Section 276B of the Act, standing as on date and introduced with effect from 01.06.1997, deals with 3 types of offences given hereunder:

(a) Failure of person to pay to the credit of the Central Government tax already deducted at source,

(b) Failure of person to pay Dividend Distribution Tax (DDT), payable under section 115-O(2) to the credit of the Central Government, and

(c) Failure of person to pay to the credit of the Central Government tax payable by him as required under Proviso to section 194B.

Ø  then such person shall be punishable with rigorous imprisonment for a period of which shall not be less than 3 months but which may extend to 7 years and with fine

(a)  Failure of person to pay to the credit of the Central Government tax already deducted at source

1st type of offence mentioned in section 276B. It deals with a situation where a tax is already deducted by any person under the provisions of Chapter XVII-B like sections 192, 194, 194C, 194-I, 194J, 195 etc., but the same has not been paid by such person to the credit of Central Government. Offence of non-deduction of tax at source is not covered here. After amendment of section 276B with effect from 01.04.1989, only if a person deducts tax but does not pay the same there is an offence. If any person fails to deduct tax at source itself, then the same is liable to monetary penalty under section 271C of the Act, whereas where a person deducts tax but fails to pay the same to the Government, then he is liable for prosecution under section 276B of the Act.

Up to 31.03.1989, non-deduction of tax at source was also an offence under section 276B of the Act. It was only vide the Direct Tax Laws (Amendment) Act, 1987 that the act of non-deduction of tax at source was brought outside the ambit of prosecution and was made liable for monetary penalty under section 271C.

(b) Failure of person to pay dividend distribution tax (DDT), payable under section 115-O(2) to the credit of the Central Government

Under section 115-O, a domestic company is liable to pay DDT on any dividends declared, distributed or paid at rates mentioned therein. Further, as per section 115-O(3), liability of payment of tax is on the company and the principal officer of the company. On failure to comply with the provisions of section 115-O, company and the principal officer of the company, are treated as assessee-in-default under section 115Q. In addition to that, such persons are also liable for monetary penalty under section 271C and for prosecution under section 276B. Thus, when a domestic company declares, distributes or pays dividend to its shareholders and when the Company fails to pay DDT to the credit of Central Government within the due date, then principal officer of the company as well as the Company shall be treated as guilty of offence under section 276B and can be made punishable thereunder.

(c) Failure of person to pay to the credit of the Central Government tax payable by him as required under proviso to section 194B

Proviso to section 194B deals with a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.

Text of Section 276B

Failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B

^[1][276B. If a person fails to pay to the credit of the Central Government,–

(a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B; or

(b) the tax payable by him, as required by or under -

(i) sub-section (2) of section 115-O; or

(ii) ^[2][***] proviso to section 194B,

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.]

KEY NOTE

1.  Substituted by the Finance Act, 1997, with effect from 01.06.1997.

2. Word “second” omitted by the Finance Act, 2022, with effect from 01.04.2022.

Nature of offence

If a person fails to pay to the credit of the Central Government,–

(a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B; or

(b) the tax payable by him, as required by or under -

(i) sub-section (2) of section 115-O; or

(ii) proviso to section 194B,

he shall be punishable

Cognizable/or Non-Cognizable

Non-Cognizable

Non-Bailable/Bailable

Bailable

Summons case/Warrants case

Warrant case

Triable by

Special Court/Magistrate of first class

Punishment

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

Threshold for launching prosecution in respect of the offences for failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B

As per Circular No. 24/2019, dated 09.09.2019, the CBDT, in order to reduce the prosecutions, has enhanced the threshold for launching prosecution in respect of the offences for failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B.

OFFENCES UNDER SECTION 276B: FAILURE TO PAY TAX TO THE CREDIT OF CENTRAL GOVERNMENT UNDER CHAPTER XII-D OR XVII-B

Cases where non-payment of tax deducted at source is Rs. 25,00,000/- or below, and the delay in deposit is less than 60 days from the due date, shall not be processed for prosecution in normal circumstances.

In case of exceptional cases like, habitual defaulters, based on particular facts and circumstances of each case, prosecution may be initiated only with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers as mentioned in Para 3.

Approving Authority [Section 276B]

Failure to pay to credit of Central Government (i) tax deducted at source under Chapter XVII-B, or (ii) tax payable under section 115-O(2) or second proviso to section 194B–

The CBDT Circular No. 24/2019, dated 09.09.2019 lays down the relaxation and appropriate safeguards for launching prosecution in respect of cases where the amount of tax involved is Rs. 25 lakhs or less.

In cases where amount involved/tax sought to be evaded is more than Rs. 25 lakhs, the Circular does not provide any relaxation/safeguard and the prosecution shall be initiated as per the prevailing guidelines.

Reasonable cause

No penalty or prosecution shall be made or launched against the assessee for any failure referred to in section 276B if he proves that there was a reasonable cause for the said failure. But if there is no reasonable cause for such failure, then the concept of compounding comes in the picture. Compounding of offences means that the assessee can, instead of serving imprisonment term, pay a fee to the revenue department and waive his prosecution charges.

No Prosecution if it is a Company assessee

Prosecution cannot be initiated against the company. It has to be initiated in the name of Director or Principal Officer responsible for TDS compliances.

Responsibility of Principal Officer for TDS Default by Company

Section 204 of Income Tax Act defines ‘a person responsible for paying’ in reference of various provisions including the provisions contained in Chapter XVIIB related with the deduction of tax at source. Section 204 (i) and (iii) of the Income Tax Act provides that in case the payments are to be made by a company, then the expression 'person responsible for paying' shall include the ‘principal officer’.

The expression ‘principal officer’ has been defined under section 2(35) of the Income Tax Act and read as under:

Text of Section 2(35)

(35) “principal officer”, used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means -

(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or

(b) any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof ;

Under Sub-clause (a), the persons mentioned therein become liable for any violation as the principal officer. It is to be taken note that the Managing Director or Director is not included within the ambit of Sub-clause (a) of Section 2(35).

In case the Income Tax Officer seeks to prosecute any person, other than as provided in section 2(35)(a), along with the company for an offence punishable under section 276-B of the Income Tax Act, then he has to issue a notice under Sub-clause (b) of 2(35) expressing his intention to treat the director as ‘principal officer’ of the company. However, it would be sufficient compliance if in the show-cause notice issued to the company it is mentioned that the directors are to be considered as principal officers of the company.

In order that a person can be said to be a ‘principal officer’ defined under section 2(35)(b), the following two ingredients must be satisfied:

(i)    He must be a person connected with the management or administration of the company; and

(ii)   The ITO must have served upon him a notice of his intention of treating him as the principal officer of the company.

The satisfaction of any one of the two conditions or ingredients will not attract this clause.

Provisions in Brief

Initiating prosecution with the previous sanction of tax authorities

As per section 279, prosecution for offences under section 276B, section 276BB, and section 277 are to be instituted with the previous sanction of Principal Commissioner or Commissioner or Commissioner (Appeals). The Principal Chief Commissioner or Chief Commissioner or, as the case may be, Principal Director General or Director General may issue such instructions or directions to the aforesaid income-tax authorities as he may deem fit for institution of proceedings under this sub-section.

Details of past conviction for default in depositing of TDS were not disclosed by assessee while filing compounding application for relevant assessment years on ground that order of conviction was under challenge before Supreme Court and was stayed, since order of conviction was a relevant fact and assessee being a repeat defaulter who was successfully convicted by criminal court for past years, there was no infirmity in order of Commissioner in rejecting said application, until pending conviction orders with respect to earlier years were set aside

Prosecution was initiated against assessee for relevant assessment years under sections276B and 278B due to default in deposit of TDS. On receipt of notice of prosecution assessee filed an application to Commissioner for compounding of offences. Commissioner rejected said application on ground that assessee had been convicted for same offences for assessment years 2010-11, 2011-12 and 2012-13 and said fact was suppressed in application. He, thus, held that application was not maintainable in light of Para 8.1(iii) of CBDT Compounding Guidelines, 2019. Assessee claimed that order of conviction related to earlier years was under challenge in SLP wherein Supreme Court had stayed operation of order of conviction and he could not be considered a 'convict' during pendency of aforesaid proceedings. Prior order of conviction is a relevant fact and could not be said to be inconsequential and, thus, assessee should have duly disclosed existence of conviction order and proceedings pending before SLP while furnishing information in instant compounding application. Since assessee was a repeat defaulter and had been successfully convicted by Criminal Court in complaints filed against him, in such circumstances until pending conviction orders with respect to earlier years were set aside, there was no infirmity in order of Commissioner in light of Para 8.1(iii) of CBDT guidelines, 2019. [In favour of revenue] (Related Assessment years : 2014-15, 2015-16 and 2017-18) – [Viraj Exports (P) Ltd. v. Chief Commissioner of Income (TDS) [2022] 142 taxmann.com 285 (Del.)]

Assessing Officer cannot initiate prosecution against director without issuing notice to treat him as principal officer of Company

Assessing Officer filed a complaint against a company and assessee (director of company) for offence punishable under section 276B. Assessee filed an application before Trial Court for his discharge contending that he was only director of company and not managing director and hence fell under charge of section 2(35)(b) which requires a notice to treat him as principal officer of company and notice issued by Assessing Officer to him asking to show cause as to why prosecution should not be initiated against him for offence punishable under section 276B could not be considered as notice under section 2(35). Trial Court held that notice dated 21.10.2018 was not in consonance with section 2(35) and discharged assessee of offence punishable under section 276B. As conclusion of Trial Court that notice dated 21.10.2018 was not in consonance with section 2(35) did not suffer from any perversity or illegality, revision petition filed by revenue deserved to be dismissed. [In favour of assessee] - [Income-tax Department, Bangalore v. Jenious Clothing (P) Ltd. (2022) 140 taxmann.com 351 (Karn.)]

Amount of TDS deducted was not more than Rs. 50,000 and TDS amount was deposited with interest, criminal proceedings initiated against assessee for offence under section 276B were liable to be quashed

Failure to pay tax on distributed profits of domestic companies/deducted at source - Complaint was filed against assessee-firm and its principal officer for failure to deposit TDS amount for financial year 2016-17 to account of Central Government of India. Prosecution was launched under section 276B read with section 278B - Whether since TDS amount in all these cases were deposited with interest prior to initiation of criminal proceedings and apart from one or two cases, deducted amount was not more than Rs. 50,000, criminal proceedings were liable to be quashed - Held, yes [Paras 17 and 18] [In favour of assessee]

A complaint was lodged by Assistant Commissioner Income-tax Department stating that the assessee-firm, accused No. 1 and its the principal officer, accused No. 2 deducted TDS amount for the financial year 2016-17 but failed to credit the same to the account of Central Government of India. Therefore, the accused No. 2 on behalf of the accused No. 1 committed offence punishable under section 276B.

The assessee filed instant petition with prayer to quash complaint. The assessee submitted that the TDS amount deducted by it was deposited with certain delay, however, in terms of section 201(1A), the amount was deposited along with interest. According to assessee once the TDS amount had been deposited along with the interest there was no occasion to initiate the prosecution under sections 276B and 278B.

Held : TDS amount in all these cases were deposited with interest and the chart with respect to the same is also annexed with the counter affidavit of the Income-tax Department, wherein the date of deduction and date of depositing the said amount has been mentioned. However, some delay occurred in depositing the TDS. Apart from one or two cases, the deducted amount are not more than Rs. 50,000. While passing the sanction under section 279(1), the sanctioning authority has not considered the CBDT Instructions, bearing F. No. 255/339/79-IT (Inv.), dated 28.05.1980, issued in this regard by the CBDT. In CBDT instructions, it is mentioned that prosecution under section 276B shall not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of Government. No such consideration will, of course, apply to levy of interest under section 201(1A). Moreover after receiving the deducted amount with interest, the prosecution has been launched against the petitioners, which is not in accordance with law. If the petitioners failed to deposit the amount in question within the stipulated time, i.e. by the 7th day of the subsequent month, it was required to launch the prosecution immediately, which has not been done in the cases in hand. Moreover section 278AA clearly states that no person for any failure referred to under section 276B shall be punished under the said provisions, if he proves that there was reasonable cause for such failure.

The amount has already been deposited with interest and there is no reason why the criminal proceeding shall proceed and the criminal proceeding was launched after receiving the said amount with interest, had it been a case that the case was immediately instituted and thereafter the TDS amount has been deposited with interest, the matter would have been different. As such the continuation of the proceedings will amount to an abuse of the process of the Court.

Accordingly, the entire criminal proceedings and the cognizance orders in their respective cases, taken against the petitioners for the offences under sections 276B and 278B pending in the Court of Special Judge, Economic Offences, Dhanbad, are hereby, quashed. – [Dev Multicom (P) Ltd. v. State of Jharkhand (2022) 138 taxmann.com 538 (Jharkhand)]

Delayed remittance of TDS punishable under section 276B; Rejects plea of mens rea, financial constraints

Special Court for Economic Offences at Bangalore holds Assessee-Company guilty under section 276B for delayed remittance of TDS, imposes fine of Rs. 20,000/- and acquits its MD as the Revenue failed to prove his involvement in the day-to-day affairs of the business; Holds that non-imposition of penalty for TDS default is no defence against prosecution under section 276B; Assessee, a multi-specialty hospital, was found to have not paid TDS of Rs.1.07 Cr. for Financial year 2016-17 to the Revenue within the stipulated period; Revenue launched prosecution against the Assessee and its Managing Director (MD) under section 276B and 278B, respectively; Special Court observes that the penal provisions have to be strictly interpreted and whenever two views are possible, the one which favours the accused is to be upheld but that does not mean that “the penal provisions have to be interpreted in a way to avoid the penal consequence only”; Notes that Section 201(1) read with Rule 30 makes it clear that TDS has to be credited to Revenue’s account within the prescribed time, failing which Section 276B gets attracted, relies on Supreme Court ruling in Madhumilan Syntex Ltd. v. Union of India (2007) 290 ITR 199 : 208 CTR 417 : 160 Taxman 71 (SC) to reject the argument that voluntary remittance of the TDS with interest absolves the Assessee from the criminal consequence and notes that had Section 276B not contained the phrase ‘as required by or under the provisions of Chapter XVII-B’ then the argument would have been accepted; Special Court further observes that “there is no law to the effect that initiation of penalty proceedings is to be preceded before initiation of criminal proceedings”, thus, rejects Assessee’s submission that since penalty for TDS default was not imposed, the prosecution was required to be dropped and notes that the argument would be good if the penalty proceedings were not initiated; Also rejects the argument based on Section 40(a)(ia) that TDS was paid before the due date of filing ITR, therefore, the time provided for remitting TDS is up to the date of filing ITR, holds that the filing of ITR is completely different from the remittance of tax deducted but not paid; Holds that mens rea is not a prerequisite for invocation of Section 276B, relies on P&H High Court ruling in DCIT v. Modern Motor Works (1996) 220 ITR 415 : 133 CTR 259 : 87 Taxman 182 (P&H)  and Delhi High Court ruling in Rishikesh Balkishan Das v. I.D. Manchanda (1987) 167 ITR 49 (Del.) and holds that jurisdictional High Court ruling in Vyalikaval House Building Co-Operative Society Ltd. v. ITO, Bangalore (2020) 428 ITR 89 : (2019) 267 Taxman 81 : 110 taxmann.com 107 (Karn.) delivered in the context of Section 276C(2) is inapplicable in the present case; Thus, observes that only way to get rid of the conviction is by showing the existence of justifiable reasons for the failure to remit the TDS as provided under section 278AA and notes, “If the failure is inflicted by the negligence or inaction. Then it cannot be held a ‘reasonable cause.’”; Thus, observes that if the accounts where the TDS amount credited were attached or due to some other reason beyond the control of the Assessee the TDS amount could not be remitted, then it would be a reasonable cause but financial constraints or absence of mens rea cannot be termed as reasonable cause and non-remittance due to negligence or using the TDS amount to meet some financial requirements certainly is not a reasonable cause and holds the Assessee guilty under section 276B and imposes a fine of Rs. 20,000/- noting that non-realization of dues from the market led the Assessee to delay the remittance of TDS which was remitted before the due date of filing ITR; Regarding charges levelled against Assessee’s MD as per Section 278B, the Special Court holds that Revenue’s case was not that MD verified the TDS returns/Form No. 26AS and except the averment in the complaint there was no other evidence to show that the MD was in charge and responsible for day-to-day affairs of the Assessee’s business; Thus, relies on Bombay High Court ruling in Homi Phiroze Ranina and Delhi High Court ruling in Anil Batra and acquits the MD. – [ITO v. Panacea Hospital (P) Ltd. – Date of Judgement : 16.10.2021 (District Court, Bangalore)]

Neither service of notice nor hearing of petitioner before treating petitioner as a principal officer was involved, and connection of petitioner with management, and administration of company was also not established, Assessing Officer could not have named petitioner as Principal Officer

The petitioner had been treated as a principal officer of the company Kingfisher Airlines for the financial year 2009 under section 2(35). The petitioner contended that to come within the ambit of Key Management Personnel, the petitioner was neither managing director nor the chief executive officer the whole time director/the company secretary/the chief financial officer/anyway connected with management administration of the company.

The revenue on the other hand justifying the said order submitted that the petitioner was the treasurer of the U.B. Group of companies during which the relevant financial years and hence he was treated as principal officer. Further that neither a personal hearing nor an order was necessary to treat the person as a principal officer. It was sufficient if a notice of the intention of the Assessing Officer of treating any person as principal officer is issued. The petitioner assailed the order of the Commissioner on ground that the objections submitted by the petitioner to the notice issued had not been duly considered hence sought to set aside said order.

Held : The impugned order deserves to be set aside for the reason that a Principal Officer, as contemplated under section 2(35), used with reference to a local authority or a company or any other public body or any association of persons or anybody of individuals, means the secretary, treasurer, manager or agent of the authority, company, association or body, or any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof.

It is clear that to treat any person as a Principal Officer, such person should be connected with the management or administration of the local authority/company or association or body. Such connection with the management or administration is the basis for treating any person as a Principal Officer. Such connection has to be established or to be supported with substantial material to decide the connection of any person with the management or administration. Without disclosing the basis, no person can be treated as a ‘Principal Officer’ of the company recognising him as the Key Management Personnel of the company. The details of such information on the basis of which the Key Management Personnel tag is made, has to be explicitly expressed in the notice of the intention of treating any person as a Principal Officer by the Assessing Officer. Neither in the show-cause notice nor in the order impugned, such connection of the petitioner with the management or administration of the company Kingfisher Airlines Limited is established. The phrase ‘Key Management Personnel’ of the company has a wide connotation and the same has to be supported with certain material unless such connection is established, no notice served on the petitioner would empower the respondent authority to treat the petitioner as a ‘Principal Officer’.

In the instant case, the question inasmuch as neither service of notice nor hearing of the petitioner before treating the petitioner as a Principal Officer is involved. The fulcrum of dispute revolves around the aspect whether the petitioner is the person connected with the management or administration of the company. Such finding has to be supported by substantial material and has to be reflected in the notice issued under section 2(35) to treat a person as a Principal Officer of the company which will have wider consequences. The said aspect is lacking in the present order impugned. Merely on surmises and conjectures, no person shall be treated as a Principal Officer. Writ petition is to be allowed. The impugned order is to be quashed. – [A. Harish Bhat v. ACIT(TDS), Bengaluru (2020) 269 Taxman 218 : (2019) 111 taxmann.com 210 (Karn.)]

Mere delay in TDS deposits in time is offence sufficient to attract section 276B - No reasonable cause was shown for delay - Launching of prosecution is held to be valid

Section 278AA makes it clear that in order to get over the penal consequences that follow on account of non-payment of tax deducted at source, it is open for the accused persons to come clean of the said charge by showing reasonable cause for failure to deposit the said amount. In the light of this provision, contentions urged by the learned counsel for the petitioners cannot be accepted. Since the material placed on record prima facie discloses that the petitioners have deducted tax at source but failed to credit the same to the account of the Central Government within the prescribed time, the petitioners cannot escape from the rigour of Section 276B of the Act.

The alternative argument canvassed by the learned counsel for the petitioners that without determining the penalty, the respondent was not entitled to resort to criminal prosecution of the petitioners under Section 276B of the Act, also cannot be accepted for the reason that the petitioners/accused have not disputed their liability. The question of determining the liability and consequent imposition of penalty would arise only in case of dispute with regard to the liability to remit the deducted tax. In the instant case, the facts alleged in the complaint clearly indicate that the amount was credited subsequent to the survey. As a result, even this defence is not available to the petitioners. (Related Assessment Years : 2011-12, 2012-13) – [Golden Gate Properties Ltd v. DCIT – (2019) 416 ITR 399 : 265 Taxman 213 (Karn.)]

Assessee i.e. Managing Director of 'A' Group of Companies was sought to be prosecuted under section 276B for failure to remit tax deducted at source, in view of fact that a notice was issued to assessee to convey intention of department to treat him as Principal Officer of ‘A’ Group of companies and, moreover, assessee failed to bring on record any proof showing that amount in question was paid to department after issuance of show-cause notice, there was no infirmity in prosecution proceedings launched against assessee

Assessee i.e. Managing Director of ‘A’ Group of Companies, was sought to be prosecuted under section 276B for failure to remit tax deducted at source. Hence, instant petition was filed challenging validity of prosecution proceedings. It was noted that a notice was issued to assessee to convey intention of department to treat him as Principal Officer of ‘A’ Group of companies and, thereupon, a show-cause notice was issued in name of accused companies. It was also found that Sanctioning Authority had passed sanction order after referring to provisions of law applicable to assessee’s case. Moreover, assessee failed to bring on record any proof showing that amount in question was paid to department after issuance of show-cause notice. On facts, there was no infirmity in prosecution proceedings launched against assessee and, thus, instant petition was to be dismissed. [In favour of revenue] (Related Assessment years : 2011-12 and 2012-13) – [Dr. Viloo Patell v. Income Tax Department (2019) 112 taxmann.com 220 (Karn.)]

Directors cannot be acquitted merely on ground that no separate notices were issued to them - Failure to pay to the credit of the Government tax deducted at source – Directors in charge, to show that offence occurred without their knowledge or due diligence was exercised by them to prevent commission of offence–Non issuance of separate notices, does not absolve directors in charge–Order of lower courts acquitting directors is held to be erroneous - Benefit of probation granted to accused directors of assessee and levy of fine

It was held that section 278B of the Act, makes the directors of the company in charge of its affairs liable for the offence committed by it unless the presumption is rebutted by such director. For the purpose of section 278B, once the offence is shown to have been committed by the company, then the liability of the directors in charge of their affairs is attracted. The burden then shifts to such directors to show that the offence occurred without their knowledge or that they had exercised all due diligence to prevent the commission of such offence. Allowing the petitions of the revenue, the Court held that, the directors of the company were convicted for the offence under section 276B for the three assessment years in question 1982-83 to 1984-85. Both the lower criminal courts had erred in acquitting the directors of the assessee only because they were not issued separate show-cause notices. Both the directors had signed the company’s balance-sheets and therefore their defence that they were not in charge of the affairs of the company was untenable. Considering that the matters pertained to the assessment years 1982-83 to 1984-85 and given the long pendency of the matters, the directors were given the benefit of probation. Accordingly, while sentencing the directors to pay a fine of Rs. 50,000 each for the offence under section 276B for each of the assessment years in question and in default to undergo simple imprisonment for seven days, they were granted the benefit of probation and directed to file a bond of good behaviour in the trial court in the sum of Rs. 10,000 each for the period of six months. The judgments of the District Judge and Additional Sessions Judge and the Additional Chief Metropolitan Magistrate were set aside. (Related Assessment years : 1982,83 to 1984-85) – [ITO v. Anil Batra. (2018) 409 ITR 428 (Del.)]

There was no material to establish that assessee was in-charge of day-to-day affairs, management, and administration of his company, Assessing Officer could not have named him as Principal Officer and accordingly he could not have been prosecuted under section 276B for TDS default committed by his company

Assessee was a Non-Executive Chairman of Board of Directors of company based in Delhi/NCR region. Assessing Officer passed an order under section 2(35) with respect to TDS default of company treating assessee as Principal Officer of company within meaning of section 2(35). Assessee stated that he was not involved in day-to-day affairs of company. Further, Managing Director, himself had specifically stated that he was person in-charge of day-to-day affairs of company and not assessee. He had stated assessee was only a Non-Executive Director in company, who was based at Chennai and was not involved with day-today management of company and had not made any visits to company till date as he did not draw any salary or remuneration from company and attended Board Meetings only in Non-Executive capacity, for which, he did not even get any sitting fees. However, Assessing Officer without giving any reasons for rejecting contention of Managing Director and without any material to establish that assessee was in-charge of Company, arrayed assessee as Principal officer. Main criteria treating a person as Principal Officer is that he should have been in-charge of management, administration and day-to-day affairs of company. In absence of any material to establish that assessee was in-charge of day-to-day affairs, management, and administration of company, Assessing Officer could not have named him as Principal Officer and accordingly assessee could not have been prosecuted under section 276B for TDS default committed by company. [In favour of assessee] (Related Financial years : 2013-14 to 2014-15) - [Kalanithi Maran v. Union of India (2018) 405 ITR 356 : 304 CTR 17 : 256 Taxman 260 : 168 DTR 385 : 92 taxmann.com 308 (Mad.)]

Failure to pay to the credit tax deducted at source–Application for compounding of offence for delay in depositing tax deducted at source was dismissed only on ground that nobody attended proceedings when said application was taken up for hearing–Order was to be set aside and, matter was remanded back for disposal on merits

There was delay in depositing the tax deducted at source. An application for compounding of offences was made. Though assessee was served with letters of intimation informing date on which they should present themselves and seek relief in terms of compounding application, they could not depute a representative to remain present. Assessee’s application was rejected and a criminal complaint was filed. Against said order, petition was filed. Allowing the petition the Court held that the respondents had not applied their mind to compounding applications by dealing with merits thereof. Since application had been dismissed only on ground that nobody attended proceedings when said application was taken up for hearing, impugned order was to be set aside and, matter was to be remanded back for disposal on merits and in accordance with law. – [Durgeshwari Hi-Rise & Farms (P) Ltd v. CCIT (2018) 172 DTR 343 : (2019) 103 taxmannn.com 292 (Bom.)]

Sanction – Chief Commissioner – Late deposit of tax deducted at source – If sanctioning was held to be not as per requirement of law summons issued by the Court can be challenged

The assessee-company deducted an amount as TDS but failed to credit same in account of Central Government. However, later on, assessee credited amount of TDS withinterest. The Commissioner issued sanction order to prosecute assessee for offence committed under section 276B, pursuant to which the assessee filed a writ petition against sanction order. The Court noted that on criminal complaint being preferred, the Additional Chief Metropolitan Magistrate had already taken cognizance of issue of non-depositing of TDS by assessee and issued summons to assessee for appearance and to face trial and in view of the fact that trial had already been initiated against assessee in criminal court, it held that it would not be fair or proper for it to decide question of validity of sanction order on merits as it would amount to a pre trial adjudication and held that the questions and issues relating to issue of sanction order could be raised and decided during trial. Accordingly, it dismissed assessee’s writ.

If the assessee is able to make out that cognisance was not justified and as per law they can challenge and question the summoning order by way of petition under section 397 read with Section 401 of the Code of Criminal Procedure, 1973 or if permissible, by way of a petition under Section 482 of the Code. Referring various case laws the Court observed that following principles can be culled out:–

(a) It is incumbent on the prosecution to prove that the valid sanction has been granted by the sanctioning authority after being satisfied that a case for sanction has been made out.

(b) The sanction order may expressly show that the sanctioning authority has perused the material placed before it and, after consideration of the circumstances, has granted sanction for prosecution.

(c) The prosecution may prove by adducing the evidence that the material was placed before the sanctioning authority and its satisfaction was arrived at upon perusal of the material placed before it.

(d) Grant of sanction is only an administrative function and the sanctioning authority is required to prima facie reach the satisfaction that relevant facts would constitute the offence.

(e) The adequacy of material placed before the sanctioning authority cannot be gone into by the court as it does not sit in appeal over the sanction order.

(f) If the sanctioning authority has perused all the materials placed before it and some of them have not been proved that would not vitiate the order of sanction.

(g) The order of sanction is a prerequisite as it is intended to provide a safeguard to a public servant against frivolous and vexatious litigants, but simultaneously an order of sanction should not be construed in a pedantic manner and there should not be a hyper-technical approach to test its validity.” – [Indo Arya Central Transport Ltd v. CIT (TDS) (2018) 92 taxmann.com 129 (Del)]

In a case of prosecution for non-deduction of TDS, the Chief Metropoliton Magistrate held that in the case of default, Mens rea has to be presumed to exist and it is for the accused to prove the contrary and that too beyond reasonable doubt. It rejected assessee’s plea that default in payment of TDS occurred due  to delay by department in refunding excess TDS due to the assessee, holding that amount deducted by way of TDS has to be deposited within prescribed time irrespective of any counter claim of the assessee. – [ITO v. VCI Hospitality Ltd - Date of Judgement : 28.08.2018 (Chief Metropolitan Magistrate, Delhi) (Del)]

If assessee deducted TDS but same was not deposited within specified time due to oversight on part of its accountant, prosecution proceedings against assessee after three years would be contrary to CBDT instruction and, thus, deserved to be quashed

The petitioner in the relevant year 2009-10 made certain payments on various dates, towards interest (other than 'interest on securities') and commission and while crediting the said sums, duly deducted tax at source under sections 194A and 194H respectively. The aforesaid tax could not be deposited within due date due to oversight on the part of the Accountant. The mistake was noticed at the time of audit of books of account by the Statutory Auditors. The petitioner so paid a sum thereafter paid aforesaid sum. Owing to the delay in payment, the petitioner while paying the said sum also deposited interest amounting to as required under section 201(1A).

Prosecution had been launched against the petitioner on the basis of complaint filed by the department alleging therein that TDS return filed by the petitioner has had not been deposited in time to the credit of Central Government relevant year. Thus, there was delay of 481 days without any reasonable cause.

The Commissioner accorded sanction under section 279(1) for launching prosecution for the offence committed by the petitioner under section 276B. The Special Judge, on the basis of the aforesaid complaint filed by the complainant took cognizance against the petitioner and its three Directors for the offence under section 276B.

On writ to the High Court, the petitioner contended that the instant prosecution was mechanical and contrary to the instructions issued by the CBDT and was wholly unsustainable in law. Oversight on the part of the Accountant could not be termed as anything but a reasonable cause and such defaults are often committed in due course of business Department contented that by making payment of TDS amount along with interest will not exonerate the petitioner from the liability of section 276B.

Held : The petitioner deducted tax at source at the rate of Rs. 1,43,029 for the financial year 2009-10, but did not deposit the same with the Central Government within the specified time limit. Subsequently, out of total amount of Rs. 1,43,029 so deducted under sections 194A and 194H, the petitioner paid a sum of Rs. 41,029 on 07.09.2010 and, thereafter paid a sum of Rs. 1,02,000 on 20.09.2010. The petitioner also deposited interest of Rs. 23,595 as required under section 201(1A) owing to the delay in payment of the aforesaid amount.

The instructions issued by the CBDT dated 28.05.1980 wherein, it is mentioned that prosecution under section 276B should not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the government. No such consideration will, of course, apply to levy of interest under section 201(1A).

In the instant case, the petitioner has deposited the amount of Rs. 1,43,029 along with interest of Rs. 23,595 on various dates in the year 2010. Allegation against the petitioner is that the petitioner did not deposit amount of Rs. 1,43,029 duly deducted at source for the financial year 2009-10 within specified time with the Central Government, but the aforesaid amount has been deposited by the petitioner along with interest on various dates in the year 2010 when the mistake was noticed by the petitioner at the time of audit of Books of Account in 2010. Prosecution has been launched against the petitioner after the lapse of three years on 14.05.2013 as a consequence of sanction order passed under section 279(1) on 31.03.2013, in contravention of the instructions dated 28.05.1980 issued by the CBDT.

Section 278AA specifically says that no person shall be punished for any failure referred to under the said provisions, if the assessee proves that there was reasonable cause for such failure. Reasonable cause would mean a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides.

Oversight on the part of the Accountant, who was appointed to deal with Accounts and Income-tax matters, can be presumed to be a reasonable cause for not depositing the tax within time. The petitioner immediately after noticing the aforesaid defects by the Statutory Auditors of the petitioner-company deposited the amount of Rs. 1,43,029 along with interest amounting to Rs. 23,595 as required under section 201(1A) in the year 2010 itself. Instant prosecution has been launched against the petitioner on 14.05.2013 after lapse of about three years from the date of deposit of due tax along with interest by the petitioner under section 201(1A), which is contrary to the instructions issued by CBDT.

The order dated 15.05.2013 passed by the Special Judge, Economic Offences, Patna, taking cognizance of the offence under section 276B, along with entire criminal proceeding against the petitioner is hereby quashed. [In favour of assessee] – [Sonali Autos (P) Ltd. v. State of Bihar (2017) 396 ITR 636 : 298 CTR 91 : 84 taxmann.com 286 (Patna)]

Documents listed with complaint for offence under sections 276B and 278B against assessee could not be produced before Trial Court owing to fact that said documents were in judicial custody in some other cases, Trial Court was not justified in dismissing complaint for want of production of documents

Revenue filed complaints before Trial Court against assessee-company and its director for offence under sections 276B and 278B for failure to remit income-tax deducted at source into Government account. Trial Court posted matter for evidence of witness and also for marking of documents. Since complainant had not taken any steps to produce witness or mark documents despite availing 23 hearings, Trial Court dismissed complaint and discharged accused. Since documents listed with complaint were on file of another Trial Court and delay had not been caused by complainant, case to be restored to file of Trial Court for deciding same on merit . [In favour of revenue] (Related Assessment year : 1988-89) – [P. Jayanandan, ITO v. Sri Ramakrishna Steel Industries Ltd. (2013) 355 ITR 528 : 38 taxmann.com 175 : (2014) 220 Taxman 92 (Mad.)]

IN CASE OF DIRECTORS - Director of a company is not 'principal officer' within meaning of section 2(35) and in case Income-tax Officer seeks to prosecute a director along with company for an offence punishable under section 276B, then he has to issue a notice under sub-clause (b) of section 2(35) expressing his intention to treat such director as ‘principal officer’ of company and in absence of such a notice prosecution against director would fail

Respondent No. 1 was a private limited company and respondent No.3 was its director. The Assessing Officer had filed complaints before the ACMM praying therein that the respondents be summoned, tried and punished under section 276B. It was alleged that the respondents had failed to deduct the tax at source (TDS) from the interest paid and deposit the same with the Income-tax department within the prescribed period and, thus, had committed an offence punishable under section 276B. Respondent No. 3 was impleaded as an accused being 'principal officer' of the company within the meaning of section 2(35). Charge under section 276B was framed against the respondents to which they pleaded not guilty and claimed trial. After holding trial, while respondent No. 1 was convicted under section 276B, respondent No.3 had been acquitted on the ground that no notice was served on him under section 2(35) treating him as the ‘principal officer’, before launching the prosecution under section 276B, inasmuch as the notice issued to the company was defective in the sense that it was not mentioned therein that the department intended to treat the directors of the company as 'principal officers'. The department filed instant petitions seeking leave to appeal against the judgment passed by ACMM whereby respondent No. 3 had been acquitted of the offence under section 276B.

Held : Section 194A mandates the deduction of tax at source on the credit or payment of interest other than 'interest on securities'. Section 194A(4) uses the expression 'the person responsible for making the payment'. Section 204 defines the expression 'person responsible for paying'. 

Perusal of section 204(iii) clearly shows that in case of a company, the company itself, including the principal officer thereof, would be responsible to deduct the tax at source and deposit it with the department. 

Infringement of section 194A(4) is an offence punishable under section 276B. In case an offence is committed by a company, the prosecution for the offence under section 276B has to be launched against the company itself and its principal officer. 

Section 2(35) defines the expression ‘principal officer’. A perusal of the aforesaid provision clearly shows that the director is not included within the ambit of sub-clause (a) of section 2(35). In case the ITO seeks to prosecute the director along with the company for an offence punishable under section 276B, then he has to issue a notice under sub-clause (b) of section 2(35) expressing his intention to treat the director as 'principal officer' of the company. 

In the instant case, admittedly, no notice as, required under section 2(35) had been issued to respondent No. 3. Only a show-cause notice was issued to the company wherein it was not mentioned that the Assessing Officer intended to treat the director of the company as the 'principal officer' for the purpose of launching prosecution under section 276B. 

The legal position emerging from the various decisions is that before launching a prosecution under section 276B against the directors of a company, the Assessing Officer has to issue a notice under section 2(35) expressing his intention to treat such directors of the company as the 'principal officers'. However, it may not be necessary to issue a separate notice or communication to all the directors that they are to be treated as the ‘principal officers'. It would be sufficient compliance if in the show-cause notice issued to the company it is mentioned that the directors are to be considered as the principal officers of the company under the Act. 

In the instant case, neither a notice was issued to respondent No. 3 under section 2(35) showing that the department intended to treat him as the ‘principal officer’ nor in the show-cause notice issued to the company it was mentioned that the department intended to treat the directors of the company as the ‘principal officers’, for the purpose of launching prosecution under section 276B. For the foregoing reasons, there was justification in not granting leave of appeal to the petitioner. The petition was to be dismissed accordingly. – [CIT v. Delhi Iron Works (P) Ltd & ORS (2011) 331 ITR 5 : (2010) 195 Taxman 372 : 8 taxmann.com 61 (Del.)]

ITO filed complaint under section 276B, read with section 278B against partners of firm which failed to deduct tax at source as required under section 194A - Trial court held that as no notice was given to partners of firm under section 2(35), they could not be considered as principal officers and as such, they could not be convicted under section 278B and that in absence of averment in complaint that partners were in charge of and responsible to firm for conduct of business of firm, complaint was liable to be dismissed - On revision petition, Sessions Judge confirmed discharge of accused partners - On facts, no interference was required in order of discharge

ITO filed the complaint under section 276B, read with section 278B against the partners of the firm which failed to deduct tax at source as required under section 194A. Accordingly, a complaint under section 276B read with section 278B was filed against the partners of the firm. The trial court came to the conclusion that as no notice was given to the partners of the firm under section 2(35), the partners could not be considered as principal officers and as such, they could not be convicted under section 278B. It was further held that in the absence of an averment in the complaint that the partners were in charge of and responsible to the firm for the conduct of the business of the firm the complaint was liable to be dismissed. Against the order of discharge, the ITO filed a revision petition which was dismissed by the Sessions Judge. On petition under section 482 of the Code of Criminal Procedure.

No interference was required in the impugned order, particularly when the order of discharge was affirmed in revision by the Court of Sessions. Though instant petition had been filed under section 482 of the Code of Criminal Procedure, 1973, in substance it was a second revision against the order of discharge which was barred under section 397(2) of the Code. The provisions of section 397(2) of the Code cannot be circumvented merely by filing the petition under section 482 of the Code. On the merits also, in similar circumstances, the High Court in Smt. Pushpa Maini v. ITO (1993) 200 ITR 198 : 68 Taxman 300 (P&H) has held that in the absence of pleading in the complaint about the involvement of the respondents and about their responsibility for the conduct of the business, the discharge order passed by the trial court on the said ground could not be said to be unjustified. Similarly, regarding the notice part, the Himachal Pradesh High Court in ITO v. Dayal Sons (2000) 244 ITR 126 : (2002) 123 Taxman 192 has held that prosecution of the accused for offences under sections 276C and 279 was bad and vitiated if no notice was given to him before launching the prosecution. The High Court has further, held that the requirement of natural justice is inherent in the provisions of section 279(2), and that the person accused is entitled to notice before initiation of the proceedings in respect of which a right of compounding has been given. A similar view was taken by the Madras High Court in Shital N. Shah v. ITO (1991) 188 ITR 376, which had been followed by the trial court, while discharging the accused. In view of this legal position, on the merits also, no infirmity or illegality was found in the impugned order. (Related Assessment year : 1980-81) – [ITO v. Shiv Sewak Cotton Co. (2006) 282 ITR 73 : 153 Taxman 509 (P&H)]

Financial Hardship – No reasonable cause

Respondents initiated prosecution proceedings against appellant under section 276B for its failure to deposit tax deducted at source. On writ, Single Judge dismissed same. Provisions of section 278AA would be available to appellant if it was proved that it had sufficient and good reasons for committing default contemplated in section 200. It was for appellant to produce sufficient evidence for non-deposit of tax deducted at source during criminal trial to avail of benefit of section 278AA and since except for pleading financial hardship, there was no other reason provided by appellant for such default, Single Judge was justified in not entertaining writ petition of appellant. The appeal was, accordingly, to be dismissed. [In favour of revenue] (Related Financial years : 1995-96, 1997-98 to 1999-2000) - [Shaw Wallace & Co. Ltd. v. CIT (2004) 136 Taxman 346 (Cal.)]

Unintentional TDS default is not punishable

In Union of India v. Pyarelal Tarachand And Anr., the Hon’ble High Court declined to interfere in the judgment where trial court acquitted the assessee because it was not proved that the assessee has deliberately or intentionally committed the default.

Criminal complaint was filed by appellant against respondent for initiation of his prosecution on account of violation of sections 276B and 278B. Trial court on appreciation of evidence found that there was no intentional suppression of income by respondent and interest paid to concerned depositors was duly shown in returns for relevant assessment years but due to inadvertence Form No. 15A was not attached with them and return in Form No. 20A as required under rule 37(2)(a) was not filed and it was not proved that he had deliberately or intentionally committed above default or there was mala fide intention in it. In view of above findings recorded by Court below wherein benefit of doubt had been extended to respondent, there was no case for any interference made out and no infirmity or perversity could be pointed out against impugned judgment and, hence, being without merit it was to be dismissed. [In favour of ssessee] (Related Assessment years : 1978-79 to 1984-85) - [Union of India v. Pyarelal Tarachand And Anr. (2003) 264 ITR 525 : 180 CTR 551: (2004) 135 Taxman 97 (MP)]

A company which cannot be punished with imprisonment can be punished with fine only - Only harmonious construction that could be given to section 276B is that the mandatory sentence of imprisonment and fine is to be imposed where it can be imposed, namely, on persons coming under categories of (i) every person, who at the time the offence was committed, was incharge of, and was responsible to the company for the conduct of business; and (ii) any director (who, in relation to a firm means a partner, manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed but where it cannot be imposed, namely, on a company fine will be the only punishment

The Commissioner filed a complaint in the Special Court for Economic Offences, alleging commission of an offence under section276B, read with section 278B, by the assessee-firm. While the Trial Court discharged the firm on the ground that before sanctioning prosecution under section 279(1) the firm was not given an opportunity of being heard, the High Court held that if ultimately the court found the firm to be guilty, the court could not legally impose the substantive sentence of mandatory imprisonment on firm and as such, the prosecution was not maintainable. On appeal to Supreme Court:

Held : From a plain reading of section 276B, it is manifest that if an offence under the Act is committed by a company, the persons who are liable to be proceeded against and punished are : (1) the company (which includes a firm) ; (ii) every person, who at the time of offence was committed, was incharge of, and was responsible to the company for the conduct of the business; and (iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed The words 'as well as the company' appearing in the section also make it unmistakably clear that the company alone can be prosecuted and punished even if the persons mentioned in categories (ii) and (iii), who are to all intents and purposes vicariously liable for the offence, are not arraigned, for, it is the company which is primarily guilty of the offence. Even though in view of the provisions of section 278B, a company can be prosecuted and punished for an offence committed under section 276B (besides other offences under the Act), the sentence of imprisonment which has got to be imposed thereunder cannot be imposed, it being a juristic person. This apparent anomalous situation can be resolved, needless to say, only by a proper interpretation of the section.

Keeping in view the 47th Report of the Law Commission which recommended punishment of fine in substitution of imprisonment in the case of a corporation and the principles of interpretation of statutes, the only harmonious construction that could be given to section 276B is that the mandatory sentence of imprisonment and fine is to be imposed where it can be imposed, namely, on persons coming under categories (ii ) and (iii) above, but where it cannot be imposed, namely, on a company, fine will be the only punishment. The two other alternative interpretations could also be given : (i) that a company cannot be prosecuted; or (ii) that a company may be prosecuted and convicted but not punished, but these interpretations will be de hors section 278B or wholly inconsistent with its plain language.

For the foregoing discussion, the High Court’s order that prosecution of the assessee-firm was legally impermissible, could not be sustained. The appeal was, therefore, allowed. - [M.V. Javali v. Mahajan Borewell & Co. (1998) 230 ITR 1 : (1997) 143 CTR 320 : 95 Taxman 306 (SC)]

Prosecution under Section 276B should not normally be proposed when the amount involved and/or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government. No such consideration will of course, apply to levy of interest under Section 201(1A)

The Assessing Officer filed a complaint against the petitioner on 31.03.1991 under section 276B read with section 278B alleging that the petitioner did not deduct the income-tax at source for the years 1982-83 and 1983-84. In fact before the prosecution proceedings were initiated the petitioner had deducted the required tax and deposited the same.

On writ, the petitioner contended that in view of the instructions issued by the CBDT dated 28.05.1980, the prosecution under section 276B should not normally be proposed when the amount involved and/or the period of default, is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government and, therefore, the petitioners were entitled to acquittal. The department contended that the instructions in question cannot possibly replace the provisions of the statute and once the relevant provisions of the statute provide punishment, the departmental instructions have to make way and it is in the discretion of the officer concerned depending upon the facts and circumstances of each case whether the prosecution should be launched or not.

The words ‘not normally’ in instructions of CBDT dated 28.05.1980 precede the words 'be proposed when the amount involved and/or the period of default is not substantial and the amount has also been deposited in the meantime to the credit of the Government'. It is true that the word 'normally' does not mean that it is necessary or incumbent upon the authorities concerned so as not to launch proceedings under section 276B but when the conditions for exempting the assessee from prosecution as spelled out in the instructions are available, it will not be open to the authorities then also to have discretion in the matter as otherwise, the authorities concerned may exempt an assessee from prosecution in one set of circumstances and to prosecute other assessee on the same or identical facts. That would undoubtedly be violative of article 41 of the Constitution of India, Discretion of the Assessing Officer to launch or not to launch prosecution is restricted only to the extent that as to what facts constitute the discretion for launching the prosecution and what facts would entail exemption from prosecution shall always depend upon the facts of each case with regard to amount involved or the period of default. That is always in the discretion of the authorities concerned which, of course, again is to be used in a judicial manner. Insofar as the other contention of the department that it is the provisions of the statute which shall have precedence and not the instructions concerned, no inconsistency was found in the relevant provision of the statute and the instructions quoted above. The relevant provision of the statute no doubt talks of prosecution but the instructions provide an exception in limited matters and that too where the conditions precedent in the instructions are available or in existence. It is no doubt true that the assessee is liable for punishment if he makes a default in deposit of tax. The instructions deal with the situation in which the department in its discretion may not launch the prosecution.

Having held that even on facts and circumstances of the instant case, it was the discretion of the authorities to apply the instructions, this case would have normally been sent to the authorities concerned for consideration but the fact that very insignificant amount of Rs. 9,428 in one case and even lesser amount in another case was involved as also that the prosecution came to be launched after a number of years since the default was committed or even from the date when the tax was deposited, it would serve no useful purpose in remitting the case to the authorities concerned. Therefore, the complaint against the petitioners in each case was quashed. [In favour of assessee] (Related Assessment years : 1982-83 and 1983-84). – [Bee Gee Motors & Tractors & Anr. v. ITO (1996) 218 ITR 155 : (1995) 127 CTR 224 : 82 Taxman 493 (P&H)]