The prosecution of a company and its principal officers/directors for default in complying with regulations and their respective timelines has been envisaged in the Income-tax Act, 1961 (Act).

However, recently there was an issue over the question that whether a mere delay in depositing tax would attract prosecution or not. Or could such proceedings be validly initiated only in cases where there has been an absolute failure in depositing tax. One can look for the answers in the long drawn-out case of Madhumilan Syntex, manufacturer and exporter of Soyabean Oil, a cooking medium used throughout the world. The sum the company defaulted on was a little over Rs one lakh and the company had deposited the tax after a two-day delay, along with interest. The Assessing Officer (AO)then issued a notice to the company for failure to credit TDS to the Central Government as required by the punishable under the Section 278B of the IT Act.

The case recently reached a climax under a the Supreme Court (SC) ruling. The Apex court has held that defaulting companies and their directors can be prosecuted for delay in deposit of tax deducted at source (TDS).

In the present case, the assessee, a public limited company, deducted taxes at source but failed to deposit such tax to the credit of the Central Government within the stipulated period. The tax, along with interest, was subsequently deposited into the government treasury. Consequently, a show-cause notice was served on the assessee, as well as, the directors of the company. Though the assessee had reasonable cause for not remitting the taxes within the stipulated period, the Commissioner of Income tax (CIT) granted sanction to prosecute the assessee and its directors.

On reference to the Supreme Court, it was held that once a statute requires payment of tax and stipulates the period within which such payment is to be made, the payment must be made within that period. If the payment is not made within the specified period, it amounts to default and appropriate action can be taken under the Act. Failure on part of the company depositing the taxes is an offense which is punishable under the Income Tax Act.

The further ruling said that the imposition of a penalty for non-deduction of tax does not take away the power to prosecute accused persons if an offense has been committed by them. If a civil suit is pending against the assessee, an appropriate order will be passed by the competent Court in such an event. That, however, does not mean that if the accused have committed any offense, the jurisdiction of criminal court would not be applicable to the situation. Both the proceedings are separate and independent and one cannot abate or defeat the other in such a scenario.

Although the company is merely a legal or juristic person and not a natural person, prosecution under the Act would still apply as corporate criminal liability is not unknown to law. Further, the Supreme Court observed that to hold a person responsible under the Act, it must be shown that he/she is a principal officer or is in charge of and responsible for the business of the company or firm.

Also, no separate notice and/or communication is required to be served on the directors treated as the principal officers, if the notice served on the company indicated that the directors are the principal officers of the company. Therefore, the sanction to prosecute granted by the CIT cannot be held to be illegal or unlawful.

This judgment of the Supreme Court is sure to cause distress to defaulting companies and their directors for delayed deposit of taxes. The decision is a revelation to companies as well as its principal officers, as they would now need to ensure that taxes deducted at source are deposited to the credit of the Central Government on time to avoid being prosecuted. Read with this, the change to the levy of interest under Section 201(1A) from an annual to monthly basis, corporates should beware as strict adherence to timelines would be monitored and imposition of stricter controls could be deployed by the authorities.

Therefore, assesses would need to be extra careful and comply with the provisions relating to t axes deducted at source.

VIKAS GARG & SHRILAKSHMI V
The authors are tax professionals with Ernst & Young