GREATWAY (P) LTD. VS ASSISTANT COMMISSIONER OF INCOME-TAX, 1993 PTD-PUNJAB-AND-HARYANA-HIGH-COURT-INDIA 1246 (1991)

(a) Income-tax---

----Offences and prosecution---Company---Failure to deduct or pay tax---No order specifying any person as principal officer of company---Prosecution of director---Not valid---Income-tax Act, 1961, Ss.2(35), 194-C, 204, 276-B - [Paramasivan (O.) v. State of Kerala (1971) Tax LR 1241 (Ker.) dissented from].

(b) Income-tax---

----Offences and prosecution---Company---Failure to deduct and pay tax-- Application of S.276-B---Condition precedent---There should be absence of reasonable cause for failure to deduct and pay tax---Revenue authorities should prove that the company had no reasonable cause for the failure to deduct and pay the tax---Income-tax Act, 1961, S.276-B.

(c) Income-tax---

----Interpretation of taxing statutes---Strict construction.

The grammatical meaning of a section has to be enforced and, in taxation law, the language has to be strictly construed. A plain reading of section 276-B of the Income-tax Act, 1961, shows that the absence of a reasonable cause or excuse is one of the ingredients of the offence. The act of non-deduction or non-payment of tax is an offence only if the act was done without any reasonable cause or excuse. The initial onus remains on the prosecution to establish all the ingredients of an offence and, for charge under section 276-B, this necessary ingredient has to be alleged and proved by the prosecution. In case the prosecution is able to discharge the initial onus, then of course, the onus will shift to the accused persons to show that he/they had a reasonable cause for failure to deduct or to deposit the tax. It is significant that section 278-AA provides that the proof of reasonable cause for failure will be a complete defence for offences under section 276-B.

Manjunatha Tyre Retreading Works v. State of Mysore (1969) 23 STC 428 (Mys.) fol.

Paramasivan (O.) v. State of Kerala (1971) Tax LIZ 1241 (Ker.) dissented from.

A perusal of sections 194-C, 204 and 2(35) of the Income-tax Act, 1961, shows that in the case of a company, deduction of tax at source is to be made by the company and its "principal officer" is one on whom notice has been issued by the Assessing Officer of his intention of treating him as the principal officer of the company. If any offence is committed under section 194-0 by a company, then the company and its principal officer alone shall become liable for the default. The proposition that directors are not only agents but are also trustees for the company may be valid for a case under the Companies Act, but it will not make the directors responsible as the principal officers unless they are so declared by issuance of a notice by the Assessing Officer.

Held, on the facts of the case, (i) that there being no pleading to the effect that the deductions were not made and tax was not deposited without a reasonable excuse or cause and also in the evidence led, no such fact having been established, no offence under section 276-B was made out;

(ii)that, in the absence of appointment of a principal officer by issuing a notice by the Assessing Officer, the prosecution, if any, could only be launched against the petitioner-company. The orders passed by the Chief Judicial Magistrate in discharging the other accused petitioners were, thus well-founded.

Balakrishnan, Managing Director, Terelac Furnaces (Pvt.) Ltd. v. ITO (1982) 134 ITR 573 (Ker.); Bombay Castwell Engineering (Pvt.) Ltd., In re (1984) 55 Comp Cas 75 (Bom.); Maharani Sharmishthabai Holkar (H.H.) v. Addl. CIT (1981) 129 ITR 13 (MP) and Kamla Vati (Smt.) v. CIT (1978) 111 ITR 248 (P&.H) ref.

H.L. Sibal and S.C. Sibal, Senior Advocates (Deepak Sibal,- R.K. Handa, K.M. Karen

Randhawa with him) for Petitioners.

R.P. Sahni for Respondent.

JUDGMENT

This judgment will dispose of Criminal Miscellaneous Nos. 2540 M/91, 2531-M/91, 2534-M/91, 2537-M/91, 2543-M/91, 2546-M/91, 2549 M/91, 2965-M/91, 2968-M/91, 2971-M/91, 2974-M/91, 2977-M/91, 2980 M/91, 2988-M/91, 2986-M/91, 2989-M/91, 2992-M/92, 2995-M/91, 2998 M/91, 3000-M/91, 3146-M/91, 3149-M/91, (3152)3152-M/91, 3155-M/91, 3158-M/91, 3161-M/91, 3164-M/91, 3167-M/91, 3170-M/91, 3173-M/91, 3176-M/91, 3179-M/91, 3182-M/91, 3185-M/91, 3191-M/91, 3194-M/91, 3197-M/91, 3263-M/91, 3266-M/91, 3269-M/91, 3272-M/91, 3275-M/91, 3278-M/91, 3281-M/91, 3284-M/91, 3287-M/91, 3290-M/91, 3293-M/91, 3296-M/91, 3299-M/91, 3302-M/91 and 3305-M/91 as common questions of law and fact are involved- therein. M/s. Greatway (P) Limited, G.T. Road, Ludhiana, alongwith its directors are being persecuted for an offence under section 276-B of the Income-tax Act, 1961 ("the Act" in short).

The facts are being drawn from Criminal Miscellaneous No.2531-M of 1991.

A complaint had been filed by the Income-tax Officer, Central Circle V, Ludhiana, on the allegations that, during the perusal of the records of the petitioner-company, it was found that the contract work of spinning was got done from M/s. Kohinoor Woollen Mills, Ludhiana, and the following amounts were credited to that account:

No income-tax was deducted at source nor deposited in the Government account and there was, thus, contravention of the provisions of section 194-C of the Act. The other persons, namely, Sarvashri H.D. Dumra, Arvind Dumra, Deepak Dumra and Rakesh Dumra were arrayed as accused, as they were the managing director and directors of the petitioner-company. After summoning, the precharge evidence was recorded by the Chief Judicial Magistrate and, on assessment of the evidence, the learned Magistrate discharged all the accused, vide order, dated March 13, 1990, Annexure P-4. Against this order, a revision was preferred to the Court of Session which was heard by Sh. Beant Singh Bedi, Additional Sessions Judge, who vide his order, dated January 5, 1991, Annexure P-5, set aside the order, Annexure P-4, and remanded the case for further inquiry against the petitioner-company, Shri H.D,. Dumra, Managing Director, and Sh. Rakesh Dumra, Director of the Company. The order of the learned Additional Sessions Judge, Annexure P-5, is the subject-matter of challenge in all these cases enumerated above. The petitioner-company and its aforesaid managing director and director seek quashing of the impugned order, Annexure P-5.

It is conceded at the Bar that the period during which the offences are alleged to have been' committed relate to the assessment years 1978-79 to 1982-83.

Section 194-C of the Act makes the following provisions for making deductions from payments to a contractor and sub-contractor:

"194-C. (1) Any person responsible for paying any sum to any resident (hereafter in. this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and---

(a)the Central Government or any State Government; or

(b)any local authority; or

(c)any corporation established by or under a Central, State or Provincial Act; or

(d)any company; or

(e)any cooperative society..

shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount.

equal to two per cent: of such sum as income-tax on income comprised therein.

(2) Any person (being a contractor and not being an individual or a Hindu undivided family), responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor .or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent. of such sum as income-tax on income comprised therein.

Explanation.---For the purposes of this section, where any sum referred to in subsection (1) or subsection (2) is credited to any account, whether called `suspense account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) No deduction shall be made under subsection (1) or subsection (2) from---

(i) any sum credited or paid in pursuance of any -contract the consideration for which does not exceed ten thousand rupees; or

(ii) any sum credited or paid before June 1, 1972; or

(iii) any sum credited or paid before June 1, 1973, in pursuance of a contract between the contractor and a cooperative society or in pursuance of a contract between such contractor and the sub contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the cooperative society.

(4) Where the Assessing Officer is satisfied that the total income of the contractor or the sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the contractor or the sub-contractor in this behalf, give to him such certificate as may be appropriate.

(5) Where any such certificate is given, the person responsible for paying the sum referred to, in subsection (1) or subsection (2) shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be."

Section 204 of the Act provides the meaning of "person responsible for payment" for purposes of section 194 and so far relevant for the purpose of these petitions, the same runs as under:

"204. For the purposes of sections 192 to 194, section 194-A, section 194-B, section 194-BB, section 194-C, section 194-D and sections 195 to 203 and section 285, the expression `person responsible for paying' means--- ....

(iii) in the case of credit or, as the case may be, payment of any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.

Explanation.-

Section 2(35) of the Act defines "principal officer" as under:--

"2(35) `principal officer', used with reference to a local authority or a company or any other public body or any association of persons or any body of individuals, means---

(a)the secretary, treasurer, manager, or agent of the authority, company, association or body, or

(b)any person connected with the management or administration of the local authority, company, association or body upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer thereof:"

In the light of the provisions referred to above, in respect of a company, any deductions are to be made by the company and its "principal officer" is one on whom notice has been issued by the Assessing Officer of his intention of treating him as the principal officer of the company. If any offence is committed under section 194-C by a company, then only the company and its principal officer shall become. liable for the default. Relying on Bombay Castwell Engineering (Pvt.) Ltd. In re (Castwell engineering Corporation v. Bombay Castwell Engineering (Pvt.) Ltd. (1984) 55 Comp Cas 75 (Bom.) learned counsel for the respondent has argued that the directors are not only the agents, but, to some extent, they are also the trustees for the company. This proposition may be valid for a case under the Companies Act, but it will not make the directors responsible as principal officers unless they are so declared by issuance of a notice by the Assessing Officer. .

The complaint is significantly silent as to whether any person had been appointed as the principal officer of the petitioner-company. In the absence of such an appointment, a director or the managing director of the company could not be prosecuted. It appears that the Assessing Officer was himself at fault and that fault has been tried to be covered by an argument by learned counsel for the respondent that the managing director and the directors will be deemed as agents of the company. However, an agent of the company cannot be equated with the principal officer as defined in section 2(35) of the Act. The prosecution of the persons other than the petitioner-company would, thus, be bad on this short ground alone.

Section 276-B, as it stood prior to its amendment of September 10, 1986 reads as follows:

"276-B. Failure to deduct or pay tax.---If a person, without reasonable cause. or excuse, fails to deduct or after deducting, fails to pay the tax as required by or under the provisions of subsection (9) of section 80-E or Chapter XVII-B, he shall be punishable---

(i)in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

(ii)in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with line."

The words "without reasonable cause or excuse" as they occur in section 276-B are significant. The act of non-deduction or non-payment was an offence only if the act was done without any reasonable cause or excuse. The initial onus remains on the prosecution to establish all the ingredients of an offence and, for a charge under section 276-B, this necessary ingredient has to be alleged and proved by the respondent. In case the prosecution is able to discharge the initial onus, then of course, the onus will shift to the accused persons to show that he/they had a reasonable cause for failure to deduct or to deposit the tax. It is significant to note that section 278-AA provides that the proof of reasonable cause for failure will be a complete defence for offences under section 276-A. Section 278-AA was inserted on September 10, 1986, that is to say, at the time amendment to section 276-A was made and the words "without reasonable cause or excuse" were deleted. The section, as framed, did not absolve the prosecution of its obligation to allege and prove the absence of reasonable cause or excuse for the default in deduction of the tax and its due deposit. Learned counsel for the respondent has relied on the observations of a Single Bench in O. Paramasivan v. State of Kerala (1971) Tax LR 1241 (Ker), dealing with a case under section 10(d) of the Central Sales Tax Act which read as follows:

"10(d) after purchasing any goods for any of the purpose specified in clause (b) of subsection (3) of section 8 fails, without reasonable excuse, to make use of the goods for any such purpose ....,"

which held that absence of reasonable excuse was not one of the ingredients of the offence. The learned Single Judge did not follow the authority of Manjunatha Tyre Retreading Works v. State of Mysore (1969) 23 STC 428 (Mysore), wherein it had been held that one of the ingredients to prove an offence is the failure to use the goods without reasonable excuse. I am unable to subscribe to the view adopted by M.U. Issac, J. in Paramasivan's case (1971) Tax LR 1241 (Ker). I follow toe judgment of the Mysore High Court in Manjunatha Tyre Retreading Works' case (1969) 23 STC 428. The grammatical meanings of the section have to be enforced and, in taxation law, the language has to be strictly construed. A plain reading of the section shows that absence of a reasonable excuse or cause is one of the ingredients of the offence.

The cases Smt. Kamla Vati v. CIT (1978) 111 ITR 248 (P&H) and H.H. Maharani Sharmishthabai Holkar v. Addl. CIT (1981) 129 TTR 13 (MP) relate to a case for imposition of penalty for failure to furnish the return in time and the mens rea with respect to the late filing of the return. Both these authorities obviously cannot be used as a guide.

Balakrishnan, Managing Director, Terelac Furnaces (Pvt.) Ltd. v. ITO (1982) 134 ITR 573 (Ker), was a case where the question involved was, whether the Income-tax Officer is a Court within the meaning of section 195(1)(b) of the Criminal Procedure Code and if the complaint did not disclose mens rea. The observations cannot provide any guidelines for the decision in this case. I, therefore, conclude that there being no pleading to the effect that the deductions were not made and tax was not deposited without a reasonable excuse or cause and also in the evidence led, no such fact having been established, no offence under section 276-B was made out. I also hold that, in the absence of appointment of a principal officer, by issuing a notice by the Assessing Officer, the prosecution, if any, could be launched only against the petitioner company. The orders passed by the learned Chief Judicial Magistrate in discharging the accused-petitioners were, thus, well-founded. I hereby accept all the criminal miscellaneous petitions enumerated above and quash the impugned orders of the learned Additional Sessions Judge, remanding the cases for further inquiry.

M.BA./2270/T_Cases remanded.