S.276 Income Tax Act | Director Can't Be Prosecuted Individually For Transferring Company Asset To Relative Without Consideration: Delhi HC
The Delhi High Court has held that a corporate director can't be prosecuted individually merely because a company asset was transferred to his relative, in this case daughter-in-law, without payment of any consideration.Justice Ravinder Dudeja held that omission to implead the company as an accused in the case is an incurable defect, which goes to the root of jurisdiction.“Section 278B IT...
The Delhi High Court has held that a corporate director can't be prosecuted individually merely because a company asset was transferred to his relative, in this case daughter-in-law, without payment of any consideration.
Justice Ravinder Dudeja held that omission to implead the company as an accused in the case is an incurable defect, which goes to the root of jurisdiction.
“Section 278B IT Act (Income Tax Act, 1961) clearly states that where an offence is committed by a company, “the company as well as every person in charge” shall be deemed guilty. Section 278B creates a deeming fiction whereby both the Company and every person in charge are deemed guilty of the offence. The legislative intent is clear that the Company must first be arraigned; only then can its officers be fastened with vicarious liability,” the bench observed.
The Court was dealing with a plea to quash the Complaint Cases and summoning order passed against the Petitioner-Director.
The allegation of the prosecution was that M/s SNR Buildwell Pvt. Ltd. failed to discharge tax liabilities and during pendency of recovery proceedings, it was found that the Company, through its Director Rakesh Agarwal (Petitioner), transferred an Audi Car 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 and proceeded to prosecute the Directors under Section 276 (Removal, concealment, transfer or delivery of property to thwart tax recovery) of the Act.
Petitioner submitted that the allegations in the complaint are entirely based on the acts and liabilities of the company, and he has been arraigned solely in his capacity as Director, which is impermissible in law.
Counsel appearing for the Income Tax Office on the other hand argued that Petitioner, as Director of the company, deliberately transferred the company asset to frustrate recovery. Prosecution and sanction (accorded by the Principal Commissioner of Income Tax) were granted against him specifically in his capacity as Directors, and the Trial Court rightly took cognizance.
It was further contended that not arraying the company as an accused is a mere technical, curable defect which does not vitiate the complaint.
Disagreeing, the High Court observed that the complaint was premised on the company's liability of its outstanding tax dues and alleged transfer of company asset but, no independent allegation was made against the director in his personal capacity.
“Hence, the omission to implead the company is therefore not a mere technical irregularity but goes to the root of jurisdiction,” it said.
Reliance was placed on Aneeta Hada v. Godfather Travels & Tours (2012) where the Supreme Court held that arraignment of the company is a condition precedent for imposing vicarious liability upon its officers and is a sine qua non for maintaining prosecution against its Directors.
As such, the plea was allowed and the complaint was quashed.
Appearance: Mr. Arjun Dewan, Mr. Akash Arora, Mr. Jasraj Singh Chhabra, Advs for Petitioner; Mr. Sunil Agarwal, Sr. Standing Counsel, Mr. Viplav Acharya, Ms. Priya Sarkar, Jr. St. Counsels, Mr. Utkarsh Tiwari, Adv. for Respondent
Case title: Rakesh Agarwal v. ITO
Case no.: CRL.M.C. 8535/2024