Income Tax

No Prosecution against the Assessee without Sanction: HC

The High Court of Delhi pronounced a judgement in the case of Vipul Aggarwal Vs Income Tax Officer on 19^th July 2022 regarding the petition for quashing the complaint case along with other proceedings against the petitioner being the director of the company on the ground of treating him as the company’s principal officer without prior notice and initiating prosecution against him without sanction.   

The article discusses the case and the judgement pronounced by the Court in the same.

Facts of the Case

• The petitioner assessee had filed the petition for quashing of complaint case No.514952/2016 wherein the assessee, and his company M/s ASM Traxim Pvt Ltd. was charged under Sec 276-CC r/w Section 278-B of ITA 1961, along with all proceedings arising from the same, including the order dated 14th December 2017,regarding the direction of framing the charges against the petitioner and the order dated 14^th May 2018 that dismissed the revision petition preferred by the petitioner against the order dated 14th December 2017.
• The allegations against the assessee and the company was regarding  the  belated filing of the ITR, i.e. after 30th September 2012 for the AY 2012-13. It was further alleged that such ITR was only filled upon the issuance of a notice u/s 142 (1) directing the assessee to file the required ITR by 2nd August 2013 despite which the ITR was filed on 12th August 2013 by the assessee, thereby committing an offence u/s 276-CC r/w Sec- 278E followed by the issue of a Show Cause Notice on 20th March 2014, the reply of which was filed by the company on 14.07. 2014; sanction was accorded under Section 276-CC r/w Section 278-B of the IT Act for the prosecution of the accused. On 06.08.14, the complaint was filed u/s 276-CC, r/w 278-B of the IT Act.
• The proceedings against the company were initiated by the IT Department through the complaint dated 6th August 2014, where the Magistrate took cognizance. After the pre-charge evidence, the ACMM (Spl. Acts) vide order dated arrived at the conclusion about the availability of sufficient material on record for establishing that a case was made out against the petitioner and the Co.
• It was further concluded by the Ld. ACMM (Spl. Acts) that the contentions of the petitioner regarding the absence of wilful default by the accused person in filing the ITR was a mere defence by the accused since the presumption (u/s 278-E) of the culpable mental state of the accused, was provided under the law and since the presumption could be rebutted by the accused at the time of the trial of the case, sufficient material was present for framing the charge resulting in the framing of charges u/s 276-CC r/w Section 278-B of ITA against both the Company and the petitioner.

Petitioners Contentions

• Upon being aggrieved by the order dated 25th May 2017, the petitioner challenged the order by filling a revision petition arguing that the government exchequer did not have to bear any loss as the return was delayed by merely 10 days. The sanction was termed to be defective for not disclosing the role of petitioner no.2 before the revisionary court, i.e. the present petitioner, and there was no offence made out on the petitioner because he was not responsible for conduct of the business of the company and there wasn’t any specific sanction taken against him resulting in the dismissal of the revision petition.
• The conclusion of the learned Spl. Judge (PC Act) (ACB-5) was also questioned in the present petition.
• The prosecution of the petitioner was also challenged by the Ld counsel of the petitioner that the petitioner was not supplied any prior notice stating that he shall be treated as a Principal Officer under Section 2(35) (b) of the IT Act and the presumption of the petitioner being the Principal Officer of the company cannot be made in the absence of such notice.
• Regarding the issue of the digital signatures of the petitioner on the notice, which was actually filed subsequent to the notice dated 26.07.13, the counsel for the petitioner stated that the petitioner signed the returns in view of the provisions of section 140 of the IT Act that mandates the director, irrespective of dealing with the day-to-day activities of the company, for signing the income tax returns and concluding the director to be the principal officer or the in charge of the affairs of the company in the relevant year, i.e. 2012 on the basis of the director signing the ITR is fallacious
• Another argument of the counsel of the petitioner was regarding the sanction u/s 279 of the IT Act. It was argued that the sanction hadn’t been accorded qua the petitioner, and hence, the entire prosecution was faulty and had to be quashed.
• The counsel for the petitioner relied on various landmark judgements to support the contentions.

Respondents Contentions

• The very first contention of the counsel for the respondent was that the notice dated 26th July was addressed to the Principal Officer/ Managing Director of the company, which was responded to by the petitioner at the time of filling the ITR on 12th August 2013 with his digital signatures. The counsel for the respondent also pointed out that no disclosure was ever made by the petitioner in respect of any other person in charge or responsible for the day-to-day activities of the company or the Principal Officer other than the petitioner himself.
• Further, the fact that the petitioner alone gave the response to the notice sent to the principal officer led to the presumption of the petitioner being in charge of the affairs of the co. during the relevant year.
• The counsel for the responded also mentioned section 278-E of the IT Act, which stated that every “person” in charge or responsible to the company for the conduct of its business, as well as the company, were to be “deemed as guilty for the offence and that the culpability of the same was not restricted to the Principal Officer and the absence of any notice u/s 235-B of ITA did not make any difference. In respect of the sanction, the counsel pointed out the paragraph about the role of the petitioner as in charge of the company, he would have had ample time to establish the same during the trial; therefore, the session’s court was correct in the opinion of the ld. Counsel and the petition of the petitioner must be dismissed. The counsel for the respondent also pointed out that the Director is an agent” of the company, and even under Section 2(35) of the IT Act as an agent, a Director of the company would also be a Principal Officer.

Judgement

The Hon’ble Court observed that, undoubtedly, the Income Tax Department^[1] has the entitlement to file a complaint for prosecution of a person for wilful failure to furnish the ITR in due time. Section 139(4) deals with belated returns, which must be filed within three months prior to the completion of the relevant year or prior to the completion of the assessment.

The Supreme Court has held in a landmark judgement which was referred by the learned ACMM in his order, that complying with Section 139(4) would in no way act as a bar for initiating proceedings for failure to furnish the ITR as per section 139(1) of the Act.

As per the provisions of ITA, prior to the prosecution proceedings, there is a need to issue a notice as per sec 142(1) (i) of the Act. Secondly, the prosecution can only be initiated with the prior sanction of the appropriate authority u/s 279 of the Act, and in the present case, the petitioner claims the fulfilment of neither of the above-mentioned conditions, whereas the respondent claim complete adherence to the conditions.

It is clear from the record that the notice served by the respondent was addressed to the MD / Principal Officer of M/s ASM Traxim (P) Ltd. The previous notice dated 26th July 2013 regarding the filing of the return as per the provisions of Section 140 of the Act by 2nd August 2013 was addressed to the “Principal Officer” of M/s ASM Traxim (P) Ltd.

Further, the court referred to section 2 (35) of the IT Act which dealt with the definition of a principal officer and observed that the principal officer is clearly defined in the IT Act, and there are separate sections containing the definitions of manager, managing agent and director; therefore, a principal officer is not equivalent to a director and agent even though a director can act as an agent in certain functions.

As per section 2(35), (a) of the Act, the agent of the company cannot be treated as a director majorly for the reason that they have separate definitions of Director, and in case the Director was to be included per se as a Principal Officer, the same would have been done by the Legislature by including the Director in Sec- 2(35) (a) of ITA, 1961. Therefore the Court rejected the contention of the respondent’s counsel regarding the inclusion of the director as the principal officer of the company due to being the agent of the company.

Section 2(35) (b) of the Act states that the person included in the administration management of the company would undoubtedly include as a director, but notice must be served by the AO clarifying his intention of treating that person as the principal officer of the company which is absent in the present case. The notice of intention must be done by a physical Act followed by the serving of the notice to the person associated with the management who was considered the principal officer by the AO.

No such notice was served to the petitioner before the supply of the notice dated 26.07.2013. the fact that the petitioner has put the digital signatures as statutory compliance of the notice, as well as the sec 140 of the act, would not be considered sufficient for meeting the conditions of Sec 2(35) and appending the signature in compliance with section 140 by the director cannot be estoppel by the director ie the petitioner, on the principles of holding out in this case. The deciding factor in the current matter is the intention and act of the assessing officer rather than the assessee.

Therefore the contention of the respondent’s counsel regarding the petitioner responding to the notice dated 26th July 2013 thereby debarring him from raising the objection regarding the non-receipt notice by the assessing officer conveying his intention of treating the director as the principal officer cannot be accepted as a valid argument

However, the counsel for the respondent emphasised on the fact that any person being in charge at the Co. or responsible for the conduct of the business at the time of the commission of the offence would be considered to be guilty as per Section 278B would cover the petitioner and there shall be a presumption against him as per  

278B for the time when the ITR wasn’t filed, resulting in the commission of an offence under sec Section 276 CC.

Undoubtedly this contention is rebuttable, but the same shall be subject to trial. Thus, even if for the sake of arguments, the contention urged on behalf of the petitioner was to be accepted that he was not notified nor declared to be a Principal Officer by the Assessing Officer under Section 235-B, nevertheless, on that plea, he cannot avoid prosecution, other requirements being satisfied.

Another issue that was closely examined was regarding the requirement of sanction under Section 279. A “person” can be a person as provided in Section 278B as “every person” being in charge of or responsible to the company for the conduct of its business. However, that “person” can’t be proceeded against for the offence under the offense u/s 276CC Section without the prior sanction of the Principal Commissioner/appropriate authority. Such sanction is necessary for prosecution, and in the absence of the same naturally, the “person” can’t be proceeded against in a court of law. The absence of sanction would imply no cognizance of the complaint can be taken by the Trial Court, and the complaint cannot proceed further.

The sanction placed on record in the present case refers to the company as the assessee, and the response received to the show cause notice under Section 276 CC dated 20th March 2014 vide a letter dated 25th March 2014 by Mr B.L. Gupta ITP on behalf of the assessee company wherein it is contended that the assessee company has filed the ITR as per Sec 139(4) of the Act showcasing the absence of any wilful default on the part of the assessee company.

The petitioner was mentioned in Para 10 of the notice wherein it was mentioned that the ITR has been verified by Vipul Agarwal, director, by the digital signature”, and nothing more than that.

Further, the notice also stated that the CIT (Central), in the exercise of his power u/s 279 (1) sanctioned prosecution of the assessee u/s 275CC r/w Section 278E of the Income-tax Act, 1961 “authorising Sh. Subhash Verma, DCIT, CC-22, and New Delhi too, in for the institution of a criminal complaint under the above-referred sections for AY 20l11-12 against the company ASM Traxim Pvt Ltd in the court of competent jurisdiction at my  {CIT (Central)},instance.

Hence the sanction was particularly for the institution of the criminal complaint clearly against the assessee, i.e. the Company, and there wasn’t any sanction for the petitioner even as a “person” either a director/ or responsible for the conduct of the business of the Co. It can’t be decided that the observation in Para No.10 of the sanction about the petitioner verifying the returns filed by petitioner’s digital signatures would be tantamount to sanction qua him. That would be stretching language too far.

The law clearly provides that the income tax Department cannot proceed with the prosecution against Section 276 CC of the IT Act without the prior sanction u/s 278B of the IT Act, the prosecution shall fail qua the petitioner, and the LD ACMM couldn’t have taken the cognizance in the absence of such sanction.

Finally, the Hon’ble Court quashed the complaint dated 6th August 2014, along with all the proceedings emanating from the same, together with the impugned order against the petitioner, thereby allowing the petition of the petitioner.

Conclusion

The judgement can be considered a landmark in matters related to prosecution against the assessee director in the absence of a notice and sanction The decision also provides clarifications regarding the terms such as principal officer and director, which had been used as the same in the present case, which can be a relief for the director of the company as it can save the director from unnecessary prosecution.  

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