I am a non-executive director. The complaint under s.276B read with s.278B says only that I was in charge of and responsible to the company for the conduct of its business. Is that enough to put me on trial?
No. The Bombay High Court held that a bare averment reciting the words of s.278B, with no material showing that the director was in fact in charge of the company's affairs and responsible for the conduct of its day to day business, does not disclose a prima facie case, and process should not have issued against such a director. The applicants, who were non-executive directors and two of whom were practising advocates who could not in law act as full-time directors, were discharged.
Decided by the High Court (A.S. Aguiar J) on 2003-02-04, reported as [2003] 117 Comp Cas 218 (Bom); (2003) 4 Comp LJ 125; [2003] 131 Taxman 100 (Bom). It bears on section 276B, section 278B, section 2(35), section 204, section 194C, section 279(1) of the Income Tax Act 1961, in Prosecution and TDS Defaults matters.
This is the point on which most director prosecutions under the Act are fought, and it is the one a professional director or an outside investor most needs. The Court's reasoning has two limbs, and both are usable. The first is s.2(35): a director is not a principal officer unless the Assessing Officer has served on him a notice of his intention to treat him as such, and no such notice had been served here — s.204 makes the company and its principal officer the persons responsible for paying the deducted tax to the Government. The second is the pleading limb: it is not enough for the complainant to state that the directors are in charge and responsible; the complaint must indicate the nature of the post and its duties and how the director is in charge of and responsible for the conduct of the business, and there must be credible material showing active involvement. The Court also rejected the magistrate's view that the question must await evidence at trial, holding it would be a travesty of justice to prosecute a person and ask him to prove that the offence was committed without his knowledge before the prosecution has established that he was in charge. Against that, the reader must be told the counter-current: the Supreme Court in Madhumilan Syntex Ltd. v. Union of India (2007), already in the library, is the authority the Department invariably cites for the propositions that directors may be prosecuted and that it suffices if the show cause notice states an intention to treat them as principal officers, and recent High Court decisions have treated inter-director blame as a triable defence rather than a ground for pre-trial discharge. Do not present this as a settled rule.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Income Tax Officer, TDS VI, Bombay filed complaints before the Additional Chief Metropolitan Magistrate, 47th Court, Bandra, against M/s Unique Oil India Ltd. and its directors under s.276B read with s.278B. The company had deducted tax at source from payments to four contractors but had not remitted it to the Government within the stipulated time: the tax was required to be credited by 7 May 1989 and was paid only on 30 May 1989. Among the accused were the chairman and managing director, a whole-time director, and the present applicants, who were accused Nos. 4 to 7 and were non-executive directors; two of them were practising advocates who could not in law act as full-time directors. Summons issued to all the accused. The applicants applied for discharge on 31 October 1996 on the grounds that they were not principal officers of the company within s.2(35), that no notice of any intention to treat them as principal officers had ever been served on them, that they had no administrative responsibilities and were not concerned with the day to day affairs of the company, and that the Commissioner had granted sanction under s.279(1) without notice to them. By order dated 30 November 1996 the magistrate rejected the discharge applications, holding that until the prosecution had been given an opportunity to lead evidence it could not be determined before the framing of charge whether accused Nos. 4 to 7 were in charge of the conduct of the business. The applicants moved the High Court to set aside that order and for their discharge.
The application was allowed, the order dated 30 November 1996 was set aside and the applicants were discharged in Case Nos. 248-S to 251-S of 1993. Apart from the averment that the accused were in charge of and responsible to the company for the conduct of its business there was no material whatever prima facie showing that they were in fact in charge of the affairs of the company and responsible for the conduct of its business and day to day affairs; unless the complaint discloses a prima facie case of the directors' liability and obligation as principal officers in the day to day affairs of the company under s.278B, they cannot be prosecuted for the offences committed by the company, and in the absence of such material process could not have been issued against them.
The Court began from the statutory scheme fixing responsibility: s.194C makes the company responsible for deducting from the contractors and crediting the amount to the Central Government, and s.204 identifies the persons responsible for doing so as the company itself and its principal officer. To fix the applicants with that liability it was essential for the complainant to show that they were principal officers, and s.2(35) provides that a person is a principal officer with reference to a company only where the Income-tax Officer has served on him a notice of his intention to treat him as such. Admittedly no such notice had been served. On the sufficiency of the complaint the Court adopted the reasoning of the Kerala High Court in M.A. Unneerikutty v. Deputy Commissioner of Income-Tax, which it noted had not been placed before the magistrate: the complainant must allege and show by some acceptable material that the persons concerned were in charge of and responsible for the conduct of the business, a mere allegation to that effect is not sufficient, and there must be credible material showing active involvement in the conduct and management of the business. Measuring the complaint against that standard, the Court found it contained nothing beyond the statutory recital. It rejected the magistrate's approach of postponing the question to the evidence, holding that the applicants could not be made to undergo the ordeal of a trial unless it could prima facie be shown that they were legally liable for the company's failure, since otherwise it would be a travesty of justice to prosecute them and ask them to prove that the offence was committed without their knowledge. For that proposition it relied on Shyam Sundar v. State of Haryana, AIR 1984 SC 53, where the Supreme Court held in the analogous context of partners that the obligation on the accused to prove under the proviso that the offence took place without his knowledge arises only once the prosecution has established the requisite condition that he was responsible for carrying on the business and was at the relevant time in charge of it, and that in the absence of such proof no partner could be convicted.
Apart from the averment that accused/applicants were incharge of and responsible to the Company for the conduct of its business there is no material what so ever which primafacie shows that the applicants/accused were in fact incharge of the affairs of the Company and responsible for the conduct of its business and day to day affairs.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court held that a bare averment reciting the words of s.278B, with no material showing that the director was in fact in charge of the company's affairs and responsible for the conduct of its day to day business, does not disclose a prima facie case, and process should not have issued against such a director. The applicants, who were non-executive directors and two of whom were practising advocates who could not in law act as full-time directors, were discharged. This was decided by the High Court (A.S. Aguiar J) and bears on section 276B, section 278B, section 2(35), section 204, section 194C, section 279(1) of the Income Tax Act 1961. It is reported as [2003] 117 Comp Cas 218 (Bom); (2003) 4 Comp LJ 125; [2003] 131 Taxman 100 (Bom). This is the point on which most director prosecutions under the Act are fought, and it is the one a professional director or an outside investor most needs. The Court's reasoning has two limbs, and both are usable. The first is s.2(35): a director is not a principal officer unless the Assessing Officer has served on him a notice of his intention to treat him as such, and no such notice had been served here — s.204 makes the company and its principal officer the persons responsible for paying the deducted tax to the Government. The second is the pleading limb: it is not enough for the complainant to state that the directors are in charge and responsible; the complaint must indicate the nature of the post and its duties and how the director is in charge of and responsible for the conduct of the business, and there must be credible material showing active involvement. The Court also rejected the magistrate's view that the question must await evidence at trial, holding it would be a travesty of justice to prosecute a person and ask him to prove that the offence was committed without his knowledge before the prosecution has established that he was in charge. Against that, the reader must be told the counter-current: the Supreme Court in Madhumilan Syntex Ltd. v. Union of India (2007), already in the library, is the authority the Department invariably cites for the propositions that directors may be prosecuted and that it suffices if the show cause notice states an intention to treat them as principal officers, and recent High Court decisions have treated inter-director blame as a triable defence rather than a ground for pre-trial discharge. Do not present this as a settled rule. If it applies to you, the first step is this: Get a certified copy of the complaint and read what it actually says about you; if it does no more than reproduce the words of s.278B, that is the ground.
The Income Tax Officer, TDS VI, Bombay filed complaints before the Additional Chief Metropolitan Magistrate, 47th Court, Bandra, against M/s Unique Oil India Ltd. and its directors under s.276B read with s.278B. The company had deducted tax at source from payments to four contractors but had not remitted it to the Government within the stipulated time: the tax was required to be credited by 7 May 1989 and was paid only on 30 May 1989. Among the accused were the chairman and managing director, a whole-time director, and the present applicants, who were accused Nos. 4 to 7 and were non-executive directors; two of them were practising advocates who could not in law act as full-time directors. Summons issued to all the accused. The applicants applied for discharge on 31 October 1996 on the grounds that they were not principal officers of the company within s.2(35), that no notice of any intention to treat them as principal officers had ever been served on them, that they had no administrative responsibilities and were not concerned with the day to day affairs of the company, and that the Commissioner had granted sanction under s.279(1) without notice to them. By order dated 30 November 1996 the magistrate rejected the discharge applications, holding that until the prosecution had been given an opportunity to lead evidence it could not be determined before the framing of charge whether accused Nos. 4 to 7 were in charge of the conduct of the business. The applicants moved the High Court to set aside that order and for their discharge. The matter was decided on 2003-02-04 by the High Court (A.S. Aguiar J). On those facts the High Court held as follows. The application was allowed, the order dated 30 November 1996 was set aside and the applicants were discharged in Case Nos. 248-S to 251-S of 1993. Apart from the averment that the accused were in charge of and responsible to the company for the conduct of its business there was no material whatever prima facie showing that they were in fact in charge of the affairs of the company and responsible for the conduct of its business and day to day affairs; unless the complaint discloses a prima facie case of the directors' liability and obligation as principal officers in the day to day affairs of the company under s.278B, they cannot be prosecuted for the offences committed by the company, and in the absence of such material process could not have been issued against them.
The Court began from the statutory scheme fixing responsibility: s.194C makes the company responsible for deducting from the contractors and crediting the amount to the Central Government, and s.204 identifies the persons responsible for doing so as the company itself and its principal officer. To fix the applicants with that liability it was essential for the complainant to show that they were principal officers, and s.2(35) provides that a person is a principal officer with reference to a company only where the Income-tax Officer has served on him a notice of his intention to treat him as such. Admittedly no such notice had been served. On the sufficiency of the complaint the Court adopted the reasoning of the Kerala High Court in M.A. Unneerikutty v. Deputy Commissioner of Income-Tax, which it noted had not been placed before the magistrate: the complainant must allege and show by some acceptable material that the persons concerned were in charge of and responsible for the conduct of the business, a mere allegation to that effect is not sufficient, and there must be credible material showing active involvement in the conduct and management of the business. Measuring the complaint against that standard, the Court found it contained nothing beyond the statutory recital. It rejected the magistrate's approach of postponing the question to the evidence, holding that the applicants could not be made to undergo the ordeal of a trial unless it could prima facie be shown that they were legally liable for the company's failure, since otherwise it would be a travesty of justice to prosecute them and ask them to prove that the offence was committed without their knowledge. For that proposition it relied on Shyam Sundar v. State of Haryana, AIR 1984 SC 53, where the Supreme Court held in the analogous context of partners that the obligation on the accused to prove under the proviso that the offence took place without his knowledge arises only once the prosecution has established the requisite condition that he was responsible for carrying on the business and was at the relevant time in charge of it, and that in the absence of such proof no partner could be convicted. In the words reproduced by the source cited on this page: "Apart from the averment that accused/applicants were incharge of and responsible to the Company for the conduct of its business there is no material what so ever which primafacie shows that the applicants/accused were in fact incharge of the affairs of the Company and responsible for the conduct of its business and day to day affairs." The decision followed or applied Shyam Sundar v. State of Haryana AIR 1984 page 53 — relied upon; M.A. Unneerikutty and Ors. v. Deputy Commissioner of Income-Tax (Kerala High Court) — observations adopted; citation given inconsistently in the report and the decision was not read; Shital N. Shah and Ors. v. Income-Tax Officer, 188 ITR 376 (Madras) — referred to; not read.
It was decided by the High Court on 2003-02-04 and is reported as [2003] 117 Comp Cas 218 (Bom); (2003) 4 Comp LJ 125; [2003] 131 Taxman 100 (Bom). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 276B, section 278B, section 2(35), section 204, section 194C, section 279(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The application was allowed, the order dated 30 November 1996 was set aside and the applicants were discharged in Case Nos. 248-S to 251-S of 1993. Apart from the averment that the accused were in charge of and responsible to the company for the conduct of its business there was no material whatever prima facie showing that they were in fact in charge of the affairs of the company and responsible for the conduct of its business and day to day affairs; unless the complaint discloses a prima facie case of the directors' liability and obligation as principal officers in the day to day affairs of the company under s.278B, they cannot be prosecuted for the offences committed by the company, and in the absence of such material process could not have been issued against them. It arises in Prosecution and TDS Defaults matters, on section 276B, section 278B, section 2(35), section 204, section 194C, section 279(1) of the Income Tax Act 1961, and was decided by A.S. Aguiar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether any notice under s.2(35) was ever served on you of the Assessing Officer's intention to treat you as principal officer of the company — its absence was decisive here. Put on record the objective material fixing responsibility elsewhere: the board's division of responsibility, Form DIR-12, the designation of the managing director or whole-time director, and any professional disability preventing you from holding executive office. Move for discharge before the magistrate first, on the material on record, rather than waiting for the trial; the Court held that a director should not be made to undergo the ordeal of a trial on a bare averment. Be ready for the Department to cite Madhumilan Syntex and to argue that the question is triable; prepare the factual defence in parallel and do not stake everything on discharge. If sanction was given without notice to you, take that point too — it was raised here, though the discharge was ordered on the pleading and s.2(35) grounds.
Validity check could not be completed. Validity check could not be completed: no citator search for later treatment was carried out, and this is a 2003 decision on a much-litigated point. Two later authorities pull the other way and the entry should not be relied on without them. Madhumilan Syntex Ltd. v. Union of India (2007) 290 ITR 199 (SC), already in the library, is cited by the Department for the propositions that directors may be prosecuted under s.278B and that it is sufficient compliance if the show cause notice states that the Assessing Officer intends to treat the directors as principal officers; that characterisation was read only as it appears quoted in the sanction order reproduced in Indo Arya Central Transport Ltd. v. CIT (TDS) (Delhi High Court, 12 March 2018), and Madhumilan itself was not read in this pass. Recent High Court decisions have also treated a director's disclaimer of responsibility as a triable defence rather than a ground for pre-trial discharge. Treat the pleading point as arguable and jurisdiction-sensitive, not as settled. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report is poorly transcribed and this should be allowed for. The sections are written throughout as '276(b)' and '278(b)', meaning s.276B and s.278B, and 'Section 194(c)' means s.194C. The parties are described at one point as 'accused Nos. 4, 5, 6 and &'. Paragraph 3 contains 'the person responsible for praying' where 'paying' is plainly meant, and paragraph 8 has 'farming of the Charge' for 'framing of the charge' and paragraph 11 'the ordinal of a trial' for 'the ordeal of a trial'. The citation of M.A. Unneerikutty v. Deputy Commissioner of Income-Tax is given inconsistently, as 'I.T.R. 218, ITR 606' in paragraph 7 and 'I.T.R. 281 and 606' in paragraph 9; neither is a usable citation and that decision was not read in this pass. Paragraph 6 refers to 'Section 194(c)(1), 2(33) 204 and 279' where the discussion that follows is plainly about s.2(35). The judgment reproduces without correction the magistrate's reliance on a Madras decision in Shital N. Shah v. Income-Tax Officer at 188 ITR 376. There is also a numbering anomaly: paragraph 6 is followed by a paragraph numbered 6.A. Two indiankanoon documents carry this judgment; the one read is /doc/1949625/, the other is /doc/1572748/. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The application was allowed, the order dated 30 November 1996 was set aside and the applicants were discharged in Case Nos. 248-S to 251-S of 1993. Apart from the averment that the accused were in charge of and responsible to the company for the conduct of its business there was no material whatever prima facie showing that they were in fact in charge of the affairs of the company and responsible for the conduct of its business and day to day affairs; unless the complaint discloses a prima facie case of the directors' liability and obligation as principal officers in the day to day affairs of the company under s.278B, they cannot be prosecuted for the offences committed by the company, and in the absence of such material process could not have been issued against them.
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