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Delayed crediting of TDS punishable
March, 31st 2007

In a judgment that is sure to send shock waves down India Inc, the Supreme Court has held that defaulting companies and their directors can be prosecuted for delayed crediting of TDS. One company Madhumilan Syntex, could not credit the TDS to the government accounts on time. Later they did so with interest, but prosecution of the company as well as its directors began. They fought the case for 15 years but finally lost in the Supreme Court on every count.

On verification of the returns 15 years ago, the amount deducted by the company as tax deducted at source was not credited by the company in the account of the central government as required by Sections 194C and 200 of the Income Tax Act read with Rule 30 of the Income Tax Rules. The Commissioner of Income Tax, Bhopal granted sanction to prosecute appellants under Section 279 of the Act observing therein that the assessee had committed default under Section 194C of the Act in paying TDS to the credit of the central government.

The appellants filed applications under Section 245 of the Code of Criminal Procedure for discharge from the case contending that they had not committed any offence and the provisions of the Act had no application to the case.

It was alleged that proceedings were initiated mala fide. Moreover, there was 'reasonable cause' for delay in making payment and the case was covered by Section 278AA of the Act. The directors further stated that they could not be treated as 'principal officers' under Section 2(35) of the Act and it was not shown that they were 'in charge' of and were 'responsible for' the conduct of business of the company. The trial Court as well as High Court rejected the petition.

The Supreme Court considered onsidered various questions: Was the High Court right in deciding the case immediately after restoration and that too without assigning any reasons? Normally, when the matter is called out and the advocate is absent, a Court may adjourn the matter to the next date of hearing. But it may also dismiss the matter for default so as to secure appearance of the advocate. It was not a substantive appeal which was heard by a court. If the High Court did not think it fit to exercise inherent powers in the light of the controversy raised, question involved and the stage at which the applicants had approached the court, it cannot be said that the court must record reasons in support of such order.

On whether there should be prosecution of the company for not depositing TDS, the court felt that it is clear that wherever a company is required to deduct tax at source and to pay it to the account of the Central Government, failure on the part of the company in deducting or in paying such amount is an offence under the Act and has been made punishable. It, therefore, cannot be said that the prosecution against a Company or its Directors in default of deducting tax is not envisaged by the Act.

As far as the directors are concerned, it is alleged that they were 'principal officers' of the company. In the show- cause notice, it was asserted that the appellants were considered as principal officers under Section 2(35) of the Act. Dealing with an application for discharge, the trial Court observed that the primary accused was the company whereas other accused were the directors. Whether they could be said to be principal officers or not would require evidence and it could be considered at the stage of trial and the application was rejected. In Revision, the First Additional Sessions Judge took similar view. In the case on hand, in the show cause notice dated March 11, 1991 issued under Section 276B read with Section 278B of the Act, it was expressly stated by the Income Tax Officer, TDS, Bhopal that the Directors were considered to be Principal Officers under Section 2(35).

Examining whether a penalty should be imposed instead of beginning prosecution, the court's opinion was that it is true that the Act provides for imposition of penalty for non payment of tax. That, however, does not take away the power to prosecute accused persons if an offence has been committed by them. If a civil suit is pending, an appropriate order will be passed by the competent Court. That, however, does not mean that if the accused have committed any offence, jurisdiction of criminal court would be ousted. The proceedings are separate and cannot abate each other.

As for whether the prosecution should be quashed because of delays, the court agreed that the matter relates to the remote past and that more than fifteen years have passed. But it cannot be ignored that prosecution could not be over in view of the fact that applications were made by the appellants for their discharge under Section 245 of the Code initially in the trial Court, then in the Sessions Court and then in the High Court. Even after dismissal of the petition by the High Court, the appellants approached this Court and obtained interim stay of further proceedings. It is because of the pendency of proceedings and grant of interim relief that the case remained pending.

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