2007 (2) TMI 150 - HC - Income Tax

Offences and prosecution - Alleged that assessee and its partners had concealed and evaded income and thereby committed an offence punishable and initiated prosecution proceeding - Held that partners were not at the time of offence hence prosecution against the partners not valid

Summary

Issues involved:
1. Discharge of accused based on lack of notice and opportunity of hearing before sanction for prosecution.
2. Discharge of accused based on their status as partners during the alleged offence.
3. Discharge of accused based on their role in the firm as active or dormant partners.
4. Interpretation of Section 279(2) of the Income Tax Act regarding notice for compounding offenses.

Analysis:

Issue 1: Discharge of accused based on lack of notice and opportunity of hearing before sanction for prosecution
The Additional Chief Metropolitan Magistrate discharged accused respondents based on the grounds that they were not given notice or an opportunity to be heard before the sanction to prosecute them, depriving them of the right to compound the offense. The Revenue challenged this decision, arguing that the accused were deprived of the right to move for compounding of the offense. The Magistrate relied on judgments of various High Courts, but the Supreme Court clarified that notice before according sanction for prosecution is not necessary, and Section 279(2) only provides an opportunity to compound, not a right to insist on compounding. The Magistrate's decision was not in line with the Supreme Court's interpretation, leading to the discharge being set aside.

Issue 2: Discharge of accused based on their status as partners during the alleged offense
The Magistrate correctly noted that certain accused persons were not partners of the firm at the time of the alleged offense, absolving them of responsibility. The assessment order confirmed that these individuals were not partners during the relevant period, and thus, they could not be held liable for acts committed before their partnership began. The Magistrate's decision regarding these accused persons was upheld as they could not be made accused in the matter.

Issue 3: Discharge of accused based on their role in the firm as active or dormant partners
The Magistrate discharged accused partners, including ladies, on the grounds that they were not active partners but sleeping or dormant partners. However, the complaint specifically stated that all accused persons were in charge and responsible for the business. The Magistrate failed to consider the partnership deed which could clarify the roles of the partners and determine their level of involvement. The decision to discharge these partners was not supported by sufficient evidence and was deemed incorrect.

Issue 4: Interpretation of Section 279(2) of the Income Tax Act regarding notice for compounding offenses
The Magistrate's reliance on judgments of different High Courts regarding the necessity of notice before sanction for prosecution was found to be incorrect based on the Supreme Court's interpretation. The Supreme Court clarified that Section 279(2) does not mandate notice before prosecution and only provides an opportunity for compounding. The Magistrate did not have the benefit of this Supreme Court judgment when making the decision, leading to the discharge being set aside, and the case being restored for further proceedings in accordance with the law.