1997 (9) TMI 17 - HC - Income Tax

Issues Involved:
1. Charges against the accused under sections 276C, 277 read with section 278B of the Income-tax Act, 1961, and sections 120B, 193, 196, and 420 read with section 511 of the Indian Penal Code.
2. Applicability of mens rea to a partnership firm.
3. Interpretation of "person" under sections 276C and 277 of the Income-tax Act.
4. Liability of a partnership firm under section 278B of the Income-tax Act.
5. Relevance of previous judgments in similar cases.
6. Determination of penalty for the first accused.

Detailed Analysis:

1. Charges Against the Accused:
The accused, a partnership firm and its partners, were charged under sections 276C, 277 read with section 278B of the Income-tax Act, 1961, and sections 120B, 193, 196, and 420 read with section 511 of the Indian Penal Code for the income-tax assessment year 1983-84. The charges included filing false returns and attempting to evade tax.

2. Applicability of Mens Rea to a Partnership Firm:
The Chief Judicial Magistrate initially found that the second accused was not guilty due to lack of mens rea, as he was not in India at the relevant time. The trial was directed only against the first accused (the firm) and the second accused. The Magistrate held that a company or a partnership firm could not be prosecuted under the Income-tax Act due to the absence of mens rea, as a company is not a natural person.

3. Interpretation of "Person" Under Sections 276C and 277 of the Income-tax Act:
The judgment clarified that the term "person" under sections 276C and 277 of the Income-tax Act includes a company and a firm, as defined in section 2(31) of the Act. This interpretation establishes that a firm can be prosecuted under these sections.

4. Liability of a Partnership Firm Under Section 278B of the Income-tax Act:
Section 278B of the Income-tax Act stipulates that if an offense is committed by a company, every person in charge of and responsible for the company's conduct at the time of the offense, as well as the company itself, shall be deemed guilty and liable to be punished. This provision clearly imposes liability on the firm, contrary to the Chief Judicial Magistrate's ruling.

5. Relevance of Previous Judgments:
The Chief Judicial Magistrate's reliance on the Rajasthan High Court judgment in Shree Singhvi Bros. v. Union of India and the Madras High Court judgment in Geethanjali Mills Ltd. v. V. Thiruvenkadathan was found to be misplaced. These judgments did not consider the statutory definitions and implications under sections 2(31) and 278B of the Income-tax Act. The court referenced other judgments, such as A. D. Jayaveerapandia Nadar and Co. v. ITO and Manian Transports v. S. Krishna Moorthy, which supported the prosecution of firms under the Income-tax Act.

6. Determination of Penalty for the First Accused:
Given the clear statutory provisions and the findings of the Income-tax Appellate Tribunal regarding the deliberate misstatement and fabrication of accounts, the court found the first accused (the firm) guilty under section 276C of the Income-tax Act. Considering the time elapsed since the relevant assessment year (1983-84) and the demise of both partners, the court imposed a nominal fine of Rs. 500 on the firm. The charge under section 277(ii) was set aside as it could not be invoked against the firm.

Conclusion:
The appeal was allowed, and the first accused was found guilty under section 276C of the Income-tax Act and sentenced to pay a fine of Rs. 500. The charge under section 277(ii) was set aside. The judgment emphasizes the statutory liability of firms under the Income-tax Act and clarifies the interpretation of "person" to include companies and firms.

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