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Petitioner: INCOME-TAX OFFICER VS Respondent: DINESH K. SHAH and others
Court Name: Madras High Court Judge(s): A. R. Lakshmanan, K. A. Swami Title: INCOME-TAX OFFICER vs DINESH K. SHAH and others Case No.: Criminal R.C. Nos.415 to 417 of 1987 Date of Judgment:1996-08-12 Reported As: 1998 PTD 3791 Result: Revision allowed
JUDGMENT
JUDGMENT ' A. R. LAKSHMANAN, J.---The Income-tax Officer, Headquarters, T.D.S., and the Income-tax Officer, Salaries Circle, Madras, have preferred three complaints before the Additional Chief Metropolitan Magistrate (Economic Offences-J), Madras-8, against the respondents herein under section 276-B and section 276-B read with section 278-B of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for their failure to deduct income-tax at source from the interest amounts paid to various persons as per section 194-A of the Act. The first respondent is the firm and the second respondent is the partner of the first respondent-firm. ' The first respondent-company in E.O.C.C.Nos.292 to 360 of 1987 (Criminal R.C.No,417 of 1987) furnished its return of income, which was signed by the second respondent, in the form of trading, profit and loss account and balance-sheet for the accounting year ending September 30, 1982 (assessm ent year 1983-84), on December 30, 1985. In the statement accompanying the return, the firm claims to have paid interest to the extent of Rs,6,64,565.98 to various parties. Of these, there were payments of over Rs,1,000 in the aggregate during the financial year in respect of 68 parties. The respondents have failed to deduct tax of Rs,2,400, on the interest credited to Sri Finance Corporation on various dates. Since the first respondent had failed to deduct the tax at source as per the provisions of section 194A of the Act, show-cause notice under section 276-B of the Act was issued on October 31, 1986, calling for the assessee's explanation for non-deduction of tax at source under section 194-A of the Act, There was no response from the firm. For the failure on the part of the first respondent-firm to deduct tax at source from the amount of interest paid to the creditors and thereafter to remit the same within seven days from the last day of the month in which deduction was made or within two months of the expiration of the month in which the date of
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crediting to the parties amount falls, to the credit of the Government of India's account as stipulated in Rule 30(1)(b) of the Income-tax Rules, 1962, which is without reasonable cause or excuse, the Department seeks to prosecute the first respondent firm under-section 276B of the Act. The second respondent being the managing partner of the first respondent-firm at the material time, is responsible for the conduct of the business of the firm, and has committed the offence under section 276B read with section 278-B of the Act. Therefore, the above complaint was filed requesting the trial Magistrate to take the complaint on file, issue process to the accused/respondents and deal with them in accordance with law. ' The first accused/first respondent in C.C.Nos.361 and 362 of 1987 on the file of the Additional Chief Metropolitan Magistrate (Economic Offences-I), Madras-8 (Criminal R.C. No,415 of 1987) is a partnership firm carrying on the business of marketing quality eyewares and the second accused, who is its partner, has signed the firm's annual return in Form No,24, under section 206 of the Act, For the assessm ent year 1986-87, relevant for the financial year ended March 31, 1986, the firm filed an annual return in Form No,24 under section 206 of the Act on April 21, 1986. It also furnished the particulars in Form No,24. According to the particulars furnished, even though the employees had a taxable income, tax was not deducted at source in accordance with the provisions of section 192 of the Act. Therefore, a letter was issued on February 17, 1987, by the complainant to the assessee-firm requiring them to furnish monthly remittance particulars: The assessee in its reply dated February 20, 1987, has stated that since the annual income under this head does not exceed the minimum amount liable to tax, the monthly remittance particulars in Form No,24 are shown as "Nil". It is stated that the failure on the part of the firm to deduct tax at source under section 192 of the Act and to remit the same within the time stipulated is an offence punishable under section 276-B of the Act. The second accused/respondent being the partner, of the first accused-firm who had signed its annual return in Form No,24 and answerable to the first accused-firm for the conduct of the business of the firm is equally liable under section 276-B read with section 278-B of the Act. ' The first accused in C.C. Nos.268 to 291 on the file of the Additional Chief Metropolitan Magistrate (Economic Offences-I), Madras-8, is the firm functioning at Madras and accused Nos.2 and 3, respondents Nos.1 and 2 are the partners, who are responsible for the conduct of the business of the firm. They filed the return for the year ended on March 31, 1980, and the final accounts in the form of trading, profit and loss account and balance-sheet. In the statement of interest paid account, the firm had claimed to have paid interest to the extent of Rs,99,000 to eight persons. It is stated that the accused have delayed the remittance of tax deducted at source to the Government of India's account from the interest. The firm remitted the T.D.S. Amount after a delay of nearly two months. Therefore, summons under section 131 of the Act were issued to the assessee on November 13, 1986, asking them to appear on November 21, 1986, with books of account for the years ended March 31, 1980, to March 31, 1983. On December 9, 1986, the assessee filed a letter, dated December 12, 1986, relating to the assessment year 1980-81 along with the particulars of interest paid, T.D.S. Paid, etc. The assessee in their explanation had stated that all the depositors were already on the list of the assessee and due to misapprehension, the depositors themselves paid advance tax on these interest payments. It is, therefore, stated that the failure on the part of the firm to deduct tax at source from the amount of interest paid to the creditors and thereafter remit the same within the time stipulated is without reasonable cause or excuse, and as such, the first accused/firm has committed the offence punishable under section 276-B of the Act and accused Nos. 2 and 3 respondents have committed the offence punishable under section 276-B read with section 278-B of the Act. ' The learned trial Magistrate heard the learned special public prosecutor for the Income-tax Department on the question of maintainability of the complaints against the second accused (managing partner) without statutory notice under section 2(35)(b) of the Act treating the second
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accused as principal officer of the firm. The following point was formulated by the learned magistrate for determination. "Whether without statutory notice under section 2(35)(b) of the Income Tax Act, cognizance can be taken of the offence under section 276-B read with section 278-B of the Income Tax Act against the second accused, the managing partner of the firm?" ' It was argued before the learned Magistrate on behalf of the Department that under section 2(35) (b) of the Act, since the principal officer includes agent and since a partner under the Indian Partnership Act is an agent for the business of the firm, no notice under section 2(35)(b) of the Act to treat such partner as principal officer of the firm is necessary. Rejecting the said contention, the learned Magistrate held that there is a legal lacuna in not issuing notice under section 2(35)(b) of the Act to the second accused, who is a partner of the first accused-firm, and who is sought to be made liable by virtue of section 278-B of the Act and because of that lacuna, a complaint cannot be taken cognizance of against the second accused. Therefore, rejecting the contention of the Department, the magistrate held that the managing partner of a firm will not come under the meaning "agent" in section 2(35)(b) of the Act and that the complaints are- not legally sustainable against the second accused for non-issue of statutory notice under section 2(35(b) of the Act to make him liable under section 278-B of the Act. Thus, the complaints were taken on file only against the first accused-firm. ' Aggrieved against the order of the Additional Chief Metropolitan Magistrate (Economic Offences- I), Madras-8, the Income-tax Officers, Headquarters, T.D.S., and Salary Circle have filed the three revisions under sections 397 and 401 of the Code of Criminal Procedure. ' The matter came up before E.J. Bellie, J., on March 10,1994. Before the learned Judge, learned counsel for the first accused/firm cited two decisions of this Court in Shital N. Shah v. ITO (1991) 188 ITR 376 ; (1990) L. W. (Crl.) 478 by T. S. Arunachalam, J (as he then was) and G. Anantharamiah v. ITO (1992) L.W. (Crl) 173 by K.A. Swamidurai J., wherein it has been held that for prosecution of a partner of a firm for the offence of non-deduction of tax at source from the interest payable by the firm, a notice under section 2(35)(b) of the Act is a precondition. E.J. Bellie, J., felt that the said decisions are not correct and that no question of notice under section 2(35)(b) of the Act to a partner arises at all. The learned Judge has also felt that it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the purview of section 2(35) of the Act. Therefore, the learned Judge thought it necessary to refer the matter to a Division Bench to have an authoritative binding judgment. That is how the matter is posted before this Bench. ' The following is the order of reference by E.J. Bellie, J. "This criminal revision petition case is by the Income-tax Officer, Headquarters, T.D.S., Office of the Commissioner, Madras-34 (hereinafter referred to as the Income-tax Officer'), against an order passed by the Additional Chief Metropolitan Magistrate, Economic Offences-I, Egmore, Madras, in Crl. M.P.No,242 of 1987 refusing to take cognizance of an offence compliance against the second accused in the case. (2) The complaint was filed by the Income-tax officer against the first accused-firm and against the second accused---its managing partner under section 276-B read with section 278-B of the Income Tax Act for an offence of failure to deduct income-tax at source from the interest payable by the partnership firm. (3) Before the case was taken cognizance, the learned Magistrate suo motu observing that as regards the second accused, the Income-tax Officer, should have issued statutory notice to him under section 2(35)(b) of the Income Tax Act and such notice having not been issued, the prosecution is incompetent against him, he took cognizance of the offence only against the first
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accused. Aggrieved by this order, the Income-tax officer has come up with this criminal revision case. (4) Mr. K. Ramaswa my, learned counsel appearing for the revision petitioner/Income-tax Officer, contends that the order of the. Court below is erroneous since no notice under section 2(35)(b) to the second accused is warranted. (5) Mr. V. Gopinath, learned counsel appearing for the second respondent/managing partner of the first respondent-firm cites two decisions of this Court. i,e,, (i) Shital N. Shah v. ITO (1991) 188 ITR 376 ; (1990) L.W. (Crl.) 478 and (ii) G. Anantharamiah v. ITO (1992) L.W. (Cr1) 173, wherein as ordered by the Magistrate, it has been held that for prosecution of a partner of a firm for the offence of non- deduction of tax at source from the interest payable by the firm, a notice under section 2(35)(b) is a pre-condition. (6) On a careful analysis of the relevant sections in the Income Tax Act, I am clearly able to see that the said decisions of this Court are not correct and no question of notice under section 2(35)(b) to a partner arises at all. (7) Now section 194-A of the Income Tax Act provides for deduction of income-tax from interest payable. Section 200 provides for payment of the deducted amount to the Government. These two sections cast a duty for deduction and payment of tax upon a person responsible for paying interest. Here it would be relevant to note that as per section 2(31) a person includes a firm. Under section 204, the meaning of person responsible for paying has been given. In this section, there are three clauses in respect of interest in clause (iii). As per this clause, the person responsible for paying is the payer himself, or, if the payer is a company, the company itself including the principal officer thereof. (8) Now, in our case, the payer is undoubtedly a partnership firm. Company' has been defined in section 2(17) of the Act. 'Firm' has been defined in section 2(23). Therefore, a firm cannot be said to be a company. They are in nature different from each other. Hence, when the clause (iii), reads. 'If the payer is a company, the company itself including the principal officer thereof', it refers only to a company defined under section 2(17) and not to a firm defined under section 2(23). (9) Section 276-B is a penal section for failure to deduct or pay tax. As per this section, if a person 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. It is seen above that the person responsible for paying in our case is the firm itself. Therefore, for non-deduction of tax from interest payable, the firm is punishable. (10) Under section 278-B where an offence under this Act has been committed by a company. Every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. In this section itself, there is an explanation according to which for the purposes of this section, a company includes a firm. As regards the firm, the partners thereof are the persons who are in charge of the firm and they are responsible for the conduct of the business of the firm. Therefore, under section 278-B for the offence committed by the firm, the partners are deemed to be liable. Hence, if the allegation that tax has not been deducted from the interest payable by the firm is true, then under section 278-B alongwith the firm, the partners also would have committed an offence. This being the case, no notice under section 2(35)(b) arises at all. (11) Firm does not come within the purview of section 2(35). This section relates to the local authority or a company or any other public body or any association of persons or anybody of individuals. Here it must be noticed that under section 2(31) person includes,--- (i) an individual, (ii) a Hindu undivided family,
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(iii) a company, (iv) a firm (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. Company, public body or an association of persons or body of individuals mentioned in section 2(35) all come within the meaning of 'person' under section 2(31) and they are besides a firm. From this, it is clear that a firm is not within the ambit of section 2(35). Therefore, as said above, no question of giving any notice under section 2(35) arises in the case of a firm. (12) In the above said two judgments of this Court, it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the purview of section 2(35). In this position, I think it is necessary to refer the matter to a Division Bench to have an authoritative binding judgment. (13) Therefore, the office is directed to place the matter before my Lord, the Hon'ble Chief Justice to post the matter before a Division Bench or Full Bench." ' It is also to be noticed that the second accused in E.O.C.C. Nos.292 to 360 of 1987/second respondent in Criminal R.C. No, 415 of 1987 filed Criminal M.P. No,7697 of 1987 under section 482 of the Code of Criminal Procedure to direct the Registry to issue notice to him for an opportunity being given to be heard on the question at issue. On August 5,1987, notice was ordered and Mr. V. Gopinath, Advocate, entered appearance on his behalf. ' We have heard Mr. K. Ramaswa mi, the learned Special Public Prosecutor for the Income-tax Department/petitioner and Ms. Nappinnai, learned counsel for the respondents. She also argued the case on behalf of the managing partners of the first accused-firm. ' It is contended by the learned Special Public Prosecutor, Mr. K. Ramaswami, as follows: (a) The learned magistrate has misdirected himself on the question of law relating to section 2(35) of the Act and has failed to note that the "principal officer" defined under section 2(35)(b) of the Act relates to only the obligations under sections 194 and 204 of the Act and they relate to a company and not to a firm. (b) The Court below ought to have held that the first accused, 'a partnership firm, is not a company, and therefore, there is no question of any principal officer being appointed or notices being served under section 2(35) of the Act. As such, the Court below has completely erred in applying section 2(35)(b) of the Act to section 278-B of the Act just because section 278-B includes a firm; (c) The Court below had failed to note that the decision reported in M.R. Pratap v. V.M. Muthuramalingam, ITO (1984) 149 ITR 798 (Mad.) applies only to a company and its employees and does not apply to a firm. (d) The Court below had failed to note that the words "company" and "director" have been given wider connotation only for the purpose of the other section of the Act. ' Countering the arguments of the learned Special Public Prosecutor. Ms. Nappinnai, learned counsel appearing for the respondents in all these cases, contended that the complaints suffered from fundamental legal defects of non-issuance of the statutory notice under section 2(35)(b) of the Act to the second respondent/partner, treating him as the principal officer, so as to bring him within the meaning of section 278-B of the Act. It is further submitted that section 276-B of the Act, with which the second respondent is sought to be charged, prescribes stringent punishment of rigorous imprisonment which may extend to three years and fine, and in any event, it shall be for a minimum period of three months. The penal provisions of the Act have to be strictly observed and non-observance of the statutory procedure is illegal and any proceedings that are sought to be taken are vitiated and hence, unsustainable.
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' The following decisions were cited before us: ' Shital N. Shah v. ITO (1991) 188 ITR 376; (1990) L.W. (Crl) 478 by T.S. Arunachalam, J.(as he then was). ' G. Anantharamiah v. ITO (1992) L.W.(Crl) 173 by K. Swamidurai, J. ' M.R. Pratap v. V.M. Muthuramalingam. ITO (1984) 149 ITR 798 by S. Natarajan, J. (as he then was ). ' M.R. Pratap, v. V.M. Muthu. Krishnan. ITO (1992) 196 ITR 1 by the Supreme Court. ' The points that arise for consideration in these revisions are: (1) Whether the second accused in his capacity as the partner is liable for prosecution under section 276-B read with section 278-B of the Act? And (2) Whether notice under section 2(35)(b) of the Act to a partner is a pre-condition? Section 2(17) of the Act, defines 'company", which runs thus "2. (17) company' means,--- (i) any Indian company, or (ii) anybody corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessm ent year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non- Indian, which is declared by general or special order of the Board to be a company: ' Provided that such institution, association or body shall be deemed to be a company only for such assessm ent year or assessm ent years whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration." ' Section 2(23) of the Act defines "firm". It runs thus: "2(23) 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932) ; but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership." ' Two essential conditions necessary to form the relation of partnership are; (i) there should be an agreement between persons to share the profits as well as the losses of the business ; and (ii) the business must be carried on by all or any of them acting for all, within the meaning of the definition of "partnership" under section 4 of the Indian Partnership Act. The principle of agency has been held to be implicit in the second requirement. ' Section 2(31) of the Act defines "person" as follows: "2. (31) 'person' includes,--- (i) an individual, (ii) a Hindu undivided family, (iii) a Company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses:" ' Section 2(35) of the Act defines "principal officer" as follows: "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 anybody 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." ' Section 192 of the Act deals with deduction at source in the case of salaried people. Section 194-A of the Act deals with interest other than interest on securities. Section 200 of the Act deals with duty
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of person deducting tax. When the tax has been deducted at source, it does not lie at the risk of the Revenue and unless the tax so deducted is deposited or paid, the person who has deducted, continues to be responsible. A default in payment of tax deducted at source to the credit of the Central Government attracts penalty under section 201(1) read with section 221, interest under section 201(1-A) and prosecution under section 276-B of the Act. The relevant rule for this section is rule 30 of the Income-tax Rules, 1962, which provides for time and mode of payment to Government account of the tax deducted at source. ' Section 201(1-A) of the Act provides for payment of simple interest at 15 per cent. Per annum if any such person, principal officer or company, does not deduct or after deducting fails to pay the tax as required by or under the Act. Section 221(1) of the Act provides for penalty in case of default in payment of tax. ' Section 276-B of the Act reads as follows: "276-B. Failure to pay the tax deducted at source.---If a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine." ' The above section was substituted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. Prior to its substitution, section 276-B as inserted by the Finance Act, 1968, with effect from April 1, 1968, and later on substituted by the Taxation Law as (Amendment) Act, 1975, with effect from October 1, 1975, and amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from September 10, 1986, stood as under: "276-B. Failure to deduct or pay tax.---If a person 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…
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