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The High Court of Delhi pronounced a judgement in the case of Vipul Aggarwal Vs Income Tax Officer on 19th 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.
Table of Contents
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.
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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