2003 (9) TMI 3 - SC - Income Tax

Court affirms tax sanction without hearing. Company lacks mens rea, MD may face liability. Debate on fines vs. jail.

Assistant Commissioner, Assessment II, Bangalore And Others Versus Velliappa Textiles Ltd. And Another

The court upheld the validity of the sanction given by the Commissioner of Income-tax without a hearing, stating it is an administrative function not ... Whether a company can be attributed with mens rea on the basis that those who work or are working for it have committed a crime and can be convicted in a criminal case - Whether a company is liable for punishment of fine if the provision of law contemplates punishment by way of imprisonment only or a minimum period of punishment by imprisonment plus fine whether fine alone can be imposed - appeals of revenue allowed Issues Involved:1. Validity of the sanction given by the Commissioner of Income-tax without an opportunity of hearing.2. Attribution of mens rea to a company for criminal liability.3. Imposition of fine on a company when imprisonment is mandatory under the law.Detailed Analysis:1. Validity of the Sanction Given by the Commissioner of Income-tax Without an Opportunity of Hearing:The court unanimously agreed that the sanction given by the Commissioner of Income-tax is not vitiated due to the lack of an opportunity for a hearing. The judgment clarified that the grant of sanction is an administrative function and does not necessitate a hearing for the accused. The court emphasized that the principles of natural justice do not apply at this stage, as the sanction merely empowers the institution of prosecution without causing any direct injury to the accused. The accused will have the opportunity to defend themselves during the trial.2. Attribution of Mens Rea to a Company for Criminal Liability:The court discussed whether a company can be attributed with mens rea, a necessary element for criminal liability. The majority opinion, which diverged from one of the judges, stated that a company, being a juristic person, cannot possess mens rea. However, the actions and intent of the individuals who are the 'alter ego' or directing mind of the company can be imputed to the company. This approach aligns with the common law tradition where the mental state of the person in control of the company is considered the mental state of the company itself. Therefore, criminal liability can be fixed on a company if the offence is committed by someone in control of its affairs.3. Imposition of Fine on a Company When Imprisonment is Mandatory Under the Law:The court was divided on whether a company can be punished with a fine alone when the law mandates imprisonment. One judge argued that the current Indian law does not allow for substituting imprisonment with a fine for companies, citing the need for legislative changes to address this issue. The judge pointed out that other jurisdictions, such as Australia, France, and the United States, have made legislative amendments to allow fines in lieu of imprisonment for corporate offenders.Another judge, however, disagreed and opined that a company should not escape prosecution merely because it cannot be imprisoned. The judge argued that the court should impose a fine on the company even if imprisonment is mandatory, as the legislative intent is to ensure that companies are held accountable for their actions. This view was supported by precedents from various High Courts and the Supreme Court of India, which have held that companies can be prosecuted and fined even if they cannot be imprisoned.The judgment concluded that the prosecution of the company (first respondent) should be quashed due to the impossibility of imposing the mandatory imprisonment, while the prosecution against the managing director (second respondent) should proceed.Conclusion:The appeal was dismissed as regards the first respondent (the company) and allowed as regards the second respondent (the managing director). The court emphasized the need for legislative intervention to address the issue of corporate criminal liability and the imposition of fines in lieu of imprisonment.