9911796707
TMI Blog1984 (8) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... the Banking Companies (Acquisition Transfer of Undertakings) Act, 1970. The company was paid a sum of Rs. 10,20 crores as compensation for the take-over of its banking business. The company, which has since changed its name and objects, has been carrying on other undertakings. Pursuant to the acquisition, the company, by a circular of February 28, 1973, gave an option to its shareholders to sell to it shares held by them in it at Rs. 38 per share, inclusive of dividend for the year 1972, in case they did not wish to continue to be its shareholders. It is claimed by the company that before issuing the circular, it had obtained the legal opinion of a former Chief justice of India to the effect that the amount payable by the company for the purchase of its own shares could not be considered as " deemed dividend ", within the meaning of section 2(22) of the Act. It is further claimed that to put the matter beyond doubt, and before issuing the circular, the company addressed a letter to the Central Board of Direct Taxes seeking their confirmation that the amount would not be " deemed dividend ". The Life Insurance Corporation of India and the Unit Trust of India were the major shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 98 of 1975, for a decision of the question whether the payment to the shareholders, in the circumstances, could be considered " deemed dividend " or not. Notice of the suit was also issued to the income-tax authorities. The suit was, however, adjourned sine die on the objection of the incometax authorities that the question could be decided only in proceedings under the Act, and not in any suit. In May 1975, the Incometax Officer, Company Circle, required the company by a notice under section 201(1A) of the Act to pay a sum of Rs. 82,17,109 along with interest, on the ground that the company had "deducted" tax at source to the extent of the above amount from the distribution of " deemed dividend " of Rs. 40 per share but had not paid the amount in Government account within the prescribed time, as required by section 200 of the Act, read with rule 30 of the Rules made under it. In reply to this notice, the company informed the officer concerned that no tax had been deducted at source and that the company had only made an on account payment towards the purchase price, and there was, therefore, no question of payment of tax to the Department. As sequel to this, the company was ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Appellate Tribunal. The Tribunal by its order of March 27, 1979, accepted the appeal of the company, and set aside the orders of the Income-tax Officer, and the appellate order of the Appellate Assistant Commissioner of Income-tax on the ground that the proceedings against the company were barred by limitation. The appeal of the Revenue was dismissed. The Tribunal also rejected the Revenue's application for stating a case and referring certain questions of law to this court. This court also rejected the Revenue's application for calling a reference on January 4, 1982. The order of the Income-tax Appellate Tribunal has, therefore, become final unless it was taken in appeal to the Supreme Court by a petition for special leave. Counsel for the respondent claimed that a petition for special leave had been filed in the Supreme Court but it was still to come up for preliminary hearing. Meanwhile, three different Benches of the Delhi Circle of the Income-tax Appellate Tribunal, by their orders of November 21, 1977, February 27, 1982, and April 17, 1982, arising out of independent proceedings in the assessment of incomes of three different shareholders, who had received the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, there was no finding by any authority under the Act to the above effect. Alternatively, it is urged that at least in cases of three shareholders, the Appellate Tribunal had held that the amount paid as price for the shares was neither "accumulated profit" nor " deemed dividend " and would not, therefore, attract any deduction of tax at source. It is urged that these decisions, which have admittedly become final between the revenue and these individual shareholders, were binding decisions of the authorities under the Act, which are clearly contrary to the basis on which the complaints have been filed against the petitioners. It was further urged that the company and its principal officers, having dealt with the matter in a bona fide manner, on the basis of authoritative opinion, consistent with its twin obligations to the exchequer, as well as its shareholders, and in consultation with the Government institutions, which were its major shareholders, the proceedings against the petitioners would be a gross abuse of the process of the criminal court and are thus liable to be quashed. On behalf of the respondent, it was urged that finding by an authority under the Act, with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between a case where there is evidence which manifestly and clearly is inconsistent with the accusation made and cases where there is legal evidence which on its appreciation may or may not support the accusation in question. In exercising its jurisdiction, the High Court would not embark upon an enquiry as to whether the evidence in question is reliable or not, because that is the function of the trial court and it would not be open to a party to invoke the inherent jurisdiction of the court and contend that on a reasonable appreciation of the evidence, the accusation made against the accused would not be sustained. (R. P. Kapoor v. State of Punjab, AIR 1960 SC 866). These tests were slightly widened subsequently (Municipal Corporation of Delhi v. Ram Kishan Rohtagi, AIR 1983 SC 67) and it may safely be said that proceedings may be quashed : " (1) Where the allegations made in the complaint or the statements of the witnesses recorded in support of the same taken at their face value make out absolutely no case against the accused or the complaint does not disclose the essential ingredients of an offence which is alleged against the accused; (2) Where the allegations made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e if " there is sufficient ground for proceeding ", the stage nevertheless, does not call for any in-depth examination of the material or possible defence of an accused, or the mere possibility that on a certain hypothesis being eventually considered and accepted by the court, the trial may end favourably to the accused, either on the existing material, or on the further material that may be expected to be brought by the complainant, or may be produced by the accused in the course of the trial. It is, however, important to bear in mind the two parameters in dealing with that stage. One is if the allegations in the complaint and the material in its support disclose the commission of an offence, the matter must be allowed to proceed, but if it does not, or there are other features, which would justify an inference that the trial would be an exercise in futility or is otherwise mala fide, an innocent person should not be allowed to be subjected to the hardship and humiliation of a full-dress trial, even though on any reckoning, it would never succeed. The expressions " ends of justice " and " to prevent abuse of the process of any court " used in section 482 of the Code, are intended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act nor returned the amounts to them The complaints then refer to the orders of the Income-tax Officer and of the Appellate Assistant Commissioner of Income-tax, which were eventually set aside by the Tribunal on the ground that the proceedings initiated under section 201 of the Act by the Income-tax Officer were barred by limitation. The claim that the amount retained by the company was tax deducted at source is sought to be reinforced not only by the findings of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax that the amount deducted by the company was tax deducted at source, but also by the further circumstance that while retaining the amount, the company furnished pro forma certificates in this respect to its shareholders " and company did not deduct tax in respect of those shareholders who lodged with the company Tax Exemption Certificate ". It is further alleged that " this amount was in trust with the company. The company has neither paid this amount to the credit of the Central Government nor refunded to the shareholders. When it comes to the deposit of the amount to the credit of the Central Government, the company says it is not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a term which shall not be less than three months but which may extend to three years and with fine. Section 194 of the Act, which deals with deduction of tax on dividend at source, runs thus: " 194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force: Provided that no such deduction shall be made in the, case of any shareholder not being a company, if (a) the shareholder is resident in India; (b) the amount of such dividend does not exceed two hundred and fifty rupees; and (c) the shareholder furnishes to the person responsible for paying the dividend a statement in writing in the prescribed form and verified in the prescribed ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either case possesses accumulated profits." Section 293 of the Act, which incorporates a bar of suits in civil courts to set aside or modify any assessment order made under the Act, and for certain other matters, runs thus: "293. No suit shall be brought in any civil court to set aside or modify any assessment order made under this Act, and no prosecution, suit or other proceeding shall lie against the Government or any officer of the Government for anything in good faith done or intended to be done under this Act. " On the contentions raised on behalf of the parties, the following four questions arise for determination " (a) Whether in the absence of determination of liability by any authority under the Act, complaints based on such liability are incompetent ? (b) If so, whether there is any subsisting order of a competent authority under the Act which could be a valid basis for the complaints? (c) Whether there is any determination by a competent authority under the Act which may be inconsistent with the liability on which the complaints are based ? (d) Whether having regard to all the circumstances, the proceedings before the criminal court would be an abus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to treat the person, who ought to have made the deduction, or to have made the payment, if deducted, as the case may be, as an assessee in default is independent of and without prejudice to any other consequence, which obviously would include, if not merely contemplate, prosecution for an offence under section 276B of the Act. True, the Act is a complete code for the determination of liability to tax or to penalties or to other consequences and provides exhaustive remedies for these, as indeed, various matters incidental thereto, and resort must, therefore, ordinarily be had to the machinery set up under the Act for relief. (Kamala Mills Ltd. v. State of Bombay [1965] 57 ITR 643 (SC)). It is, however, not possible to ignore the distinction between determination of liability to tax and of penalty, etc., the proceedings to realise tax and other penalties, on the one hand, and to administer the other penal provisions, on the other. While the first set of proceedings have, by their very nature, to be conducted before the authorities constituted under the Act, the penal provisions for which cognizance has to be taken by criminal court at the instance of the specified authority unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, liable to deduction of tax at source, but the contention that these are subsisting orders of competent authorities, notwithstanding the fact that both the orders were set aside by the Tribunal, even though on the ground of limitation is devoid of any force. An order which is set aside by the Tribunal, even though on the ground of limitation, is devoid of any force. An order which is set aside on the ground of limitation ceases to have any legal existence and no advantage can be taken of any finding which it may have returned. One would have perhaps sympathised with the contention if the prosecutions had been filed while the orders of the two authorities were subsisting, but the prosecutions were filed, oddly enough, after the two orders had been set aside by the Appellate Tribunal. In fact, the complaints were filed in March, 1980, after the Tribunal had even turned down the Department's application for reference to this court. There was, therefore, no subsisting order of any competent authority, under the Act, which could provide a valid basis of determination of liability, on which the complaints are grounded, even though in view of my conclusion on the question at (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At attempt was made on behalf of the respondent to wriggle out of the liability to be bound by these decisions on the ground that each of these matters involved a very meagre amount, as a result of which the Department did not consider it worthwhile to challenge these decisions and that, in the peculiar circumstances, the Department should not be held bound by these decisions and these decisions should not have any impact on the competence or propriety of the proceedings which are challenged in the present petition. While I would consider the question of their impact when I deal with question No. (d) above, there can be little doubt that there is a determination by a competent authority, under the Act, which is contrary to the hypothesis on which the complaints are based and the decisions are not only binding on the Department but have also become final, since they remain unchallenged and the limitation for challenge has since expired. The question at (d) above has to be answered in the affirmative for variety of reasons. In the first instance, clamping a criminal prosecution for an offence, which is not part of the normal penal law of the country, but is a creature of a specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... still persisted in its contention or had sought special leave from the Supreme Court, the proper course for the Department would have been to await the outcome of the proceedings in that court before launching the prosecution, particularly where the prosecution was immune from any constraints of limitation, by virtue of the provisions of the Economic Offences (Inapplicabilty of Limitation) Act, 1974. Thirdly, there were three subsisting orders of the Tribunal in the proceedings between the Department and three individual shareholders of the company, in which three different Benches of the Appellate Tribunal had taken the view of liability, which was inconsistent with the hypothesis, on which the prosecutions were based. It was not disputed that these decisions were not challenged and have, therefore, become final. True, the petitioners were not parties to any of the three proceedings, but the Department is certainly bound by these decisions and the question which fell for decision in the proceedings directly arose out of transactions forming the subjectmatter of the prosecutions. It may be, as was sought to be explained, that these three proceedings involved very small amounts and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that there was no reasonable cause or excuse for the manner in which the company dealt with the matter. Some of these reasons may not by themselves, be enough to render the prosecution liable to be quashed, but I have no doubt in my mind that in their cumulative effect, the prosecutions could hardly be described as being just and fair and are clearly exposed to the criticism of constituting an abuse of the process of the court and are, therefore, liable to be quashed. I have dealt with the various contentions raised on behalf of the parties at the hearing but that is not the end of the matter because while drawing up the judgment, it occurred to me that there were quite a few other facts of the prosecutions, which were controversial and would, therefore, deserve consideration. Petitioner No. 1 is a corporate body. Section 276B of the Act, as well as section 409 of the Indian Penal Code, make the offences under these provisions punishable with a sentence of imprisonment and with fine. Under section 276B, the sentence of imprisonment shall not be less than six months. It is well settled that a corporate body could not be given corporeal punishment, and if it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of these and certain other controversies, I had the petition listed for further hearing. In the course of further hearing, learned counsel for the parties made their submissions with regard to these questions. In the course of arguments, however, two further questions were thrown up. Section 194 of the Act imposes an obligation to make deduction from payment of any dividend on the principal officer " of a company. Section 200 of the Act imposes on the person making the deduction " a further duty to pay the amount within the prescribed time to the credit of the Central Government. Section 276B makes failure to deduct or failure to pay after deduction penal. If the obligation to deduct and to pay be the obligation under section 194 of the Act of the " principal officer " of the company, could the company be prosecuted for an offence under section 276B ? In these complaints, in addition to the company, the chairman, a director and secretary of the company are being proceeded against. The liability to deduct under section 194 is that of the " principal officer " of the company. The expression " principal officer " is defined by section 2(35) of the Act to mean " the secretary, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is unnecessary for me to deal with some of the other questions raised at the further hearing, even though they are of considerable importance, and of some difficulty and, on one reckoning, introduce further legal infirmities in the prosecution. As for the offence under section 409 of the Code, it is enough to say that the admitted circumstances in which, and the reasons for which, part of the payment of the price was retained, leave no manner of doubt as to the true intention of the company and the other petitioners, or as to the misappropriation or conversion of funds, to the extent they were retained by the company and for the reasons I have already set out above in the other context, it would certainly be an abuse of the process of court to prosecute the petitioners even for an offence under section 409 of the Code, assuming that a complaint of the commission of that offence was otherwise competent or the Magistrate could have taken cognizance of it even without a formal complaint. That leaves for consideration the question if it would be reasonable and proper to impose any condition on the petitioners, while quashing the proceedings. The historical background of the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainly not kept the amount in a separate fund, but would be deemed to have utilised it for its legitimate business activity, must pay interest on the amount for the entire period at a reasonable rate, even though the payment to the shareholders would be subject to the undertaking of the shareholders concerned that the requisite amount with interest as received from the company would be paid to the exchequer if it is ultimately held that the payment was subject to deduction at source, as deemed dividend. I was, therefore, inclined to impose the condition requiring the company to make payment to the shareholders within a reasonable period with interest at a reasonable rate, subject to the shareholders giving an appropriate indemnity to the company and its officers against any claims of revenue against them. But there is substance in the contention of the petitioners that such a course may perhaps create complications for them eventually, unless the income-tax department concurs in the course that they may be asked to follow, or an appropriate direction is obtained from the Supreme Court in the proceedings, pending before it, or if the proceedings, now pending in the Supreme Court, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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