Prosecution u/s 276B for delay in deposit of TDS quashed by High Court in the light of CBDT circulars
In a recent judgment, Hon’ble Bombay High Court has quashed prosecution u/s 276B for delay in deposit of TDS in the light of CBDT Circular/Instructions stating that when TDS amount or period of default is not substantial and amount is deposited, prosecution is not warranted.
ABCAUS Case Law Citation:
4242 (2024) (08) abcaus.in HC
In the instant case, the Petitioner being directors of the assessee company had challenged the Issuance of process by the Additional Chief Metropolitan Magistrate (ACCM) on the basis of the complaints filed by the Income Tax Officer (ITO) under Section 279 (1) of the Income Tax Act, 1961 (the Act) to prosecute them for the offence punishable under sections 276B r/w 278B of the Act related to non deposit of TDS
As per the complainant it was alleged that the assessee was a Company incorporated under the Companies Act, 1956. The assessee had deducted TDS but there was a delay in paying the same to the Government Treasury within the prescribed time limit.
Show cause notices were issued to the assessee company and it’s directors and it was held that the assessee and it’s Directors were responsible for paying tax as per section 204 of the Act and have, therefore, committed default under Section 200 of the Act r/w Rule 30 of the Income Tax Rules without reasonable cause or to pay the tax so deducted which amounted to an offence punishable under section 276B r/w Section 278B of the Act.
Subsequently, the complaint was filed in the Court of ACCM after taking approval of the CIT(TDS). The ACCM prima facie, arrived at a conclusion and issued process against the petitioners and assessee.
The said orders were challenged by the assessee and the Petitioners by filing Criminal Revision before the Additional Sessions Court who by the impugned orders rejected the Revision Applications and confirmed the orders of issuance of process passed by the Additional Chief Metropolitan Magistrates.
The Hon’ble High Court observed that the complaint had been filed against the Company and the petitioners who were it’s Directors, for delay in deposit of TDS. Admittedly, TDS deducted by the Company had already been deposited with interest as provided under section 201(1A) of the Act.
The Hon’ble High Court further observed that no notice had been issued by the Assessing Officer to any of the petitioners under Section 2 (35) (b) of the Act to treat any of them as “Principal Officer” of the Company. Also, no order as contemplated under Section 201 (1) r/w Section 201 (3) of the Act had been passed treating any of the petitioners as ‘Principal Officer” of the company and by which such Principal Officer is whereby “deemed to be assessee in default”. No order imposing penalty (either initially or further penalty) as “deemed to be an assessee in default” under Section 221 had been passed against the company or any of the petitioners. Also, the petitioners were “Directors” of the Company, however, no averment had been made in the complaints regarding “Consent”, “Connivance” or “negligence” as required under Section 278B (2) of the Act.
The Hon’ble High Court observed that Section 276B covers cases of “Failure to Pay” and not mere “Delay in Deposit” of TDS”. In Pre-1997 unamended provisions, the words “as required by or under the provisions of Chapter XVII-B” could be read along with the words “BOTH”. Under the amended provisions (post 1997), the criminal liability, however, is attracted on “Failure to Pay”. The phrase “as required by or under the provisions of Chapter XVII-B” is separately mentioned in Clause (a) of Section 276B and hence, is linked only with and explains the manner in which tax is required to be deducted and not the manner of payment thereof. Thus, under the amended provisions, in case TDS has been paid in full, even with some delay, Section 276B would not be attracted.
The Department had placed reliance on the judgment of the Hon’ble Supreme Court which held that it cannot be said that the prosecution against a Company or its Directors in default of deducting or paying tax is not envisaged by the Act. However, Petitioners contended that the said decision would not apply to the case in hand in view of a subsequent CBDT Circular No. 285/90/2008 – IT (Inv-I)/05 dated 24.04.2008 which states that where the amount of tax deducted is Rs.25,000 or more, and the same is not deposited even within 12 months from the date of deduction, shall be processed for prosecution. The Petitioners pressed into service two decisions of Punjab and Haryana High Court and of Jharkhand High Court wherein the aforesaid Circular had been referred.
The Hon’ble High Court observed that the ratio laid down by the Jharkhand High Court would be squarely applicable to the present set of facts which were identical. In the said case also, the petitioners had already deposited TDS amount with interest and that the case was instituted against the petitioners after considerable lapse of time. The learned Judge quashed the cognizance taken by the Special Judge after referring to the CBDT instructions bearing F. No.255/339/79-IT (Inv.) dated 28.05.1980 stating that prosecution under Section 276(B) of the Act shall not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of Government. The SLP against the judgment of the Jharkhand High Court was dismissed by the Supreme Court on the ground that it did not have any merit. Thus, the Supreme Court had also not interfered with the verdict rendered by the Jharkhand High Court.
The Hon’ble High Court further observed that the above CBDT Instruction was discussed in detail by the Hon’ble Punjab & Haryana High Court stating that in the said Instruction, the words “not normally” precede the words “be proposed when the amount involved and/or the period of default is not substantial and the amount has also been deposited in the meantime to the credit of the Government”. It is true that the word “normally” does not mean that it is necessary or incumbent upon the authorities concerned so as not to launch proceedings under section 276B but when the conditions for exempting the assessee from prosecution as spelled out in the instructions are available, in the considered view of the Court it will not be open for the authorities then also to have discretion in the matter as otherwise, the authorities concerned may exempt an assessee from the prosecution in one set of circumstances and to prosecute another assessee in the same or identical facts. That would undoubtedly be violative of article 14 of the Constitution of India.
The Hon’ble High Court opined that a combine reading of Circulars dated 28th May, 1980 and 24th April, 2008 contemplate that prosecution ought not be launched where the tax has been deposited. The words “where the amount of default has been deposited in the meantime” in the Circular dated 28th May, 1980 signify such intent and the words “in addition to the recovery steps as may be necessary in such cases” in Circular dated 24th April, 2008 also signify that there are pending arrears which need to be recovered. Therefore, the the ratio laid down by the Hon’ble Supreme Court as relied upon by the Department would not be made applicable in view of the Circular dated 24th April, 2008 and, therefore, it cannot be treated as a precedent for the period after 24th April, 2008.
The Hon’ble High Court also observed that Circular dated 24th April, 2008 prescribes that the prosecution is to be launched within sixty days of deduction of the default. Though the circular also prefixes the requirement with the words “preferably”, it also signify that if not in sixty days the period cannot extend indefinitely for an unreasonable period. If Section 276B is interpreted to include the delay in deposit of TDS would make the said provision manifestly arbitrary.
Further, the Hon’ble High Court with respect to the interpretation of the term “principal Officer” opined that since the provision is squarely for prosecuting an offender, the term ‘conduct of business of the Company” must have a nexus with “the offence committed” and hence, in the context of such offence under section 276B ought to be interpreted (which is in relation to “failure to pay” the TDS deducted) to be the “Principal Officer” who has been made responsible, under Section 204 (iii) of the Act, for paying the tax. Proviso to Section 278B (1) prescribes ‘absence of knowledge’ as a valid defence for invoking the said section Where a person is declared a principal officer of a company by an “order” under section 201 (1), it would, prima facie, fulfill the requirement of presumption of knowledge. The term “Director” which has been separately defined under section 2 (20) of the Act has not been used in Section 278B (1). As such director is not covered thereunder.
As a result, the Petitions were allowed and orders of issuance of process were quashed. Also the revision order passed by the Additional Sessions Judge were also quashed and set aside.
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