2007 (3) TMI 670 - SC - Income Tax

Supreme Court affirms corporate criminal liability for TDS non-credit; procedural objections dismissed

MADHUMILAN SYNTEX LTD & ORS Versus UNION OF INDIA & ANR

The Supreme Court upheld the validity of the prosecution against a public limited company and its directors for failure to credit Tax Deducted at Source ... Prosecution and Penalty- Alleged that appellant was fail to credited TDS to the central government and accordingly prosecutes the appellant- Authority decided that ground of delay is not relevant fact for drop the proceedings. Issues Involved:1. Failure to credit Tax Deducted at Source (TDS) to the Central Government.2. Prosecution of the company and its directors under Sections 276B and 278B of the Income Tax Act, 1961.3. Validity of the show-cause notice and the complaint.4. Applicability of Section 278AA regarding 'reasonable cause' for non-payment.5. Personal liability of the directors as 'principal officers'.6. Procedural aspects concerning the dismissal and restoration of the petition by the High Court.Issue-wise Detailed Analysis:1. Failure to credit TDS to the Central Government:The appellants, a public limited company and its directors, were accused of not crediting Rs. 1,29,348/- deducted as TDS to the Central Government within the prescribed period as mandated by Sections 194C and 200 of the Income Tax Act, 1961, read with Rule 30 of the Income Tax Rules, 1962. Although the amount was later credited with interest, the delay led to the issuance of a notice under Section 276B of the Act, alleging failure to credit TDS, thereby committing an offense punishable under Section 278B.2. Prosecution under Sections 276B and 278B of the Income Tax Act:The Commissioner of Income Tax granted sanction to prosecute the appellants under Section 279 of the Act, leading to a criminal complaint. The trial court rejected the appellants' application for discharge, and this decision was upheld by the Sessions Judge and the High Court. The Supreme Court held that the prosecution of the company and its directors was valid, stating that corporate criminal liability is recognized by law, and the company, being a legal or juristic person, can be prosecuted.3. Validity of the show-cause notice and the complaint:The appellants contended that no separate notice was issued to treat them as 'principal officers' under Section 2(35) of the Act. The Supreme Court held that the show-cause notice and the complaint sufficiently indicated that the directors were considered 'principal officers,' making the complaint maintainable. The Court also dismissed the argument that the complaint lacked necessary averments, emphasizing that such matters require evidence and should be decided at trial.4. Applicability of Section 278AA regarding 'reasonable cause':The appellants argued that the delay in TDS payment was due to a 'reasonable cause,' including a delay in receiving a loan from IDBI and a shortage of liquid funds. The Supreme Court noted that the question of 'reasonable cause' under Section 278AA is a matter of evidence to be decided during the trial, and thus, the contention did not warrant quashing the prosecution at this stage.5. Personal liability of the directors as 'principal officers':The appellants argued that the directors could not be treated as 'principal officers' without specific evidence showing their involvement in the conduct of the company's business. The Supreme Court referred to various precedents, emphasizing that necessary averments in the complaint are sufficient to proceed with the prosecution. The Court held that the directors were rightly considered 'principal officers' under Section 2(35) of the Act, making them liable for prosecution.6. Procedural aspects concerning the dismissal and restoration of the petition by the High Court:The appellants contended that the High Court erred in dismissing their petition for default and subsequently restoring it but insisting on proceeding on merits the same day. The Supreme Court found no procedural irregularity, stating that the High Court acted within its discretion. The Court also rejected the argument that the High Court's summary dismissal without detailed reasons was improper, noting that the petition under Section 482 of the Code was not a substantive appeal requiring a detailed order.Conclusion:The Supreme Court dismissed the appeal, upholding the validity of the prosecution against the company and its directors. The Court clarified that the prosecution was maintainable, and the issues raised by the appellants regarding 'reasonable cause' and the status of directors as 'principal officers' should be decided based on evidence during the trial. The procedural objections concerning the High Court's handling of the petition were also found to be without merit. The Court emphasized that it had not entered into the merits of the case and that the trial should proceed independently.