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High Court Of Calcutta
Shyamal Kumar Sen, J.
Vinar And Co. And Another - Appellant
Versus
Income-Tax Officer And Others. – Respondents
Matter No. 336 of 1987
Decided on : Aug 17,1990
INCOME TAX - Prosecution for delayed payment of tax deducted at source under section 194A of the Income-tax Act, 1961 - Validity - Applicability of section 276B of the Act - Interpretation of the word "person" in section 276B - Liability of a partner of a firm for the default of the firm - Limitation for initiating prosecution - Delay in issuing show-cause notices - Whether prosecution can be initiated after a lapse of 10 to 16 years - Principles of natural justice and abuse of process of law - Scope of judicial review.
Fact of the Case:
The petitioners, a partnership firm, failed to pay the tax deducted at source under section 194A of the Income-tax Act, 1961, within the time specified in rule 30 of the Income-tax Rules, 1962. The Income-tax Officer issued show-cause notices to the firm and its managing partner under section 276B of the Act, proposing to initiate prosecution for the default. The petitioners challenged the show-cause notices on various grounds, including the delay in issuing the notices, the applicability of section 276B to the firm and its partners, and the absence of mens rea.
Finding of the Court:
The court held that: 1. Section 276B of the Income-tax Act, 1961, as originally enacted, did not apply to a partnership firm or its partners, and the subsequent amendment to the section, which made it applicable to "any person" who fails to pay the tax deducted at source, cannot have retrospective effect. 2. A partner of a firm cannot be prosecuted under section 276B for the default of the firm, as the section provides for imprisonment as a mandatory punishment, and a firm cannot be imprisoned. 3. There is no limitation period prescribed under the Income-tax Act for initiating prosecution under section 276B, but the prosecution must be initiated within a reasonable time. A delay of 10 to 16 years in issuing the show-cause notices was held to be unreasonable and violative of the principles of natural justice and abuse of process of law. 4. The prosecution of the petitioners after such a long delay, without any explanation for the delay, was held to be arbitrary and oppressive, and the show-cause notices were quashed.
Issues: 1. Whether section 276B of the Income-tax Act, 1961, applies to a partnership firm and its partners? 2. Whether a partner of a firm can be prosecuted under section 276B for the default of the firm? 3. Whether there is a limitation period for initiating prosecution under section 276B? 4. Whether the delay of 10 to 16 years in issuing the show-cause notices was reasonable and justified?
Ratio Decidendi: 1. The word "person" in section 276B of the Income-tax Act, 1961, does not include a partnership firm or its partners, as the section provides for imprisonment as a mandatory punishment, and a firm cannot be imprisoned. 2. There is no provision in the Income-tax Act imposing criminal liability for delay in deduction or for non-payment in time. Under section 276B, delay in payment of income-tax is not an offence. 3. Although the Income-tax Act does not prescribe any limitation for initiating the proceedings, it is well settled by numerous judicial decisions that such proceedings have to be initiated within a reasonable time and a lapse of 10 to 16 years could not be said to be reasonable and initiation of proceedings after a lapse of such a long time would be contrary to public and abuse of process of law for the obvious reason that, after lapse of such a long time, the evidence, facts and other materials could not be available.
Final Decision: The court allowed the writ petition and quashed the impugned show-cause notices and the order passed by the Income-tax Officer proposing to initiate prosecution against the petitioners.
SHYAMAL KUMAR SEN, J.
1. IT is the contention of the writ petitioners that, until the death of its partner, Sri. H. P. Nevatia, on October 15, 1977, the business and the accounts of petitioner No. 1 firm were solely looked after and maintained by and under the instructions of the said Sri. H. P. Nevatia. Other partners of the said firm did not at any time have any significant participation in the activities of petitioner No. 1. Petitioner No. 1, at all material times, maintained and still maintains its accounts in accordance with the mercantile system of accountancy. This application relates to purported criminal proceedings sought to be initiated by respondent No. 1 against the petitioners for alleged failure to pay the tax deducted at source under section 194A of the said Act within time, under section 276B of the said Act, for the assessment years 1970-71 to 1976-77. The previous years of petitioner No. 1 were the relevant financial years. During the course of its business, petitioner No. 1 raised and/or received loans and/or advances from different persons on interest. The accounts of the said creditors in the books of petitioner No. 1 used to be credited with the amount of accrued interest in every accounting year on the basis of the mercantile system of accountancy. On such credit for interest made in the accounts of the creditors, the petitioner-firm was required to deduct income-tax at source under section 194A of the said Act at the rate prescribed therein. In accordance with the mercantile system of accountancy, simultaneously with the crediting of interest to the accounts of the creditors, the petitioner-firm used to credit the Central Government with the amount of tax notionally deducted at source thereon every accounting year. The petitioner-firm was always in financial stringency. The balance-sheet of the petitioner-firm always showed debit balance in the capital accounts of its partners. In the premises, the petitioner-firm, as and when liquid funds were available with it, used to pay the tax deducted at source under section 194A of the said Act to the Central Government as follows :
Details of tax deducted at source on interest payable to creditors.
BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=576> Assessment year
Name of the creditor
Amount of interest credited in the account
TDS Amount
Date of deductionof tax credited
Tax paid on
Rs. P.
Rs. P.
1970-71 Hindusthan Sugar Mills Ltd. 1,76,319.00 35,264.00 31-03-70 29-01-73
1971-72 do. 91,763.84 18,352.75 31-08-70 29-01-73
(BOM)bay Oxygen Corpn. Ltd. 39,876.79 7,975.40 30-12-70 29-01-73
1972-73 Hindusthan Sugar Mills Ltd. 61,035.85 12,207.00 31-03-72 27-08-74
Auto Centre 10,551.50 1,055.00 30-06-71 27-08-74
29,550.56 2,955.00 31-03-72 27-08-74
1973-74 Hindusthan Sugar Mills Ltd. 24,821.00 5,252.00 31-03-74 14-08-75
Arvind and Co. 46,005.90 4,601.00 31-12-73 14-08-75
do. 11,991.59 1,199.00 31-03-74 14-08-75
1975-76 Hindusthan Sugar Mills Ltd. 8,141.92 1,709.82 31-07-74 22-04-76
do 18,247.24 3,831.92 31-03-92 22-04-76
2. IN the accounting year relevant to the assessment year 1976-77, Messrs. Hindustan Sugar Mills Ltd., by a letter, informed the said firm that, on and from April 1, 1975, no interest is chargeable on their loan. IN the premises, the said firm, although initially credited interest on the said account for the said accounting year, later on, after the receipt of the said letter, wrote back the interest credited and thus filed a revised return under the said Act and, therefore, no tax was deductible at source for the said assessment year 1976-77. The amount of tax required to be deducted at source on interest payable under section 194A of the said Act could not be deposited or paid to the credit of Central Government within the time specified in rule 30 of the INcome-tax Rules, 1962, i.e., within two months from the date of such credit due to paucity of funds. The accounts of the creditors used t
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