Landmark Judgements of Supreme Court on Section Section 276B [Failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B]
Where TDS has been deposited late, it cannot be contended that since TDS has already been deposited to account of Central Government, there is no default and no prosecution can be ordered - On company’s failure to deduct tax at source and to pay it to Central Government, prosecution can be validly ordered against company and charge can be framed against it
Wherever a company is required to deduct tax at source and to pay it to the account of the Central Government, failure on the part of the company in deducting or in paying such amount is an offence under the Act and has been made punishable. It, therefore, cannot be said that the prosecution against a company or its directors in default of deducting or paying tax is not envisaged by the Act. It is no doubt true that company is not a natural person but ‘legal’ or ‘juristic’ person. That, however, does not mean that company is not liable to prosecution under the Act. ‘Corporate criminal liability’ is not unknown to law. The law is well-settled on the point and it is not necessary to discuss it in detail. Therefore, prosecution could have been ordered against the company and charge could have been framed against it.
From the statutory provisions, it is clear that to hold a person responsible under the Act, it must be shown that he/she is a ‘principal officer’ under section 2(35) of the Act or is 'in charge of' and 'responsible for' the business of the company or firm. It is also clear from the various cases that where necessary averments have been made in the complaint, initiation of criminal proceedings, issuance of summons or framing of charge cannot be held illegal and the Court would not inquire into or decide correctness or otherwise of the allegations levelled or averments made by the complainant. It is a matter of evidence and an appropriate order can be passed at the trial. In the case at hand, in the show-cause notice issued under section 276B, read with section 278B, it was expressly stated by the ITO, that the directors were considered to be principal officers under section 2(35). In the complaint filed by the Commissioner also, it was stated that appellants were considered as principal officers. In the above view of the matter, it was to be held that the complaint filed against the appellants, particularly against the directors was well-founded and, hence, maintainable.
No separate notice and/or communication ought to have been issued before issuance of show-cause notice under section 276B, read with section 278B, that the directors were to be treated as principal officers under the Act. When in the show-cause notice itself it was stated that the directors were to be considered as principal officers under the Act and a complaint was filed, such complaint was entertainable by a Court, provided it was otherwise maintainable. In view of the aforesaid discussion, the sanction to prosecute granted by the Commissioner could not be held illegal or unlawful, nor the complaint could be held bad in law. – (Related Assessment year : 1989-90) – [Madhumilan Syntex Ltd. v. Union of India (2007) 290 ITR 199 : 208 CTR 417 : 160 Taxman 71 (SC)]
Merely being a director of a company is not sufficient. – Managing and joint director would admittedly be in charge. [SMS Pharmaceuticals v. Neeta Bhalla & Anr. (2005) 148 Taxman 128 (SC)]
A company is not a natural person but legal or juristic person. That would not mean that it is not liable to prosecution under the Act
It was held that juristic person is also subject to criminal liability under the relevant law. Only thing is that in case of substantive sentence, the order is not enforceable and juristic person cannot be ordered to suffer
imprisonment. Other consequences, however, would ensue, that is, payment of fine, etc. – [Standard Chartered Bank v. Directorate of Enforcement (2005) 145 Taxman 154 (SC)]
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 section 276B, 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:
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 beprosecuted 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) 95 Taxman 306 (SC)]