2025 (2) TMI 53 - HC - Income Tax

Duty of the party making the payment to deduct TDS and deposit the same with the income tax authority - complainant s case is that TDS certificate is false and fake documents manufactured by the accused no. 1 (employee of the complainant) in collusion and connivance with the accused no. 1 - complainant company alleged that the TDS certificates used in the arbitration were forged - remedy for cheque being dishonoured - individuals responsible for the alleged crime within the company like directors or key decision-makers - prosecution of only the company as the sole accused (of the company) or it employees is required to be done - complainant had participated in the arbitration process and only initiated criminal proceedings after an unfavorable award was passed HELD THAT - When a company is accused of a crime the individuals responsible for the actions that led to the offense usually those in senior management positions can be held vicariously liable. As such the prosecution of only the company as the sole accused (of the company) is prima facie bad in law. Admittedly there is existence of an agreement between the parties for the business transaction which included an arbitration clause and by invoking the said clause the reference was made to the Arbitrator by the petitioner herein who has been made the accused no. 2 in the proceedings before the trial Court. In the present case the arbitral award has been passed on 4th March 2014. The complainant having initially participated in the arbitral proceeding has initiated the present criminal proceeding on 29th March 2023. The arbitral award was granted in favour of the petitioner company herein on the basis of documents and evidence before the learned arbitrator. There is no whisper of the said arbitral proceedings nor its award in the petition of complaint. The complainant having suffered an arbitral award initiated the criminal proceedings after 9 long years which prima facie appears to be malafide and motivated. Having admitted making payment by way of cheque to the petitioner herein (later dishonoured) the income tax rules requires mandatory deduction of TDS by the complainant. Thus considering the said facts and circumstances the materials on record prima facie do not contain the ingredients required to constitute the offences alleged and as such continuation of the said proceeding in the present case shall be an abuse of the process of law/court.

Summary

The Court was tasked with determining whether the criminal proceedings against the petitioner company should be quashed. The proceedings were initiated based on allegations of forgery, conspiracy, and other offenses under various sections of the Indian Penal Code. The core issues revolved around the validity of TDS certificates and whether the company and its employees were culpable for the alleged offenses.

Upon examining the case, the Court considered several legal frameworks and precedents. It was noted that the parties had a business relationship, and there was an existing arbitral award in favor of the petitioner company. The complainant company alleged that the TDS certificates used in the arbitration were forged. However, the Court observed that the complainant had participated in the arbitration process and only initiated criminal proceedings after an unfavorable award was passed, raising questions about the timing and motivation behind the complaint.

In its analysis, the Court referenced the Supreme Court's decision in M/s US Technologies International Pvt. Ltd. vs The Commissioner of Income Tax, which clarified the scope of penalties related to TDS under the Income Tax Act. The Court emphasized that penalties for non-deduction or delayed remittance of TDS are distinct and should not be conflated. The statutory provisions were interpreted strictly, indicating that the allegations of forgery related to TDS certificates did not automatically imply criminal liability under the penal code sections cited.

The Court also considered the principles of vicarious liability and the necessity of arraigning a company as an accused alongside individuals responsible for its actions. Citing several Supreme Court judgments, the Court reiterated that for criminal liability to be established against company officials, specific allegations demonstrating their active role and criminal intent are required. In this case, the complainant failed to implicate individuals from the accused company, focusing solely on the corporate entity.

Significantly, the Court highlighted the binding nature of arbitral awards, which have the effect of a court judgment. The complainant's failure to challenge the arbitral award in a timely manner and the absence of any mention of the arbitration in the criminal complaint were crucial factors in the Court's decision. The Court noted that the complainant's actions appeared to be an attempt to circumvent the unfavorable arbitral award, which was not permissible.

In conclusion, the Court found that the continuation of the criminal proceedings would constitute an abuse of the legal process. The allegations did not meet the threshold required to establish the offenses alleged, particularly in light of the existing arbitral award and the principles governing corporate criminal liability. Consequently, the Court quashed the proceedings against the petitioner company, emphasizing the need for adherence to legal procedures and the finality of arbitral awards.