Facts of the Case

·         The petitioner filed complaints before the ACMM praying that the respondents be summoned, tried, and punished under Section 276-B of the Income Tax Act, 1961.

·         Respondent no. 1 was a private limited company, and respondent no. 3 was its Director, alleged to be the "Principal Officer" responsible for the day-to-day affairs.

·         The respondents failed to deduct tax at source (TDS) from interest paid to M/s Bhanamal & Co. (P) Ltd., M/s Banwari Lal & Sons (P) Ltd., and M/s Bhanamal Gulzari Mal (P) Ltd., and did not deposit the same with the Income Tax Department within the prescribed period.

·         During the trial, respondent no. 1 (the company) was convicted under Section 276-B of the Act.

·         Respondent no. 3 was acquitted by the ACMM because no notice was served on him under Section 2(35) of the Act treating him as a "principal officer" before launching the prosecution.

Issues Involved

·         Whether a director of a company can be prosecuted as a "principal officer" under Section 276-B of the Income Tax Act without the Assessing Officer issuing a specific notice or expressing intention under Section 2(35)(b) of the Act.

Petitioner’s Arguments

·         The petitioner (Income Tax Officer) sought leave to appeal against the judgment dated 8th September, 2009, passed by the ACMM.

·         The petitioner argued that respondent no. 3 was impleaded as an accused being the "principal officer" of the company within the meaning of Section 2(35) of the Act and was responsible for managing the daily affairs of the company.

Respondent’s Arguments

·         The respondent maintained that the notice issued to the company was defective.

·         It was argued that it was not mentioned in the show cause notice that the department intended to treat the directors of the company as "principal officers".

·         Therefore, the acquittal of respondent no. 3 for non-compliance with Section 2(35) of the Act was entirely justified.

Court Order / Findings

·         The Delhi High Court dismissed all the petitions filed by the Income Tax Officer.

·         The Court observed that under Section 204(iii) of the Act, if the payer is a company, the company itself including the principal officer thereof is responsible for deducting and depositing the tax.

·         The Court noted that a director is not automatically included within the ambit of Sub-clause (a) of Section 2(35) of the Act.

·         If the Income Tax Officer intends to prosecute a director along with the company for an offence under Section 276-B, it is incumbent upon him to issue a notice under Sub-clause (b) of Section 2(35) expressing the intention to treat the director as the "principal officer".

·         Admittedly, no such notice was issued to respondent no. 3, and the show cause notice issued to the company did not mention that the Assessing Officer intended to treat the director as a "principal officer".

·         The High Court found no manifest error or perversity in the ACMM's decision to acquit respondent no. 3.

Important Clarification

·         The Court cited the Supreme Court judgment in Madhumilan Syntex Ltd. and Others vs. Union of India (2007) 290 ITR 199 (SC), clarifying that there is no need to issue a separate notice to directors if the show-cause notice issued to the company explicitly states that the directors are to be considered as principal officers.

·         The Court also relied on Greatway (P) Ltd. & Ors. Vs. Asstt. CIT [1993] 199 ITR 391 (P&H), ITO Vs. Roshini Cold Storage (P) Ltd. and Ors. (2000) 245 ITR 322 (Mad), and ITO Vs. Singhal and Co. (2000) 244 ITR 86 (Delhi), which collectively establish that in the absence of a notice under Section 2(35)(b) indicating the intention to treat a director as a principal officer, the prosecution against the director cannot be continued and is bound to fail.

·         In the present case, since neither a direct notice was sent to the director nor did the company's show cause notice contain the required declaration of intent, the prosecution against the director failed.

Sections Involved

·         Section 276-B of the Income Tax Act, 1961.

·         Section 2(35) of the Income Tax Act, 1961.

·         Section 194-A of the Income Tax Act, 1961.

·         Section 204 of the Income Tax Act, 1961.

 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:14550/AKP11112010CRLMP872010_102802.pdf

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