1. These two petitions have been presented by the petitioners for quashing the notices and summons issued against them, annexure "P/10-A" to annexure "P/10-E". In the first case, the petitioners have been challenging the prosecution under Section 276DD read with Section 278B of the Income-tax Act, and, in the second case, the petitioners have been challenging their prosecution under Section 276E read with Section 278B of the Income-tax Act, 1961.

2. Both the petitions are being disposed of by this common order. Miscellaneous Criminal Case No. 1987 of 1992 shall be the leading case.

3. The petitioners, in both the petitions, claimed that they are carrying on business as partners in the name and style of Prakash Iron Stores at Lohiya Bazar, Gwalior. They have been dealing in wholesale of iron steel goods. They have been maintaining account books. The petitioners are partners in the firm.

4. Another sister concern of the same family in the name of Santosh Steel Sales at Lohiya Bazar, Gwalior, is also carrying on business as a firm. In that firm, Shekar Jain, Smt. Sharda Devi Jain, Smt. Sushila Jain and Nirmal Jain are the partners.

5. Copies of the partnership deeds of the two firms are annexures "P-1" and "P-2" on record. The above two firms for business convenience had maintained current accounts in the regular course of business for the year 1988-89. The assessment of Prakash Iron Stores was taken up by the respondents. All the records were produced. The proceedings were finally completed on June 22, 1989, and the assessment order was passed, annexure "P-3".

6. The account books of the sister concern, Prakash Iron Stores, were also examined, vide notice dated January 2, 1989, annexure "P-4".

7. The petitioners claimed that the assessing authority of the respondents was fully satisfied with the account books and the action proposed against the firm was finally dropped as evident from the office note. The queries in respect of the current accounts were dropped on June 22, 1989. Later on, respondent No. 4 issued a show-cause notice dated February 14, 1991, to the firm, Prakash Iron Stores, after a gap of about two years for launching prosecution under Sections 276DD and 276E of the Income-tax Act. The petitioners put their representation and prayed for an opportunity of personal hearing. Again a notice dated March 11, 1991, was issued proposing to launch prosecution proceedings again under Sections 276DD and 276E of the Income-tax Act, vide annexures "P/8-A" to "P/8-E". The petitioners submitted their explanations, annexure "P-9".

8. The contentions of the petitioners were not accepted and the respondents launched prosecution of the petitioners and filed a complaint in the Court of the Additional Chief Judicial Magistrate (Economic Offences), Indore (M. P.). The summons were issued on February 18, 1992, to the petitioners to appear on April 20, 1992, copies of which are annexed as annexure "P/10-A" to annexure "P/10-E".

9. The petitioners had already explained their transactions and there was no illegality or irregularity in the same. The petitioners had not committed any irregularity amounting to any offence under the Income-tax Act or under any other law. The loan, deposit, etc., were properly accounted for and the adjustment of amounts amongst the two sister concerns for short periods were fully explained. They did not amount to loan or deposit and no offence was committed by the petitioners. The adjustment of accounts between the two sister concerns does not come within the mischief of Section 269SS of the Income-tax Act. The loan or deposits as alleged by the respondents, were not in contravention of Section 269SS and the petitioners were not liable to be prosecuted.

10. The petitioners further alleged that Section 276DD of the Income-tax Act, 1961, was amended on September 10, 1986, omitting Section 276DD and, therefore, no offence could be alleged against the petitioners. The departmental circulars also make the provisions and the petitioners were not guilty of any such offence.

11. The petitioners further alleged that in the firm, Prakash Iron Stores, there are five partners but it is solely managed and looked after by Shri Ajay Kumar Jain, who is the active partner, petitioner No. 5.

12. The petitioners,, therefore, allege that they were not liable to be prosecuted under any provision of the Income-tax Act and the case instituted before the criminal court was not competent.

13. The respondents contended that the petitioners have committed gross irregularity amounting to an offence punishable under Sections 276DD and 276E of the Income-tax Act. The petitioners have not explained their deposit or loans, etc., in their books of account and the respondents had properly given notices to them for their prosecution. When the respondents were not satisfied from the explanation given by the petitioners, the case was instituted in the criminal court for their prosecution.

14. The respondents further alleged that the court at Indore was fully competent to prosecute and punish the petitioners for the offences alleged and these petitions under Section 482 of the Code of Criminal Procedure were not maintainable here at Gwalior.

15. The preliminary objection regarding territorial jurisdiction of this court was raised in the two cases at the very outset. This question was taken up by this court as a preliminary point and was decided by order dated October 5, 1993, passed by brother Shacheendra Dwivedi J. holding therein that the jurisdiction of this Bench seat was intact to entertain such petitions and this court had powers to pass necessary orders. These petitions were held to be maintainable by order dated October 5, 1993, as referred to above and this order shall form part of the present order in the two cases.

16. I have heard learned counsel for both the parties and perused the record. The two petitions are of identical nature arising out of the same type of transactions.

17. The first point raised at the time of hearing on behalf of the petitioners was that Sections 276DD and 276E were deleted from the Income-tax Act. Both the sections were omitted with effect from April 1, 1989. According to the petitioners, after deletion of the two sections the prosecution against the petitioners could not be launched on February 18, 1992, in the two criminal cases referred to above. The effect of the omission of these sections would be that they never existed and in this view of the matter the prosecution of the petitioners was unwarranted by law. There was no saving clause after omission of these two sections from the Income-tax Act that any incident which occurred prior to the omission could be a basis for prosecution even thereafter.

18. Reliance was placed on the case of Rayala Corporation (P.) Ltd. v. Director of Enforcement, AIR 1970 SC 494. It was held in that case that :

" Prosecution launched on March 17, 1968, after Rule 132A(2) was omitted by the Defence of India Amendment Rules, 1965. Prosecution is illegal."

19. In that case it was held that the omission of a particular section or rule from the statute would be that it never existed.

20. In the case of Gujarat Travancore Agency v. CIT [1989] 177 ITR 455 (SC), it was held that in case of default of the income-tax payer mens rea has to be established.

21. In the case of S. Vaidyanathan, ITO v. Dr. B. Mathuram and Sons [1989] 179 ITR 463 (Mad), it was held that only the managing partner who had submitted the return was liable to face the charge and not other sleeping partners. The same view was taken in the case of Sushila Industries v. Deputy CIT [1992] 198 ITR 332 (Orissa).

22. In the case of Kumari A.B. Shanthi (alias) Vennira Adai Nirmala v. Assistant Director of Inspection, Investigation [1992] 197 ITR 330, the Madras High Court held that in a case of lending and receipt of loan only the borrower is liable to stringent punishment. The lender was not liable.

23. In the case of Smt. Sitaben v. Union of India [1994] 208 ITR 285 (MP), it was held that when there was an offence by a firm punishable under Sections 276B and 278B, the partner who is in charge of or responsible for the conduct of the business of the firm can only be prosecuted, other partners who are not in charge of or responsible for the conduct of the business could not be prosecuted and their prosecution has to be quashed.

24. On this basis learned counsel for the petitioners argued that even if the prosecution was necessary it could be only of the managing partner. Petitioner No. 5, Ajay Jain, is the managing partner of the firm in this case and other persons like Patiram Jain, Om Prakash Jain, Santosh Jain and Vinod Jain are the sleeping partners and they are not liable to such prosecution.

25. The main contention raised in this case on behalf of the petitioners was that the offences enumerated under Sections 276DD and 276E of the Income-tax Act could not attract the facts of the present case. Transactions between the two sister concerns were fully explained to the authorities concerned. The two sections of the Income-tax Act as aforesaid, were already deleted with effect from April 1, 1989, without any saving clause. Since Section 276E of the Income-tax Act was deleted without any saving clause no prosecution could be launched for the offences under that section after the same was deleted and nothing was contained in the Act that the prosecution could continue for the past act of any party. As held in the case of Rayala Corporation, AIR 1970 SC 494, referred above, prosecution for the said offences after deletion of the section itself was illegal and unwarranted by law.

26. The Selective Scrutiny Scheme of the Department of Income-tax had taken the assessment of the year 1988-89 and after perusal of all the records including that of current accounts and books of account of the two firms, the assessment was finally completed on June 22, 1989. Copy of the assessment is filed with the petition as annexure "P-3". The Income-tax Department was fully satisfied and convinced of the bona fides of the transactions between the two sister concerns and the assessment authorities had dropped the proposed action finding that the amounts transferred from one concern to the other being of the same firm were simply to accommodate the emergency needs and were genuine transactions. They did not come under the mischief of Section 269SS or the offences alleged under Sections 276DD and 276E of the Income-tax Act were not attracted and, therefore, the income-tax authorities themselves had concluded their findings dropping the proceedings in favour of the petitioners. It was done by respondent No. 4, the Income-tax Officer, Ward No. 1, Gwalior, with the approval of the Deputy Commissioner of Income-tax, respondent No. 3.

27. Once the proceedings were dropped and the explanations offered by the petitioners were accepted, the same could not be reopened for prosecution of the petitioners after a lapse of two years that the show-cause notices were given to them for the same offences under Sections 276DD and 276E of the Income-tax Act. Detailed explanations were tendered by the two firms and an opportunity of personal hearing was sought, but the respondents did not hear the petitioners at all.

28. In view of the fact that Sections 276DD and 276E of the Income-tax Act were deleted from the Act without any saving clause, prosecution of the petitioners thereafter when already explanations were accepted, was unwarranted and unauthorised by law. The facts of this case are fully covered by the law laid down in the case of Rayala Corporation, AIR 1970 SC 494, referred above.

29. Further, the amount alleged to have been deposited from one sister concern to the other sister concern was simply accommodating adjustment of the accounts and it was not in the shape of loan. This contention of the petitioners was already accepted by the respondents and the proceedings were earlier dropped. Once proceedings were dropped and Section 276DD of the Income-tax Act was already deleted, the same could not be reopened for prosecution of the petitioners. It has also been accepted by the respondents that the transactions made between the two sister concerns were under exceptional circumstances to accommodate the emergency needs of the sister concern for a very short and temporary period. As such, it did not amount to a loan or deposit as defined under Section 269SS of the Income-tax Act. Therefore, the proceedings initiated under Sections 276DD and 276E of the Income-tax Act were against the provisions of law.

30. The assessment order dated June 22, 1989, annexure "P-3", clearly indicates in para. 1 that the amount to the extent of Rs. 10,000 deposited was a genuine transaction and the prosecution under Section 276DD be not launched. The firms were already assessed by this assessment order and prosecution was not authorised since penalties were proposed to be imposed. Once assessment was made final and the contentions of the petitioners were accepted and also in view of the fact that the penal sections were already deleted, launching of prosecution of the petitioners in the year 1992 was, therefore, wholly unwarranted by law. Therefore, the contentions of the petitioners are accepted and their prosecution has to be quashed.

31. Again reverting back to the question of territorial jurisdiction of this court, this point was already decided by Brother Shacheendra Dwivedi J., on October 5, 1993, which is a part of this order. That order became final as none of the parties filed any appeal or revision against that order either before a larger Bench or before the Supreme Court. Therefore, this point has been finally decided that this court had jurisdiction to entertain petitions under Section 482 of the Criminal Procedure Code, in respect of a case pending in the Court of Judicial Magistrate First Class, Economic Offences, Indore. It was also pointed out that the Court of Economic Offences was established only at Indore at that time and the respondents initiated proceedings there at Indore itself also in respect of cases of Gwalior, where the cause of action had arisen.

32. As such, without further commenting on the facts and circumstances of the case, it is settled for good that so far territorial jurisdiction of this Bench is concerned, this Bench at Gwalior had jurisdiction to entertain these petitions.

33. In view of the discussions made above and findings recorded, these petitions deserve to be allowed. These two petitions under Section 482 of the Criminal Procedure Code, are allowed and the notices/summons issued against the petitioner, vide annexures "P/10-A" to "P/10-E" and the prosecution proceedings launched against the petitioners are hereby quashed. Criminal cases as against the petitioners in the present form shall not continue and be deemed to have been dropped.

34. Let a copy of this order be placed in the record of Miscellaneous Criminal Case No. 1988 of 1992, which shall govern disposal of that case too.