S.c.kumar v. Income Tax Officer And Others

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CRM No.M-4477 of 1988Date 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 IncomeTax Officer and other respondents under Section 482 Cr.P.C. forquashing of complaint Annexure P-2 filed by the respondent on26.03.1987 in the Court of Chief Judicial Magistrate, Chandigarh, thesame having disclosed no offence being against law and facts and theorder of summoning Annexure P-3 dated 26.03.1987 passed by CJM,Chandigarh and the subsequent order issuing non-bailable warrantsagainst 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 beingfiled by the petitioner in his individual capacity as an employee of the Mills Limited, which was incorporated as Public Limited Company. It is further stated in the petition that Industrial FinanceCorporation of India advanced huge amounts to the said Companywith a view to look after the financial interest of the Industrial FinanceCorporation of India. The brief facts are that earlier the petitioner asAsstt. Manager of the said Corporation was appointed as a nomineeDirector on the Board of the Directors of M/s Sukhna Paper MillsLimited with effect from 30.06.1980. By letter dated 09.11.1984,Sh.J.C.Malhotra was appointed as a Member of the Board ofDirectors. By another letter dated 15.01.1987, the nomination ofSh.J.C.Malhotra from the Board of Directors of M/s Sukhna PaperMills was withdrawn by the Industrial Finance Corporation of India.M/s Sukhna Paper Mills had deposits with its various parties and whilemaking the payment of interest to the depositors, it was required todeposit tax at source for the accounting year 1984-85 amounting to`44,036/- within specified time in Government account. However, thesaid amount was not deposited in time and consequently, Income TaxOfficer gave a notice to the Company. Reply was given by theCompany that, as no interest was paid to the parties and only aprovision had been made in the account, the amount was notdeposited. It is further stated in the petition that Income Tax Officer-respondent filed a complaint before CJM, Chandigarh alleging thatduring the course of assessment proceedings, it was found that forthe period from 01.01.1983 to 31.12.1983 relevant to the assessmentyear 1984-85, M/s Sukhna Paper Mills Limited accused No.1 had paid interest amounting to `4,40,360/- to various persons and as such wasliable to deduct tax at source amounting to `44,036/- within stipulatedtime in the Government account i.e. upto 28.02.1984. In reply to thenotice, details of amount of interest and the amount of tax deducted atsource were submitted and it was further submitted that during theperiod relevant to the assessment year 1986-87, the assessee neithercredited the interest to the accounts of the parties nor paid interest tothem but only made a provision in the final accounts. However, in theprofit and loss account, the company claimed this amount of`4,40,360/- as financial expense on account of interest to others. Itwas also stated in the complaint that by opening a separate accountunder head 'Interest Payable' the account of individual partiesindirectly becomes credited on account of interest payable and assuch the company was liable to deduct the tax at source and pay thesame as per provisions of Section 194-A of the Act. It is further statedin the complaint that the company deposited the tax deducted atsource late. It is also stated that the learned CJM, Chandigarh withoutadverting to the facts of the case and appreciating the position of thenominee Directors appointed by Industrial Finance Corporation ofIndia, summoned the petitioner along with others by passing a non-speaking and cryptic order. It is further stated that the petitioner wasonly a nominee Director appointed by Industrial Finance Corporationof India with a view to look after the financial interest. He attendedonly the meetings of the Board of Directors, as a nominee Director. In fact, he was not at all concerned with the day to day working of thecompany for the conduct of affairs of the Company. Notice of motion was issued in this case and respondentsappeared through their counsel and filed reply contesting the petition.I have gone through the record and have heard learnedcounsel for the parties. First of all, as regarding the summoning order, I find thatas the complaint has been filed by a public servant acting orpurporting to act in the discharge of his official duties, therefore, thereis no necessity to examine the complainant or the witnesses in thepreliminary evidence as per the proviso attached to Section 200Cr.P.C. Therefore, the order passed by learned CJM, Chandigarhsummoning the accused vide order dated 26.03.1987, cannot be heldas a non-speaking order or illegal being without recording preliminaryevidence. Learned counsel for the petitioner argued that S.C.Kumarwas only a nominee Director and he was not at all concerned withday-to-day work or affairs of the company, therefore, he cannot beheld as Incharge for the conduct and affairs of the Company. Thegeneral averment in the complaint that accused No.2 to 8 are itsDirectors including Chairman and Managing Director and as such,these are persons Incharge of and responsible to the Company for theconduct of affairs of the company, is not sufficient. The petitioner wasonly a nominee Director of M/s Sukhna Paper Mills Limited with effectfrom 30.06.1980. Learned counsel for the petitioner further argued that explanation to Section 194-A of the Income Tax Act has beenadded by Finance Act 1987 with effect from 01.06.1987. Thus inassessment year 1984-85, the explanation making crediting of incomeby transferring the amount to 'Interest Payable' account was not anoffence and the complaint filed by the Income Tax Officer for the year1984-85 i.e. prior to insertion of the explanation treating the creditingof interest without deduction of tax at source as an offence wascompletely without jurisdiction and contrary to the provision of the Act.Learned counsel for the petitioner further argued that the complaintwas filed under Section 276-B, which provision has been amendedafter 01.04.1989 and only failure to pay tax deducted at source hasbeen made offence. Therefore, on the basis of earlier provision underSection 276-B, which has been amended, the petitioner cannot bepunished and the trial cannot be continued. Learned counsel for thepetitioner also argued that under Section 25 and 30-A of the IndustrialFinance Corporation Act under Sub clause 3, it has been specificallyprovided that, a person appointed as a Director on behalf of thecorporation, will not be liable to incur any obligation or liability. On other hand, learned counsel for the respondentsargued that there is no merit in the present petition. The complaintand summoning order are not liable to be quashed. From the record, first of all, I find that petitioner S.C.Kumarwas appointed as a nominee Director in M/s Sukhna Paper MillsLimited by the Industrial Finance Corporation of India. He is notsupposed to look into the day-to-day affairs of M/s Sukhna Paper Mills On other hand, learned counsel for the respondentsargued that there is no merit in the present petition. The complaintand summoning order are not liable to be quashed. From the record, first of all, I find that petitioner S.C.Kumarwas appointed as a nominee Director in M/s Sukhna Paper MillsLimited by the Industrial Finance Corporation of India. He is notsupposed to look into the day-to-day affairs of M/s Sukhna Paper Mills Limited and to manage that company. He was nominated as Directoronly to watch the interest of Industrial Finance Corporation of India ashuge amount was advanced to M/s Sukhna Paper Mills Limited.There is also nothing in the complaint to show that the presentpetitioner was responsible for managing day-to-day affairs of thatcompany. There are only general averments in the complaint in parano.6 that accused No.2 to 8 are its Directors including Chairman andManaging Director and as such, these are persons Incharge of andresponsible to the Company for the conduct of affairs of the company.Furthermore, as per Section 25 and 30-A of the Industrial FinanceCorporation Act, it has been provided that a person appointed as aDirector on behalf of the corporation will not be liable to incur anyobligation or liability. Provision of Section 194-A of the Income Tax Act reads as under:- “Any person, not being an individual or a HinduUndivided Family, who is responsible for paying to aresident any income by way of interest other than income[by way of interest on securities], shall, at the time of creditof such income to the account of the payee or at the timeof payment thereof in cash or by issue of a cheque or draftor by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that an individual or a Hindu UndividedFamily, whose total sales, gross receipts or turnover fromthe business or profession carried on by him exceed themonetary limits specified under clause A or clause B) ofSection 44A during the financial year immediatelypreceding the financial year in which such interest iscredited or paid, shall be liable to deduct income-tax underthis section. -ExplanationFor the purposes of this section, where anyincome by way of interest as aforesaid is credited to anyaccount, whether called “Interest payable account” or “Suspense account” or by any other name, in the books ofaccount of the person liable to pay such income, suchcrediting shall be deemed to be credit of such income tothe account of the payee and the provisions of this sectionshall apply accordingly.” The explanation was inserted by Finance Act 1987 to theprovision under Section 194-A, which means that in the assessmentyear 1984-85, the explanation making crediting of income bytransferring the amount to the Interest Payable account was not anoffence and the complaint filed by Income Tax Officer for the year1984-85 i.e. prior to insertion of explanation treating the crediting ofinterest without deduction at source as an offence was completelywithout jurisdiction and contrary to the provisions of the Act. Learned counsel for the petitioner cited judgment passedby this Court in Punjab Business and Supply Co. Pvt. Ltd. andanother vs. Income Tax Officer and another, 1991 Income TaxReports 550, in which it is held as under:- The explanation was inserted by Finance Act 1987 to theprovision under Section 194-A, which means that in the assessmentyear 1984-85, the explanation making crediting of income bytransferring the amount to the Interest Payable account was not anoffence and the complaint filed by Income Tax Officer for the year1984-85 i.e. prior to insertion of explanation treating the crediting ofinterest without deduction at source as an offence was completelywithout jurisdiction and contrary to the provisions of the Act. Learned counsel for the petitioner cited judgment passedby this Court in Punjab Business and Supply Co. Pvt. Ltd. andanother vs. Income Tax Officer and another, 1991 Income TaxReports 550, in which it is held as under:- A bare glance through the above referred provisionsleaves no doubt that failure to deduct income-tax frominterest payable to different depositors is visited with penalconsequences only if such deduction is not made at thetime of credit of such income to the account of the payeeor at the time of payment thereof in cash or throughcheque or draft or by any other mode. The term 'by anyother mode' pertains to the actual payment of interest todepositors and thus cannot be said to cover showing suchinterest in a general interest payable account. Thus by nostretch of imagination can it be said that showing of theabove interest to different payees in the general interestpayable account by the Company would be deemedpayment of interest to different depositors. As a matter offact this interpretation cannot be disputed because whileintroducing the Finance Bill, 1987, the Explanatory Noteclearly provides that the Legislature had filled up a lacunain the existing provisions of Section 194. Paras No. 38.1 and 38.2 of the Explanatory Note relating to modification of provisions relating, to tax deduction atsource reads as under:- "38.1 With a view to rationalise the provisions of Sections194, 194A and 194D, the limits up to which no tax is to bededucted have been raised as under : 38.2 Under the existing provisions, deduction of tax atsource from interest is to be made at the time of paymentor credit to the account of the payee. With a view toprevent postponement of liability relating to suchdeduction of tax at source, Section 194A has beenamended to provide that tax will be deducted at source, onaccrual of interest at the end of the accounting year or atthe time of credit to the account of a payee or at the timeof payment whichever is earlier. Similarly, Section 195 hasbeen amended to ensure that deduction of tax at sourcefrom payments to non-residents will have to be made atthe time of payment or at the time of giving credit to theaccount of the non-resident, whichever is earlier. Any sumcredited to 'suspense account' or 'interest payableaccount" shall be deemed to be credited for the purpose oftax deduction at source." A bare glance through the above referred notes leaves nodoubt that Section 194A has been amended to providethat the tax will be deducted at source on accrual ofinterest in the end of the accounting year or at the time ofcrediting to the account of payee or at the time ofpayment, whichever is earlier and it further states that itwas done with a view to prevent postponement of liabilityrelating to such deduction of tax at source. Thus theexplanatory note itself reveals that there was a lacuna orloop hole in the unamended provisions of Section 194Awhich enabled the concerned person to postpone theliability relating to such deduction of tax at source and thusdwindling the tax collection. For the reasons stated above, there is absolutely no doubtthat Explanation to subsection (1) of Section 194A hascreated a fresh penal liability and it cannot be said to be asimple Explanation of the existing provisions of thissection. If that is so, then this Explanation cannot have retrospective operation. For the reasons stated above, there is absolutely no doubtthat Explanation to subsection (1) of Section 194A hascreated a fresh penal liability and it cannot be said to be asimple Explanation of the existing provisions of thissection. If that is so, then this Explanation cannot have retrospective operation. Consequently, it cannot be said that the petitioners hadviolated the provisions of Section 194A by showing theaccruing interest to different depositors in their interestpayable account instead at crediting it to the payeesaccount. In view of this legal position, the pendency of theproceedings resulting from the afore-referred complaintswound certainly amount to abuse of the process of theCriminal Court and call for quashment. It is orderedaccordingly by accepting these petitions. Further, I find that the provision of Section 276-B asexisted for the year 1984-85 reads as under:- 276B. Failure to deduct or pay tax.- If a person fails todeduct or after deducting, fails to pay the tax as requiredby or under the provisions of sub- section (9) of section80E or Chapter XVIIB, he shall be punishable,- (i) in acase where the amount of tax which he has failed todeduct or pay exceeds one hundred thousand rupees,with rigorous imprisonment for a term which shall not beless than six months but which may extend to seven yearsand with fine; (ii) in any other case, with rigorousimprisonment for a term which shall not be less than threemonths 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 aperson fails to pay to the credit of the CentralGovernment, the tax deducted at source by him asrequired by or under the provisions of Chapter XVIIB, heshall be punishable with rigorous imprisonment for a termwhich shall not be less than three months but which mayextend 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 theIncome Tax Act. The Hon'ble Supreme Court also in M/s GeneralFinance Company vs. Assistant Commissioner of Income Tax, AIR 2002 SC 3126 while examining the provisions of Section 269SSconcluded that even if the offence was committed at the time of filingof the complaint, the same could not be continued after the omissionof the provision. The Hon'ble Madhya Pradesh High court in NarenderKumar Khandewal and others vs. Union of India and another,2003 ITR 593 has held that after the omission of the provision offailure to deduct tax at source, the trial cannot be continued againstthe petitioners. Keeping in view the above discussion, I find that thecontinuation of the complaint proceedings qua the petitioner isabuse/misuse of the process of the law. Therefore, finding merit inthe present petition, the same is allowed. Accordingly, complaintdated 26.03.1987, the order of summoning dated 26.03.1987 passedby CJM, Chandigarh and the subsequent proceedings qua thepetitioner are hereby quashed. August 05, 2014Vgulati (INDERJIT SINGH) JUDGE