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TMI Blog1996 (8) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... unting year ending September 30, 1982 (assessment year 1983-84), on December 30, 1985. In the statement accompanying the return, the firm claims to have paid interest to the extent of Rs. 6,64,565.98 to various parties. Of these, there were payments of over Rs. 1,000 in the aggregate during the financial year in respect of 68 parties. The respondents have failed to deduct tax of Rs. 2,400, on the interest credited to Sri Finance Corporation on various dates. Since the first respondent had failed to deduct the tax at source as per the provisions of section 194A of the Act, show-cause notice under section 276B of the Act was issued on October 31, 1986, calling for the assessee's explanation for non-deduction of tax at source under section 194A of the Act. There was no response from the firm. For the failure on the part of the first respondent-firm to deduct tax at source from the amount of interest paid to the creditors and thereafter to remit the same within seven days from the last day of the month in which deduction was made or within two months of the expiration of the month in which the date of crediting to the parties amount falls, to the credit of the Government of India's acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hief Metropolitan Magistrate (Economic Offence-I), Madras-8, is the firm functioning at Madras and accused Nos. 2 and 3, respondents Nos. 1 and 2 are the partners, who are responsible for the conduct of the business of the firm. They filed the return for the year ended on March 31, 1980, and the final accounts in the form of trading, profit and loss account and balance-sheet. In the statement of interest paid account, the firm had claimed to have paid interest to the extent of Rs. 99,000 to eight persons. It is stated that the accused have delayed the remittance of tax deducted at source to the Government of India's account from the interest. The firm remitted the TDS amount after a delay of nearly two months. Therefore, summons under section 131 of the Act were issued to the assessee on November 13, 1986, asking them to appear on November 21, 1986, with books of account for the years ended March 31, 1980, to March 31, 1983. On December 9, 1986, the assessee filed a letter dated December 12, 1986, relating to the assessment year 1980-81 along with the particulars of interest paid, TDS paid, etc. The assessee in their explanation had stated that all the depositors were already on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken on file only against the first accused-firm. Aggrieved against the order of the Additional Chief Metropolitan Magistrate (Economic Offences-I), Madras-8, the Income-tax Officers, Headquarters, TDS, and Salary Circle have filed the three revisions under sections 397 and 401 of the Code of Criminal Procedure. The matter came up before E. J. Bellie J., on March 10, 1994. Before the learned judge, learned counsel for the first accused/firm cited two decisions of this court in Shital N. Shah v. ITO [1991] 188 ITR 376 ; [1990] L. W. (Crl.) 478 by T. S. Arunachalam J. (as he then was) and G. Anantharamiah v. ITO [1992] L. W. (Crl.) 173 by K. A. Swamidurai J., wherein it has been held that for prosecution of a partner of a firm for the offence of non-deduction of tax at source from the interest payable by the firm, a notice under section 2(35)(b) of the Act is a precondition. E. J. Bellie J., felt that the said decisions are not correct and that no question of notice under section 2(35)(b) of the Act to a partner arises at all. The learned judge has also felt that it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and no question of notice under section 2(35)(b) to a partner arises at all. 7. Now section 194A of the Income-tax Act provides for deduction of income-tax from interest payable. Section 200 provides for payment of the deducted amount to the Government. These two sections cast a duty for deduction and payment of tax upon a person responsible for paying interest. Here it would be relevant to note that as per section 2(31) a person includes a firm. Under section 204, the meaning of 'person respon sible for paying' has been given. In this section, there are three clauses in respect of interest is clause (iii). As per this clause, the person responsible for paying is the payer himself, or, if the payer is a company, the company itself including the principal officer thereof. 8. Now, in our case, the payer is undoubtedly a partnership firm. 'Company' has been defined in section 2(17) of the Act. 'Firm' has been defined in section 2(23). Therefore, a firm cannot be said to be a company. They are in nature different from each other. Hence, when the clause (iii), reads, 'If the payer is a company, the company itself including the principal officer thereof', it refers only to a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(35). Therefore, as said above, no question of giving any notice under section 2(35) arises in the case of a firm. 12. In the abovesaid two judgments of this court, it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the purview of section 2(35). In this position, I think it is necessary to refer the matter to a Division Bench to have an authoritative binding judgment. 13. Therefore, the office is directed to place the matter before my Lord, the hon'ble Chief Justice to post the matter before a Division Bench or Full Bench. " It is also to be noticed that the second accused in E. O. C. C. Nos. 292 to 360 of 1987/second respondent in Criminal R. C. No. 415 of 1987 filed Criminal M. P. No. 7697 of 1987 under section 482 of the Code of Criminal Procedure to direct the Registry to issue notice to him for an opportunity being given to be heard on the question at issue. On August 5, 1987, notice was ordered and Mr. V. Gopinath, advocate, entered appearance on his behalf. We have heard Mr. K. Ramaswami, the learned Special Public Prosecutor for the Income-tax Department/petitioner and Ms. Nappinnai, learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 992] L. W. (Crl.) 173 by K. Swamidurai J. M. R. Pratap v. V. M. Muthuramalingam, ITO [1984] 149 ITR 798 by S. Natarajan J. (as he then was). M. R. Pratap v. V. M. Muthukrishnan, ITO [1992] 196 ITR 1 by the Supreme Court. The points that arise for consideration in these revisions are : (1) Whether the second accused in his capacity as the partner is liable for prosecution under section 276B read with section 278B of the Act ? and (2) Whether notice under section 2(35)(b) of the Act to a partner is a pre-condition ? Section 2(17) of the Act, defines "company", which runs thus : " 2. (17) 'company' means,--- (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue and unless the tax so deducted is deposited or paid, the person who has deducted, continues to be responsible. A default in payment of tax deducted at source to the credit of the Central Government attracts penalty under section 201(1) read with section 221, interest under section 201(1A) and prosecution under section 276B of the Act. The relevant rule for this section is rule 30 of the Income-tax Rules, 1962, which provides for time and mode of payment to Government account of the tax deducted at source. Section 201(1A) of the Act provides for payment of simple interest at 15 per cent. per annum if any such person, principal officer or company, does not deduct or after deducting fails to pay the tax as required by or under the Act. Section 221(1) of the Act provides for penalty in case of default in payment of tax. Section 276B of the Act reads as follows : " 276B. Failure to pay the tax deducted at source. --- If a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mentioned, shall be punishable with rigorous imprisonment for a term which may extend to six months and shall also be liable to fine, which shall not be less than a sum calculated at 15 per cent. per annum on the amount of such tax from the date on which such tax was deducted, to the date on which such tax was actually paid. An imposition of rigorous imprisonment at least for a fraction of six months was imperative under the provision. In fixing the amount of fine, the court may take into account circumstances such as the recurrent nature of the defaults and the interest lost by the Government due to the failure. Under section 278B, a limited company as well as every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company (sic). Section 278B of the Act runs thus : " 278B. (1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) will come into operation only after the initial onus cast on the prosecution under the main section gets discharged. In view of the provisions of this section, non-issuance of individual notices to any of the partners is of no consequence, rather it is not necessary to issue any such notice. Section 2(35) of the Act as pointed out earlier defines the expression "principal officer" only with reference to a local authority or a company or any other public body or any association of persons or any body of individuals. The Act adopts the definition of the terms "firm", "partner", and "partnership" as contained in the Indian Partnership Act, 1932. Each partner is an agent of the others. Consequently, all the partners are jointly and severally liable for the acts of one or other of the partners of the firm and are also entitled to share the profits and losses. (Vide the decision reported in Geethanjali Mills Ltd. v. Thiruvengadathan [1989] 179 ITR 558 (Mad)). A consistent view has been expressed by courts that a company being a juridical person cannot be made liable for corporeal punishment like imprisonment. It is also held that if the contravention is by a company, the persons w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting for all, and (c) an agreement between those persons to carry on such business and to share its profits. It is the relationship between those persons which constitutes the partnership. In other words, the following important elements must be there in order to establish partnership. (a) there must be an agreement entered into by all parties concerned ; (b) the agreement must be to share profits of business ; and (c) the business must be carried on by all or any of the persons concerned acting for all. Section 18 of the Indian Partnership Act runs as follows : " 18. Partner, to be agent of the firm. --- Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. " Section 18 of the Indian Partnership Act makes a partner the agent of the firm for the purposes of the business of the firm. It is thus clear that a partner is liable for the acts of the other partners and vice versa as a principal is liable for the acts of his agent done in the ordinary course of business. The effect of section 18 is to make every partner an agent of the firm and make him jointly and severally liable for all the acts of the firm. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeded against under section 278B of the Act notwithstanding the fact that the person proceeded against may not be either the "principal officer" or the "person responsible for paying". The intention of Parliament is, therefore, not to confine the prosecution under section 278B of the Act only against the "principal officer" and the "person responsible for paying". We also came across another decision of T. S. Arunachalam J. (as he then was) reported in G. Ramaswami Moopanar v. E. S. I. Corporation [1990] L. W. (Crl.) 414 decided on August 8, 1990. The learned judge had considered the question of law as to whether a director of a company or a partner of a firm be prosecuted as a "principal employer" falling within the fold of section 2(17) of the Employees' State Insurance Act as it stood prior to its amendment by the Central Act 29 of 1989, in and by which section 86A of that Act was introduced in the said Act (amended with effect from October 20, 1989). Section 86A of the Employees' State Insurance Act reads as follows : " 86A. Offences by companies. --- (1) If the person committing an offence under this Act is a company, every person, who at the time the offence was comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence. The onus is upon such person to prove any one of the above circumstances and if he so proves, he shall not be liable for punishment. Sub-section (2) of section 86A of the Employees' State Insurance Act contains a deeming provision. It states, where an offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. For, the purpose of this section, "company" has been given an extended meaning. It means any body corporate and includes a partnership-firm or other association of individuals. This means that "company" will include not only public or private limited companies registered under the Indian Companies Act, but also statutory corporations, partnership-firm or any society registered under the Societies Registration Act or any State Societies Registration Act. In interpreting similar provisions in the Drugs and Cosmetics Act, 1940, the Supreme Court in the decision in Rajasthan Pharmaceutical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time when the offence was committed. If such a person were to be prosecuted after satisfying the basic requirement of the section, even then it would be open to such a person to prove that the offence was committed without his knowledge or he was unable to prevent the commission of the offence in spite of his having exercised all due diligence. It is, therefore, fairly clear that the Legislature had taken note of the defence which may be feasible. On the contrary, if the Principal employer fails to pay the contribution he is liable to pay under the Act, the offence is complete and prima facie there appears to be no defence open for him. Therefore, it is possible to hold, that the Legislature, when it introduced this welfare legislation, did not intend to punish every partner or every director for non-payment of the contribution, for apart from being directors or partners, they may not have the ultimate control over the affairs of the factory. In that context, it is quite possible, that under section 2(17) of the Act, the meaning of the word 'principal employer' refers to the owner or the occupier or the manager of the factory if he had been so named. The liability, therefore, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in criminal law unless the statute takes that also within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not. It is, therefore, necessary to add an emphatic note of caution in this regard. More often it is common that some of the partners of a firm may not even be knowing of what is going on day-to-day in the firm. There may be partners, better known as sleeping partners who are not required to take any part in the business of the firm. There may be ladies and minors who were admitted only for the benefits of partnership. They may not know anything about the business of the firm. It would be a travesty of justice to prosecute all the partners and ask them to prove under the proviso to sub-section (1) that the offence was committed without their knowledge. It is significant to note that the obligation of the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gives notice to him of his intention to treat him as such. Consequently, if any one connected with the company is not the secretary, treasurer, manager or agent, then he cannot be treated as the principal officer of the company unless the Income-tax Officer has served a notice on him as envisaged under section 2(35)(b) of the Act. Section 192(1) does not refer to a director or managing director but only to a person responsible for paying income chargeable under the head 'Salaries'. Consequently, the managing director of a company cannot be held liable under section 276B unless the Income-tax Officer has served a notice on him under section 2(35)(b) and informed him of his intention to treat him as the principal officer of the company. " The decision in G. Anantharamiah v. ITO [1992] L. W. (Crl.) 173 was decided by K. Swamidurai J. In that case, the first accused was a partnership firm carrying on business as film exhibitors. The second accused is the managing partner and the third accused was the joint managing partner of the first accused-firm and the fourth accused was an employee of the first accused-firm, in charge of financial borrowings, bank transactions, interest payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of being a director or partner is not a "principal employer" as contemplated by section 2(17) of the Employees' State Insurance Act and, therefore, not personally liable to pay the contribution under the Employees' State Insurance Act. The position came to be altered as pointed out above on the introduction of section 86A of the Employees' State Insurance Act. Therefore, we find it difficult to subscribe to the view expressed in Shital N. Shah v. ITO [1991] 188 ITR 376 ; [1990] L. W. (Crl.) 478. As already seen, section 276B of the Act provides that if a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. Section 278B of the Act deals with offences committed by the companies. The definition "company" for the purpose of the said section includes "a firm". Therefore, the expression "company" used in section 278B of the Act has to be understood so as to include a firm. If an offence is committed by a firm, only the person who was in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement is that the person proceeded against should have been in charge of and responsible to the firm and for the conduct of the business of the firm at the time when the offence was committed. It may be that such person may also be the "person responsible for paying" as contemplated in section 204 of the Act or a "principal officer" as defined in section 2(35) of the Act. It is not as if the prosecution under the section can be launched only against the "principal officer" as defined in section 2(35) of the Act or against the "person responsible for paying". The person proceeded against for prosecution under section 278B of the Act should have been in charge of and was responsible to the firm for the conduct of the business of the firm, even though such a person may not satisfy the definition of "principal officer". In other words, it is not as if prosecution is contemplated only against a "principal officer". If that were the intention of Parliament, then, the language of the section would be different and the section would have stated that the prosecution can be launched only against the "principal officer". In the light of the above discussion, we are of the view, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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