Income Tax Officer vs Dinesh K. Shah and Others

A.R. Lakshmanan, J.—The Income Tax Officer, Headquarters, TDS, and the Income Tax Officer, Salaries Circle, Madras, have preferred

three complaints before the Additional Chief Metropolitan Magistrate (Economic Offences-I), Madras-8, against the respondents herein u/s 276B

and Section 276B read with Section 278B 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 194A 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 (assessment 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 u/s 276B of

the Act was issued on October 31, 1986, calling for the assessee''s explanation for non-deduction of tax at source u/s 194A 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 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 u/s 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 u/s 276B read with Section 278B 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, u/s 206 of the Act. For the assessment year 1986-87,

relevant for the financial year ended March 31, 1986, the firm filed an annual return in Form No. 24 u/s 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 u/s 192 of the Act and to remit the same within

the time stipulated is an offence punishable u/s 276B 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 u/s

276B read with Section 278B of the Act.

The first accused in C. C. Nos. 268 to 291 of 1987 on the file of the Additional Chief Metropolitan Magistrate (Economic Offence-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 TDS amount after a delay of nearly two months. Therefore, summons u/s 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, TDS 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 u/s 276B of the Act and

accused Nos. 2 and 3/respondents have committed the offence punishable u/s 276B read with Section 278B 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 u/s 2(35)(b) of the Act treating the second accused as principal

officer of the firm. The following point was formulated by the learned magistrate for determination :

Whether without statutory notice u/s 2(35)(b) of the Income Tax Act, cognizance can be taken of the offence u/s 276B read with Section 278B

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 u/s 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 u/s 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

u/s 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

278B 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 u/s 2(35)(b) of the Act to

make him liable u/s 278B 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, TDS, 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 and others Vs. Income Tax Officer, 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 u/s 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 u/s 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, TDS, 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 complained against the second accused in the case.

The complaint was filed by the Income Tax Officer against the first accused-firm and against the second accused--its managing partner u/s 276B

read with Section 278B of the Income Tax Act for an offence of failure to deduct Income Tax at source from the interest payable by the

partnership firm.

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 u/s 2(35)(b) of the Income Tax Act and such a notice having not been issued, the prosecution is

incompetent against him, he took cognizance of the offence only against the first accused. Aggrieved by this order, the Income Tax Officer has

come up with this criminal revision case.

Mr. K. Ramasamy, learned counsel appearing for the revision petitioner/income tax Officer, contends that the order of the court below is

erroneous since no notice u/s 2(35)(b) to the second accused is warranted.

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 and others Vs. Income Tax Officer, and (ii) G. Anantharamiah v. ITO, [1992] L. W. (Crl.) 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 u/s 2(35)(b) is a pre-condition.

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 u/s 2(35)(b) to a partner arises at all.

Now Section 194A 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. u/s 204, the meaning of ''person responsible for

paying'' has been given. In this section, there are three clauses in respect of interest is 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.

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 u/s 2(17) and

not to a firm defined u/s 2(23).

Section 276B 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 Sub-section (9) of Section 80E 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.

u/s 278B 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, u/s 278B 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 u/s 278B along

with the firm, the partners also would have committed an offence. This being the case, no notice u/s 2(35)(b) arises at all.

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 any body of individuals. Here it must be noticed that u/s 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. Company, public body or an association of persons or body

of individuals mentioned in Section 2(35) all come within the meaning of ''person'' u/s 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 u/s 2(35) arises in the case of a firm.

In the abovesaid 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.

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 u/s 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. Ramaswami, 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 u/s 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 u/s 2(35) of the Act. As such, the court below has completely erred in applying Section

2(35)(b) of the Act to Section 278B of the Act just because Section 278B includes a firm.

(c) The court below had failed to note that the decision reported in M.R. Pratap Vs. Y.M. Muthuramalingam, Income Tax Officer, Central Circle-

III, Madras, 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 sections 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 u/s 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 278B of the Act. It is further

submitted that Section 276B 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.

The following decisions were cited before us :

Shital N. Shah and others Vs. Income Tax Officer, 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 Vs. Y.M. Muthuramalingam, Income Tax Officer, Central Circle-III, Madras, by S. Natarajan J. (as he then was).

M.R. Pratap Vs. V.M. Muthukrishnan, Income Tax Officer, Central Circle-III, Madras, 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 u/s 276B read with Section 278B of the Act ? and

(2) Whether notice u/s 2(35)(b) of the Act to a partner is a pre-condition ?

Section 2(17) of the Act, defines ""company"", which runs thus :

(17) ''company'' means,--

(i) any Indian company, or

(ii) any body 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 assessment 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 assessment year or assessment 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 :

(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"" u/s 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 :

(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 :

(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.

Section 192 of the Act deals with deduction at source in the case of salaried people. Section 194A of the Act deals with interest other than

interest on securities. Section 200 of the Act deals with duty 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 u/s 201(1) read with Section 221, interest u/s

201(1A) and prosecution u/s 276B 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(1A) 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 276B of the Act reads as follows :

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 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 276B as inserted by the Finance Act, 1968, with effect from April 1, 1968, and later on substituted by the Taxation Laws (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 ;

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 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

fine.

Under the amended provision, Section 276B of the Act now provides for prosecution only in respect of a failure to pay to the Government the

tax deducted at source. The offence of failure to deduct tax at source under the provisions of Chapter XVII-B now attracts penalty u/s 271C of

the Act. Reference to Section 80E has been omitted consequent on the omission of Section 80E. A uniform punishment has been provided for the

offences, which is rigorous imprisonment for at least three months extending up to seven years and fine. Even under the old section, the burden of

proving the existence of reasonable cause or excuse was shifted to the assessee with effect from September 10, 1986. Under the new section also,

the position continues to be the same. Prior to April 1, 1989, the breach or contravention which attracted prosecution under this section related to

the failure of a person without reasonable cause or excuse, to deduct, or, after deducting, to fail to pay, the tax as required by or under the

provisions of Sub-section (9) of Section 80E or Chapter XVII-B of the Act. It provided that a person failing without reasonable cause or excuse

to deduct or after deducting to pay the tax as required by the provisions hereinbefore mentioned, shall be punishable with rigorous imprisonment

for a term which may extend to six months and shall also be liable to fine, which shall not be less than a sum calculated at 15 per cent. per annum

on the amount of such tax from the date on which such tax was deducted, to the date on which such tax was actually paid. An imposition of

rigorous imprisonment at least for a fraction of six months was imperative under the provision. In fixing the amount of fine, the court may take into

account circumstances such as the recurrent nature of the defaults and the interest lost by the Government due to the failure.

u/s 278B, a limited company as well as 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 (sic).

Section 278B of the Act runs thus :

278B. (1) 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 :

Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was

committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in Sub-section (1), where an offence under this Act has been committed by a company and it is proved

that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager,

secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and

shall be liable to be proceeded against and punished accordingly.

Explanation.--For the purposes of this section, --

(a) ''company'' means a body corporate, and includes-

(i) a firm ; and

(ii) an association of persons or a body of individuals whether incorporated or not ; and

(b) ''director'', in relation to --

(i) a firm, means a partner in the firm ;

(ii) any association of persons or a body of individuals, means any member controlling the affairs thereof.

This section, which was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from October 1, 1975, does not apply to an

offence committed prior to that date. A person ""in charge of"" the business is the person who is in overall control of the day-to-day business.

The effect of this section is to make every person who was in charge of and was responsible to the company for the conduct of the business of

the company at the time the offence was committed, apart from the managing director, who signed the return, liable to be proceeded against and

punished. The position earlier was that only the principal officer (which term included the managing director in the case of a company) could be

prosecuted and punished. u/s 278B of the Act, the basic requirement is that the prosecution must prove that the persons concerned were in charge

of, and were responsible to, the company or the firm as the case may be for the conduct of the business of the company or the firm at the time

when the offence was committed. It is only then that they can be vicariously prosecuted along with the company or the firm as the case may be.

The proviso to Sub-section (1) will come into operation only after the initial onus cast on the prosecution under the main section gets discharged. In

view of the provisions of this section, non-issuance of individual notices to any of the partners is of no consequence, rather it is not necessary to

issue any such notice. Section 2(35) of the Act as pointed out earlier defines the expression ""principal officer"" only with reference to a local

authority or a company or any other public body or any association of persons or any body of individuals. The Act adopts the definition of the

terms ""firm"", ""partner"", and ""partnership"" as contained in the Indian Partnership Act, 1932. Each partner is an agent of the others. Consequently, all

the partners are jointly and severally liable for the acts of one or other of the partners of the firm and are also entitled to share the profits and

losses. (Vide the decision reported in Geethanjali Mills Ltd. v. Thiruvengadathan, [1989] 179 ITR 558 .

A consistent view has been expressed by courts that a company being a juridical person cannot be made liable for corporeal punishment like

imprisonment. It is also held that if the contravention is by a company, the persons who may be held guilty and punished are ; (i) the company itself;

(ii) every person who, at the time the contravention was committed was in charge of, and was responsible to, the company for the conduct of the

business of the company (in short, the person in charge) ; and (iii) any director, manager, secretary or other officer of the company with whose

consent or connivance or acts of neglect attributable to whom the offence had been committed, i.e., an officer of the company. Any one or more or

all of them may be prosecuted and punished. The person in charge may also be prosecuted.

It is seen from the Explanation to Section 278B of the Act that the partner of a firm or, as the case may be, a member of other association, is

also liable to be convicted for an offence committed by the firm or other association if he is in charge of and is responsible to the firm or other

association for the conduct of the business of the firm or association or if it is found that the offence is committed with the consent or connivance or

is attributable to any neglect on the part of the partner or member concerned. The expression ""a person in charge and responsible for the conduct

of the affairs of a company"" appearing in Sub-section (1) of Section 278B would also refer to a firm or other association in view of the Explanation

to Section 278B. The test, therefore, to be applied to a director in charge of a company must also necessarily apply to the partner of a firm or, as

the case may be, member of other associations, in charge of a business. In that context, a person ""in charge"" must mean a person in overall control

of the day-to-day business of the company or firm or other association.

Sections 4 and 18 of the Indian Partnership Act, 1932, should also be beneficially noticed in this context. Section 4 reads as follows :

Definition of ''partnership'', ''partner'', ''firm'' and ''firm name''.--''Partnership'' is the relation between persons who have agreed to share the

profits of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually ''partners'' and collectively ''a firm'', and the name under which

their business is carried on is called the ''firm name''.

The components of the definition of ""partnership"" consist of : (a) persons, (b) a business carried on by all of them or any of them acting for all,

and (c) an agreement between those persons to carry on such business and to share its profits. It is the relationship between those persons which

constitutes the partnership. In other words, the following important elements must be there in order to establish partnership, (a) there must be an

agreement entered into by all parties concerned ; (b) the agreement must be to share profits of business; and (c) the business must be carried on by

all or any of the persons concerned acting for all.

Section 18 of the Indian Partnership Act runs as follows :

Partner to be agent of the firm.--Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the

firm.

Section 18 of the Indian Partnership Act makes a partner the agent of the firm for the purposes of the business of the firm. It is thus clear that a

partner is liable for the acts of the other partners and vice versa as a principal is liable for the acts of his agent done in the ordinary course of

business. The effect of Section 18 is to make every partner an agent of the firm and make him jointly and severally liable for all the acts of the firm.

In the light of the above discussion and analysis of the relevant sections of the Income Tax Act and the Indian Partnership Act, we have to see

whether the decisions of this court in Shital N. Shah and others Vs. Income Tax Officer, and G. Anantharamiah v. ITO, [1992] L. W. (Crl.) 173,

are correct and whether the notice u/s 2(55)(b) of the Act to a partner is a pre-condition.

All the three complaints given by the Department relate to the partnership firms. All of them have been rejected by the magistrate on the ground

that the complaints against the partners are not legally sus-tainable for the non-issue of statutory notice u/s 2(35)(b) of the Act to make them liable

u/s 278B of the Act. We have already seen the scope of Sections 194A 200 204 276B and 278B of the Act. Sections 194A and 200 of the Act

cast a duty for deduction and payment of tax upon a person responsible for paying interest.

In Shital N. Shah and others Vs. Income Tax Officer, , T.S. Arunachalam J. (as he then was), who decided the case on August 27, 1990, had

taken the view that the words ""any person who is responsible for paying"" found in Section 194A of the Act had to be read in conjunction with

Section 204 of the Act, which furnishes the meaning of ""person responsible for paying"". We are unable to endorse and subscribe to the views of

the learned judge in the above case. It is not necessary that prosecution u/s 278B of the Act can be launched only against the company and ""its

principal officer"". There is no warrant to give a restricted meaning to the following expression found in Section 278B of the Act : ""Every person

who was in charge and was responsible to the company for the conduct of the business of the company at the time when the offence was

committed would be liable. Such person, who was in charge of and was responsible to the company and for the conduct of the business may be

the ''principal officer'' as defined in Section 2(35) of the Act or ''person responsible for paying''"".

The interpretation placed by the learned judge, T.S. Arunachalam J. (as he then was), is contrary to the express language of Section 278B of

the Act. Therefore, any person who at the time the offence was committed was in charge of and was responsible to the company, which includes a

firm, for the conduct of the business, can be proceeded against u/s 278B of the Act notwithstanding the fact that the person proceeded against may

not be either the ""principal officer"" or the ""person responsible for paying"". The intention of Parliament is, therefore, not to confine the prosecution

u/s 278B of the Act only against the ""principal officer"" and the ""person responsible for paying"".

We also came across another decision of T. S. Arunachalam J. (as he then was) reported in G. Ramasivami Moopanar v. E.S.L Corporation,

[1990] L. W. (Crl.) 414 decided on August 8, 1990. The learned judge had considered the question of law as to whether a director of a company

or a partner of a firm be prosecuted as a ""principal employer"" falling within the fold of Section 2(17) of the Employees'' State Insurance Act as it

stood prior to its amendment by the Central Act 29 of 1989, in and by which Section 86A of that Act was introduced in the said Act (amended

with effect from October 20, 1989).

Section 86A of the Employees'' State Insurance Act reads as follows :

86A. Offences by companies.--(1) If the person committing an offence under this Act is 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 :

Provided that nothing contained in this sub-section shall render any person liable to any punishment, if he proves that the offence was committed

without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in Sub-section (1), where an offence under this Act has been committed with the consent or connivance of,

or is attributable to, any neglect on the part of, any director or manager, secretary or other officer of the company, such director, manager,

secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation.--For the purposes of this section, --

(i) ''company'' means any body corporate and includes a firm and other association of individuals ; and

(ii) ''director'' in relation to, --

(a) a company, other than a firm, means the managing director or a wholetime director ;

(b) a firm means a partner in the firm.

On a comparison of Section 86A of the Employees'' State Insurance Act with Section 278B of the Act, it is seen that they are verbatim the

same. Section 86A of the Employees'' State Insurance Act has been inserted by the Employees'' State Insurance (Amendment) Act 29 of 1989.

This provision is analogous to similar provisions contained in various statutes such as the Essential Commodities Act, the Electricity Act, the

Prevention of Food Adulteration Act, etc., in which for the offences under such Acts, prosecution can be launched against both natural and

artificial persons.

It is provided that if a person committing the offence is a company, then, 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 prosecuted against and punished accordingly. The proviso to Sub-section (1) safeguards the interest

of the persons who can prove that the offence was committed without his knowledge or that he exercised due diligence to prevent such offence.

The onus is upon such person to prove any one of the above circumstances and if he so proves, he shall not be liable for punishment.

Sub-section (2) of Section 86A of the Employees'' State Insurance Act contains a deeming provision. It states, where an offence has been

committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of

the company, such director, manager, secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded

against and punished accordingly. For the purpose of this section, ""company"" has been given an extended meaning. It means any body corporate

and includes a partnership-firm or other association of individuals. This means that ""company"" will include not only public or private limited

companies registered under the Indian Companies Act, but also statutory corporations, partnership-firm or any society registered under the

Societies Registration Act or any State Societies Registration Act.

In interpreting similar provisions in the Drugs and Cosmetics Act, 1940, the Supreme Court in the decision in Rajasthan Pharmaceutical

Laboratory, Bangalore and Others Vs. State of Karnataka, , has held that the directors who are not directly in charge of the management of the

company cannot be held liable.

In this context, we may also beneficially refer to Section 10 of the Essential Commodities Act, 1955. Section 10 of the said Act contains

similar provisions to Section 86A(1) of the Employees'' State Insurance Act.

Two things have to be proved, viz., (i) the company must be charged for the same offence ; and (ii) the persons, besides the company sought

to be made liable, must be in charge of and responsible to the company for the conduct of the business.

While dealing with a similar situation with reference to the provisions of the Prevention of Food Adulteration Act, 1954, the Allahabad High

Court in the decision in D.K. Jain Vs. The State, held that a reading of Section 17(2) of the Prevention of Food Adulteration Act, makes it obvious

that the Legislature has taken care to provide that natural persons made vicariously liable for an offence under the Act, committed by a company or

anyone of its employees are to be punished only when it is established that they had some nexus with the crime either because of their connivance

with it or due to their criminal negligence which had resulted in its commission. The Allahabad High Court has further held that to make a person

liable for the offence committed by the company or its salesman who was physically present on the scene, it must be proved that the offence was

committed with his connivance.

In the decision in G. Ramaswami Moopanar v. E.S.I. Corporation, [1990] L. W. (Crl.) 414, T.S. Arunachalam J. (as he then was) had

observed as follows :

By this provision, if a person committing an offence under the Act was a company, it makes 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, liable

to be proceeded against and punished. A similar provision regarding vicarious liability, is found in several Acts, for example, the Prevention of

Food Adulteration Act, Essential Commodities Act, Indian Explosives Act, Indian Electricity Act, etc. The liability is sought to be fastened only

when such person was in charge of and responsible for the conduct of the business of the company at the time when the offence was committed. If

such a person were to be prosecuted after satisfying the basic requirement of the section, even then it would be open to such a person to prove

that the offence was committed without his knowledge or he was unable to prevent the commission of the offence in spite of his having exercised all

due diligence. It is, therefore, fairly clear that the Legislature had taken note of the defence which may be feasible. On the contrary, if the principal

employer fails to pay the contribution he is liable to pay under the Act, the offence is complete and prima facie there appears to be no defence

open for him. Therefore, it is possible to hold, that the Legislature, when it introduced this welfare legislation, did not intend to punish every partner

or every director for non-payment of the contribution, for apart from being directors or partners, they may not have the ultimate control over the

affairs of the factory. In that context, it is quite possible, that u/s 2(17) of the Act, the meaning of the word ''principal employer'' refers to the owner

or the occupier or the manager of the factory if he had been so named. The liability, therefore, in such event, will rest on such person, who has

complete control over the affairs of the factory. If the partners and directors were liable to be proceeded against u/s 2(17) of the Act, it appears to

my mind, that there was no need for the Legislature to introduce Section 86A, by Act 29 of 1989, making the company and persons in charge of

and responsible for the conduct of the business of the company liable for the offence under the Act. A similar provision in Section 278B was

introduced in the Income Tax Act on October 1, 1975.

The Delhi High Court while considering the insertion of Section 278B in the Income Tax Act, in the decision in Parameet Singh Sawney Vs.

Dinesh Verma and Another, , held as follows (at page 7) :

Before the introduction of this section (Section 278B), a firm alone could have been proceeded against. Mr. Jolly states that ''firm'' includes its

partners and they as well could be prosecuted. I must at once point out that Mr. Jolly is labouring under a misconception. Under the Partnership

Act, partners, of course, will be liable for all the liabilities but we are in a different field. Section 278B, which was brought into existence on

October 1, 1975, for the first time, made every person connected with the affairs of the company liable for prosecution, The fact of the matter is

that earlier to the introduction of Section 278B, the partners could not be prosecuted and the firm alone could be prosecuted. The person referred

to in Section 276B is in the context of the definition of ''person'' as contained in Section 2(31) of the Income Tax Act. Otherwise also, Mr. Sethi''s

contention seems to be strong that in case the partners were to be proceeded against in the absence of Section 278B, there was no need for the

Legislature to introduce Section 278B as has been done in the year 1975.

It may be relevant at this stage to refer to the observations of the Supreme Court in the decision reported in Sham Sunder and Others Vs.

State of Haryana, . While considering provisions similar to Section 86A of the Employees'' State Insurance Act (introduced by Act 29 of 1989), it

was stated as follows (at page 4 of 67 Comp Cas) :

But we are concerned with a criminal liability under a penal provision and not a civil liability. The penal provision must be strictly construed in the

first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Section 10 does not provide for

such liability. It does not make all the partners liable for the offence whether they do business or not.

It is, therefore, necessary to add an emphatic note of caution in this regard. More often it is common that some of the partners of a firm may not

even be knowing of what is going on day-to-day in the firm. There may be partners, better known as sleeping partners who are not required to

take any part in the business of the firm. There may be ladies and minors who were admitted only for the benefits of partnership. They may not

know anything about the business of the firm. It would be a travesty of justice to prosecute all the partners and ask them to prove under the

proviso to Sub-section (1) that the offence was committed without their knowledge. It is significant to note that the obligation of the accused to

prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only

when the prosecution establishes that the requisite condition mentioned in Sub-section (1) is established. The requisite condition is that the partner

was responsible for carrying on the business and was during the relevant time, in charge of the business. In the absence of any such proof, no

partner could be convicted.

The Supreme Court in M.R. Pratap Vs. V.M. Muthukrishnan, Income Tax Officer, Central Circle-III, Madras, , while affirming the decision of

the Madras High Court in M.R. Pratap v. V.M. Muthukrishnan, ITO [19771 110 ITR 655 stated as follows (headnote) :

The word ''person'' used in Section 277 of the Income Tax Act, 1961 (as the Act stood prior to its amendment with effect from October 1,

1975), refers not only to the assessee but also to the person who has made the false verification in the return on behalf of the assessee. The

managing director who verifies the return filed on behalf of the company, which is the assessee, would be the principal officer within the meaning of

the definition in Section 2(35). In view of Section 139 read with Section 140(c), the return has to be signed by the principal officer of the

company. A statutory obligation is cast on the principal officer to sign the tax returns filed on behalf of the company. The subsequent amendments

made by the Taxation Laws (Amendment) Act, 1975, will not in any way alter the position with regard to the operation of the provisions of the

Income Tax Act as against the managing director of a company when he has signed the return in such capacity. The effect of the new Section

278B, inserted by the Amendment Act of 1975, is to make every person connected with the affairs of the company, apart from the managing

director who had signed the return, liable to be proceeded against and punished in relation to an offence by the company.

S. Natarajan J. (as he then was), in the decision reported in M.R. Pratap Vs. Y.M. Muthuramalingam, Income Tax Officer, Central Circle-III,

Madras, , held as follows (headnote) :

Section 276B of the Income Tax Act, 1961, does not refer to a managing director but only to a person. The definition of person, as contained in

Section 2(31), refers to the various categories of assessees who can be treated as persons within the meaning of the Income Tax Act. The

principal officer as defined in Section 2(35) will automatically take in the secretary, treasurer, manager or agent of, inter alia, a company but as far

as the managing director is concerned, he can be treated as the principal officer of the company only if the Income Tax Officer gives notice to him

of his intention to treat him as such. Consequently, if any one connected with the company is not the secretary, treasurer, manager or agent, then he

cannot be treated as the principal officer of the company unless the Income Tax Officer has served a notice on him as envisaged u/s 2(35)(b) of the

Act. Section 192(1) does not refer to a director or managing director but only to a person responsible for paying income chargeable under the

head ''Salaries''.

Consequently, the managing director of a company cannot be held liable u/s 276B unless the Income Tax Officer has served a notice on him u/s

2(35)(b) and informed him of his intention to treat him as the principal officer of the company.

The decision in G. Anantharamiah v. ITO, [1992] L. W. (Crl.) 173 was decided by K. Swamidurai J. In that case, the first accused was a

partnership firm carrying on business as film exhibitors. The second accused is the managing partner and the third accused was the joint managing

partner of the first accused-firm and the fourth accused was an employee of the first accused-firm, in charge of financial borrowings, bank

transactions, interest payments, etc. The Income Tax Officer, Madras-34, filed a complaint u/s 276B read with Section 278B of the Act for failure

to remit the tax deducted at source to the credit of the Government of India within the time prescribed u/s 200 of the Act read with Rule 30(1)(b)

(i)(2) of the Income Tax Rules, 1962. The main contention raised by the fourth accused, was, that he was not the person responsible to and in

charge of the company for the conduct of the business of the company and so, he should not be charged for the alleged offences. The learned

judge, after referring to Sections 200, 276B and 278B of the Act, and following the decision in Shital N. Shah and others Vs. Income Tax Officer,

, held that the prosecution has failed to prove that the fourth accused is a person responsible for payment of tax deducted to the Government and is

also a person in charge of and responsible for paying the said amount. Therefore, the learned judge held that the charge as against the fourth

accused under Sections 276B and 278B of the Act is not maintainable.

As already seen, T.S. Arunachalam J. (as he then was), has decided two cases in Ramaswami Moopanar (G.) v. E.S.I. Corporation, [1990]

L. W. (Crl.) 414 on August 8, 1990, and Shital N. Shah and others Vs. Income Tax Officer, on August 27, 1990. Undoubtedly, the decision in

Ramaswami Moopanar (G.) v. E.S.L Corporation, [1990] L. W. (Crl.) 414, dated August 8, 1990, and in particular the passage extracted by us,

has not been brought to the notice of the learned judge at the time of hearing of the case reported in Shital N. Shah and others Vs. Income Tax

Officer, . It is seen that Section 278B of the Act was introduced only on October 1, 1975. The decision of T.S. Arunachalam J. (as he then was),

in Ramaswami Moopanar (G.) v. E.S.L Corporation, [1990] L. W. (Crl.) 414, has been rendered after the introduction of Section 86A of the

Employees'' State Insurance Act, under which persons in charge of and responsible for the conduct of the business are liable for the offences under

the Act, and the offence in question in that case had taken place after the introduction of Section 86A of the Employees'' State Insurance Act.

Though prior to the introduction of Section 86A of the Employees'' State Insurance Act, the director of a company and partner of a firm by virtue

of being a director or partner is not a ""principal employer"" as contemplated by Section 2(17) of the Employees'' State Insurance Act and,

therefore, not personally liable to pay the contribution under the Employees'' State Insurance Act. The position came to be altered as pointed out

above on the introduction of Section 86A of the Employees'' State Insurance Act. Therefore, we find it difficult to subscribe to the view expressed

in Shital N. Shah and others Vs. Income Tax Officer, .

As already seen, Section 276B of the Act provides that if a person fails to pay to the credit of the Central Government, the tax deducted at

source by him as required by 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. Section 278B of the Act deals with offences committed by the

companies. The definition ""company"" for the purpose of the said section includes ""a firm"". Therefore, the expression ""company"" used in Section

278B of the Act has to be understood so as to include a firm. If an offence is committed by a firm, only the person who was in charge of and was

responsible to the firm for the conduct of the business of the firm at the time when the offence was committed, as well as the firm shall be

proceeded against and punished accordingly. Sub-section (2) of Section 278B of the Act, which opens with a non obstante clause, provides that

where an offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or

connivance of, or is attributable to any neglect on the part of any director, manager, (secretary or other officer of the company), such director,

manager, secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished

accordingly. Sub-section (2) of Section 278B of the Act takes away the burden cast on the prosecution by Sub-section (1) thereof, to prove that

at the time the offence was committed by a company or a firm, persons against whom the prosecution is launched were in charge of and were

responsible to the company or the firm as the case may be for the conduct of the business of the company or the firm. At the same time, Sub-

section (2) of Section 278B casts a burden on the prosecution to prove that the offence has been committed with the consent or connivance of, is

attributable to any neglect on the part of any director, manager, secretary or other officer of the company. In such an event, such director,

manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished

accordingly. In a case falling under Sub-section (2) of Section 278B of the Act, whether the persons prosecuted were in charge of and were

responsible for the company for the conduct of the business of the company need not be proved. Such proof is necessary only when the case falls

u/s 278B(1) of the Act. In the event the prosecution proves the essential ingredients of Section 276B(1) of the Act, the accused would have a right

to prove that the offence was committed despite due diligence to prevent the commission of such offence. That is the distinction between the two

sections.

Section 204 of the Act enumerates as to who are the ""persons responsible for paying"" for the purposes of Sections 192, 193, 194, 194A and

194B of the Act. For the purposes of prosecution u/s 278B of the Act, the only requirement is that the person proceeded against should have been

in charge of and responsible to the firm and for the conduct of the business of the firm at the time when the offence was committed. It may be that

such person may also be the ""person responsible for paying"" as contemplated in Section 204 of the Act or a ""principal officer"" as defined in

Section 2(35) of the Act. It is not as if the prosecution under the section can be launched only against the ""principal officer"" as defined in Section

2(35) of the Act or against the ""person responsible for paying"". The person proceeded against for prosecution u/s 278B of the Act should have

been in charge of and was responsible to the firm for the conduct of the business of the firm, even though such a person may not satisfy the

definition of ""principal officer"". In other words, it is not as if prosecution is contemplated only against a ""principal officer"". If that were the intention

of Parliament, then, the language of the section would be different and the section would have stated that the prosecution can be launched only

against the ""principal officer"".

In the light of the above discussion, we are of the view, that the order of the court below is contrary to law. The court below has misdirected

itself on the question of law relating to Sections 2(35) and 2(38)(b) of the Act. On a careful analysis of the relevant sections of the Act and the

provisions of the allied Acts and of the decisions referred to supra, we are of the view, that the finding of the court below is not correct.

Accordingly, we hold that no question of issuing notice u/s 2(35)(b) of the Act to a partner arises at all. We are unable to subscribe to the views

expressed by T.S. Arunachalam J. (as he then was), in Shital N. Shah and others Vs. Income Tax Officer, and K. Swamidurai J. in G.

Anantharamiah v. ITO, [1992] L. W. (Crl.) 173, since the said decisions do not lay down the correct proposition of law. Therefore, in the light of

the aforesaid discussion we overrule both the above decisions. The reference is answered accordingly.

For the foregoing reasons, all the revisions are allowed. The orders of the court below are set aside. The court below is directed to proceed

with the cases in accordance with law and in the light of the observations made in this order.