Delhi High Court has, in a recent judgment, decided on an important question of law concerning the liability of the Director of a company which has been proceeded against by the Income Tax Department (ITD) under Section 276-B of the Income Tax Act, 1961.

Case Details:
CRL LP 241/2012, 242/2012, 243/2012
Income Tax Officer vs Anil Batra and Anrs
Date of Judgment : 23-09-2014
Coram: Justice S. Muralidhar

Case Laws Considered:
Delhi HC-Income Tax Officer v. Delhi Iron Works (P) Ltd. 2010 (175) DLT 495.
Madras HC-Income Tax Officer v. Dinesh Kumar Shah (1997) 223 ITR 68.
Premwati v. Raghubans 1992 RLR 223
Supreme Court-Madhumilan Syntex Limited v. Union of India IV (2007) SLT 14.

Facts of the case:
In the instant case, the show cause notice was issued for failure to pay TDS u/s 276B for three assessment years; AY 1982-83, 1983-84, and AY 1984-85. The Notices issued by the Inspecting Assistant Commissioner, Income Tax (Assistant), Range XV, New Delhi were addressed to The Principal Officer, M/s. Anil Batra & Associates (P) Limited, Batra Cinema, Dr. Mukherjee Nagar, Delhi.

For AY 1983-84 and 184-85, the Trial Court convicted the company and two of its directors with simple imprisonment and fine. However, on appeal, District Judge (DJ) and Additional Sessions Judge (ASJ) set aside the convictions of the two directors by enhancing the fine to Rs. 50,000 for each of the assessment years. For AY 1982-83, Additional Chief Metropolitan Magistrate (ACMM) acquitted the directors but convicted the company. The main ground on which accused directors were acquitted is that the Show Cause Notices (SCNs) were issued only to the “principal officer” of the company and not to the individual directors. The reliance was place on Delhi High Court Judgment in Income Tax Officer v. Delhi Iron Works (P) Ltd. 2010 (175) DLT 495.

Judgment:
The Court set aside the judgment of the DJ & ASJ and ACMM and convicted the two directors for the offence under Section 276 B of the IT Act.  The Court observed that as laid by Supreme Court in Madhumilan Syntex Limited issue of separate notices to directors are not required and directors can be prosecuted if the complaint clearly states that they were being treated as principal officers of the company.

Excerpts of the Judgment:

“This Court has perused the judgment in Income Tax Officer v. Delhi Iron Works (P) Ltd. (supra) which in turn referred to the decision of the Supreme Court in Madhumilan Syntex Limited v. Union of India IV (2007) SLT 14. The Supreme Court has in the said decision held that before launching a prosecution under Section 276 B IT Act against the directors of a company, the Assessing Officer has to issue notice under Section 2 (35) of the IT Act expressing his intention to treat such directors of a company as „principal officers‟. It was held that it would be sufficient compliance if in the SCN issued to the company it is mentioned that the Assessing Officer intends to treat the directors as principal officers of the company under the IT Act.”

“The relevant paragraphs of the decision in Madhumilan Syntex Limited (supra) read as under:

45. It was argued that a separate notice and/or communication ought to have been issued before issuance of show cause notice under Section 276B read with Section 278B of the Act that the Directors were to be treated as Principal Officers under the Act. In our opinion, however, no such independent and separate notice is necessary and when in the show cause notice it was stated that the Directors were to be considered as Principal Officers under the Act and a complaint was filed, such complaint is entertainable by a Court provided it is otherwise maintainable.”

“Section 278 B of IT Act makes the directors of the company in charge of its affairs liable for the offence committed by it unless the presumption is able to be rebutted by such director. This explains why the Supreme Court in Madhumilan Syntex Limited (supra) expressly rejected the arguments advanced on behalf of the directors in that case that the complaint filed against the company was not maintainable against the directors as well. It was further explained that “when in the show cause notice it was stated that the directors were to be considered as Principal Officers under the Act, and a complaint was filed, such complaint is entertainable by a Court provided it is otherwise maintainable.” What was considered by the Supreme Court was not only the wording of the SCN but also the wording of the complaint filed by the ITD. The purpose of making explicit either in the SCN or in the complaint, the intention of the ITD that it was proceeding against the directors was to enable the directors to explain why they should not be proceeded against. Even if in the SCN there was no express mention that the directors were considered as „principal officers‟, in the complaint filed by the ITD it was clearly stated that “Accused Nos. 2, 3 and 4 are the directors/principal officer of the said company and were in charge and responsible to Accused No. 1 for the conduct of .........”

“In Madhumilan Syntex Limited (supra) it was held that the proceedings against the Directors would be maintainable as long as the complaint clearly stated that they were being treated as principal officers of the company. Even otherwise for the purpose of Section 278 B of the IT Act, once the offence is shown to have been committed by the company, then the liability of the directors in charge of its affairs is attracted. The burden then shifts to such directors to show that the offence occurred without their knowledge or that they had exercised all due diligence to prevent the commission of such offence. The law as explained by the Supreme Court in Madhumilan Syntex Limited (supra) has not been noticed by the DJ&ASJ or the ACMM in the present case even while reference was made to the decision of this Court in Income Tax Officer v. Delhi Iron Works (P) Limited (supra).”

“Consequently, this Court is of the view that both Courts erred in acquitting A-2 and A-3, the directors of the company only because they were not issued separate notices.”

“As far as the merits of the matter are concerned, it is seen that both directors have signed the Company‟s balance sheets. Their defence that they were not in charge of the affairs of the company is, therefore, untenable.”

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