Finding that the petitioners are being prosecuted only in their capacity of being Directors of the company based on vicarious liability, the Delhi High Court held that the continuation of prosecution under Section 276 of the Income Tax Act against the petitioners as Directors alone, without impleading the Company as an accused, would be contrary to law and amount to an abuse of process.
While clarifying that the omission to implead the company is not a mere technical irregularity but goes to the root of jurisdiction, the Court asserted that in the absence of the Company being made an accused, the prosecution under Section 276 against its Directors is contrary to Section 278B of the Income Tax Act.
A Single Judge Bench of Justice Ravinder Dudeja observed that the complaints are premised on the company’s liability for its outstanding tax dues and alleged transfer of company assets, where the petitioners are arraigned solely as “Directors”, and no independent allegation is made against them in their personal capacity. The Bench therefore quashed the complaint as well as the prosecution proceedings.
The Bench referred to Section 278B to explain that where an offence is committed by a company, “the company as well as every person in charge” shall be deemed guilty. Thus, Section 278B creates a deeming fiction whereby both the Company and every person in charge are deemed guilty of the offence.
The Single Judge therefore highlighted that the legislative intent is clear that the Company must first be arraigned, and only then can its officers be fastened with vicarious liability. While applying the jurisprudence under Section 141 of the Negotiable Instruments Act (NI Act) to the present case, the Bench pointed out that the structure of the provision of Section 278B of the Income Tax Act is pari materia to Section 141 of the NI Act.
Briefly, in this case, the prosecution alleges that one SNR Buildwell Pvt Ltd. had failed to discharge tax liabilities, leading the Income Tax Department to raise a demand for tax dues amounting to Rs. 4.44 crores. During the pendency of recovery proceedings, it was found that the Company, through its Director Rakesh Agarwal, transferred an Audi Car bearing a UK Registration number in favour of his daughter-in-law, without adequate consideration. The Department treated this transfer as void under Section 281 of the Income Tax Act and proceeded to prosecute the Directors under Section 276 of the Act.
During the course of the trial, since the Company itself was not arrayed as an accused, the petitioners objected that prosecution against them is not maintainable. The Trial Court, however, held that the complaints were maintainable and listed the matter for framing of notice.
Case Relied On:
Aneeta Hada v. Godfather Travels & Tours – (2012) 5 SCC 661
Appearances:
Advocates Arjun Dewan and Akash Arora, for the Appellant/ Taxpayer
Advocates Sunil Agarwal, Viplav Acharya, and Priya Sarkar, for the Respondent/ Revenue
