2018 (4) TMI 522 - HC - Income Tax

Non-Executive Chairman Not 'Principal Officer' under Income Tax Act

The court held that the petitioner could not be construed as the 'Principal Officer' under Section 2(35) of the Income Tax Act, 1961. The impugned order ... Maintainability of petition - jurisdiction of high court - Held that:- In the case on hand, admittedly the impugned order was served on the petitioner at his residential address at Chennai. Though the authority is at Delhi, it is clear that part of cause of action had arisen at Chennai. As per Article 226(2) of the Constitution of India, the writ petition is maintainable before a High Court within which the cause of action wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories. That apart, though the company's registered corporate office is at Delhi and the TAN number is at Delhi assessment, the petitioner in this writ petition has not challenged the assessment order, but, has challenged only the impugned order naming him as the Principal Officer. In these circumstances, this Court has jurisdiction to entertain the writ petition. Treating a person as the Principal Officer - criminal proceedings - Held that: The main criteria treating a person as the Principal Officer is he should have been in charge of the management, administration and day-to-day affairs of the company. It was also stated by the Managing Director that the petitioner is only a Non-Executive Director in the company, who is based at Chennai and is not involved with the day-to-day management of the company and has not made any visits to the company till date as he does not draw any salary or remuneration from the company and attends the Board Meetings only in the Non-Executive capacity, for which, he does not even get any sitting fees. For the reasons stated above, it is clear that the petitioner was not involved in the management, administration and the day-to-day affairs of the company, therefore, the petitioner cannot be treated as Principal Officer. Issues Involved:1. Jurisdiction of the Court to entertain the writ petition.2. Determination of whether the petitioner can be construed as the 'Principal Officer' under Section 2(35) of the Income Tax Act, 1961.3. Application of Sections 276B and 278B of the Income Tax Act regarding prosecution for failure to deposit tax deducted at source (TDS).Issue-wise Detailed Analysis:1. Jurisdiction of the Court:- The petitioner argued that the impugned order was served at his residential address in Chennai, thus giving rise to a cause of action within the territorial jurisdiction of the Madras High Court. The petitioner emphasized that he was challenging only the impugned order naming him as the Principal Officer, not the assessment order.- The respondents contended that the facts giving rise to the dispute occurred in Delhi, where the company's registered office and TAN number are located. They argued that the mere residence of the petitioner in Chennai does not confer jurisdiction on the Madras High Court.- The court held that as per Article 226(2) of the Constitution of India, a writ petition can be entertained if a part of the cause of action arises within its jurisdiction. Since the impugned order was served on the petitioner in Chennai, the court concluded that it had jurisdiction to entertain the writ petition.2. Determination of 'Principal Officer':- The petitioner claimed that he was a Non-Executive Chairman residing in Chennai, not involved in the day-to-day affairs of the company, and did not draw any salary from the company. He argued that the Managing Director and other managerial personnel were responsible for the company's daily operations.- The respondents argued that the petitioner, being the Chairman, was involved in the management and administration of the company and thus could be treated as the Principal Officer under Section 2(35) of the Income Tax Act.- The court noted that the Managing Director of the company had explicitly stated that he was responsible for the day-to-day affairs of the company and that the petitioner was not involved in its management. The court found no material evidence provided by the respondents to substantiate that the petitioner was responsible for the company's daily operations.- The court concluded that the petitioner could not be treated as the Principal Officer based on the available evidence and the statements of the company's Managing Director and Chief Financial Officer.3. Application of Sections 276B and 278B:- The petitioner argued that under Section 278AA, no person shall be punished for failure to deposit TDS if there was a reasonable cause for such failure. He claimed that the company faced acute financial and liquidity problems, which were known to the Income Tax Authorities.- The respondents maintained that the petitioner, as a Director and Chairman, was responsible for the company's failure to deposit TDS and could be prosecuted under Section 276B. They argued that the provisions of Chapter XVII relating to TDS are stringent and mandatory.- The court observed that the respondents had not provided any material evidence to establish that the petitioner was responsible for the company's failure to deposit TDS. The court emphasized that the Managing Director had admitted responsibility for the company's daily affairs and that the petitioner was not involved in its management.- The court held that the impugned order naming the petitioner as the Principal Officer was not supported by any material evidence or legally sustainable reasons. Consequently, the court set aside the impugned order and allowed the writ petition.Conclusion:The court concluded that the petitioner could not be treated as the Principal Officer under Section 2(35) of the Income Tax Act, 1961, and set aside the impugned order dated 03.11.2014. The writ petition was allowed, and no costs were imposed.