S.C. Kumar V. Income Tax Officer and others

CRM/4477/1988

AI Insights

S.C. Kumar, the petitioner, challenged the complaint filed by the Income Tax Officer and the subsequent legal actions taken against him, including the issuance of non-bailable warrants. The complaint alleged that Sukhna Paper Mills Limited, where Kumar was a nominee director, failed to deduct tax at source on interest payments as required under Section 194-A of the Income Tax Act for the assessment year 1984-85. The petitioner argued that the legal provisions cited in the complaint were not in effect during the relevant period and that his role as a nominee director did not involve managing the company's day-to-day affairs. The court agreed with the petitioner's arguments, leading to the quashing of the complaint and related proceedings.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 675558 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 05-08-2014
• Assessment Year: misc
• Other Referred Cases: Punjab Business and Supply Co. Pvt. Ltd. and another vs. Income Tax Officer and another, M/s General Finance Company vs. Assistant Commissioner of Income Tax, Narender Kumar Khandewal and others vs. Union of India and another
• Laws Referred To: Section 482 Cr.P.C., Section 194-A of the Income Tax Act, Section 276-B of the Income Tax Act, Industrial Finance Corporation Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: URVASHI DHUGGA
• Assessee Lawyers: RADHIKA SURI
• Keywords: Abuse of Process; Nominee Director; Non-bailable Warrants; Quashing of complaint; Tax deduction at source; Financial interest
• Section: 482; 194-A; 276-B

Judgement Text

"IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CRM No.M-4477 of 1988 Date of decision: August 05, 2014 S.C.Kumar ...Petitioner Versus Income Tax Officer and others ...Respondents CORAM: HON'BLE MR. JUSTICE INDERJIT SINGH Present: Ms.Radhika Suri, Advocate for the petitioner. Ms.Urvashi Dhugga, Advocate for the respondents. **** INDERJIT SINGH, J. Petitioner S.C.Kumar has filed this petition against Income Tax Officer and other respondents under Section 482 Cr.P.C. for quashing of complaint Annexure P-2 filed by the respondent on 26.03.1987 in the Court of Chief Judicial Magistrate, Chandigarh, the same having disclosed no offence being against law and facts and the order of summoning Annexure P-3 dated 26.03.1987 passed by CJM, Chandigarh and the subsequent order issuing non-bailable warrants against the petitioner being abuse of the process of the Court. It is stated in the petition that petitioner is employed with the Industrial Finance Corporation of India and the petition is being filed by the petitioner in his individual capacity as an employee of the said Corporation while he was acting as Director of M/s Sukhna Paper VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -2- Mills Limited, which was incorporated as Public Limited Company. It is further stated in the petition that Industrial Finance Corporation of India advanced huge amounts to the said Company with a view to look after the financial interest of the Industrial Finance Corporation of India. The brief facts are that earlier the petitioner as Asstt. Manager of the said Corporation was appointed as a nominee Director on the Board of the Directors of M/s Sukhna Paper Mills Limited with effect from 30.06.1980. By letter dated 09.11.1984, Sh.J.C.Malhotra was appointed as a Member of the Board of Directors. By another letter dated 15.01.1987, the nomination of Sh.J.C.Malhotra from the Board of Directors of M/s Sukhna Paper Mills was withdrawn by the Industrial Finance Corporation of India. M/s Sukhna Paper Mills had deposits with its various parties and while making the payment of interest to the depositors, it was required to deposit tax at source for the accounting year 1984-85 amounting to `44,036/- within specified time in Government account. However, the said amount was not deposited in time and consequently, Income Tax Officer gave a notice to the Company. Reply was given by the Company that, as no interest was paid to the parties and only a provision had been made in the account, the amount was not deposited. It is further stated in the petition that Income Tax Officer- respondent filed a complaint before CJM, Chandigarh alleging that during the course of assessment proceedings, it was found that for the period from 01.01.1983 to 31.12.1983 relevant to the assessment year 1984-85, M/s Sukhna Paper Mills Limited accused No.1 had paid VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -3- interest amounting to `4,40,360/- to various persons and as such was liable to deduct tax at source amounting to `44,036/- within stipulated time in the Government account i.e. upto 28.02.1984. In reply to the notice, details of amount of interest and the amount of tax deducted at source were submitted and it was further submitted that during the period relevant to the assessment year 1986-87, the assessee neither credited the interest to the accounts of the parties nor paid interest to them but only made a provision in the final accounts. However, in the profit and loss account, the company claimed this amount of `4,40,360/- as financial expense on account of interest to others. It was also stated in the complaint that by opening a separate account under head 'Interest Payable' the account of individual parties indirectly becomes credited on account of interest payable and as such the company was liable to deduct the tax at source and pay the same as per provisions of Section 194-A of the Act. It is further stated in the complaint that the company deposited the tax deducted at source late. It is also stated that the learned CJM, Chandigarh without adverting to the facts of the case and appreciating the position of the nominee Directors appointed by Industrial Finance Corporation of India, summoned the petitioner along with others by passing a non- speaking and cryptic order. It is further stated that the petitioner was only a nominee Director appointed by Industrial Finance Corporation of India with a view to look after the financial interest. He attended only the meetings of the Board of Directors, as a nominee Director. In VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -4- fact, he was not at all concerned with the day to day working of the company for the conduct of affairs of the Company. Notice of motion was issued in this case and respondents appeared through their counsel and filed reply contesting the petition. I have gone through the record and have heard learned counsel for the parties. First of all, as regarding the summoning order, I find that as the complaint has been filed by a public servant acting or purporting to act in the discharge of his official duties, therefore, there is no necessity to examine the complainant or the witnesses in the preliminary evidence as per the proviso attached to Section 200 Cr.P .C. Therefore, the order passed by learned CJM, Chandigarh summoning the accused vide order dated 26.03.1987, cannot be held as a non-speaking order or illegal being without recording preliminary evidence. Learned counsel for the petitioner argued that S.C.Kumar was only a nominee Director and he was not at all concerned with day-to-day work or affairs of the company, therefore, he cannot be held as Incharge for the conduct and affairs of the Company. The general averment in the complaint that accused No.2 to 8 are its Directors including Chairman and Managing Director and as such, these are persons Incharge of and responsible to the Company for the conduct of affairs of the company, is not sufficient. The petitioner was only a nominee Director of M/s Sukhna Paper Mills Limited with effect from 30.06.1980. Learned counsel for the petitioner further argued VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -5- that explanation to Section 194-A of the Income Tax Act has been added by Finance Act 1987 with effect from 01.06.1987. Thus in assessment year 1984-85, the explanation making crediting of income by transferring the amount to 'Interest Payable' account was not an offence and the complaint filed by the Income Tax Officer for the year 1984-85 i.e. prior to insertion of the explanation treating the crediting of interest without deduction of tax at source as an offence was completely without jurisdiction and contrary to the provision of the Act. Learned counsel for the petitioner further argued that the complaint was filed under Section 276-B, which provision has been amended after 01.04.1989 and only failure to pay tax deducted at source has been made offence. Therefore, on the basis of earlier provision under Section 276-B, which has been amended, the petitioner cannot be punished and the trial cannot be continued. Learned counsel for the petitioner also argued that under Section 25 and 30-A of the Industrial Finance Corporation Act under Sub clause 3, it has been specifically provided that, a person appointed as a Director on behalf of the corporation, will not be liable to incur any obligation or liability. On other hand, learned counsel for the respondents argued that there is no merit in the present petition. The complaint and summoning order are not liable to be quashed. From the record, first of all, I find that petitioner S.C.Kumar was appointed as a nominee Director in M/s Sukhna Paper Mills Limited by the Industrial Finance Corporation of India. He is not supposed to look into the day-to-day affairs of M/s Sukhna Paper Mills VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -6- Limited and to manage that company. He was nominated as Director only to watch the interest of Industrial Finance Corporation of India as huge amount was advanced to M/s Sukhna Paper Mills Limited. There is also nothing in the complaint to show that the present petitioner was responsible for managing day-to-day affairs of that company. There are only general averments in the complaint in para no.6 that accused No.2 to 8 are its Directors including Chairman and Managing Director and as such, these are persons Incharge of and responsible to the Company for the conduct of affairs of the company. Furthermore, as per Section 25 and 30-A of the Industrial Finance Corporation Act, it has been provided that a person appointed as a Director on behalf of the corporation will not be liable to incur any obligation or liability. Provision of Section 194-A of the Income Tax Act reads as under:- “Any person, not being an individual or a Hindu Undivided Family, who is responsible for paying to a resident any income by way of interest other than income [by way of interest on securities], shall, at the time of credit of such income to the account of the payee 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 income- tax thereon at the rates in force : Provided that an individual or a Hindu Undivided Family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause A or clause B) of Section 44A during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section. Explanation-For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “Interest payable account” or VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -7- “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.” The explanation was inserted by Finance Act 1987 to the provision under Section 194-A, which means that in the assessment year 1984-85, the explanation making crediting of income by transferring the amount to the Interest Payable account was not an offence and the complaint filed by Income Tax Officer for the year 1984-85 i.e. prior to insertion of explanation treating the crediting of interest without deduction at source as an offence was completely without jurisdiction and contrary to the provisions of the Act. Learned counsel for the petitioner cited judgment passed by this Court in Punjab Business and Supply Co. Pvt. Ltd. and another vs. Income Tax Officer and another, 1991 Income Tax Reports 550, in which it is held as under:- A bare glance through the above referred provisions leaves no doubt that failure to deduct income-tax from interest payable to different depositors is visited with penal consequences only if such deduction is not made at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or through cheque or draft or by any other mode. The term 'by any other mode' pertains to the actual payment of interest to depositors and thus cannot be said to cover showing such interest in a general interest payable account. Thus by no stretch of imagination can it be said that showing of the above interest to different payees in the general interest payable account by the Company would be deemed payment of interest to different depositors. As a matter of fact this interpretation cannot be disputed because while introducing the Finance Bill, 1987, the Explanatory Note clearly provides that the Legislature had filled up a lacuna in the existing provisions of Section 194. Paras No. 38.1 and 38.2 of the Explanatory Note relating VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -8- to modification of provisions relating, to tax deduction at source reads as under:- \"38.1 With a view to rationalise the provisions of Sections 194, 194A and 194D, the limits up to which no tax is to be deducted have been raised as under : Sl. No. Type of Payment Present Limit up to which no tax is deductible Amended limit 1. 2. 3. Divident (Section (194) Interest Other than interest on securities (section 194A) Insurance Commission (section 194D) (Rs.) 1,000 1,000 Nil (Rs.) 2,500 2,500 5,000 38.2 Under the existing provisions, deduction of tax at source from interest is to be made at the time of payment or credit to the account of the payee. With a view to prevent postponement of liability relating to such deduction of tax at source, Section 194A has been amended to provide that tax will be deducted at source, on accrual of interest at the end of the accounting year or at the time of credit to the account of a payee or at the time of payment whichever is earlier. Similarly, Section 195 has been amended to ensure that deduction of tax at source from payments to non-residents will have to be made at the time of payment or at the time of giving credit to the account of the non-resident, whichever is earlier. Any sum credited to 'suspense account' or 'interest payable account\" shall be deemed to be credited for the purpose of tax deduction at source.\" A bare glance through the above referred notes leaves no doubt that Section 194A has been amended to provide that the tax will be deducted at source on accrual of interest in the end of the accounting year or at the time of crediting to the account of payee or at the time of payment, whichever is earlier and it further states that it was done with a view to prevent postponement of liability relating to such deduction of tax at source. Thus the explanatory note itself reveals that there was a lacuna or loop hole in the unamended provisions of Section 194A which enabled the concerned person to postpone the liability relating to such deduction of tax at source and thus dwindling the tax collection. For the reasons stated above, there is absolutely no doubt that Explanation to subsection (1) of Section 194A has created a fresh penal liability and it cannot be said to be a simple Explanation of the existing provisions of this section. If that is so, then this Explanation cannot have VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -9- retrospective operation. Consequently, it cannot be said that the petitioners had violated the provisions of Section 194A by showing the accruing interest to different depositors in their interest payable account instead at crediting it to the payees account. In view of this legal position, the pendency of the proceedings resulting from the afore-referred complaints wound certainly amount to abuse of the process of the Criminal Court and call for quashment. It is ordered accordingly by accepting these petitions. Further, I find that the provision of Section 276-B as existed for the year 1984-85 reads as under:- 276B. 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 sub- section (9) of section 80E or Chapter XVIIB, 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 fine. The above-said Section was amended with effect from 01.04.1989 which reads as under:- “276B. 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 XVIIB, 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 perusal of amended Section shows that now mere failure to deduct tax is no longer offence under Section 276-B of the Income Tax Act. The Hon'ble Supreme Court also in M/s General Finance Company vs. Assistant Commissioner of Income Tax, VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh CRM No.M-4477 of 1988 -10- AIR 2002 SC 3126 while examining the provisions of Section 269SS concluded that even if the offence was committed at the time of filing of the complaint, the same could not be continued after the omission of the provision. The Hon'ble Madhya Pradesh High court in Narender Kumar Khandewal and others vs. Union of India and another, 2003 ITR 593 has held that after the omission of the provision of failure to deduct tax at source, the trial cannot be continued against the petitioners. Keeping in view the above discussion, I find that the continuation of the complaint proceedings qua the petitioner is abuse/misuse of the process of the law. Therefore, finding merit in the present petition, the same is allowed. Accordingly, complaint dated 26.03.1987, the order of summoning dated 26.03.1987 passed by CJM, Chandigarh and the subsequent proceedings qua the petitioner are hereby quashed. August 05, 2014 (INDERJIT SINGH) Vgulati JUDGE VINEET GULATI 2014.09.10 10:13 I attest to the accuracy and integrity of this document Chandigarh "