2003 (2) TMI 31 - HC - Income Tax

Offences and prosecution - Unless the complaint disclosed a prima facie case against the applicants/accused of their liability and obligation as principal officers in the day-to-day affairs of the company as directors of the company under section 278B the applicants cannot be prosecuted for the offences committed by the company. In the absence of any material in the complaint itself prima facie disclosing responsibility of the accused for the running of the day-to-day affairs of the company process could not have been issued against them. The applicants cannot be made to undergo the ordeal of a trial unless it could be prima facie showed that they are legally liable for the failure of the company in paying the amount deducted to the credit of the company. Otherwise it would be a travesty of justice to prosecute them and ask them to prove that the offence is committed without their knowledge.

Summary

Issues:
Seeking quashing of order for discharge in income tax cases.

Analysis:
The applicants sought quashing of an order passed by the Additional Chief Metropolitan Magistrate, charging them under section 276B read with section 278B of the Income-tax Act, 1961. The applicants argued that they were not the principal officers of the company accused of failing to deposit taxes deducted at source. They contended that the liability rested with the managing director and whole-time director of the company. The applicants emphasized that they were non-executive directors without administrative responsibilities. They highlighted sections 194C(l), 2(35), 204, and 279 of the Income-tax Act, which impose liability on the company and its principal officers for tax payments. The applicants argued that no notice was served by the Commissioner of Income-tax prior to granting sanction to prosecute under section 279(1) of the Act, violating principles of natural justice.

The magistrate rejected the discharge application, stating that evidence was needed to determine if the applicants were in charge of the company's business conduct. The applicants relied on legal precedents emphasizing the need for credible materials showing active involvement in business management to establish liability. The court noted that no notice was served by the Income-tax Officer to treat the applicants as principal officers. Despite observations from prior cases, the magistrate held that the prosecution should be given an opportunity to lead evidence before determining the applicants' liability.

The court emphasized that the complaint must disclose a prima facie case against the applicants, showing their responsibility as principal officers in the company's day-to-day affairs. Without such material, prosecuting the applicants would be unjust. Referring to a Supreme Court case, the court highlighted that partners could not be convicted without proof of their responsibility for the business. Ultimately, the court allowed the application, setting aside the order and discharging the applicants in the income tax cases.