Delhi High Court Quashes Prosecution Against Directors, Stresses on Arraignment of Company

The court ruled that prosecuting directors without including the company as an accused is contrary to law and amounts to abuse of process.

In a significant ruling, the Delhi High Court quashed the prosecution of directors of M/s SNR Buildwell Pvt. Ltd. for alleged tax evasion, emphasizing the necessity of arraigning the company itself as an accused. The judgment, delivered by Justice Ravinder Dudeja, addressed petitions filed by Nilesh Agarwal and others, seeking to quash criminal proceedings initiated by the Income Tax Office (ITO) against them for the non-payment of tax liabilities and the alleged transfer of a company asset to frustrate recovery efforts.

The court found that the prosecution of the directors alone, without including the company as an accused, was fundamentally flawed. Citing Section 278B of the Income Tax Act, 1961, Justice Dudeja underscored that both the company and its directors should be deemed guilty when an offence is committed by a company. The judgment drew parallels with Section 141 of the Negotiable Instruments Act, which has been interpreted by the Supreme Court to mandate the arraignment of the company for imposing vicarious liability on its directors.

The judgment highlighted that the Income Tax Department had raised a tax demand of Rs. 4.44 crore against the company for assessment years 2014-15 to 2016-17. During the recovery proceedings, it was alleged that the company's director, Rakesh Agarwal, transferred an Audi car to his daughter-in-law without adequate consideration, a move treated as void under Section 281 of the Income Tax Act. However, the prosecution sanctioned by the Principal Commissioner of Income Tax was directed only at the directors, not the company.

Petitioners' counsel argued that the absence of the company as an accused rendered the prosecution invalid, relying on precedents like Aneeta Hada v. Godfather Travels & Tours and other Supreme Court rulings which stress the necessity of including the company in such proceedings. The court agreed, noting that the complaints were based solely on the company's liabilities, and without its arraignment, the directors could not be prosecuted for vicarious liability.

The court rejected the respondent's argument that the omission to include the company was a mere technical defect that could be amended. The judgment concluded that such an omission went to the root of jurisdiction and could not be remedied by amendment.

The court's decision to quash the summoning orders and complaints against the directors underscores the judicial emphasis on proper procedural adherence in prosecutions involving corporate offences. However, the judgment leaves room for the ITO to pursue other legal remedies against the company in accordance with the law.

Bottom Line:

Section 278B of the Income Tax Act, 1961 mandates arraignment of a company as an accused for prosecuting its directors under vicarious liability provisions.

Statutory provision(s): Section 278B, Section 276, Section 281 of the Income Tax Act, 1961; Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023

Nilesh Agarwal v. Income Tax Office (ITO), (Delhi) : Law Finder Doc Id # 2792428