9911796707
TMI Blog1993 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... Penal Code and sections 276C, 277 read with section 278B of the Income-tax Act, 1961, in C. C. No. 47 of 1986 on the file of the Additional Chief judicial Magistrate, Madurai, for the assessment years 1981-82 and 1980-81 respectively. It is alleged in the complaint that the first accused partnership firm was manufacturing and selling tin containers. The sales tax authorities inspected the premises of the accused firm on July 26, 1980, and October 1, 1981. It was found during the inspection that some bogus purchases were made with one Messrs. Thiraviam Agencies, Kannan and Company, Trichy, S. Perumal Chetty, and Messrs. K. Ravindran and Brothers, Madurai. It is further alleged that, on enquiry, it was found out that there were no such dealers at the addresses given in the respective bills. Hence, the sales tax authorities decided that these purchases were bogus as the dealers were found to be non-existing and non-registered parties. The Commissioner (Taxes) had confirmed these findings. After orders of the Commercial Tax Officer, the books of account of the accused firm were scrutinised independently for essential proceedings and came to the conclusion that the bills and invoices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned, there are no averments in the complaint to that effect. In support of the above contention, learned counsel for the petitioner submitted the following rulings : In Alfred Borg and Co. (P.) Ltd. v. Antox India (P.) Ltd. [1992] L. W. (Crl.) 120 (Mad), Arunachalam J. has observed as follows : "In a catena of cases, the apex court has held that initiating prosecution against sleeping partners or women, when the company is the main offender, cannot be sustained unless there was basic material to show that such partners or directors were also in charge of and responsible for the conduct of the business of the company. Merely by alleging that the directors are in charge of the company, as is found in paragraph 11 of the complaint, petitioners Nos. 2 to 6 cannot be prosecuted. The complainant should further show that petitioners Nos. 2 to 6 were responsible for the day-to-day conduct of the business of the company." The same view was followed by Swamidurai J. in the case decided in K Subramanyam v. ITO [1993] 199 ITR 723 (Mad). In a case reported in G. Anantharamiah v. ITO [1992] L. W. (Crl.) 173 (Mad), Swamidurai J. has observed that though an employee of partnership-fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as follows (paragraph 10) : 'Even so, a general principle pervades this branch of law when a specific provision is made : easy resort to inherent power is not right except under compelling circumstances. Not that there is absence of jurisdiction, but that inherent power should not invade areas set apart for specific power under the same Code.' Another important consideration which is to be kept in mind is as to when the High Court, acting under the provisions of section 482, should exercise its inherent power in so far as quashing of criminal proceedings is concerned. This matter was gone into in greater detail in Smt. Nagawwa v. Veeranna Shivalingappa Konjalgi [1976] Suppl. SCR 123; AIR 1976 SC 1947, where the scope of sections 202 and 204 of the present Code was considered and while laying down the guidelines and the grounds on which proceedings could be quashed, this court observed as follows (paragraph 5): 'Thus, it may be safely held that in the following cases, an order of the Magistrate issuing process against the accused can be quashed or set aside : (1) Where the allegations made in the complaint or the statements of the witnesses recorded in support of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laint, that there is any act committed by the directors from which a reasonable inference can be drawn that they could also be vicariously liable. In these circumstances, therefore, we find ourselves in complete agreement with the argument of the High Court that no case against the directors (accused Nos. 4 to 7) has been made out ex facie on the allegations made in the complaint and the proceedings against them were rightly quashed." On the other hand, it was contended by learned counsel for the Income-tax Department, Mr. K. Ramaswamy, that, after the insertion of section 278B of the Income-tax Act by the Taxation Laws (Amendment) Act, 1975, with effect from October 1, 1975, and in view of the Supreme Court ruling in the case of M. R. Pratap v. V. M. Muthukrishnan [1992] 196 ITR 1, at page 6, there is no need for a specific averment in the complaint regarding individual partners with regard to the offence under section 278B of the Income-tax Act and the effect of the new section is to make every person connected with the affairs of the company or firm liable to be proceeded against and punished. Learned counsel for the Income-tax Department, Mr. K. Ramasamy, relied upon the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein, the Supreme Court has held as follows : "In the present case, the appellant admittedly was the managing director of the company and he was thus the principal officer thereof. Rule 12(1) of the Income-tax Rules states that the return of income shall, in the case of a company, be in Form No. 1 and be verified in the manner indicated therein. In view of section 139 read with section 140(c) of the Act, the return has to be signed by the principal officer of the company. A statutory obligation is cast on the principal officer to sign the tax returns. The substitution of the words made under the new Amendment Act will not in any way alter the position with regard to the operation of the provisions of the Income-tax Act as against a managing director of company when he has signed the return of the company in such capacity. The effect of the amended section 140(c) of the Act is that the company's return of income should be signed only by the managing director or by any director, When there is no managing director, and not by the secretary or the treasurer, who are however included within the meaning of 'principal officer' under section 2(35) of the Act. By the introduction of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1), where an offence under this Act has been committed by a company and it is proved that the 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 also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.-For the purposes of this section, (a) 'company' means a body corporate, and includes (i) a firm ; and (ii) an association of persons or a body of individuals whether incorporated or not ; and (b) 'director', in relation to (i) a firm, means a partner in the firm ; (ii) any association of persons or a body of individuals, means any member controlling the affairs thereof." Before the amendment, the firm alone was liable to be prosecuted and not the partners, The Supreme Court, in the case reported in M. R. Pratap v. V. M. Muthukrishnan, ITO [1992] 196 ITR 1, has held as follows (at page 7) : "By the introduction of section 278B by the Taxation Laws (Amendment) Act of 1975, with effect from October 1, 1975, it is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners. In fact every partner is liable for an act of the firm. Section 2(a) of the Partnership Act defines an 'act of a firm' to mean any act or omission by all the partners or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm. But, we are concerned with a criminal liability under a penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability 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 travesty of jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The person referred to in section 278B is in the context of the definition of 'person' as contained in section 2(31) of the Income-tax Act .... in case the partners were to be proceeded against in the absence of section 278B, there was no need for the Legislature to introduce section 278B as has been done in the year 1975. . . . It is thus clear that the partners of a firm who at the time of commission of offence were responsible for the conduct of the business of the firm could alone be prosecuted.... To me it appears that this prosecution has been initiated due to a total failure of the concerned authority to apply its mind. If the petitioners could not be legally prosecuted as has been pointed out above, then this court is justified in coming to the conclusion that the authority concerned has not at all applied its mind to the case before permitting the prosecution of the petitioners. . . . The complaint is bound to provide indication, though not evidence, as to in what manner a particular partner of the firm is supposed to be in charge of and responsible for the conduct of business. Mere reproduction of the words used in the section is not sufficient. Income-tax Officers an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, to use the words of the Supreme Court in the case of Sham Sunder v. State of Haryana [1990] 67 Comp Cas 1, 4 ; AIR 1989 SC 1982, (at page 1984) : "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 condition is that the partner was responsible for carrying on the business and was, during the relevant time, in charge of the business. In the absence of any such proof, no partner could be convicted." It is, therefore, imperative that the concerned authority must properly apply its minds to the facts of the case and indicate in the complaint the manner in which a partner is in charge of or is responsible for the conduct of the business. The complaint is bound to provide indication though not evidence as to in what manner a part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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