2025 (9) TMI 37 - HC - Income Tax

Quashing proceedings where mere 'in-charge and responsible' allegation fails to plead consent, connivance or neglect under s.278B(2) IT Act

Pinakin Kantilal Patel Versus Dy. Comm of Income Tax and Anr.

HC allowed the criminal application and quashed proceedings against the applicant director. Relying on SC authority, the court held that mere allegation ... Prosecution of Applicant u/s 276C(2) r/w 278B of the Income Tax Act, 1961 - Liability of director - applicant was a part time director of accused No.1- Company as defaulted in making payment of tax and since the applicant (accused No.7) is a director by invoking the provisions of Section 278B of the IT Act has been made a co- accused in the complaint. HELD THAT:- Hon’ble Supreme Court in the case of Sunita Palita [2022 (8) TMI 55 - SUPREME COURT] wherein, although in connection with the proceedings under Section 138 of the Negotiable Instruments Act 1981, the ingredients required for satisfaction of Section 278B(2) of the Income Tax Act and Section 138/141 of the Negotiable Instruments Act are identical. The Hon’ble Supreme Court observed that there has to be a specific averment in the pleadings to substantiate involvement in the day to day affairs of the company or running of the business, and a mere statement that all directors are in-charge and responsible for conduct of the business of the company without anything more would not satisfy the ingredients for filing a complaint against the directors. The facts of the present case are similar to the facts before the Hon’ble Supreme Court and therefore, the said decision squarely applies to the facts of the present case. We not agree with the contention of Respondents that provisions of Section 278B(2) of the IT Act are applicable in the facts of the present case. Section 278B(2) of the IT Act provides that where an offence has been committed by a Company and it is proved that offence has been committed with the consent or connivance or is attributable to any neglect on the part of any Director, Manager or Secretary or any Officer then such Director, Manager, Secretary or Officer shall be deemed to be guilty and shall be liable to be proceeded against and punished accordingly. There are no pleadings in the complaint that ingredients of Section 278B(2) of IT Act are attracted. As observed by the Supreme Court in the case of Sunita Palita (supra) there has to be a specific allegation and in the facts of the present case the same are lacking. Present Criminal Application is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a criminal complaint under Section 276C(2) read with Section 278B of the Income Tax Act can be sustained against a director when the complaint contains only a bald averment that the person is a director, without specific allegations that the director was 'in charge of' or 'responsible for' the company's day-to-day affairs. 2. Whether the ingredients of Section 278B(2) (offence by a company attributable to consent, connivance or neglect of a director/manager/secretary/officer) are satisfied by mere pleading that a director is 'in charge of and responsible for' the company, in absence of specific factual averments linking the director to the alleged offence. 3. The relevance and effect of earlier discharge of a similarly-placed director by the Magistrate and confirmation in revision by the Sessions Court on the treatment of the present accused's prosecution. 4. Whether the Supreme Court's reasoning in the decision treating requirements of pleading under Section 138 of the Negotiable Instruments Act as analogous to Section 278B(2) of the Income Tax Act is applicable and determinative for quashing the present complaint. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sufficiency of pleadings against a director - legal framework Legal framework: Section 276C(2) creates the substantive offence; Section 278B (and specifically 278B(2)) provides for attribution of company offences to directors/managers/secretaries/officers where the offence is committed with their consent, connivance or attributable to their neglect. Criminal complaints must plead facts sufficient to show that the accused falls within the statutory deeming provision. Precedent Treatment: The Court relied on the Supreme Court's approach that, in analogous contexts (Section 138 NI Act), mere generic allegations that 'all directors are in-charge and responsible for the conduct of business' are insufficient; specific factual averments are required to show involvement in day-to-day management or running of business. Interpretation and reasoning: The Court examined the complaint and found only a bald averment of directorship without any specific factual allegations that the applicant was in charge of or responsible for day-to-day affairs. The cheque central to the alleged default was not signed by the applicant (admitted in the complaint), and the applicant had earlier, by written response to a SCN, stated he was a part-time professional director with no role in day-to-day activities and had resigned before the cheque date. The respondents did not rebut these assertions on record. The Court reasoned that absent specific pleading of facts establishing control, consent, connivance or neglect, the statutory ingredients for proceeding under Section 278B(2) are not made out. Ratio vs. Obiter: Ratio - A criminal complaint seeking to prosecute a director under Section 276C(2) read with Section 278B(2) must contain specific factual allegations connecting the director with the company's day-to-day management or with consent/connivance/neglect in commission of the offence; mere allegation of directorship is insufficient. Obiter - Observations stressing the non-signature of the cheque and the applicant's prior resignation serve as case-specific support but the legal principle is framed broadly. Conclusion: The complaint was insufficient as to the applicant; the proceedings against him under Section 276C(2) read with Section 278B are quashed insofar as they relate to the applicant. Issue 2: Applicability of Section 278B(2) on the facts - legal framework Legal framework: Section 278B(2) deems directors/managers/secretaries/officers guilty where an offence by a company is shown to have been committed with their consent, connivance or attributable to their neglect; the prosecution must plead and ultimately prove the specific nexus between the officer and the commission of the offence. Precedent Treatment: The Supreme Court authority applied treats pleading requirements under Section 278B(2) as analogous to those under Section 138/141 NI Act: courts require specific averments demonstrating a director's active role or culpable neglect, not generalized attributions of responsibility. Interpretation and reasoning: The Court found no pleadings satisfying Section 278B(2) - there were no specific allegations of consent, connivance or neglect by the applicant. The Court emphasized that statute contemplates proof of such nexus; without pleadings making out those ingredients, the deeming provision cannot be invoked to fasten criminal liability on the director. Ratio vs. Obiter: Ratio - The application of Section 278B(2) requires pleading of specific facts showing consent/connivance/neglect; absence of such facts mandates quashing. Obiter - The observation that the Revenue had not rebutted the applicant's written statements is factual to this case. Conclusion: Section 278B(2) is not attracted on the present pleadings; the complaint as to the applicant is unsustainable and must be quashed. Issue 3: Effect of prior discharge of a similarly-placed director and confirmation in revision Legal framework: While each accused's liability is determined on available facts and pleadings, prior judicial orders discharging similarly situated accused and confirmation thereof are relevant as indicative of the sufficiency of prosecution material. Precedent Treatment: The Court treated the earlier discharge and confirmation by the Sessions Court as persuasive and significant; absence of challenge to that confirmation by the Revenue was taken to indicate acceptance of that outcome. Interpretation and reasoning: The Court noted that accused No.10 (Technical Director) had been discharged by the Magistrate, and that discharge had been confirmed by the Sessions Court in revision, with no record shown of further challenge. The Court saw no material distinction between accused No.10 and the present applicant on the pleadings. That parity reinforced the conclusion that the complaint did not make out culpability of the applicant. Ratio vs. Obiter: Ratio (limited): Prior discharge of a similarly-placed director, confirmed on revision and left unchallenged by the prosecution, is a relevant factor in assessing sufficiency of allegations against another director in the same facts. Obiter: The weight accorded to the Revenue's inaction (no further challenge) is specific to these proceedings. Conclusion: The prior discharge and its confirmation materially support quashing the complaint against the applicant. Issue 4: Applicability of Supreme Court reasoning from analogous NI Act jurisprudence Legal framework: Pleading standards for attributing liability to company officers under different statutes may be analogous where the statutory ingredients require demonstration of a director's active role or culpable neglect. Precedent Treatment: The Court followed the Supreme Court decision addressing Section 138 NI Act which held that specific averments of involvement in day-to-day affairs are necessary; the Court treated that ratio as squarely applicable to Section 278B(2) of the Income Tax Act because the required ingredients are identical in substance. Interpretation and reasoning: The Court applied that precedent to hold that mere blanket allegations of responsibility are inadequate; specific factual pleadings are essential. The Court found the present complaint to fall short of that requirement, making the precedent determinative. Ratio vs. Obiter: Ratio - Analogous authority requiring specific factual averments for officer liability under corporate-offence provisions is binding and was followed. Obiter - The Court's remark that the facts 'are similar' to the precedent is case-specific. Conclusion: The Supreme Court's reasoning is applicable and supports quashing the complaint insofar as it relates to the applicant. Overall Disposition and Limitation of Order Conclusions: The criminal complaints under Section 276C(2) read with Section 278B are quashed insofar as they concern the applicant due to lack of specific pleadings establishing that the applicant was in charge of or responsible for the company's day-to-day affairs or that the offence was committed with his consent, connivance or neglect. The order does not preclude prosecution of other accused, and observations are confined to the facts pertaining to the applicant.