2025 (7) TMI 1314 - HC - Income Tax

Partners cannot be added as accused without prior sanction under Section 279 Income Tax Act

The Bombay HC allowed a criminal revision application challenging an order under Section 319 CrPC that sought to implead three partners as accused in an ... Offences by companies/firms and liability of partners - application u/s 319 of the Criminal Procedure Code (Cr.P.C.) - impleading Applicant Nos. 2 to 4 as “accused” along with accused No. 1 - Power to proceed against other persons appearing to be guilty of offence u/ss (1) of Section 319 of the Cr.P.C Three complaints against the firm-accused No. 1 and Mr. Kapporchand Jain-accused No. 2 alleging offence committed under Section 276C and 277 of the Income Tax Act - While the complaint was pending, Mr. Kapoorchand Jain, accused No. 2 in the original complaint died - Respondent No. 1 made an Application for making Applicant Nos. 2 to 4 as representatives of accused No. 1-Firm. This action was contested by Applicant Nos. 2 to 4 on the ground that no sanction was obtained of the Commissioner of Income Tax for adding Applicant Nos. 2 to 4 as representatives of accused No. 1. HELD THAT:- Section 279 of the Income Tax Act provides that, a person shall not be proceeded against for offence specified therein except with previous sanction of the authorities viz., Principal Commissioner or Commissioner or Joint Commissioner (Appeal) or Commissioner (Appeal) or the appropriate authority. In the absence of any sanction as required under Section 279 of the Income Tax Act, the Application u/s 319 of Cr.P.C. to make Applicant Nos. 2 to 4 as accused is without jurisdiction. Therefore, even on this count Application made under Section 319 of Cr.P.C. is required to be rejected. The Supreme Court in the case of Surinderjit Singh Mand & Anr. State of Punjab & Anr. [2016 (7) TMI 1247 - SUPREME COURT] has held that even for the purpose of Section 319 of the Cr.P.C., mandatory sanction required by Section 197 of the Cr. P.C. or by a special statue has to be complied with. The basis of Application under Section 319 of Cr.P.C. is evidence recorded of Mr. A. P. Shrivastava who was posted as Assistant Director of Income Tax in 1982 at Mumbai. In the said evidence it is the case of Respondent No. 1 that they came to know that there were four partners of the firm having share in the range of 20-25% and one minor partner having share of 5 %. In the evidence, it is also recorded that accused No. 1-firm had filed Form No. 12 for continuation of registration as a firm in which each of the partner had signed. Form No. 12 was already filed with the Income Tax Department in the year 1981-1982 itself and the Income Tax Department was aware that accused No. 1 is a firm having four partners. This is not something which surfaced for the first time in the evidence recorded by the learned Metropolitan Magistrate, but this was something within the knowledge of the Income Tax Department much prior to the date of search and filing the complaint. Inspite of the same, the original complaint was filed against the firm as accused No. 1 and Shri Kapoorchand Jain-accused No. 2 who passed away pending the completion of the trial. Therefore, today, it is not permissible for Respondent No. 1 to make an Application under Section 319 of Cr.P.C. on the basis that for the first time they came to know that Applicant Nos. 2 to 4 were partners of accused No. 1 and therefore, they are entitled to make an Application under Section 319 of Cr.P.C. Therefore even on this count Application under Section 319 of Cr. P. C. could not have been allowed by the learned Sessions Judge. Based on the evidence on the basis of which the Application under Section 319 is made, it cannot be concluded that the said evidence inculcates Applicant Nos. 2 to 4 for having committed an offence. Furthermore, has observed above, the statement and submission of Respondent No. 1 accepted and recorded in the Magistrate’s order dated 31 August 1996 itself states that Applicant No. 2 to 4 are brought on record not as an “accused” but has representative of Respondent No. 1-Firm. Therefore, ingredients required for allowing the Application under Section 319 is not satisfied and, therefore, even on this ground, the impugned order dated 18 November 2011 passed by the Sessions Judge is required to be quashed and set aside. Section 319 of the Cr.P.C. cannot be read in isolation. In the facts of the present case it will have to be read along with Section 278B of the Income Tax Act. Section 278B deals with offences by Companies and Explanation to Section 278B defines 'company' to mean a firm; and 'director' in relation to a firm to mean a partner in the firm. On a conjoint and harmonious reading of Section 278B of the Income Tax Act and Section 319 of the Cr.P.C., the provisions of Section 319 will be triggered only if in the course of enquiry or trial of an offence it appears from the evidence that the other partners who were not impleaded as accused in the original complaint were in charge of and responsible to the firm for the conduct of the business of the firm or the offence has been committed with the consent or connivance or is attributable to any neglect on the part of the partner then only the application made under Section 319 can be allowed for trying the other partners for the offence which appears to have been committed. In the instant case, from the evidence of Mr. Srivastava, nowhere it can be remotely inferred that Applicant nos. 2 to 4 were in-charge of or that were responsible to the firm for the conduct of the business or that the offence has been committed with the consent or connivance or negligence attributable to any of the partner who have made this application before me. Therefore, based on a conjoint reading of Section 319 of the Cr.P.C. and Section 278 B of the Income Tax Act, in the absence of even prima facie satisfaction of the conditions required for fulfilment of Section 278 B of the Income Tax Act, learned Session Judge erred in allowing the application under Section 319 of the Cr.P.C. filed by the respondent No. 1 and thereby directing impleadment of applicant Nos. 2 to 4 as” accused”. Criminal Revision Application is allowed. ISSUES: Whether an application under Section 319 of the Criminal Procedure Code (Cr.P.C.) can be allowed to implead partners of a firm as accused without prior sanction under Section 279 of the Income Tax Act.Whether the order allowing partners to be impleaded as accused under Section 319 Cr.P.C. can be sustained when an earlier order had recognized them only as representatives of the firm and not as accused.What is the scope and threshold for exercise of power under Section 319 Cr.P.C. to proceed against persons not originally accused.How Section 319 Cr.P.C. interacts with Section 278B of the Income Tax Act regarding offences by firms and liability of partners.Whether the evidence relied upon justifies impleading the partners as accused under Section 319 Cr.P.C. RULINGS / HOLDINGS: The application under Section 319 Cr.P.C. to implead partners as accused without sanction under Section 279 of the Income Tax Act is 'without jurisdiction' and must be rejected.The earlier order dated 31 August 1996, which allowed partners to be brought on record only as representatives of the firm and not as accused, has become final; therefore, the Income Tax Department cannot now seek to implead them as accused under Section 319 Cr.P.C.The power under Section 319 Cr.P.C. is a 'discretionary and an extraordinary power' to be exercised sparingly and only where 'strong and cogent evidence' exists that, if unrebutted, may lead to conviction; mere probability is insufficient.Section 319 Cr.P.C. must be read in conjunction with Section 278B of the Income Tax Act, which deems partners liable only if they were 'in charge of, and responsible to, the company for the conduct of the business' or if the offence was committed with their 'consent or connivance' or attributable to their 'neglect'.The evidence relied upon, namely the statement of the Assistant Director of Income Tax, does not establish that the partners were in charge or responsible for the firm's business or that the offence was committed with their consent, connivance, or neglect; hence, the application under Section 319 Cr.P.C. was wrongly allowed. RATIONALE: The Court applied the statutory provisions of Section 319 of the Cr.P.C. and Sections 278B and 279 of the Income Tax Act to assess the validity of impleading partners as accused.The Court relied on the principle that sanction under Section 279 of the Income Tax Act is mandatory before proceeding against persons for specified offences, and this requirement extends to applications under Section 319 Cr.P.C., following Supreme Court precedent that mandates compliance with statutory sanction provisions.The Court adopted the Supreme Court's interpretation of Section 319 Cr.P.C. as a power exercisable only with strong and cogent evidence, referencing recent authoritative analysis emphasizing that the evidence must be more than a prima facie case but less than full satisfaction leading to conviction.The Court harmonized Section 319 Cr.P.C. with Section 278B of the Income Tax Act, interpreting the latter's definitions of 'company' and 'director' to include firms and partners, and the conditions under which partners are deemed guilty.The Court followed precedent from the Supreme Court and Kerala High Court interpreting similar provisions in related statutes, holding that a partner must be shown to be in overall control or responsible for the firm's business to be liable for offences committed by the firm.The Court found no material evidence satisfying these conditions, and thus concluded the Sessions Judge erred in setting aside the Magistrate's order dismissing the application under Section 319 Cr.P.C.