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1995 (2) TMI 61 - HC - Income Tax

Issues Involved:
1. Challenge to the order taking cognizance under sections 276C and 277 of the Income-tax Act, 1961.
2. Prosecution based on modified assessment order.
3. Requirement of specific averment under section 278B of the Income-tax Act for prosecuting directors.

Issue-wise Detailed Analysis:

1. Challenge to the order taking cognizance under sections 276C and 277 of the Income-tax Act, 1961:
The petitioners challenged the order dated February 1, 1994, passed in Complaint Case No. 1 of 1994, which took cognizance under sections 276C and 277 of the Income-tax Act, 1961. The Union of India filed a complaint alleging that the accused company, a private company and an assessee under section 2(7) of the Act, filed two returns of loss with discrepancies. The assessment was completed under section 143(3) of the Act, determining the total income at nil, with additions for stock discrepancy and motor car expenses. The penalty proceedings under section 271(1)(c) were upheld by the Commissioner of Income-tax (Appeals). The complaint alleged that the company and its directors wilfully attempted to evade tax by furnishing inaccurate particulars and making false verifications, thus committing offenses under sections 276C and 277.

2. Prosecution based on modified assessment order:
The petitioners argued that the prosecution should be quashed as the assessment order was modified by the Income-tax Appellate Tribunal, which remanded the matter regarding stock discrepancy and reduced the disallowance of motor car expenses. The court referred to the Supreme Court cases of Uttam Chand v. ITO and P. Jayappan v. S. K. Perumal, concluding that a criminal court must independently judge the case before it, giving due regard to the result of proceedings under the Income-tax Act. The modification of the assessment order does not automatically quash the prosecution, especially when the assessment order was upheld in part, indicating a prima facie case of tax evasion by filing a false return.

3. Requirement of specific averment under section 278B of the Income-tax Act for prosecuting directors:
Section 278B states that for an offense committed by a company, every person in charge of and responsible for the conduct of the business at the time of the offense shall be deemed guilty. The court emphasized that not all directors are liable unless it is specifically alleged that they were responsible for the conduct of the business. Citing cases like Sham Sunder v. State of Haryana and State of Karnataka v. Pratap Chand, the court held that there must be specific averments in the complaint that the directors were in charge of and responsible for the business at the relevant time. In this case, the complaint lacked such specific averments, making the prosecution of the directors unsustainable in law. However, the prosecution of the company will proceed, and the complainant may show during the trial that any director was responsible for the business, allowing the court to add them as accused under section 319 of the Code.

Conclusion:
The applications challenging the prosecution of the directors were allowed, and the prosecution against the directors under sections 276C and 277 of the Income-tax Act was quashed. However, the prosecution against the company will continue, with the possibility of adding directors as accused if evidence shows they were responsible for the conduct of the business.

 

 

 

 

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