1. Introduction
Numerous occasions arise when it is alleged that an offence under any Act is committed by a company and prosecution is invariably sought to be launched against the company, its directors and some of its executives. As “Company” is an artificial person created by law, and is capable of acting only through human agency occupying the position of directors and executives, it is but natural that all such persons are charged for the offence.
The provisions regarding the liability of the directors and other persons for offences committed by the company are enumerated under various Acts such as Industries (Development and Regulation) Act, Foreign Exchange Regulation Act; MRTP Act, Securities Contracts (Regulations) Act; Essential Commodities Act, Employees’ Provident Fund and Misc. Provisions Act, Workmen’s Compensation Act, Payment of Bonus Act, Payment of Wages Act, The Environment (Protection) Act, Water (Prevention and control of Pollution) Act, Minimum Wages Act; Payment of Gratuity Act, Apprentices Act, Central Excise and Salt Act, Customs Act, 1961, Negotiable Instruments Act etc. etc. and the pro-visions are somewhat identical in nature. Hence, when the provisions qua the directors’ liability are considered under the Income-tax Act, 1961, it is also pertinent to note the law as laid down under other Acts by the Courts.
2. Provisions of Section 278B
As per sub-section (1) of section 278B, where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. The proviso to sub-section (1) provides that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
Sub-section (2) provides that notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
As per sub-section (3) where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or sub-section (2), such company shall be punished with fine and every person, referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (2), shall be liable to be proceeded against and punished in accordance with the provisions of this Act. The Explanation to section 278B provides that for the purposes of section 278B — (a) “company” means a body corporate, and includes — (i) a firm and (ii) an association of persons or a body of individuals whether incorporated or not and (b) “director”, in relation to — (i) a firm, means a partner in the firm (ii) any association of persons or a body of individuals, means any member controlling the affairs thereof.
3. Legislative history and analysis of the Section
Section 278B was inserted by the Taxation Laws (Amendment) Act, 1975 reported in (1975) 100 ITR 33 (ST) w.e.f. 1-10-1975. The object and scope of this section was explained by the Board in its Circular No. 179 dated 30-9-1975 reported in (1976) 102 ITR 26 (ST).
Under sub-section (1) the essential ingredient for implicating a person is his being “in-charge of” and “responsible to” the company for the conduct of the business of the company. The term responsible is defined in the Black’s Law dictionary to mean accountable. Hence, the initial burden is on the prosecution to prove that the accused persons at the time when the offence was committed were “in charge of” and “was responsible” to the company for its business and only when the same is proved that the accused persons are required to prove that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
Both the ingredients “in-charge of” and “was responsible to” have to be satisfied as the word used is “and” [Subramanyam v. ITO (1993) 199 ITR 723 (Mad.)]. Under sub-section (2) emphasis is on the holding of an offence and consent, connivance or negligence of such officer irrespective of his being or not being actually in charge of and responsible to the company in the conduct of the business. Also, while all the persons under sub-section (1) and sub-section (2) are liable to be proceeded against it is only persons covered under sub-section (1) who by virtue of the proviso escape punishment if he proves that the offence was committed without his knowledge or despite his due-diligence. From the language of both the sub-sections it is also clear that the complaint must allege that the accused persons were responsible to the firm/company for the conduct of its business at the time of the alleged commission of the business to sustain their prosecution. [Jai Gopal Mehra v. ITO (1986) 161 ITR 453 (P&H)].
Insertion of sub-section (3) by the Finance (No.) Act, 2004 w.e.f. 1-10-2004 was explained by Circular No. 5 dated 15th July, 2005 reported in (2005) 276 ITR 151 (ST). The said amendment was brought to resolve a judicial controversy as to whether a company, being a juristic person, can be punished with imprisonment where the statute refers to punishment of imprisonment and fine. The Apex Court in Javali (M.V.) v. Mahajan Borewell and Co. (1998) 230 ITR 1
held that a company which cannot be punished with imprisonment can be punished with fine only. However, in a subsequent decision by majority in the case of ACIT v. Veliappa Textiles Ltd. (2003) 263 ITR 550 (SC) it was held that where punishment is by way of imprisonment then prosecution against the company would fail. In order to plug loopholes pointed by the Apex Court in Veliappa Textiles (supra) sub-section (3) was introduced whereby company would be punished with fine and other person in-charge of or conniving officers of the company would be punished with imprisonment and fine. It is also to be noted that the legal position laid down in the case of Veliappa Textiles (supra) was overruled by the Apex Court decision rendered in
Standard Chartered Bank v. Directorate of Enforcement (2005) 275 ITR 81 (SC).
4. Nature of liability
The principal liability under section 278B is that of the company. The other persons mentioned in sub-section(1) and sub-section (2) are vicariously liable i.e., they could be held liable only if it is proved that the company is guilty of the offence alleged.
The Apex Court in Sheoratan Agarwal v. State of Madhya Pradesh AIR 1984 S.C. 1824 while dealing with the provisions of section 10 of the Essential Commodities Act which are similar to section 278B has held that the company alone may be prosecuted. The person-in-charge only may be prosecuted. The conniving officer may individually be prosecuted.
The Apex Court in Anil Hada v. Indian Acrylic Ltd. A.I.R 2000 S.C. 145 while dealing with section 141 of the Negotiable Instruments Act held that where Company is not prosecuted but only persons in-charge or conniving officer are prosecuted then such prosecution is valid provided the prosecution proves that the company was guilty of the offence.
5. Strict Construction
The Supreme Court in the case of Girdharilal Gupta v. D. N. Mehta, AIR 1971 S.C. 2162, has held that since the provision makes a person who was in charge of and responsible to the company for the conduct of its business vicariously liable for an offence committed by the company. The provision should be strictly construed.
6. Mens rea
Section 278B is a deeming provision and hence it does not require the prosecution to establish mens rea on the part of the accused. In
B. Mohan Krishna v. UOI 1996 Cri.L.J 638 AP it is held that exclusion of mens rea as a necessary ingredient of an offence is not violative of Article 14 of the Constitution of India.
7. Proprietary concern
In S. K. Real Estates (2002) Cr.L.J. 1689 (Mad.) it was held that prosecution against a proprietary concern is not maintainable as it is not a legal entity or juridical person.
8. Society
In Dharma Pratisthan v. Mandal (1988) 173 ITR 487 (Del.) it is held that a Society being a AOP and its members can be prosecuted.
9. Liability of Directors, Managing Directors, Manager, Partners, etc.
From the analysis of the provisions of section 278B, it could be seen that the scope and the exact connotation of the expression “every person who at the time the offence was committed was in-charge of, and was responsible to, the company for the conduct of business of the company” assumes a very important role. If a person i.e. the director or an executive of the company falls within the purview of this expression, he would be liable for the offence of the company, and may be punished therefor. If, on the other hand, the person charged with an offence is not the one who falls within the ambit of that expression, the Court will relieve him of the accusation. Therefore, the essential question that arises is as to who are the persons in-charge of, and responsible to, the company for the conduct of the business of the company. It should be noted that the onus of proving that the person accused was in-charge of the conduct of the business of the company at the time the contravention took place lies on the prosecution.
In Girdhari Lai Gupta’s case (Supra), the Supreme Court construed the expression, ‘person in-charge and responsible for the conduct of the business of the company’ as meaning the person in overall control of the day-to-day business of the company. In arriving at this inference the Supreme Court took into consideration the wordings pertaining to sub-section (2) and observed:
“It mentions director, who may be a party to the policy being followed, by a company and yet not be in-charge of the business of the company. Further, it mentions manager who usually is in-charge of the business but not in over-all-charge. Similarly the other officers may be in charge of only some part of business”.
10. Firm and partners
The Apex Court in State of Karnataka v. Pratap Chand & Ors. (1981) 2 SCC 335 has while dealing with prosecution of partners of a firm held that ‘person in-charge’ would mean a person in overall control of day-to-day business. A person who is not in overall control of such business cannot be held liable and convicted for the act of firm. In
Monaben Ketanbhai Shah & Anr. v. State of Gujarat & Ors. (2004) 7 SCC 15 (SC) the Apex Court while dealing with the provisions of sections 138 and 141 of the Negotiable Instruments Act, 1881, it was observed that when a complaint is filed against a firm, it must be alleged in the complaint that the partners were in active business. Filing of the partnership deed would be of no consequence for determining the question. Criminal liability can be fastened only on those who at the time of commission of offence were in-charge of and responsible for the conduct of business of the firm. The Court proceeded to observe that it was because of the fact that there may be sleeping partners who were not required to take any part in the business of the firm; there may be ladies and others who may not be knowing anything about such business. The primary responsibility is on the complainant to make necessary averments in the complaint so as to make the accused vicariously liable. In
Krishna Pipe and Tubes v. UOI (1998) 99 Taxman 568 (All.) it was held that sleeping partners cannot be held liable for offence.
11. Manager
In Municipal Corporation of Delhi v. Ram Kishan Rohtagi & Ors. AIR 1983 SC 67, the accused invoked the jurisdiction of the High Court under section 482 of the Code praying for quashing of criminal proceedings initiated against them under the Prevention of Food Adulteration Act, 1947. Whereas accused No. 1 was manager of the company, accused Nos. 2-5 were directors. A complaint was led by the Food Inspector of the Municipal Corporation, inter alia, alleging that ‘Morton Toffees’ sold by the accused did not conform to the standards prescribed for the commodity. The Metropolitan Magistrate issued summons to all the accused for violating the provisions of the Act. It was contended on behalf of the accused that proceedings were liable to be quashed as it was not shown that accused persons were in-charge of and responsible for the conduct of business. The High Court allowed the petition and quashed the proceedings. Aggrieved Municipal Corporation challenged the decision. The Apex Court held that so far as the manager is concerned, we are satisfied that from the very nature of his duties it can be safely inferred that he would undoubtedly be vicariously liable for the offence, vicarious liability being an incident of an offence under the Act.
12. Company and Directors etc.
In Jamshedpur Engineering & Machine Manufacturing Co. Ltd. & Ors. v. Union of India & Ors. (1995) 214 ITR 556 (Pat.), the High Court of Patna (Ranchi Bench) held that no vicarious liability can be fastened on all directors of a company. If there are no averments in the complaint that any director was ‘in-charge of’ or ‘responsible for’ conduct of business, prosecution against those directors cannot be sustained.
In R. K. Khandelwal v. State [(1965) 2 Cri. L.J. 439 (AH)] while dealing with liability of non-working directors it has been very succinctly stated by Mathur J. as under:
“In companies there can be directors who are not in charge of, and responsible to the company for the conduct of the business of the company. There can be directors who merely lay down the policy and are not concerned with the day-to-day working of the company. Consequently, the mere fact that the accused person is a director of the company, shall not make him criminally liable for the offences committed by the company unless the other ingredients are established which make him criminally liable. To put it differently, no director of a company can be convicted of the offence under section 27 of the Act [The Drugs Act, 1940] unless it is proved that the sub-standard drug was sold with his consent or connivance or was attributable to any neglect on his part, or it is proved that he was a person in-charge of, and responsible to the company for the conduct of the business of the company.”
In Mahalderam Team Estate Pvt. Ltd. v. D. N. Pradhan [(1979) 49 Comp. Cas. 529 (Cal.)], a case under the Employees’ Provident Fund, Act, 1952, of which section 14A is pari materia, all the directors of a company were prosecuted for the offence of non-payment of provident fund contributions of the company’s employees, the Calcutta High Court held that under the said section a company is made primarily liable for an offence committed under the Act. The liability may be extended to other persons vicariously only under the conditions laid down in the section. A director of a company may be concerned only with the policy to be followed and might not have any hand in the management of its day-to-day affairs. Such person must necessarily be immune from such prosecutions. Thus, it has to be established by placing before the Court necessary and sufficient material from which the Court can satisfy itself, that the accused directors took some part in the running of the business of the com¬pany and a mere bald statement that the accused persons are directors of the company and hence responsible for the conduct of the business and management of the company will not do.
In the case of Om Prakash v. Shree Keshariya Investments Ltd. [(1978) 48 Comp. Cas. 85 (Delhi)], had held that a distinction has to be made between directors who are on the board purely by virtue of their technical skill-or because they represented certain special interests and those who are in effective control of the management and affairs and it would be unreasonable to fasten liability on independent directors for defaults and breaches of the company where such directors were appointed by virtue of their special skill or expertise but did not participate in the management. This view has been followed by the Division Bench of the Bombay High Court in the case of
Tri-Sure India Ltd. [(1983) 54 Comp. Cas. 197 (Bom.)].
In SMS Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. [2005] 148 Taxman 128 (SC) wherein this Court while dealing provisions of section 141 of the Negotiable Instruments Act which is similar to section 278B laid down following important law relating to liability of directors:
(a) It is necessary to specifically aver in a complaint under section 141 that at the time the offence was committed, the person accused was in charge of, and responsible for the conduct of business of the company. This averment is an essential requirement of section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of section 141 cannot be said to be satisfied.
(b) Merely being a director of a company is not sufficient to make the person liable under section 141 of the Act. A director in a company cannot be deemed to be in- charge of and responsible to the company for conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in-charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.
(c) The Managing Director or Joint Managing Director would be admittedly in-charge of the company and responsible to the company for conduct of its business. When that is so, holders of such positions in a company become liable under section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in-charge of and responsible for the conduct of business of the company. Therefore, they get covered under section 141.
In Madhumilan Syntex Ltd. v. UOI (2007) 290 ITR 199 (SC) assessee had deducted TDS but credited the same to the account of the Central Government after the expiry of the prescribed time limit thereby constituting an offence under section 276B r.w.s. 278B. A show cause notice was issued against the company as well as its four directors as “principal officers”. The accused pleaded that the ground of “reasonable cause”. However sanction for prosecution was granted a complaint was filed against the appellants on 26th Feb., 1992 in the Court of the Addl. Chief Judicial Magistrate (Economic Crime), Indore. The accused filed applications under s. 245 of the Cr. PC, 1973 (hereinafter referred to as ‘the Code’) for discharge from the case contending that they had not committed any offence and the provisions of the Act had no application to the case. It was alleged that proceedings were initiated mala fide. In several other similar cases, no prosecution was ordered and the action was arbitrary as also discriminatory. Moreover, there was ‘reasonable cause’ for delay in making payment and the case was covered by s. 278AA of the Act. The directors further stated that they could not be treated as ‘principal officers’ under s. 2(35) of the Act and it was not shown that they were ‘in-charge’ of and were ‘responsible for’ the conduct of business of the company. No material was placed by the complainant as to how the directors participated in the conduct of business of the company and for that reason also, they should be discharged. However the prayers of the accused were rejected. Against this rejection a Revision petition was filed which was also rejected. Against the same Criminal petition was filed before the High Court which was also dismissed. Hence the accused approached the Supreme Court. Following were the important points of law laid down by the Apex Court:
1. 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.
2. 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 s. 2(35) of the Act or is ‘in charge of’ and ‘responsible for’ the business of the company or firm. 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.
3. No independent and separate notice that the directors were to be treated as principal officers under the Act is necessary and when in the showcause notice it was stated that the directors were to be considered as principal officers under the Act and a complaint was filed, such complaint is entertainable by a Court provided it is otherwise maintainable.
4. Once a statute requires to pay tax and stipulates period within which such payment is to be made, the payment must be made within that period. If the payment is not made within that period, there is default and an appropriate action can be taken under the Act.
5. It is true that the Act provides for imposition of penalty for non-payment of tax. That, however, does not take away the power to prosecute accused persons if an offence has been committed by them.
Though the Apex Court did not go into the merits of the case and decided the issue in respect of maintainability of criminal complaint, the decision has given a clear warning to the corporates and their principal officers, the need for strict adherence to time schedules in the matter of payment of taxes, especially TDS. It is time that the taxpayers also realise they have to be extra careful when it comes to remittance of the TDS, as it is money due to the Government, which they have withheld from paying to a third party. However it is important that the Revenue does not take shelter of this decision and launch criminal prosecution even in case of few months of delayed remittance of tax deducted at source.
13. Accountant
In Dev v. State of A.P. 2002 Cri.L.J 4770 (Andhra Pradesh) it was held that an Accountant is in-charge of and was responsible to the company for the conduct of its business.