2021 (4) TMI 755 - DSC - Income Tax

Complaint filed u/s 276 B read with Section 278 B of the Income Tax Act - accused company has not deposited the TDS - non -service of notice or defect in notice u/s 2(35) - HELD THAT - As the complaint does not mention about the mode of service of notice and order u/s 2(35) Ex CW1/7 and Ex CW1/8 of the Income Tax Act; CW 1 and CW 2 confirmed that no proof of service is placed on record and the diary number on CW1/8 was incomplete and no clarification was brought on record despite court observation. Merely, on the basis of partial diary number written on the notice, it cannot be safely presumed that the notice and order u/s 2(35) of the Income Tax Act Ex CW1/7 and Ex CW1/8 have been served upon the accused no.2. From the record, it is clear that the complainant has failed to prove the service of notice and order u/s 2(35) of the Income Tax Act upon accused no. 2. From the mandate given in Roshni Cold Storage 1998 (7) TMI 13 - MADRAS HIGH COURT and M.R. Pratap 1983 (7) TMI 38 - MADRAS HIGH COURT it is clear that in the absence of proof of service of notice u/s 2(35) the contention of accused that he cannot be proceeded with for the delayed payment of the tax amount by the company, is a well founded one. Whether accused was not personally responsible for the deposit / collection of the TDS with the complainant department? - From the evidence on record, it is clear that complainant has failed to prove that accused no 2 Sh. Pradeep Kumar Jain as Managing director for the relevant period, the service of notice and order under section 2 (35) Income Tax Act, 1961 on accused no 2 is not proved and the document Form 27A shows that it was Mr. Yoginder Singh who was responsible for the deduction and collection of TDS. In view of the aforesaid, accused no 2 Sh. Pradeep Kumar Jain is given benefit of doubt and acquitted for the offence u/s 276B r/w S. 278B of the Income Tax Act, 1961. Financial Difficulties - As the case of accused will be covered u/s 278 AA of the Income Tax Act, if he is able to prove the reasonable cause existed when the default was committed. There is initial onus on prosecution to establish the ingredients of offence alleged and prove absence of the reasonable cause on the part of the accused / assessee. The reasonable cause shall be fair, not absurd, not irrational and not ridiculous. Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or for want of bonafides. The tax deducted as source cannot be equated with the payment of other liabilities like service tax or sales tax whose payment may be dependent upon the actual realization of money. TDS is deducted in advance by the assessed before making any payment for the scheduled items. The assessee acts as custodian of tax/TDS amount and needs to deposit the same within stipulated period as per Rule 30. Merely because the business suffered from recession and the working capital stifled, cannot be a termed as sufficient cause for non payment of TDS amount. A company cannot be permitted to use the TDS amount for channelizing and fulfilling its working capital deficit. DW1 Sh Ashish Verma in his cross examination admitted that the company was making payment of various loans to its directors and its associate companies during the relevant period. Therefore, when the company is able to discharge its other liabilities, the ground for recession cannot be cited as an excuse for non payment of the TDS amount. In the sanction order Ex CW1/2 the CIT (TDS) has also appreciated the financial exigencies cited by the company and has concluded that the payment of TDS has nothing to do with the liquidity of the deductor company. Though the audit reports DW1/3 to DW1/6 specifies the liabilities and the loans of the accused no 1 company, but it does not pinpoint the reasons for failure make the payment of TDS amount. Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or for want of bonafide. In present facts and circumstances the company has failed to show any circumstances which has prevented the company from payment of TDS amount especially when the payment to the associate companies and directors were continuing. Merely because there was recession in the market cannot be considered as reasonable cause for non compliances because a company is supposed to keep its working capital reserves or overdraft facilities to meet these lean period patches. The case of the accused company is clearly not covered u/s 278AA Income Tax Act, 1961 and accordingly the accused no 1 company is convicted for the offence u/s 276 B Income Tax Act, 1961 for delay in depositing the of the TDS amount.

Summary

Issues Involved:
1. Payment of TDS amount.
2. Adherence to CBDT Circulars.
3. Role of accused no. 2.
4. Service of notice and order u/s 2(35) of the Income Tax Act.
5. Financial Difficulties as a defense.

Detailed Analysis:

1. Payment of TDS amount:
The prosecution alleged that the accused company deposited only ?6.95 Crores out of ?13.17 Crores of TDS. The defense argued that the complete TDS amount along with interest was eventually deposited. The court noted that the total payment of TDS was ?13,40,24,297/-, but there was a delay of 15 months. The court concluded that while the TDS was deposited, the issue of delay needed examination.

2. Adherence to CBDT Circulars:
The defense argued that the notices and show cause notices did not follow the mandatory timelines as stipulated in the SOP issued by the Income Tax department. The court held that while adherence to deadlines is important, missing some deadlines does not provide blanket protection from prosecution. The court found that the second show cause notice was issued because the concerned CIT had transferred, and a new officer had joined, thus the argument was without merit.

3. Role of accused no. 2:
The court scrutinized whether accused no. 2 was rightly treated as the Principal Officer. The documents presented by the complainant showed that accused no. 2 was only one of the directors and not the Managing Director. The court found that the prosecution failed to prove that accused no. 2 was the Managing Director. The court noted that the Form-27A indicated Mr. Yogender Singh as the person responsible for TDS, not accused no. 2. Consequently, the court acquitted accused no. 2 due to the erroneous presumption of his role.

4. Service of notice and order u/s 2(35) of the Income Tax Act:
The defense contended that the notice and order u/s 2(35) were not served on accused no. 2. The court emphasized the legal requirement of serving notice to treat someone as the Principal Officer. The court found no evidence of service of the notice and order on accused no. 2. The court cited legal precedents to establish that non-service of notice goes to the root of the matter, rendering the prosecution invalid. Hence, the court held that accused no. 2 could not be prosecuted.

5. Financial Difficulties as a defense:
The defense argued that the accused company faced severe liquidity issues due to a recession in the real estate sector, which was a reasonable cause for the delay in TDS payment. The court referred to Section 278AA, which provides that no person shall be punishable if they prove a reasonable cause for failure. The court, however, found that the company continued to make payments to directors and associate companies during the relevant period. The court concluded that financial difficulties did not constitute a reasonable cause for non-payment of TDS as the company should have maintained reserves or overdraft facilities to meet such obligations. Thus, the court convicted the accused company for the delay in depositing the TDS amount.

Judgment:
Accused no. 2 was acquitted due to the erroneous presumption of his role and lack of service of the notice and order. The accused company was convicted for the offense u/s 276B of the Income Tax Act for the delay in depositing the TDS amount.