the contrary, could not be automatically assumed to be a person concerned with the management or administration

The instant Revision Appeal was filed by the appellant/Revisionist against the order passed by the whereby he had been directed to be charged for offence under Section 276-B r/w Section 278-B of Income Tax Act, 1961 (the Act)

ABCAUS Case Law Citation
ABCAUS 2359 (2018) 06 AC

The Income Tax Officer (ITO/Respondent) had filed a complaint under Section 276-B r/w Section 278-B of the Act against a company as well as against the Revisionist wherein he had been specifically described as “Director” of accused company in the complaint.

According to the complaint, the company had deducted tax at source (TDS) under various sections of TDS amounting to Rs. 1,28,94,348/- during the relevant financial year but did not deposit such amount within the stipulated period. Accordingly, a show cause notice was issued to the accused company and it was asked to send information about the names of its Directors/partners/proprietors/Principal Officers for the relevant financial year. The said notice was not responded to. Accordingly, another notice under Section 2 (35) of the Act was issued which was addressed to “Principal Officer”, but no name of anyone as “Principal Officer” was mentioned in the notice though it was stated therein that the addressee was being treated as Principal Officer.

Thereafter, another notice was sent which was addressed to the present in which The Revisionist was described as “Director” and it was also claimed that he had been actively participating in functioning & management of company affairs.

The accused company replied through its Assistant Manager (Accounts). Thereafter, another notice under Section 2 (35) of the Act was sent to revisionist. In such notice also, revisionist was described as “Director” and it was reiterated that Income Tax Officer intended to treat him as Principal Officer. Such notice was replied by the accused company in which it was claimed that assessee company had received similar notice for the same period from Assistant Commissioner of Income Tax, TDS Circle and that two parallel proceedings from two different jurisdictions had ben initiated in respect of the same matter and it was requested that jurisdiction may be decided before passing any order under Section 2 (35) of Income Tax Act.

The Income Tax Department eventually passed order under Section 2 (35) of the Act holding the revisionist, director as Principal Officer of the company besides deciding the jurisdiction.

The trial court, after considering the material available on record, held that there was no reason to disbelieve the statements of ITO and that there was sufficient material on record to frame charges against accused persons under Section 276-B r/w Section 278-B of Income Tax Act.

In the Revision proceedings before the Sessions Judge, the Revisionist contended that he was never a Director and, therefore, prosecution was totally misconceived as he had been held ‘Principal Officer’ because of his such mis-assumed status. Secondly, notice under Section 2 (35) of Income Tax Act was never actually served upon him personally. It was rather received by the company and was replied by the company without his knowledge. He claimed that he never acquiesced about such status of his being Director or Principal Officer and reply given by accused company cannot bind him.

It was vehemently contended that leaving aside the aspect of Directorship, accused was never responsible for the conduct of the affairs of accused company and, therefore, he could not have been treated as ‘Principal Officer’. He also contended that there was no material with the complainant to have assumed the revisionist as a ‘Principal Officer’ and no such document was placed on record either when the complaint was filed.

It was pointed out that when complainant ITO entered into witness box and was posed tough questions in cross-examination, the department became wiser and when Complaining Witness entered into witness box, complainant attempted to fill up the lacuna by placing on record one document purportedly taken from TRACES module of Income Tax Department in which name of the revisionist stood reflected. He argued that he had taken the objection regarding mode of proving such document. No specific permission was obtained from the Court to place such document on record and, therefore, such document, even otherwise, had no sanctity. It was argued that merely on the basis of the fact that his name was found mentioned in “Traces” module, he could neither be presumed to be a ‘Director’ nor a ‘Principal Officer’ in context of Section 2 (35) of Income Tax Act. It was contended that accused was neither responsible for deduction of tax at source nor responsible for accounting for or depositing the same. It has also been contended that immediately after learning about the aforesaid development, revisionist rather resigned from the accused company.

On the other hand, the Department contended that when the notice was issued under Section 2(35) of Income Tax Act, reply was given by the company and in such reply, status of revisionist either as a director or as the person managing affairs of the company was never disputed and, therefore, revisionist cannot be permitted to run away from his liability. Relying on the words used in Section 2(35) of Income Tax Act, it was contended that it is not necessary that only a director can be a Principal Officer and, therefore, even if it is assumed for a moment that the accused was never a director, he was certainly responsible for the deduction of tax at source and to deposit the same within the stipulated period.

The Sessions Judge opined that the core question to be evaluated was whether the prosecution had been able to prove that revisionist was the ‘Principal Officer’ of the accused company and if yes, why? And whether, in such eventuality, revisionist was appropriately served with the statutory notice under Section 2(35) of Income Tax Act or not. Also, whether the reply filed by the accused company can bind revisionist or not.

The Sessions Judge observed that as per first communication, Department did not know as to who was Director or Principal Officer. It sought information from accused company. In first

notice under Section 2 (35) of the Act, no name of any person as such is found mentioned. This notice was manifestly ambiguous and it had to be assumed that at the time of issuance of such notice, ITO was completely in dark as to who he wanted to treat as Principal Officer. As per despatch proof, the notice was dispatched one day before the date mentioned on the notice. Moreover, dispatch proof did not indicate that the notice had been addressed to any Principal Officer. It rather showed that it was addressed to the company as such. In second notice the Revisionist was described as Director. There was no service proof with respect to said notice though fact remains that such notice was received by the accused company but it cited some jurisdictional issue and there was no acknowledgment from the side of accused company that the Revisionist was its Principal Officer. Thereafter, one more notice was issued in which revisionist was described as Director and again the similar type of reply was received from the company. Finally, ITO sent one more notice under Section 2 (35) of Income Tax Act. It was not specifically addressed to revisionist. It was simply addressed to Principal Officer and it was not made clear therein as to whom ITO wanted to treat as Principal Officer. The Revisionist was eventually held as Principal Officer and had been prosecuted accordingly.

The Department conceded that the revisionist was never a Director in the accused company. The Sessions Judge opined that going by the terminology used in Section 2 (35) of Income Tax Act, complainant was required to demonstrate that any such person was concerned with the management or administration of the company and an employee of Accounts Department at middle level, without any extra material to show to the contrary, could not be automatically assumed to be a person concerned with the management or administration.

The Sessions Judge opined that the notice under Section 2 (35) had become erroneous and fallacious as revisionist was never a director in the said company. The concerned ITO should have made it very specific and explicit in the notice as to how it learnt that revisionist was performing and functioning the management of the company affairs particularly when he was not even its director. Thus, there was, in the first instance, no occasion or material to have served any notice upon him. Secondly and more importantly, no notice u/s 2(35) of Income Tax Act was ever served upon the revisionist.

The Sessions Judge observed that though accused company did not give any specific reply about the aforesaid mis-assumed capacity of revisionist and, such reply cannot be taken as an admission by inference either. Moreover, admission if any made by one, of which the other has not acquiesced in any manner, cannot bind such other so as to make him vicariously liable in a criminal prosecution.

The Sessions Judge observed that as per pre-charge evidence. Both Complaining Witness admitted in cross-examination that revisionist never represented himself either as Principal Officer or Director in any of his communication. Even in the reply sent by accused company, accused company never admitted that revisionist was its Principal Officer.

The Sessions Judge was intrigued as to why no Form 32 was collected from RoC by the complainant before launching of prosecution. Even in the complaint, revisionist has been described as Director and, therefore, the very foundation of the prosecution case becomes faulty. It was only at the time of leading of pre-charge evidence that complainant placed on record one document which was stated to a printout generated from TRACES module of Income Tax Department in which the name of the revisionist was reflected which led the Department to assume that he was a Director and assuming so, he was held as person responsible for the day-to-day affairs and management of the company.

The Sessions Judge observed that any person, who at the time the offence was committed was in charge of and was responsible to the company, can also be against under Section 278B of IT Act notwithstanding the fact he may not be either the “principal officer” or the “person responsible for paying”. Thus, though the words used in said two provisions may look somewhat overlapping but for attracting section 2(35) of the Income Tax Act, prosecuting department is always required to show that the person being prosecuted is in-charge and responsible for the conduct of business of the company. To invoke sec 276 B of IT Act, he should be the person who fails to pay to the credit of Central Government the tax deducted at source by him. In any eventuality, it is sine qua non for the complainant department to show and substantiate ‘culpable capacity’ of revisionist. Mere fact that revisionist was working in accounts department would not mean and hold that he automatically becomes person liable for such default.

The Sessions Judge allowed the revision petition and revisionist was discharged.

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