- Bookmark
- Share
- CaseIQ
M/S. Kusum Products Ltd. v. S.K Sinha, I.T.O Central Circle-X, Calcutta
Factual and Procedural Background
The petitioner, Kusum Products Ltd. (the Company), filed its Income Tax Return for the Assessment Year 1974-1975, signed by its Accountant and Constituted Attorney, Kundanmal Lakhotia. Subsequently, on March 27, 1979, the Income Tax Officer, Sri S.K. Sinha, lodged a complaint alleging that the Company had committed an offence under Section 277 of the Income Tax Act, 1961. The allegation centered on the Company's claim of a deduction of Rs. 1,14,212/- as interest on advance income tax, which was stated in the return to have been assessed in an earlier year, though no such assessment had occurred. The deduction was disallowed in the draft assessment order and added to assessable income, with no objection or appeal from the Company.
The Chief Metropolitan Magistrate took cognizance of the complaint and issued summons to the Company and Kundanmal Lakhotia. The Company appeared through a representative and filed an application praying for quashing of the proceedings against it.
Legal Issues Presented
- Whether a company, as a juristic person, can be prosecuted under Section 277 of the Income Tax Act, 1961, which mandates imprisonment for false verification in a return of income.
- Whether the allegations in the complaint disclose a prima facie case against the Company under Section 277 of the Act.
- Whether mens rea (knowledge or belief that the statement is false) can be attributed to a company for the purpose of prosecution under Section 277.
Arguments of the Parties
Petitioner’s Arguments
- The complaint does not disclose a prima facie case against the Company or the essential ingredients of an offence under Section 277 of the Act.
- Since mens rea is essential for the offence and the Company is a juristic person, it cannot be prosecuted for false verification requiring knowledge or belief of falsity.
- Imprisonment is compulsory under Section 277, which cannot be imposed on a company, indicating legislative intent not to punish juristic persons under this provision.
- Even if the deduction was claimed, the return gave a true picture of profit and loss, negating any false statement.
Revenue’s Arguments
- Section 2(31) of the Act defines “person” to include a company, thus a company can be prosecuted under Section 277.
- Although imprisonment is compulsory on conviction under Section 277, courts have discretion to award appropriate punishment or none, even to companies.
- Supported this argument by citing the Madras High Court decision in Jayaveeranandia Nair and Company v. Income Tax Officer (1975) 101 JTR 390.
- Also relied on the English Court of Appeal decision in Regina v. St. Margaret's Trust Ltd. (1958) 1 WLR 522, which held a company could be prosecuted despite imprisonment being a prescribed punishment.
- Referred to the Supreme Court decision in State of Maharashtra v. M.H George, AIR 1965 SC 722, which cited the English case.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Jayaveeranandia Nair and Company v. Income Tax Officer, Central Circle V Madras (1975) 101 JTR 390 | Firm can be prosecuted under Section 277 of the Income Tax Act when false return is filed; imprisonment was not compulsory at that time. | Distinguished on the basis that imprisonment was not compulsory then; the Court noted that a corporation cannot be subjected to imprisonment. |
| Regina v. St. Margaret's Trust Ltd. (1958) 1 WLR 522 | A company can be prosecuted for offences even when imprisonment is a prescribed punishment; courts may exercise discretion in awarding punishment. | Supported the argument that prosecution of a company is possible but imprisonment cannot be imposed on a company. |
| State of Maharashtra v. M.H George, AIR 1965 SC 722 | Confirmed that “person” in penal provisions penalizes individuals; corporations cannot be imprisoned. | Referred to the English decision and emphasized mens rea and imprisonment issues relating to companies. |
| Kapurchand Shrimal v. Tax Recovery Officer, AIR 1969 SC 682 | “Person” in penal provisions applies to individuals responsible for acts; a Hindu undivided family’s Karta cannot be imprisoned for default of the family. | Used to reinforce that mens rea and personal liability are essential, excluding juristic persons from imprisonment under penal tax provisions. |
Court's Reasoning and Analysis
The Court examined the statutory provisions and relevant case law to determine whether a company could be prosecuted under Section 277 of the Income Tax Act, which mandates imprisonment for false verification in income tax returns. The Court noted that mens rea is an essential element of the offence and only actual persons capable of knowledge or belief can be held liable. Although the definition of “person” includes companies, the Court held that Parliament could not have intended to include companies under Section 277 because imprisonment is compulsory and a company cannot be imprisoned.
The Court distinguished earlier decisions where imprisonment was not compulsory and noted the legislative amendment making imprisonment mandatory. It emphasized that imposing punishment on a company under Section 277 would alter the legislative scheme and usurp judicial powers. The Court relied on Supreme Court precedents clarifying that penal provisions requiring imprisonment apply only to individuals and not to juristic persons. Consequently, the Court found that the Company could not be attributed with the necessary mens rea, and continuing prosecution against it would be an abuse of process.
Holding and Implications
The Court held that the prosecution of Kusum Products Ltd. under Section 277 of the Income Tax Act, 1961, cannot be sustained because a company cannot be attributed with the requisite mens rea nor subjected to imprisonment as mandated by the statute.
The Court quashed the proceedings pending against the Company in the Chief Metropolitan Magistrate’s Court. The decision directly prevents the Company from facing criminal liability under the said section and clarifies that juristic persons cannot be prosecuted under penal provisions mandating imprisonment. No broader precedent beyond the immediate effect on the parties was established, and leave to appeal to the Supreme Court was refused.
P.C Borooah, J.:— The petitioner Kusum Products Ltd. (hereinafter the Company) has its registered office at 9, Brabourne Road, Calcutta. It carries on business in the manufacture and sale of Vanaspati and other products. On July 30, 1974 the company filed a return of Income for the Assessment year 1974-1975 under the signature of one Kundanmal Lakhot a, who at the material time was the Accountant and also the Constituted Attorney of the Company.
2. On March 27, 1979 the Opposite-Party Sri S.K Sinha, Income Tax Officer, Central Circle-X, Calcutta, filed a petition of complaint in the Court of the Chief Metropolitan Magistrate, Calcutta against the Company and Kundanmal Lakhotia alleging the commission of an offence punishable under S. 277 of the Income Tax Act, 1961 (hereinafter ‘the Act’). It was a leged, inter alia, that in the aforesaid return the company had shown a total profit in its business amounting to Rs. 66,62,114/- from which a total amount of deduction amounting to Rs. 12,89,107/- was claimed. The deduction included a sum of Rs. 1,14,212/- which was received by the company as interest on advance income tax paid for the Assessment Year 1967-1968. It was further alleged that in claiming the said amount as deduction it was stated in page 6 of the return that it had been assessed in an earlier year, although no such assessment had taken place and the company also could not produce any evidence to show that the said amount had been assessed to tax in any previous year. In the draft assessment order deduction was disallowed in respect of Rs. 1,14,212/- and it was added to the assessable income. The company also did not prefer any objection to the inclusion of the said amount as income for the relevant year. Thereafter the final assessment order was passed, but the company neither preferred any appeal nor raised any dispute in respect of the said sum. Under the circumstances it was alleged that the accused persons had made a false verification in the Return of Income for the assessment year 1974-1975, knowing or believing it to be false or not believing it to be true.
3. The learned Magistrate by an order dated March 27, 1979 took cognizance and directed Issue of summons against the company and Kundanmal Lakhotia. Pursuant to the said summons the company appeared before the learned Magistrate through its representative, one Sri Monoranjan Sengupta, an Accounts Assistant under its employment. In this application it is prayed that the proceeding pending against the company in the Court of the learned Magistrate be quashed.
4. Dr. Debiprosad Pal, appearing on behalf of the petitioner, has submitted that as the allegations in the complaint do not disclose a prima facie case against the company nor disclose the essential ingredients of the offence under S. 277 of the Act, the continuance of further proceedings against the company would tantamount to an abuse of the process of law. Dr. Pal further submitted that the petitioner being a company and a juristic person no prosecution can be initiated against it for an alleged offence under S. 277 of the Act as ‘mens rea’ is an essential ingredient of the offence and the company cannot be charged for verification of a statement with the knowledge or belief that the said statement is false. Dr. Pal's further submission in this respect was that as imprisonment has been made compulsory for violation of S. 277 of the Act, it would clearly go to show that it was not the intention of the legislature to punish a juristic person but an actual person who made the false statement in the verification. Dr. Pal also argued that in any event the company cannot be deemed to have committed any offence under S. 277 of the Act inasmuch as the return of income for the assessment year 1974-1975 gives a true picture of the profit and loss of the company and even if the company had claimed the sum of Rs. 1,14,212/- as a deduction, it would out necessarily go to show that there was any false statement in the return. It will however not be necessary for us to go into this aspect of the matter as we intended to decide the case on the prior submissions of Dr. Pal.
5. Mr. Balai Chandra Pal, appearing on behalf of the Revenue, has contended that S. 2(31) of the Act includes a company within the definition of a person, and as such a company can be prosecuted for an offence under S. 277 of the Act, Mr. Pal also contended that although under the law as it now stands imprisonment is compulsory on a conviction under S. 277 of the Act, there is no bar to the prosecution of a company for the commission of an offence under the said section, because, in case the company is convicted it will be open to the Court to award any appropriate punishment or if the Court so thinks fit not to award any punishment at all. Mr. Pal has stregthened this branch of his argument with reference to a decision of the Madras High Court in the case of Jayaveeranandia Nair and Company v. Income Tax Officer, Central Circle V Madras reported in (1975) 101 JTR 390. Mr. Pal has also referred to a decision of the Court of Appeal in England in the case Regina v. St. Margaret's Trust Ltd. reported in (1958) 1 WLR. 522, wherein it was held that a company could be prosecuted for violation of the Hire Purchase and Credit Sale Agreement (Central) Order, 1956 and although Parliament had prescribed imprisonment as one of the punishments that may be inflicted for breach of the order, nevertheless, it would be left open to the Court to use its powers to inflect any manner of punishment or none at all in appropriate cases. Mr. Pal also drew our attention to the decision of the Supreme Court in the case of State of Maharastra v. M.H George reported in AIR 1965 SC 722 where the decision of the Court of Appeal in the case of Regina v. St. Margaret's Trust Ltd. (supra) was referred to.
6. In the case of A.D Jayaveernandia & Co. (supra) the Madras High Court was dealing with the filing of a false return by one of the partners of the appellant firm for the assessment year 1962-1963, and the Court held that the firm could be prosecuted for an offence under S. 277 of the Act. It must however be borne in mind that S. 277 of the Act as it then stood prescribed punishment of simple imprisonment extending to six months or with fine extending to Rs. 1000/- or with both. This was the law till March 31, 1964 whereinafter it was amended and imprisonment was made compulsory, Moreover the Madras High Court in page 420 of the judgment made the following observations:—
“A Corporation could not be subjected to bodily punishment. It could however be fined; and to this date fine remains the only mode of punishment applicable to a Corporation. Since fine only is the type of punishment appropriate to a Corporation, if a crime is not punishable with fine, a Corporation cannot be convicted of it.”
7. The Supreme Court in the case of State of Maharashtra v. M.H George (supra) was dealing with a case of an offence under S. 23(1A) of the Foreign Exchange Regulation Act, 1947 under which imprisonment was not compulsory.
8. In the instant case we are concerned with the assessment year 1974-1975. Section 70 of the Taxtion Laws (Amendment) Act, 1975 further amended S. 277 of the Act. The section as it stood with effect from October 1, 1975 when the Amending Act came into force is as follows:—
“If a person makes a statement in any verification under this Act or under any rule made thereunder, or delivers an account or statement which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable,—
(i) in a case where the amount of tax, which would have been evaded if the statement or account had been accepted as true, exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;
(ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.”
9. That ‘mens rea’ is an essential ingredient of an offence under S. 277 of the Act is clear from the section itself and only an actual person who does any of the acts indicated therein with a specific knowledge or intent can be made liable. Although under S. 2(31) of the Act the definition of a person is wide enough to include a company or any juristic person, the word person could not have been used by Parliament in S. 277 of the Act in the sense given in the definition clause. That this was the intention of Parliament is clear because imprisonment has been made compulsory for an offence under S. 277 of the Act. A company or a juristic person cannot possibly be sent to prison, and it is not open to a Court to impose a sentence of fine or not to award any punishment if the Court finds a company guilty under the said section. If the Court does so it would be altering the very scheme of the Act and usurping the legislative function. In this connection reference may be made to the case of Kapurchand Shrimal v. Tax Recovery Officer, Hyderabad, reported in AIR 1969 SC 682 where the Supreme Court in paragraph 7 of the judgment made the following observations:—
“In the context in which the expression “person” occurs in Ss. 276, 276A, 277 and 278, there can be no doubt that it seeks to penalise only those individuals who fail to carry out the duty cast by the specific provisions of the statute or otherwise responsible for the acts done. For the default of the Hindu undivided family, therefore, in payment of tax, the Karta cannot be arrested and detained in prison”.
10. In view of what has been stated above, we must hold that as the petitioner cannot be attributed with the requisite mens rea, its further prosecution in the Court of the learned Magistrate for an offence under S. 277 of the Act would tantamount to an abuse of the process of the Court. The application must therefore succeed and the proceedings pending against the petitioner company in case No. C449 of 1979 in the Court of the Chief Metropolitan Magistrate, Calcutta is quashed.
11. The Rule is made absolute.
12. Mr. Ghosal, learned Advocate appearing on behalf of the Revenue, orally prays for leave for the grant of a certificate to appeal to the Supreme Court. The prayer is refused.
13. R.K Sharma, J.:— I agree.
Rule made absolute.
Leave to grant certificate to appeal to the Supreme Court refused.
Alert