Facts of the Case

The Income Tax Department instituted a criminal complaint against M/s Dayagen and its partners for Assessment Year 1988-89 alleging failure to file the return of income within the prescribed period and failure to produce books of account and documents despite statutory notices.

The complaint was filed under Sections 276CC and 276D read with Section 278B of the Income-tax Act. The prosecution alleged that the firm failed to file its return by the due date and did not comply with notices issued under Sections 139(2) and 142(1) of the Act.

The petitioners were among the persons arrayed as accused on the basis that they were partners of the firm. However, they contended that pursuant to an arbitration award dated 6 July 1987, made rule of the Court on 17 March 1988, they had ceased to be partners of the firm with effect from 7 July 1987. According to them, the firm thereafter became the sole proprietorship concern of accused No. 8, Shri V.P. Punj, who alone was controlling and conducting its affairs.

The petitioners challenged the orders refusing to discharge them and sought quashing of the criminal proceedings.

 

Issues Involved

  1. Whether the petitioners could be prosecuted under Sections 276CC and 276D read with Section 278B of the Income-tax Act when they had allegedly ceased to be partners before the relevant assessment year obligations arose.
  2. Whether a complaint under Section 278B is maintainable when it merely reproduces the statutory language without specifying how and in what manner the accused were responsible for the conduct of the firm's business.
  3. Whether the material on record disclosed a prima facie case against the petitioners warranting continuation of criminal prosecution.

 

Petitioner’s Arguments

The petitioners argued that:

  • They had ceased to be partners of M/s Dayagen with effect from 7 July 1987 pursuant to the arbitration award and had no concern with the business thereafter.
  • Since they were no longer partners, they could not be regarded as persons in charge of and responsible for the conduct of the firm's business during Assessment Year 1988-89.
  • The complaint itself acknowledged that accused No. 8, Shri V.P. Punj, was signing documents and corresponding with the Income Tax Department on behalf of the firm.
  • The complaint did not contain any specific averments explaining how the petitioners were responsible for the conduct of the business.
  • Mere reproduction of the language of Section 278B was insufficient to prosecute them.
  • Reliance was placed upon the earlier Division Bench decision concerning M/s Punj Sons Pvt. Ltd., where similar proceedings were quashed for lack of specific allegations.
  • One petitioner was more than seventy years of age and prosecution was contrary to applicable CBDT guidelines.
  • The Department had charged interest under Section 139(8), indicating extension of time for filing the return and thereby negating wilful default.
  • Penalty proceedings under Section 271(1)(c) had already been set aside by the appellate authority.

 

Respondent’s Arguments

The Income Tax Department contended that:

  • The petitioners were partners and were responsible for the affairs of the firm during the relevant period.
  • The firm failed to file the return despite statutory notices and failed to produce books of account required by the Department.
  • Pre-charge evidence showed that the petitioners were in charge of and responsible for the conduct of the business.
  • The material on record disclosed a prima facie case justifying framing of charges.
  • At the stage of framing charge, detailed examination of defence pleas was not required and only a prima facie assessment was necessary.

 

Court Order / Findings

The Delhi High Court allowed the petitions and quashed the criminal proceedings against the petitioners.

The Court observed that the complaint merely stated that the petitioners were "in-charge of and responsible for the conduct of the business" of the firm. No particulars were provided as to how and in what manner they were responsible for the affairs of the firm.

The Court relied heavily on its earlier Division Bench decision relating to M/s Punj Sons Pvt. Ltd., where prosecution under similar provisions had been quashed because the complaint lacked specific averments regarding the role and responsibility of the accused persons.

The Court held that mere reproduction of the language contained in Section 278B of the Income-tax Act is insufficient. The complaint must disclose specific facts showing the role played by each accused and how such person was responsible for the conduct of the business at the relevant time.

The Court further noted that the complaint itself specifically referred to accused No. 8, Shri V.P. Punj, as the person controlling the affairs of the firm and corresponding with the Income Tax Department.

Accordingly, the Court found that continuation of prosecution against the petitioners would amount to abuse of the process of law.

The summoning orders issued against the petitioners were quashed, the petitioners were discharged, and the complaint against them was dismissed.

 

Important Clarification

Mere Reproduction of Section 278B is Not Sufficient

The judgment reiterates that for fastening vicarious criminal liability under Section 278B of the Income-tax Act, the complaint must contain clear and specific allegations showing:

  • How the accused was in charge of the business.
  • How the accused was responsible for the conduct of the business.
  • What role the accused played in the commission of the alleged offence.

A bald statement reproducing the statutory language of Section 278B without supporting particulars does not create a valid basis for prosecution.

Sections Involved

  • Section 139(1), Income-tax Act, 1961
  • Section 139(2), Income-tax Act, 1961
  • Section 142(1), Income-tax Act, 1961
  • Section 144, Income-tax Act, 1961
  • Section 276CC, Income-tax Act, 1961
  • Section 276D, Income-tax Act, 1961
  • Section 278B, Income-tax Act, 1961
  • Section 271(1)(c), Income-tax Act, 1961
  • Section 482, Code of Criminal Procedure, 1973
  • Section 240, Code of Criminal Procedure, 1973

 

Link to download the order-https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:14126/AKS22112006CRLMM1532005_144433.pdf

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