Delayed TDS deposit after payment with interest does not by itself sustain prosecution or vicarious director liability.
Prosecution under section 276B for delayed remittance of tax deducted at source was held unsustainable where the tax had already been deposited with interest, and CBDT instructions indicated that prosecution should ordinarily not be launched in such circumstances. The Court treated the provision as targeting failure to pay, not mere delay after payment. Directors also could not be proceeded against under section 278B because no prior order had determined them to be principal officers, and the complaints lacked averments of consent, connivance or neglect. Vicarious liability was held not to arise automatically from directorship, and the criminal process was quashed.
Issues: (i) Whether prosecution under section 276B of the Income-tax Act, 1961 could be sustained where the tax deducted at source had already been deposited with interest and the governing CBDT instructions indicated that prosecution should ordinarily not be launched in such circumstances; (ii) Whether the petitioners, being directors, could be prosecuted under section 278B of the Income-tax Act, 1961 in the absence of a prior determination treating them as principal officers under section 2(35)(b) read with sections 201(1) and 201(3), and in the absence of averments of consent, connivance or neglect.
Issue (i): Whether prosecution under section 276B of the Income-tax Act, 1961 could be sustained where the tax deducted at source had already been deposited with interest and the governing CBDT instructions indicated that prosecution should ordinarily not be launched in such circumstances.
Analysis: The relevant prosecution was founded on delayed remittance of tax deducted at source, not on non-deduction. The deposited tax had already been paid to the credit of the Government along with interest under section 201(1A). The Court treated the post-amendment scope of section 276B as directed to failure to pay, and found support in the CBDT instructions of 28 May 1980 and 24 April 2008, which indicated that prosecution was not to be ordinarily pursued where the amount had already been deposited and the default was not substantial. The Court also placed reliance on the later approach adopted in comparable decisions where continuation of prosecution after deposit of the tax with interest was held to be unwarranted.
Conclusion: The prosecution under section 276B was held not to survive on these facts.
Issue (ii): Whether the petitioners, being directors, could be prosecuted under section 278B of the Income-tax Act, 1961 in the absence of a prior determination treating them as principal officers under section 2(35)(b) read with sections 201(1) and 201(3), and in the absence of averments of consent, connivance or neglect.
Analysis: The Court held that a mere notice does not amount to a final determination of a person as principal officer, because such classification has civil and penal consequences and must be made by an order under section 201(1) and section 201(3), with appeal lying under section 246(1)(i). On the pleadings, no such order had been passed against the petitioners, and the complaints did not contain the specific averments required to attract section 278B(2), namely consent, connivance or neglect. The Court further held that liability under section 278B is not automatic merely because a person is a director.
Conclusion: The directors could not be proceeded against vicariously on the complaints as framed.
Final Conclusion: The criminal process and the revisional orders founded on it were unsustainable, and the proceedings were quashed in full.
Ratio Decidendi: For prosecution for failure to pay tax deducted at source, the Revenue must show a legally sustainable basis for criminal liability beyond mere delayed deposit, and a director cannot be prosecuted vicariously under section 278B unless the statutory ingredients, including the requisite principal-officer determination or the specific averments required by the provision, are established.