Income Tax Prosecution against accountant u/s 276 B for delay in deposit of TDS quashed.

Prosecution against accountant u/s 276 B for delay in deposit of TDS quashed. The Court asked why instead of treating directors as principal officers the Income Tax Department was hell-bent in prosecuting its small-time employee.

The Court warned the ITO that false deposition can make him face criminal prosecution.

ABCAUS Case Law Citation
ABCAUS 2358 (2018) 06 AC ABCAUS Premium case law

The Income Tax Department (the Respondent/Revenue) had filed a complaint under Section 276-B read with Section 278-B of Income Tax Act 1961 (the Act) against the appellant and the accused company. It was the allegation that the accused company had deducted tax at source (TDS) which was supposed to be deposited in the government account by the 7th of the next month as per Rule 30 of the Income Tax Rules, 1962 (the Rules) but was not done so.

Accordingly, a show cause notice under Section 2(35) of the Act was issued. However, the said notice was not in the name of appellant but was issued to one Director by the Assessing Officer (AO) revealing his intention to treat him as “Principal Officer” as he was actively participating in the functioning and affairs of the accused company. No reply was received to said notice from anyone.

The Income Tax Department, eventually, passed an order under Section 2(35) of the Act holding the said director to be the “Principal Officer” and, therefore, it was recommended that proceedings as per Section 276-B the Act may be taken against such assessee/deductor. However, again, in the body of complaint, it was mentioned that such order was passed against the appellant.

Subsequently, notice under Section 279(1) of the Act was also issued which was addressed to both, the director and the appellant and both were granted an opportunity of being heard before launching prosecution.

In response to the said notice, a reply was sent by the Chartered Accountant whereby it was informed that assessee company had undergone severe financial setback/losses and company had already filed an application before BIFR (Board for Industrial & Financial Reconstruction) for declaring it to be a sick company. Later, another reply was sent by same Chartered Accountant firm reiterating the previous stand while also supplementing that there was no intention to delay TDS payment. It was also added that the assessee company had paid interest on the delayed payment.

The submissions were, however, not found satisfactory. Accordingly, a complaint was filed against the accused company as well as appellant on the ground that it was their mandatory duty to deposit the TDS in the government account within the stipulated period which amount they had, instead, deliberately diversified for business/ personal purpose.

During the Trial, the appellant claimed that he was merely working as “Assistant Accounts Executive” in the accused company and his duty, inter-alia, related to data entry. He claimed that he was neither a director nor a Principal Officer of the accused company.

The Trial court, however, did not agree with his contention and observed that when the notice in question was replied, appellant never denied averments made therein. It also held that belated deposit was not permissible as the accused company was not allowed to take unfair advantage and use the tax amount so deducted for any other purpose and, thus, held both, the accused company as well as appellant guilty.

However, the trial court ordered the appellant to be released on probation on furnishing personal bond in a sum of Rs. 50,000/- with one surety in like amount and also directed him to pay Rs. 25,000/- as litigation cost.

Appellant filed appeal against his conviction and sentence. The Special Judge set aside the order on sentence as the benefit or probation could not have been given to the appellant in view of Section 292-A of the Act. However, the appeal of the accused company was dismissed on merits

In the remand proceedings, the Trial Court, heard fresh arguments on sentence and sentenced the appellant to undergo simple imprisonment for a period of six months besides imposing fine of Rs. 20,000/-.

Aggrieved by the sentence, the appellant had filed the instant appeal before the Sessions Judge contending that:

(i) He was neither a director nor Principal Officer in the company and, therefore, could not have been prosecuted;

(ii) No statutory notice under Section 2(35) of the Act was served upon him and reply given by the accused company cannot be fastened upon him;

(iii) He was never connected with the management/affairs of the accused company.

(iv) Due to genuine financial hardship, the company could not deposit TDS in time and such aspect was over looked by the trial court;

(iv) There was no document on record which may show that appellant was person responsible to deduct any such TDS or to account for the same in any capacity whatsoever

The Revenue opposed the appeal and contended that when the notice u/s 2(350 was issued, reply was given by the company and in such reply, status of appellant either as a director or as the person managing affairs of the company was never disputed and, therefore, appellant now cannot be permitted to run away from his liability. It was contended that it is not necessary that only a director can be a Principal Officer and, therefore, even if it was assumed 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.

It was also contended that appellant had deliberately concealed the material facts. Though the appellant was representing the accused company yet he never took any objection or exception to the reply sent by the accused company. It was pointed out that answers given by the appellant during the Trial were cryptic and vague which also demonstrated falsity in his stand. It was supplemented that if at all, he was of the view that the company was acting in detrimental to his interest, he should have taken some action against the company and should have lodged some sort of complaint in this regard whereas he kept on representing the accused company even in the appeal.

It was further contended that Section 278E of the Act provides for presumption of culpable mental state which distinguishes the Act from the prosecution provided under Negotiable Instruments Act and, therefore, appellant cannot be permitted to dig out any advantage from those judgments.

The Session Judge observed that the situation of the instant case was little curious, unusual and intricate. Appellant had been acting in a dual capacity during the trial. He was resisting the present criminal proceedings in his individual capacity as well as being authorized representative of the accused company. There was little bit of clash of interest as well between the stance of accused company and appellant but appellant still chosen to represent the company, keeping aside his personal stakes.

It was observed that when asked, the appellant could not disclose as to who else, if not him, was the Principal Officer at the relevant time. The Hon’ble Sessions Judge opined that understandably, the appellant might be in somewhat dilemma as his response could have displeased his employers but, at the same time, the fact can not be ignored that the instant appeal had been filed by him in his individual capacity, not as representative of the company.

Also, the Sessions Judge opined that the principles of adducing evidence and discharge of onus would remain the same even for a prosecution under Income Tax Act and, therefore, it was the bounden duty of prosecution to establish basic and fundamental facts and appellant cannot be compelled to enlighten about said aspects. It was also for the ITO to disclose his intention as to whom he chosen to be treated as Principal Officer and why?

Thus the core question before the sessions Court was to find out whether the prosecution had been able to prove that appellant was the Principal Officer of the accused company and if yes, why? Also, whether, in such eventuality, appellant was appropriately served with statutory notice u/s 2(35) of the Act or not. It was also to be evaluated whether the reply filed by the accused company can bind appellant?

The Sessions Judge observed that most of the judgments relied upon by the appellant were in context of complaints filed under Section 138 of Negotiable Instruments Act, which provision is in itself a complete code. Though these judgments cannot be straightway applied to a prosecution launched under Income Tax Act, yet certain universal principles can always be borrowed. The vicarious liability must be pleaded and proved and not inferred. Prime onus is on the complainant to meet the specific requirements under the law so as to make any one liable vicariously. Also that for fastening criminal liability, there is no presumption that every director would know about the transaction though such analogy may not be applicable to a Managing Director, Joint Managing Director as well as to any other Director or Officer of the company who signed the cheque in question. Thus, there would not be any deemed liability upon any director in such cases. It was also required to be spelt out by the complainant as to how and in what manner any director was in-charge or responsible for conduct of business of the company and mere bald averment would not suffice.

With respect to the contention of the Revenue that even an accountant is liable for prosecution if he is found to be a person looking after affairs of the company, the Sessions Judge opined that there cannot be any qualm with such proposition. Such offence can be committed by other officer of the company also, provided the requirements specified under Section 141(2) of N. I. Act are found to be met.

The Sessions Judge opined that no notice was ever issued under Section 2(35) of the Act to the appellant. His name cropped up for the first time while issuing notice under Section 279(1) where the appellant was also described as director. When the notice under Section 2(35) was found addressed to someone else, the whole prosecution was completely misconceived. Intention was to treat someone else as principal officer but prosecution was against the appellant.

The Hon’ble Sessions Judge opined that when the appellant was neither a director nor person described in clause (a) of section 2 (35), ITO had to demonstrate that appellant was concerned with the management or administration of the accused company.

The Hon’ble Sessions Judge observed that any employee of accounts department at middle level, without any extra material to show to the contrary, cannot be assumed to be a person concerned with the management or administration. Moreover, no document to that effect has been placed on record by the ITO.

The Hon’ble Sessions Judge observed that notice under Section 279(1) of the Act became erroneous and fallacious as appellant was never a director in the said company. It was not made clear as to how the Income Tax Officer came to the conclusion that the appellant was a director and was actively participating in the functioning of the company affairs. Mere reproduction of the statutory language in the notice would not serve the requisite purpose. The concerned ITO should have made it very specific and explicit in the notice as to how it learnt that appellant was performing and functioning the management of the company affairs particularly when he was not even its director.

The Hon’ble Sessions Judge opined that ITO came to the aforesaid conclusion for his own fanciful reasons, assumed the appellant to be a director when nobody knew as to what made ITO believe that appellant was performing and functioning the management of the company affairs. 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 the Act was ever served upon the appellant. Merely because accused company decided to authorize appellant to represent it in a criminal prosecution, it cannot be inferred that appellant knew each and everything right from the beginning and was served with the notice as well. Without knowing the possible adverse consequences, the appellant, quite possibly, agreed to represent the company before the court. Therefore, his not going against the company cannot be taken as a circumstance against him or deemed service of the notice.

It was also observed that no reply by the accused company cannot be taken as admission on the part of accused company. Even otherwise, 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.

It was observed that the Revenue relied upon screen shots taken from “CBN PAN based query-ITD”, wherein name of the appellant was appearing. The Hon’ble Sessions Judge opined that this in itself would not indicate anything at all much less that appellant was personally responsible for deducting the tax or for that matter depositing the tax deducted at source. No material in this regard had been placed by the complainant which may even remotely indicate that the appellant was the person responsible for such deductions and/or deposits.  

The Hon’ble Sessions Judge observed that as per CBDT Circular prescribing Standard Operating Procedure (SOP) for prosecution in case of TDS default, the department is required to collect the details of directors/partner/proprietors and then department is required to issue show cause notice to the persons responsible for deductions (directors/principal officer/partners/members/karta). However, the department did not make any effort, even namesake, and since the name of the appellant surfaced in the PAN based query, he was assumed to be director and was served with notice. No attempt was made to collect form no. 32 from the concerned Registrar of Companies which would have immediately reflected that the appellant was never a director in the aforesaid company at any point of time.

The Hon’ble Sessions Judge took a serious view of the false deposition made by the ITO before the Trial Court that he had verified that the appellant was the director of the accused company and was principal officer during the relevant financial year. He also claimed that notice under Section 2(35) IT Act was served upon the appellant. The Sessions Judge warned that the said false deposition can make the ITO face criminal prosecution.

It was 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 proceeded 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 incharge and responsible for the conduct of business of the company. To invoke sec 276B of the 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 appellant. Mere fact that appellant is working in accounts department would not mean and hold that he automatically becomes person liable for such default. Merely because appellant had been asked to represent the accused company in a joint prosecution would also not mean that he should be assumed to be principal officer in context of Section 2 (35) of Income Tax Act as well without there being any notice to that effect.

The Hon’ble Sessions Judge further observed that as held by the Supreme Court, a director/partner does not automatically come within the definition of ‘principal officer’ unless the Income Tax Officer had served notice of his intention to treat him as principal officer being connected with the management or administration of the company/firm. Thus, complainant must allege and show by some acceptable material that any such director was in-charge of and responsible for, the conduct of the business of the firm to make him vicariously responsible. It added a word of caution that mere allegation to that effect will not be sufficient and, therefore, there should be credible material to show his active involvement in the conduct and management of the business of the firm.

It was also observed that as held by the Madras High Court, the main criteria for treating a person as Principal Officer was that he should have been in-charge of the management, administration and day-to-day affairs of the company.

On the day scheduled for pronounced for judgment, the Revenue moved an application u/s 391 read with sec 311 & sec 386 Cr.P.C. praying for permission to place on record one document and praying for recording of additional evidence. The court considered the application and issued notice to appellant. It was observed that the said application had been moved on the strength of one screenshot taken from computer system, projecting that appellant was the person repsonsible for the deduction of tax. The Revenue pressed that the additional evidence, to that extent, be also permitted to be adduced.

The Hon’ble Sessions Judge observed that such powers needs to be exercised with utmost care and caution. It cannot be invoked in routine and casual manner and should be pressed in service in exceptional exigency. The primary object of such provisions is prevention of a guilty man’s escape or for vindication of an innocent person wrongfully accused, where the court omitted to record the circumstances essential to elucidation of truth.

The Hon’ble Sessions Judge opined that though the offence in question had shades of economic offence but, instead of finding fault with the justice delivery system, prosecution should rather blame its own department. It was not a case where any new evidence had surfaced. The document, which prosecution wanted to take on board, which was otherwise not supported with any certificate under Section 65B Indian Evidence Act, was in existence much before the prosecution was contemplated. However, extreme carelessness was displayed in not collecting the same during the investigation stage and placing the same on record. It was only when the court pricked prosecution repeatedly as to where was any such document showing culpability on the part of appellant, it woke up from its deep slumber.

The Hon’ble Sessions Judge opined that the act of moving such application was nothing but a sheer attempt to fill up lacuna. Court should not come to rescue of a party who deliberately chooses to remain callous and negligent. Concerned department may, if it so desires, conduct a departmental enquiry as to why such a serious prosecution was taken so unconcernedly but it would be travesty of justice and somewhat injustice to appellant, who was until now branded as Director, that too wrongly, was asked to face another round of trial for the alleged violation.

The Hon’ble Sessions Judge opined that by placing such document on record, prosecution was making attempt to change the nature & character of complaint as it, all along, presumed the appellant to be a director. The Hon’ble Sessions Judge also questioned as to why prosecution, instead of treating the concerned Directors as Principal Officers, was hell-bent in prosecuting its small-time employee. The application moved by prosecution was dismissed.

The appeal was allowed and accordingly and the impugned order, so far as it related to appellant was set aside and he stood acquitted subject to personal bond and surety bond in a sum of Rs. 20,000/- each under section 437-A Cr.P.C. 

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