Nominee director liability and retrospective tax amendment rules led to quashing of prosecution proceedings.

A nominee director who was not shown to be involved in the company's day-to-day affairs could not be fastened with criminal liability on the basis of only general averments that all directors were in charge of the business. The material indicated that such a director was appointed to protect the financing corporation's interests and, under the governing statute, was not intended to incur liability for company acts. The later tax amendment deeming credit to an interest payable account as credit to the payee created a fresh obligation and could not be applied retrospectively to assessment year 1984-85. In light of the subsequent amendment to the penal provision, mere failure to deduct tax was no longer sufficient to sustain prosecution.

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Issues: Whether the complaint and summoning order could be quashed against a nominee director who was not for the day-to-day affairs of the company, and whether the statutory amendments to the tax deduction provisions could be applied retrospectively to sustain the prosecution.

Analysis: The petitioner was only a nominee director appointed to safeguard the interests of the financing corporation and the complaint contained only general averments that the directors were in charge of and responsible for the conduct of the company's affairs. No material was shown to connect the petitioner with the day-to-day management of the company. The relevant provisions of the financing corporation statute also indicated that a director appointed on behalf of the corporation was not to incur liability. On the tax issue, the explanation added to Section 194-A of the Income-tax Act, 1961 by the Finance Act, 1987 created a fresh liability by deeming credit to an interest payable account as credit to the payee, and the explanatory note showed that it was intended to remove a loophole. That amendment could not be given retrospective effect to cover assessment year 1984-85. The later amendment to Section 276-B of the Income-tax Act, 1961 also showed that mere failure to deduct tax was no longer an offence, so continuation of the prosecution on that basis was not sustainable.

Conclusion: The complaint, the summoning order, and the subsequent proceedings against the petitioner were liable to be quashed as an abuse of the process of law.

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