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Smt. Sitaben And Others v. Union Of India And Another.
Factual and Procedural Background
This petition under section 482 of the Criminal Procedure Code challenges the framing of charges under sections 276B and 278B of the Income-tax Act, 1961, and seeks quashing of the related criminal proceedings. The respondents are a firm (accused No. 1) and its partners (accused Nos. 2 to 8). The firm carried on a business dealing in black steel tubes, PVC pipes, G.I. steel tubes and allied products.
For the assessment year 1984-85 the firm filed a return on July 28, 1984 declaring income of Rs. 98,240 and furnished particulars showing credits to Messrs. Precision Tubes (Rs. 12,617) and Messrs. Jotindra Steel and Tubes Ltd. (Rs. 7,845). The firm did not deduct tax at source on these amounts; this omission was brought to its notice. The firm later deducted and deposited Rs. 4,094 after approximately 36 months, leaving a shortfall of Rs. 202. On these facts the Income-tax Department filed a criminal complaint alleging offences under sections 276B and 278B of the Act.
During trial the Department examined one witness (Radhavallabh Goswami, Assistant Commissioner of Income-tax) and thereafter charges under the cited sections were framed. The accused challenged framing of charges by way of revision, which was dismissed by the Fifth Additional Sessions Judge, Indore, by an order dated September 18, 1991 (Criminal Revision No. 252 of 1990). This petition followed, challenging prosecution of all petitioners and framing of charges.
Legal Issues Presented
- Whether all partners of a firm (including so-called "sleeping partners") can be prosecuted under sections 276B and 278B of the Income-tax Act without the prosecution averring and proving which person(s) was in charge of, and responsible to, the firm for the conduct of its business at the relevant time.
- Whether, once a company/firm is prosecuted under section 278B (which deems certain persons guilty), the burden immediately shifts to each accused partner/director to prove that the offence was committed without his knowledge or that he exercised all due diligence to prevent it, or whether that burden arises only after the prosecution establishes the condition that the accused was in charge of and responsible for the business.
Arguments of the Parties
Petitioners' Arguments
- All partners of the firm, including sleeping partners, have been made accused; sleeping partners were not in charge of the business and therefore cannot be criminally convicted.
- Because this is a criminal prosecution, it is for the prosecution to show which partners were in charge of the business; absent such averment and proof, the sleeping partners cannot be prosecuted.
Union of India (Respondent) Arguments
- The statutory deeming provision treats a company as including a firm and its partners; therefore partners have been rightly made accused along with the firm.
- The proviso to section 278B places on the accused the burden to prove that the offence was committed without his knowledge or that he exercised all due diligence to prevent it; accordingly accused must establish this defence.
- The accused have themselves suggested in cross-examination that they or any of them were not in charge of or responsible to the company for the conduct of business (an apparent concession relied on by the Union).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sham Sundar v. State of Haryana, [1990] 67 Comp Cas 1; AIR 1989 SC 1982 | Emphasises that partners who are not in charge of the firm's day-to-day business (sleeping partners, admitted partners for benefit, minors, ladies admitted for benefit) should not be prosecuted without proof that they were in charge and responsible for conduct of business. The proviso to the deeming provision obliges the accused to prove absence of knowledge or exercise of due diligence only after the prosecution establishes the requisite condition that the accused was in charge and responsible. | The court relied on these observations to hold that the prosecution must first prove who was in charge and responsible; prosecution of sleeping partners without such proof is contrary to principle and must be quashed. |
| Jasbir Singh v. ITO, (1987) 168 ITR 770 (Punjab & Haryana High Court) | Held that where there is no allegation that partners were in charge of the firm's affairs and where returns/verifications were not signed by the partners, such partners are not liable to be prosecuted under provisions akin to section 277. | Cited to support the proposition that prosecutions against partners not shown to be in charge or to have signed returns may be quashed. |
| Murari Lal v. ITO, (1985) 154 ITR 227 (Punjab & Haryana High Court) | Held that complaints against partners who were not in charge of the business and had not signed statements/grounds could be quashed. | Cited to reinforce the principle that partners not involved in conduct of business should not be prosecuted where the prosecution does not allege or prove their responsibility for the firm's conduct. |
Court's Reasoning and Analysis
The court commenced with a textual reading of section 278B of the Income-tax Act (quoted in full in the opinion) and framed the relevant interpretive approach: penal provisions must be strictly construed and the standard of proof in criminal cases is proof beyond reasonable doubt, unlike civil cases. The court noted that criminal law does not recognise vicarious liability except where the statute specifically provides for it.
Applying these principles, the court held that section 278B should be read to require the prosecution, in the first instance, to aver and prove that a particular person was "in charge of, and was responsible to, the company for the conduct of the business" at the time the offence was committed. Only after the prosecution establishes that requisite condition does the burden shift, under the proviso, to the accused to prove lack of knowledge or exercise of due diligence.
The court relied on the Supreme Court's observations in Sham Sundar v. State of Haryana for the proposition that it would be unjust to require sleeping partners (or partners not participating in the firm's day-to-day affairs) to prove their innocence where the prosecution has not established that they were in charge. The court also referred to decisions of the Punjab & Haryana High Court (Jasbir Singh and Murari Lal) holding that prosecutions against partners who did not sign returns or who were not shown to be in charge should be quashed.
Turning to the facts, the court observed that the Department's complaint by itself did not ipso facto identify who was in charge of the firm's business. However, documentary evidence produced in the trial (identified as documents P-6 to P-10 in the record) showed that K. B. Shah (accused-petitioner No. 3 / K. Shah) had signed the documents and returns on behalf of the firm, and notices were also signed by him. On that basis the court concluded that K. B. Shah was in fact in charge of and responsible for the conduct of the firm's business and was rightly prosecuted.
Conversely, the court found that the other named petitioners (Smt. Sitaben, Shantiben, Rasiklal, Kirtibhai, Rajnikant and Bharatkumar) appeared to be sleeping partners who had nothing to do with the conduct of the business, and there was no material to show they were in charge or responsible. Accordingly, continuing their prosecution would be inconsistent with the legal principles outlined above.
The court further observed that if, during the course of trial, the parties (including the Income-tax Department) cannot show that any other person(s) were in charge and responsible, cognizance against such person(s) can still be taken later under section 319 CrPC if the trial discloses their culpability; the present quashing order does not preclude such later action if an offence is disclosed.
Holding and Implications
Holding: The court quashed the prosecution and framing of charges against the following petitioners: Smt. Sitaben (wife of Bhogilal Shah), Shantiben (wife of Premchand Shah), Rasiklal (son of Premchand Shah), Kirtibhai (son of Bhogilal Shah), Rajnikant (son of Kantilal Shah) and Bharatkumar (son of Bhogilal Shah). The prosecution and framing of charges against the firm (accused No. 1) and K. B. Shah (identified in the record as an accused and the person shown to be in charge) shall continue.
Implications and direct effects:
- The listed partners whose prosecutions were quashed are discharged from the criminal proceedings presently pending; proceedings against them stand quashed.
- The firm (company-equivalent) and K. B. Shah remain subject to prosecution under sections 276B and 278B; they were directed to appear before the Magistrate, Economic Offences, Indore, on February 10, 1994.
- The quashing order does not prevent the trial court from taking cognizance under section 319 CrPC at a later stage if evidence during trial discloses that other person(s) were in charge and responsible for the conduct of the business and thus culpable; the quashing will not adversely affect such later cognizance.
- This petition under section 482, Criminal Procedure Code, has been directed against framing of charges under sections 276B and 278B of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), against all the petitioners with a further prayer for quashing the proceedings.
It is not in dispute that accused No. 1 is a firm and accused Nos. 2 to 8 are its partners. They are carrying on the business of purchases and sale of black steel tubes, PVC pipes, G. I. steel tubes and allied products. The firm submitted a return of income for the year 1984-85, on July 28, 1984, declaring an income of Rs. 98,240 and further furnished particulars of interest and credit. Rupees 12,617 were credited to Messrs. Precision Tubes and Rs. 7,845 were credited to Messrs. Jotindra Steel and Tubes Ltd., but the petitioners failed to deduct tax out of these amounts. This was brought to their notice. The contention of the petitioners was that deduction was not by way of interest, but was a penal Batav. The same was not accepted by the Income-tax Department. The petitioners, thereafter, deducted the tax Rs. 4,094 at source, and deposited it after 36 months, though it was also short by Rs. 202.
On these facts, the Income-tax Department filed a complaint that the accused-petitioners have committed an offence under sections 276B and 278B of the Income-tax Act, 1961. During the trial, one witness, Radhavallabh Goswami, Assistant Commissioner of Income-tax, was examined and thereafter charges under the aforesaid sections were directed to be framed. The accused-petitioners preferred a revision against the charge. The same was dismissed by the Fifth Additional Sessions Judge, Indore, vide order dated September 18, 1991, passed in Criminal Revision No. 252 of 1990.
Now, this petition has been filed challenging the prosecution of the accused-petitioners including framing of charges.
The contention of learned counsel for the petitioners is that all the partners of the firm including the so-called sleeping partners have also been made accused in the case. Since they were not in charge of the business, they cannot be convicted. Hence, the prosecution is bad. The second contention of learned counsel for the petitioners is that since this is a criminal prosecution, it is for the prosecution to show as to how many partners were in charge of the business and in the absence of such averment and proof they cannot be prosecuted.
As against this the contention of learned counsel for the Union of India is that not only the person who was in charge of and was responsible to the company for the conduct of the business, but the company as well shall be deemed to be guilty of the offence and, here, company includes firm and its partners as well. As such they have rightly been prosecuted. The second contention of learned counsel for the Union of India is that it is for the person who is accused to prove that the offence was committed without his knowledge or that he has exercised all due diligence to prevent the commission of such offence. It has also been submitted that the accused-petitioners have put to question to the prosecution witness suggesting that they or any of them were not in charge of or responsible to the company for the conduct of business.
Now, therefore, it will have to be seen as to whether all the partners including the so-called sleeping partners can be prosecuted without showing who in charge of, or was responsible to, the company for the conduct of the business and where it is for them subsequently to prove their innocence by proving that the offence has been committed without their knowledge or that they exercised due diligence to prevent the commission of the offence. Section 278B of the Act reads as follows :
"(1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly :
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly :
Explanation. - For the purposes of this section, -
(a) company means a body corporate, and includes -
(i) a firm; and
(ii) an association of persons or a body of individuals whether incorporated or not; and
(b) director, in relation to -
(i) a firm, means a partner in the firm;
(ii) any association of persons or a body of individuals, means any member controlling the affairs thereof."
Though it is true that every partner is liable for the acts of the firm, "the acts of the firm" include any act or omission by all the partners or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm. The same is true of all civil liabilities, but the standard of proof for a criminal liability and under a penal provision shall not be the same as preponderance of probability is the rule of civil law while proof beyond reasonable doubt is the rule of criminal law. Therefore, penal provisions must be strictly construed. It may also be noted here that there is no vicarious liability in criminal law unless the statute or the law specifically provides for the same.
Learned counsel for the Union of India failed to show any specific provision regarding vicarious liability to the extent that all the partners of the firm or the shareholders of the company shall be held responsible for the offence. The provisions of section 278B of the Act are, therefore, required to be interpreted in this background. A plain reading of section goes to show that it is for the prosecution in the first instance to demonstrate by averment and proof that the person was in charge of, and was responsible to, the company for the conduct of the business of the company and, therefore, while the company may be deemed to be guilty of offence, so far as the partners or directors are concerned, only those persons can be prosecuted who are in charge of and responsible to the company for the conduct of its business.
A similar point, though in a case under the Essential commodities Act, arose before their Lordships of the Supreme Court. Section 10 of the Essential Commodities Act, reads as follows :
"10. Offences by companies. - (1) If the person contravening an order made under section 3 is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly :
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the contravention took place without his knowledge or that he had exercised all due diligence to prevent such contravention.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary, or other officer of the company such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation. - For the purposes of this section, -
(a) company means any body corporate, and includes a firm or other association of individuals; and
(b) director in relation to a firm means a partner in the firm."
The provisions of section 278B and Section 10 of the Essential Commodities Act, 1955, are in pari materia and are the same. The following observations of their Lordships in the case of Sham Sundar v. State of Haryana [1990] 67 Comp Cas 1; AIR 1989 SC 1982 is relevant for the decision of this case which reads as follow (at page 1984 of AIR 1989 SC and at page 4 of Comp Cas) :
"It is, therefore, necessary to add an emphatic note of caution in this regard. More often, it is common that some of the partners of a firm may not even be knowing of what is going on day-to-day in the firm. There may be partners, better known as sleeping partners, who are not required to take any part in the business of the firm. There may be ladies and minors who were admitted only for the benefits of partnership. They may not know anything about the business of the firm. It would be a travesty of justice to prosecute all the partners and ask them to prove under the proviso to sub-section (1) that the offence was committed without their knowledge. It is significant to note that the obligation of the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was, during the relevant time, an charge of the business. In the absence of any such proof, no partner could be convicted. We, therefore, reject the contention urged by counsel for the State.
The complaint filed by the Income-tax Department ipso facto does not show who was in charge of or responsible for the conduct of the business of the firm. However, the document (P-6) shows that it has been signed by K. Shah, i.e., accused-petitioner No. 3. Similarly, the other documents and return filed by the firm (P-7, P-8, P-9 and P-10) have been signed by accused petitioner No. 3 on behalf of the company, i.e., accused No. 1. The notice has also been signed by Shri K. B. Shah. It is thus clear that Shri K. B. Shah was, in fact, in charge of and responsible for the conduct of business of the firm. He has, therefore, been rightly prosecuted.
Similarly, the respondent-accused No. 1 company has also rightly been prosecuted, but so far as the prosecution of the petitioners Nos. 1, 2, 4, 5, 6, and 7 are concerned, i.e., accused Nos. 3, 5, 6, 7 and 8, it does not appear to be in consonance with the principle of law. It appears that all the others are sleeping partners of the firms and they have got nothing with the conduct of business. In such a situation, they cannot be made criminally liable.
A similar question arose before the Punjab and Haryana High Court in the case of Jasbir Singh v. ITO [1987] 168 ITR 770 and Murari Lal v. ITO [1985] 154 ITR 227 and it was held that there was no allegation to the effect that the partners were in charge of the affairs of the firm or that they were conducting the business of the firm in any manner. The returns and the verification thereof had not been signed by the petitioners and as such the petitioners were not liable to be prosecuted under section 277 of the Act. In the second case the complaints against three other partners who were not in charge of the business and had not signed the statement of grounds were quashed.
In view of the discussion above, the prosecution of and framing of charges against the petitioners, Smt. Sitaben, wife of Bhogilal Shah, Shantiben, wife of Premchand Shah, Rasiklal, son of Premchand Shah, Kirtibhai, son of Bhogilal Shah, Rajnikant, son of Kantilal Shah and Bharatkumar, son of Bhogilal Shah, is had and the same deserves to be quashed and is hereby quashed.
It is further observed that if during the hearing of the case the parties including the Income-tax Department cannot show that any other person or persons were in charge of and responsible to the company for the conduct of the business, cognizance against that person/persons can be taken under section 319 of the Criminal Procedure Code in due course and this quashing would have no adverse effect against taking of the cognizance as per the provisions referred to above, if the offence is disclosed during the trial of the case.
However, the prosecution against the company, and K. B. Shah, i.e., accused Nos. 1 and 4 shall continue. The parties, i.e., (accused Nos. 1 and 4 and prosecutor), are directed to appear before the Magistrate, Economic Offences, Indore, on February 10, 1994.
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