Director Alone Cannot be prosecuted under Income Tax Act for Transferring Company assets to Daughter in law without consideration: Delhi HC [Read Order]

In a recent case, the Delhi High Court has held that the director alone cannot be prosecuted under Income Tax Act, 1961, for transferring company assets to the daughter-in-law without consideration.

Nilesh Agarwal and Rakesh Agarwal, the Petitioners under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023[“BNSS”]/(Section 482 of Cr.P.C.) seeking quashing of Complaint Case No. 3067/2020 titled as “ITO v. Nilesh Agarwal” and Complaint Case No. 3068/2020 “ITO v. Rakesh Agarwal”, as well as the summoning orders dated 06.06.2024 passed by the ACMM (Special Acts), Central District, Tis Hazari Courts, New Delhi [“trial court”].

M/s SNR Buildwell Pvt. Ltd. [“the Company”] failed to discharge tax liabilities for the Assessment Years 2014-15, 2015-16 and 2016-17 leading the Income Tax Department to raise demandof tax dues amounting to Rs.4,44,82,912/-.

During pendency of recovery proceedings, it was found that the Company, through its Director Rakesh Agarwal, transferred an Audi Car (bearing Registration No. UK 07 BE 2759) in favour of his daughter-in-law without adequate consideration. The Department treated this transfer as void under Section 281 of the Income Tax Act, 1961 and proceeded to prosecute the Directors under Section 276 of the Act.

The Principal Commissioner of Income Tax accorded sanction for prosecution to prosecute the petitioner under section 276 of the Income Tax Act. The complaints were filed against the petitioners before the trial court, but notably the Company itself was not arrayed as an accused. The petitioners objected that in absence of the company being a party, prosecution against them is not maintainable.

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By the impugned orders dated 06.06.2024, the trial court held that the complaints were maintainable, thereby rejecting their objections and listed the matter for framing of notice. Aggrieved thereby, the Petitioners approached the Court.

Counsel for the Petitioners contended that the prosecution is fundamentally flawed and assailed the maintainability of the complaint on the ground that the company, M/s SNR Buildwell Pvt. Ltd., has not been impleaded as an accused. It was submitted that the allegations in the complaint are entirely based on the acts and liabilities of the company, and the petitioners have been arraigned solely in their capacity as directors.

Reliance was placed on Section 278B of the Income Tax Act, 1961, which specifically provides that “where an offence under the Act has been committed by a Company, the Company as well as every person in charge of, and responsible to the Company for the conduct of its business shall be deemed to be guilty”.In such circumstances, prosecution of the Directors alone is impermissible in law.

Per contra, Standing Counsel for the Respondent/ITO opposed the petitions and contended that the present petitions are wholly misconceived. It was submitted that the petitioners, as Directors of the company, deliberately transferred the company asset to frustrate recovery. Prosecution and sanction were granted against them specifically in their capacity as Directors, and the Trial Court rightly took cognizance.

The principal objection raised by the petitioners that the company was not arrayed as an accused was described as a mere technical defect. It is contended that such omission does not vitiate the complaint and is curable by way of amendment. It was urged that the petitioners cannot be permitted to take undue advantage of a procedural lapse.

The core issue in the present case is “Whether Directors alone can be prosecuted when the company, which is the principal offender, is not arraigned as an accused”. Section 278B IT Act clearly states that where an offence is committed by a company, “the company as well as every person in charge” shall be deemed guilty.

The Supreme Court in Aneeta Hada v. Godfather Travels & Tours (supra) laid down that for maintaining prosecution against Directors under a vicarious liability provision, arraigning of the Company is imperative. It was held that the company being a juristic person has to be impleaded as an accused, and without it, the directors cannot be prosecuted.

The single bench of Justice Ravinder Dudeja clarified that commission of the offence by the company is the foundation, and only thereafter can liability extend to its Directors.This principle has been reiterated in Sharad Kumar Sanghi (supra), wherein proceedings against a Director were quashed for want of the company as an accused and in Sushil Sethi (supra) wherein the Court stressed that without impleadment of the company, prosecution of Directors cannot survive.

The present complaints are premised on the company’s liability of its outstanding tax dues and alleged transfer of company asset.The bench held that continuation of prosecution against the petitioners as Directors alone without impleading the Company as an accused would be contrary to law and amount to an abuse of process.

The court quashed all proceedings.

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