Important point
A company cannot be prosecuted for offences under Sections 276C, 277 and 278 read with Section 278B, Income Tax Act, since each one of these sections requires the imposition of a mandatory term of imprisonment coupled with fine and leaves no choice to the Court to impose only a fine.

Headnote:(i) Income Tax Act, 1961—Sections 276C, 277 and 278 rw/s 278B—Criminal prosecution of a Company—Sanction given by Commissioner of Income Tax—Whether vitiated on account of want of opportunity of hearing—(No)—No opportunity of hearing was required to be afforded to respondents before grant of sanction—Grant of sanction is purely an administrative act—Affording of opportunity of hearing to accused is not contemplated at that stage. (Para 8)
       (ii) Income Tax Act, 1961—Sections 276C, 277 and 278 rw/s 278B—Criminal prosecution of Company for offences under—Mandatory sentence of imprisonment—Whether criminal prosecution is unsustainable as it being a juristic person no substantive sentence can be awarded to it—Held, yes (majority view)—(No, as per G.P. Mathur, J.).
       Held : Majority Opinion : (B.N. Srikrishna and Rajendra Babu, JJ.)
       Per B.N. Srikrishna, J.
       The question of criminal liability of a juristic person has troubled Legislatures and Judges for long. Though, initially, it was supposed that a Corporation could not be held liable criminally for offences where mens rea was requisite, the current judicial thinking appears to be that the mens rea of the person in-charge of the affairs of the Corporation, the alter ego, is liable to be extrapolated to the Corporation, enabling even an artificial person to be prosecuted for such an offence. I am fully in agreement with the view expressed on this aspect of the matter in the judgment of brother Mathur, J. What troubles me is the question whether a Corporation can be prosecuted for an offence even when the punishment is a mandatory sentence of imprisonment. (Para 27)
       Prior to the substitution of Section 276C, 277 and 278 by the Taxation Laws (Amendment) Act, 1975 with effect from 1.10.1975 in the present form, there was no minimum sentence of imprisonment provided for. The intention of the legislature in imposing a minimum term of imprisonment for offences punishable thereunder was to do away with the Court’s discretion of only imposing of a fine and make the punishment more stringent. (Para 35)
       For the aforesaid reasons, I am of the view that the first respondent company cannot be prosecuted for offences under Sections 276C, 277 and 278 read with Section 278 since each one of these Sections requires the imposition of a mandatory term of imprisonment coupled with a fine and leaves no choice to the Court to impose only a fine. (Para 48)
       Per S. Rajendra Babu, J. (Concurring)
       Corporate criminal liability cannot be imposed without making corresponding legislative changes. For example, the imposition of fine in lieu of imprisonment. Such legislative changes took place in Australia, France (Penal Code of 1992), Netherlands (The Economic Offences Act, 1950 and Article 51 of Criminal Code), and Belgium (in 1934. Cour de Cassation recognized the punishment of a corporate body by making it a subject of Belgian Criminal Statute). Germany practices a sort of administrative sanction to deviant corporations and doesn’t recognize criminal liability of corporations. In United States the punishment of corporate crime is based on the doctrine of ‘Respondent Superior’, whereby agent’s conduct is imputed to the corporation. This was envisaged in the Model Penal Code (1962) proposed by the American Law Institute and many States subsequently enacted this Model Code. The Canadian Federal Criminal Code was amended as far back as in 1909 whereby a fine could be substituted for a sentence of imprisonment, made the corporate criminal liability possible. Section 718 of the Canadian Criminal Code imposes fine to corporate offenders and Section 720 provides special enforcement procedure for fines on corporations. The European Council in 1988 made a recommendation to the member states to carry out necessary amendments in their respective criminal statutes to ensure corporate liability. Whereas, the United Kingdom follows the alter ego or identification approach to fix corporate liability in criminal cases. In my considered view, under the present Indian law it is difficult to impose fine in lieu of imprisonment though the definition of ‘person’ in the Indian Penal Code includes ‘company’. Brother Srikrishna, J. in his opinion has discussed two Reports of Law Commission of India in this regard. It is also worthwhile to mention that our Parliament has also understood this problem. (Paras 57 and 58)
       To bring such a fundamental change in the criminal jurisprudence is a legislative function. Only the Parliament can do it. (Para 59)
       Per G.P. Mathur, J. (Minority Opinion)
       Courts would be shirking their responsibility of imparting justice by holding that prosecution of a company is unsustainable merely on the ground that being juristic person it cannot be sent to jail to undergo the sentence. Companies are growing in size and have huge resources and finances at their command. In the course of their business activity they may sometimes commit breach of the law of the land or endanger other’s lives. More than four thousand people lost life and thousands others suffered permanent impairment in Bhopal on account of gross criminal act of a multinational corporation. It will be wholly wrong to allow a company to go away scot free without even being prosecuted in the event of commission of a crime only on the ground that it cannot be made to suffer part of the mandatory punishment. (Para 21)
       (iii) Income Tax Act, 1961—Sections 276, 277 and 278 rw/s 278B—Criminal prosecution of a company—Mens rea—Whether a company can be attributed with mens rea on basis that those who work or are working for it have committed a crime and can be convicted in a criminal case—Yes (Majority Opinion, G.P. Mathur and Srikrishna, JJ.)—No (Minority Opinion).
       As per S. Rajendra Babu, J. (Minority Opinion)
       The constitution of a modern company consists of two documents usually bound up as one - the memorandum and articles of association. A company’s authority always remains circumscribed by the object clause of its memorandum and it cannot contain anything unlawful. Anything done outside the object and powers of the company is ultra vires. With regard to criminal activities, the agents are beyond their authority and corporate capacity. Company is thus a potentially complex organization, which is assimilated into the pre-existing individualistic framework of the law by pursuit of fiction and analogy with a natural person. In order to trigger corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the ego, the centre of the corporate personality, the vital organ of the body corporate, the alter ego of the employer corporation or its directing mind. Since the company/corporation has no mind of its own, its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. To this extent there are no difficulties in our law to fix criminal liability on a company. The Common Law tradition of alter ego or identification approach is applicable under our existing laws. But the problem crops up in mens rea offences. Mens rea and negligence are both fault elements, which provide a basis for the imposition of liability in criminal cases. Mens rea focuses on the mental state of the accused and requires proof of a positive state of mind such as intent, recklessness or willful blindness. Negligence, on the other hand, measures the conduct of the accused on the basis of an objective standard, irrespective of the accused’s subjective mental state. Criminal liability of a company arises only where an offence is committed in the course of the company’s business by a person in control of its affairs to such a degree that it may fairly be said to think and act through him so that his actions and intent are the actions and intent of the company. And it is not possible to attribute element of mens rea to a juristic person, which requires positive act of omission or commission. Since this cannot be attributed to a juristic person, it is difficult to accept the proposition of ‘punishing a company’ wherein mens rea element is necessary. It is all the more difficult in the event of mandatory punishment that leads to imprisonment. However, I need not dilate on this aspect of the case and reserve that answer for consideration in a more appropriate case. (Paras 54 and 55)

Judgment

G.P. Mathur, J.—This appeal by special leave has been preferred against the judgment and order dated 12.4.1993 of High Court of Karnataka by which the petition preferred by the respondents under Section 482 Cr.P.C. was allowed and the criminal complaint filed against them under Section 276C, 277 and 278 read with Section 278B of the Income Tax Act (hereinafter called “the Act”) was quashed. Liberty was, however, granted to the appellants to institute fresh prosecution against respondent No. 2 after affording him an opportunity of hearing before according sanction under Section 279(1) of the Act.

2. The respondent No. 1 in the appeal, M/s. Velliappa Textiles Ltd., is a company registered under the provisions of Companies Act and respondent No. 2 Shri C. Velliappa is its Managing Director. For the A.Y. 1985-86 the company filed its return of income tax for the period ending 30.6.1984 showing an income of Rs. 43,940/-. The company had claimed deduction of Rs. 9,16,442/- on account of depreciation and investment allowance, etc. on the ground that two new machines worth Rs. 14,79,589/- were purchased and installed during the previous year relevant to A.Y. 1985-86. The company was asked to produce documentary evidence in support of purchase and installation of the machines but it failed to do so and accordingly the assessing officer disallowed the assessee’s claim. After the matter had been remanded by the CIT(A) in the appeal preferred by the assessee, the Assessing Officer made inquiries from M/s. Lakshmi Machine Works Ltd., Coimbatore from whom the machines had allegedly been purchased and from M/s. Voltas Ltd. who had allegedly installed the same. The inquiries revealed that the machines had actually been dispatched to the assessee company on 2.7.1984 and 12.7.1984. The documents produced by M/s. Voltas Ltd. showed that the machines had been installed after the close of the accounting period ending 30.6.1984. When the aforesaid facts were brought to the notice of the assessee company, their authorised representative made a statement that the claim made by them regarding depreciation and other allowances be disallowed. Subsequent thereto, the Commissioner of Income Tax, Bangalore, by his order dated 26.3.1992 accorded sanction for filing of a criminal complaint under Section 276C, 277 read with Section 278B of the Act against the company and its Managing Director (respondents in the appeal). The respondents then filed a petition under Section 482 Cr.P.C. in the High Court for quashing the proceedings of the complaint case which had been instituted against them in the Special Court for Economic Offences at Bangalore. Two pleas were raised before the High Court. The first was that the assessee (respondent No. 1) being company which is a juristic person, it is not liable for criminal prosecution. The second plea was that the sanction granted by the Commissioner, Income Tax, under Section 279 of the Act was invalid as the same was given without affording any opportunity of hearing to them. The High Court relying upon an earlier Division Bench decision of the same Court in P.V. Pai v. R.L. Rinawma ILR 1993 Kar. 709 held that as the company is a juristic person, it cannot be punished with imprisonment and, therefore, its prosecution was unpurposeful. The High Court further held that since the sanction to prosecute the respondents had been granted without affording them any opportunity of hearing, the principles of natural justice were violated and the order granting sanction was invalid. On these findings, the petition was allowed and the proceedings of the complaint case were quashed. However, liberty was given to the appellants to accord fresh sanction for prosecution of respondent No. 2 alone after giving him an opportunity of hearing and thereafter to take appropriate action in accordance with law.

3. Mr. T.L.V. Iyer, learned senior counsel for the appellants has submitted that though in law there is no requirement of afford

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2003 Supreme(SC) 907

Important pointA company cannot be prosecuted for offences under Sections 276C, 277 and 278 read with Section 278B, Income Tax Act, since each one of these sections requires the imposition of a mandatory term of imprisonment coupled with fine and leaves no choice to the Court to impose only a fine.

Cases Referred (13)