Facts of the Case

·         The Income Tax Officer (petitioner) filed complaints before the ACMM to summon, try, and punish the respondents under Section 276-B of the Income Tax Act, 1961.

·         Respondent No. 1 is a private limited company, and Respondent No. 3 was its Director and alleged "Principal Officer" responsible for managing daily 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 deposit it with the Income Tax Department within the prescribed period.

·         After the trial, the company (Respondent No. 1) was convicted under Section 276-B of the Act.

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

·         The notice issued to the company was deemed defective because it did not mention the department's intention to treat the directors of the company as "principal officers."

Issues Involved

·         The primary issue was whether a director of a company can be prosecuted under Section 276-B of the Income Tax Act without the Assessing Officer issuing a specific notice under Section 2(35) expressing the intention to treat them as the "principal officer."

Petitioner’s Arguments

·         The petitioner sought leave to appeal against the judgment dated 8th September 2009 passed by the ACMM, which acquitted Respondent No. 3 of the offence under Section 276-B of the Act.

Respondent’s Arguments

·         The defence of the respondent, upheld by the lower court, was based on the non-compliance with Section 2(35) of the Act.

·         It was argued that Respondent No. 3 could not be prosecuted because the required statutory notice to treat him as a "principal officer" was never issued to him, nor was it mentioned in the show-cause notice sent to the company.

Court Order / Findings

·         The High Court found no manifest error or perversity in the view taken by the ACMM and refused to grant leave to appeal to the petitioner.

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

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

·         In this case, it was an admitted fact that no such notice under Section 2(35) had been issued to Respondent No. 3.

·         Furthermore, the show-cause notice issued to the company failed to mention that the Assessing Officer intended to treat the director as the "principal officer" for launching the prosecution.

·         Consequently, the High Court dismissed all the petitions.

Important Clarification

·         The High Court, relying on the Supreme Court judgment in Madhumilan Syntex Ltd. and Others vs. Union of India (2007) 290 ITR 199 (SC), clarified the procedure for treating directors as principal officers.

·         It was noted that there is no need to issue a separate, individual notice to all directors to treat them as "principal officers."

·         It constitutes sufficient compliance if the show-cause notice issued to the company explicitly states that the directors are to be considered as principal officers of the company under the Act.

Sections Involved

·         Section 276-B: Relates to the punishment for failure to deduct or pay tax.

·         Section 2(35): Defines the expression "principal officer."

·         Section 194-A (4): Mandates the deduction of tax at source on the credit or payment of interest by the person responsible for making the payment.

·         Section 204: Defines the expression "person responsible for paying."

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Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:14555/AKP11112010CRLMP892010_103139.pdf

 

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