2006 (11) TMI 185 - HC - Income Tax

Default in depositing TDS offence summoning order - held that a Managing Director was a principal officer of a company and that if he signs and verifies a return on behalf of the company which later turns out to be false, he would be liable there is not need to issue separate notice to Managing Director - prosecution could continue in respect of petitioner, Managing Director and the company but summoning order against those who are not principal officer is set aside

Issues Involved:
1. Validity of the summoning order under Section 276B read with Section 279 of the Income-tax Act, 1961.
2. Interpretation of "person responsible for paying" under Section 204 of the Income-tax Act.
3. Requirement of notice under Section 2(35)(b) for prosecution under Section 276B.
4. Distinction between the roles of managing director and other directors in the context of prosecution.

Issue-wise Detailed Analysis:

1. Validity of the Summoning Order:
The petitioners challenged the summoning order dated March 30, 2005, issued by the Additional Chief Metropolitan Magistrate, Delhi, after cognizance was taken of the offence under Section 276B read with Section 279 of the Income-tax Act, 1961, for the financial years 2002-03, 2003-04, and 2004-05. The court noted that Section 276B punishes a "person" who fails to pay the tax deducted at source to the credit of the Central Government, with rigorous imprisonment and fine.

2. Interpretation of "Person Responsible for Paying":
The term "person responsible for paying" is defined under Section 204 of the Income-tax Act. Specifically, Section 204(i) and (iii) clarify that if the payer is a company, the "person responsible" includes the company itself and the principal officer thereof. The court examined this definition to determine who could be held liable for the default in depositing the tax deducted at source.

3. Requirement of Notice Under Section 2(35)(b):
The petitioners argued that no notice under Section 2(35)(b) was served on them, indicating the Assessing Officer's intention to treat them as principal officers. They relied on precedents from the Madras High Court (ITO v. Roshni Cold Storage P. Ltd. [2000] 245 ITR 322) and the Punjab and Haryana High Court (Greatway P. Ltd. v. Asst. CIT [1993] 199 ITR 391), which held that such notice is mandatory before prosecuting directors under Section 276B. The court agreed with these precedents, stating that a mandatory notice under Section 2(35)(b) is required before prosecution under Section 276B can be initiated against directors or other personnel connected with the company's management.

4. Distinction Between Managing Director and Other Directors:
The court distinguished between the roles of managing directors and other directors. It held that the managing director, by the very nature of his office, is a principal officer under Section 2(35)(a), which includes the "manager" of the company. Thus, no notice under Section 2(35)(b) is necessary for prosecuting a managing director. This view was supported by Supreme Court rulings in M. R. Pratap v. V. M. Muthukrishnan, ITO [1992] 196 ITR 1 and Rama Narang v. Ramesh Narang [1995] 83 Comp Cas 194, which emphasized the managing director's responsibility for the company's affairs.

Conclusion:
The court concluded that the prosecution could continue against the managing director and the company without the need for a notice under Section 2(35)(b). However, for other directors or personnel, the summoning order was set aside due to the absence of the mandatory notice. The Department may proceed against any other person deemed to be a principal officer only after complying with the notice requirement under Section 2(35)(b). The revision petitions were disposed of accordingly.

← Previous Next →