Prosecution u/s 278B without proof of service of notice u/s 2(35) quashed

Prosecution u/s 278B without proof of service of notice u/s 2(35) expressing intention treating a person as Principal Officer of the Company quashed

ABCAUS Case Law Citation:
ABCAUS 2740 (2019) (01) AC

Important Case Laws Cited/relied upon:
V.P. Punj Vs. Asstt. CIT, 2001,   119   TAXMAN   543   Delhi,  
Sushil Suri and Ors. Vs. State & Ors. (2008) 303 ITR 86 
Madhumilan Syntex Ltd. and Ors. Vs. Union of India (SC)
Greatway (P) Ltd. & Ors. Vs. Asstt. CIT, [1993] 199 ITR 391 (P&C),
ITO Vs. Roshini Cold Storage (P) Ltd. and Ors., (2000) 245 ITR 322 (Mad)
Income Tax Commissioner Vs. Delhi Iron Works (P) Ltd. &  Ors.  [175 (2010) DLT 495).

The appellant had filed a Criminal Appeal before the Special Judge against the impugned judgment of the Additional Chief Metropolitan Magistrate (ACMM) whereby the assessee was held held  guilty, convicted and sentenced for a period of six months rigorous imprisonment and fine for offence(s)  under Section 276B read with Section 278 B of Income Tax Act (the Act).

The appellant assessee was the director of the company which failed to deposit the amount of the tax deducted at source (TDS) with the  Income  Tax Department. Therefore, a complaint was made by the Income Tax Department for offence under Section 276B read with Section 278B of the Act. 

The Appellant was summoned and pre­charge evidence was led on behalf of the department. The appellant did not opt to cross­ examine the only witness examined by the department, reserving his right to conduct the cross­ examination at post charge stage, which was carried out on behalf of the appellant after framing of the charge. 

Statement of the accused was recorded u/s 313 Cr.P.C. The appellant did not opt to lead any evidence in defence and as such, after conclusion of arguments, the appellant was convicted and sentenced through the impugned judgment and order.

The appellant pleaded that despite complaint being filed after six years of delay, it lacked the statutory requirement as notice  under  Section  2(35)  of the Income Tax Act, which is a pre­-condition to initiate action against the defaulter under the relevant provisions was not served upon the appellant, therefore, prosecution, in the first place, could not  have  taken  place  and in any case, appellant was entitled to be acquitted on the basis of this fact only.

The attention of the court was drawn to the cross ­examination  of  the  only witness examined by the department, vis-­a-­vis notice under Section 2(35) of Income Tax Act who had stated that proof of dispatch of notice under Section 2(35) of the Act had been reflected in the Dispatch Register. It had been inadvertently taken as the proof of service of the notice u/s 2(35) of the Act whereas the witness had categorically  stated  that  he  had  not brought any record to prove the service of notice under Section 2(35) of the Act nor any such document had been placed on record. The original dispatch register brought by the witness did not contain address of the company which reflected that no notice was even dispatched to the address of  the appellant when   the witness categorically stated that no proof of  service of  notice under Section 2(35) of Income Tax Act had been placed on record.

Thus, it was submitted that on account of noncompliance of the statutory requirement of the notice to treat him as Principal Officer of the company as contemplated under Section 2(35) of the Income Tax Act, the appellant could not have been  held  guilty and sentenced.  It was submitted that appellant, therefore deserved to be acquitted of the charge.

On the other hand, the Department contended that the purpose  of  notice is to notify a person about the contemplated action and the appellant had the knowledge of this fact which could be inferred from the cross examination of the witness. Additionally, it was submitted that other communications were received  by  the  appellant  at that very address where initial communication of notice u/s 2(35) was dispatched.

The Special Judge observed that on the aspect of delay in filing the complaint, the appellant did not raise any  issue  although  there  was  no limitation in law presumably, because of the offence being continuing in nature as well as the TDS is not dispatched. The limitations, if any, may commence from the date when the amount was deposited. And for that matter it had not been pressed.

The Special Judge observed that the Dispatch Register  although  reflected the name of the company but no address had been mentioned in it as  to where the said communication was to be delivered. There was no evidence to the effect that the communication was in fact delivered or served upon the appellant especially when appellant asserts that it was not served upon him and that being the case, it could not be treated  to  have  been  proved by the complainant that the appellant was conveyed  the  intentions to treat him as Principal Officer of the Company, and that being mandatory, therefore the prosecution did not seem to be in consonance with the law.   

The Special Judge observed that the Delhi High Court had held that before  a prosecution under Section 276­B of the  Act  can  be  launched  against the Director he should have been notified that department/Assessing Officer (AO) has intention of treating him as “principal officer” of the company. In absence of such notice under section  2(35)(b) of the Act,prosecution against the Director cannot be continued and is bound to fail.

It was observed that the Hon’ble Supreme Court had held that to treat the directors of a company as “principal officers” there is no need  to  issue a separate notice or communication to them that they are to be treated as “principal officers”, before the issuance of the show cause notice under Section 276B read with Section 278B. It is sufficient that in the show­ cause notice u/s 276B read with section 278B, it is stated that  the   directors are to be considered as principal officers of the company under the Act and such a complaint is entertainable by the Court provided it is otherwise maintainable.

Similarly, the Hon’ble  Punjab and Haryana High Court held that in the absence of appointment of a principal officer by issuing a notice by the  AO, the prosecution could only be launched against the petitioner company.  

Similar view was expressed by the Madras High Court  that  in  case  Income Tax Officer sought to prosecute the director along with company for an offence under Section 276­B of the Act then it was incumbent upon him to issue a notice under Sub­clause (b) of Section 2 (35) of the Act expressing his intention to treat the director as “principal officer” of the company and in absence thereof, director shall be entitled to the acquittal.  

The Special Judge opined that it is primarily for the prosecution/the complainant to establish  its case and therefore  the  entire  responsibility was on the respondent to prove its case. The inferences and presumptions cannot substitute the evidence, nor the responsibility or the onus shift towards anyone else except the prosecuting agency. In these circumstances, when the witness had categorically admitted that the proof of dispatch /service of notice was not there on record, therefore it could not be held that the appellant was notified with the intention of the respondent to treat him as the Principal Officer of the Company.

The Special Judge opined that the Trial Court had came to a conclusion based  upon  the  testimony  of the witness whereas he had not stated  about the service of the notice under section 2(35) of the  Income Tax Act, therefore in the absence of the foundation, the edifice can’t be raised and if raised,  cannot be sustained and is bound to collapse as is the case here.  

The Special Judge set aside the impugned judgment of the Trial Court and the matter was remanded  back to the Trial Court to give an opportunity to the Income Tax Department to bring on record the  proof of service of notice.

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