TDS Default Liability to Be Decided at Trial: Delhi High Court

In a significant ruling concerning corporate accountability, the Delhi High Court has declined to quash criminal proceedings initiated against Dr. Manoj Khanna, the Managing Director of Enhance Aesthetic & Cosmetics Studio Pvt. Ltd. , regarding defaults in the deposit of Tax Deducted at Source (TDS).

Justice Amit Mahajan, presiding over the matter, emphasized that arguments questioning the personal liability of a director in a corporate tax default case are essentially disputed questions of fact that must be adjudicated through a full-fledged trial.

The Corporate Blame Game: Case Background

The dispute stems from the Financial Year 2017-18, during which the company allegedly failed to deposit TDS amounting to over ₹2 crore into the Government treasury within the stipulated timeframe. The Income Tax Department initiated prosecution under Section 276B, read with Sections 278B and 278E of the Income Tax Act, 1961 .

Dr. Manoj Khanna, seeking to quash the summoning order, argued that he was not responsible for the day-to-day management of TDS deductions. He pointed to admissions by his co-accused, Sanjeev Mahajan (a wholetime director at the time), who had allegedly acknowledged in correspondence that he was solely responsible for managing the company’s affairs and tax deposits. The Income Tax Department , however, maintained that both individuals were "Principal Officers" and that subsequent payment of the tax does not extinguish criminal liability.

"Mini-Trial" at the Threshold

Justice Amit Mahajan’s analysis focused on the limitations of the court’s inherent powers under Section 528 of the Bharatiya Nagarik Suraksha Sanhita (BNSS) , corresponding to the former Section 482 of the CrPC . The Court remarked that at the stage of summoning, it is not required to conduct a detailed scrutiny of evidence.

Citing the landmark judgment Rajiv Thapar and Ors. v. Madan Lal Kapoor , the Court clarified that it would only exercise its powers to quash if the material produced by the accused is "sterling and impeccable" enough to reject the prosecution's case entirely. In this instance, the Court found the disagreement between the two directors to be a classic "triable issue."

Key Observations

The judgment offers a firm stance on how the court views corporate liability:

• On the Nature of Dispute: "The veracity of the allegations raised by both the directors and the liability of the Petitioner, becomes purely a factual issue, which can only to be decided after due consideration of evidence at the time of trial."
• On Subsequent Deposits: "It is also well-settled that subsequent payment does not obliterate criminal liability unless the statute so provides. The assessee cannot be granted immunity from prosecution merely on the ground that ultimately TDS was deposited in Govt. account albeit belatedly."
• On Judicial Restraint: "The Petitioner essentially invites this Court to appreciate the material and to sit in appeal over the satisfaction recorded by the sanctioning authority... Interference for that purpose would amount to conducting a mini-trial at the threshold, which is impermissible."

Implications for Directors

The Court’s decision serves as a stern reminder that internal corporate divisions of labor cannot serve as a blanket shield against statutory tax obligations. By leaving the determination of “responsible officer” status to the trial court , the High Court has reaffirmed that corporate executives cannot easily bypass criminal proceedings by shifting blame in the pre-trial phase. For businesses, the ruling underscores the importance of strict compliance with TDS timelines, as the act of depositing tax after the deadline does not automatically erase the criminality of the original default.

The petitioner is now expected to advance his defense in the Trial Court , where both documentary evidence and cross-examination will play a decisive role in establishing who, if anyone, should be held criminally liable.