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Smart Summary

Judgment Summary — P.K. Sarin, J.

Factual and Procedural Background

These three cases were filed by the same petitioners against the same opposite parties and were heard together. Each complaint was filed by the Income Tax Officer, Ward 'B', Special Investigation Circle, Patna, alleging that the petitioners attempted to evade income tax by filing returns showing false or low income. A raid allegedly produced account books showing a turnover greater than declared; fresh-return notices were issued under section 143 of the Income Tax Act and assessments were passed at higher income, upheld on appeal.

The complaints charged offences under Sections 276C and 277 of the Income Tax Act and Section 420 of the Indian Penal Code. The petitioners moved in the trial court for discharge on the ground that petitioner No.1 is a partnership firm (which cannot be sentenced to imprisonment) and therefore the partners (petitioners No.2 and 3) could not be prosecuted merely because they were partners. The trial court rejected discharge, observing that there was sufficient ground for framing a charge because complainant's evidence before the charge had been recorded. The petitioners then filed the present applications under Section 482 of the Code of Criminal Procedure for quashing the criminal proceedings (including the cognizance order dated 29.3.1984 and the order dated 23.7.1986 rejecting discharge). The proceedings related to specified case numbers in the Special Court (Economic Offences), Muzaffarpur, later said to be pending before the Special Judge (Economic Offences), Patna.

Legal Issues Presented

  1. Whether the petitioners can be prosecuted under the substituted Section 276C of the Income Tax Act for acts alleged to have been committed before the substitution took effect (i.e., whether the substituted Section 276C (effective 1.10.1975) applies to an act of 30.7.1974).
  2. Whether a partnership firm (petitioner No.1) can be prosecuted and punished under Sections 276C and 277 of the Income Tax Act where imprisonment is a prescribed punishment.
  3. Whether partners (petitioners No.2 and 3) can be proceeded against under provisions such as Section 278B (company/firm liability) in the absence of specific averments in the complaint describing how each partner was in charge of, and responsible for, the conduct of the firm's business at the relevant time.

Arguments of the Parties

Petitioners' Arguments

  • One of the cases relates to an alleged offence on 30.7.1974, prior to the substitution of Section 276C effective 1.10.1975; the earlier Section 276C related solely to failure to furnish returns, whereas the substituted Section 276C criminalises wilful attempts to evade tax—therefore the substituted provision cannot be applied retrospectively to acts of 1974.
  • Petitioner No.1 is a partnership firm and cannot be imprisoned; since Sections 276C and 277 carry imprisonment as part of the sentence, the firm cannot be punished in its name, rendering prosecution against the firm futile.
  • Partners (petitioners No.2 and 3) cannot be prosecuted merely because they are partners; the complaint must contain specific averments showing how each partner was in charge of and responsible for the business (or signatory to verifications), and such specific averments are absent in the complaint and in the evidence recorded before charge.

Prosecution / Trial Court Position (as reflected in the opinion)

  • The trial court refused discharge, observing that there was sufficient ground for framing charge because the complainant's evidence before the charge had been recorded. The opinion does not set out detailed prosecutorial argumentation beyond that observation.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Sham Sundar v. State of Haryana (AIR 1989 S.C. 1982) Penal provisions must be strictly construed; no automatic or vicarious criminal liability of all partners unless statute explicitly creates such liability; the partner must be shown to have been in charge and responsible for the business for liability to attach. The court followed this dictum to hold that partners cannot be prosecuted merely because they are partners; the complaint must contain specific averments showing each partner's responsibility for the firm's business.
Tmt. Thangalakshmi v. Income-Tax Officer [(1994) 205 I.T.R. 176 (Madras)] Complaint must specifically aver that a partner was in charge of and responsible for the conduct of the firm's business; mere reproduction of statutory words is insufficient. The court relied on this decision to require specific averments in the complaint and found such averments absent here for petitioners No.2 and 3.
Mahar Chand Om Prakash v. Income-Tax Officer [(1994) 209 I.T.R. 494 (P&H)] Where a firm is prosecuted for filing an erroneous return, a partner against whom there is no specific allegation cannot be held liable. The court treated this as supportive authority for the principle that partners without specific allegations cannot be held liable; it reinforced the petitioners' contention.
Parameet Singh Sawney v. Dinesh Verma & Another [(1998) 169 I.T.R. 5 (Delhi)] Mere reproduction of statutory wording (e.g., section akin to 278B) in the complaint does not satisfy the requirement; complaint must indicate how a particular partner was in charge and responsible. The court relied on this authority to reinforce the requirement for factual particulars in the complaint as to each partner's role; found those particulars missing here.
Dunlop India Ltd. v. Arun Chandra Sinha [(1995) 211 I.T.R. 79 (Calcutta)] Proceedings under Section 277 of the Income-Tax Act cannot be initiated against a company because imprisonment is a compulsory punishment under that section and a company cannot be sent to prison; the court cannot impose only a fine where statute prescribes imprisonment. The court applied this principle to the partnership firm (petitioner No.1), holding the prosecution against the firm to be a futile exercise because imprisonment cannot be imposed on the firm.

Court's Reasoning and Analysis

The court proceeded in a structured analytical sequence:

  1. Joinder and common hearing: The three cases involved common questions of law and were heard together.
  2. Temporal application of penal provision (Section 276C): The court compared the text of the pre-1.10.1975 Section 276C (punishing failure to furnish returns) with the substituted Section 276C (effective 1.10.1975) (punishing wilful attempts to evade tax). Because one complaint referred to an act dated 30.7.1974 (before substitution), the court held that the substituted Section 276C could not be applied to that alleged act; criminal liability under the substituted provision arises only after it came into force. Thus, prosecution under substituted Section 276C for the 1974 act was impermissible.
  3. Application to remaining cases: The other two complaints involved dates after 1.10.1975, so liability under the substituted Section 276C could be maintained in those cases only if the ingredients of the offence were made out.
  4. Firm/partner liability and requirement of specific averments: The court analysed statutory provisions (including Section 278B) and relevant authorities (Sham Sundar, Tmt. Thangalakshmi, Mahar Chand Om Prakash, Parameet Singh Sawney) to conclude that criminal liability of partners is not automatically vicarious; for a partner to be made liable the complaint must contain specific averments showing how the partner was in charge of, and responsible for, the conduct of the business at the relevant time. Mere recital of statutory language or bald assertions that specific persons were in charge is insufficient.
  5. Application of that principle to the record: The court examined the complaint and the complainant's evidence recorded before charge and found no specific averments or evidence identifying the particular role of petitioners No.2 and 3 (for example, who signed verifications of returns or who delivered a statement known or believed to be false). Consequently, there was no basis to proceed against petitioners No.2 and 3 under Sections 276C or 277.
  6. Firm cannot be sentenced to imprisonment: Invoking Dunlop India Ltd., the court held that prosecution of the partnership firm (petitioner No.1) under Sections 276C and 277—which carry imprisonment—would be futile because a firm is not a legal entity that can be imprisoned; accordingly a prosecution that can result only in an impossible sentence is improper.
  7. Exercise of inherent jurisdiction under Section 482 CrPC: Considering the foregoing defects (temporal inapplicability in one case, absence of requisite averments against partners, and futility of prosecution against the firm), the court concluded that the proceedings were illegal and amounted to an abuse of process; it therefore exercised its power under Section 482 CrPC to quash the entire criminal proceedings, including orders taking cognizance and rejecting discharge.

Holding and Implications

HOLDING: The court quashed the criminal proceedings in Cases No. 332(M)/84, Tr. No. 241/86; 331(M)/84, Tr. No. 240/86; and 330(M)/84, Tr. No. 238/86 (Muzaffarpur Court, now pending before the Special Judge (Economic Offences), Patna), including the order taking cognizance and the order rejecting the petition for discharge, by exercising its powers under Section 482 of the Code of Criminal Procedure.

Implications:

  • The complaint in respect of the alleged act of 30.7.1974 could not sustain prosecution under the substituted Section 276C (effective 1.10.1975) because the offence defined by the substituted provision did not exist at the time of the act.
  • The partnership firm (petitioner No.1) cannot be validly prosecuted under Sections 276C and 277 where imprisonment is a prescribed punishment, because a firm cannot be sentenced to imprisonment; such prosecution is a futile exercise.
  • Partners (petitioners No.2 and 3) cannot be proceeded against merely because they are partners. In the absence of specific averments in the complaint showing how each partner was in charge of and responsible for the conduct of the business (or who signed verifications), they cannot be held liable under provisions like Section 278B or Sections 276C/277. The court found those averments and supporting evidence absent here and therefore held that proceedings against them were improper.
  • No broader or novel legal principle was declared beyond the application of the cited authorities to the facts: the decision effected the direct quashing of the proceedings and related orders in these cases.

Note: This summary is based exclusively on the content of the provided opinion and does not add or infer facts or legal propositions beyond what the opinion itself states.

Show full summary ...

    M/S Quality, A Registered Partnership Firm v. Md. Ejaz

    P.K Sarin, J.:— These three cases have been filed by the same petitioners against the same opposite parties. As common question of law arises, the three applications have been heard together and are being disposed of by this common judgment.

    2. It appears that a complaint (Annexure-2) in each of the case was filed by the Income Tax Officer, Ward ‘B’, Special Investigation Circle, Patna, against the petitioners making allegations that they have tried to evade the income tax by filing returns showing false and low income. It was alleged that a raid was conducted at the premises of the petitioners and some account books were seized, which revealed that the turnover of the petitioners' business was much larger than shown in the income tax return. Accordingly, proceedings were initiated and then the petitioners were issued notice to file fresh return under section 143 of the Income Tax Act. Ultimately assessment order was passed assessing the petitioners at higher income than shown in the earlier income tax returns. Assessment order was upheld upto appellate stage. The complaint had been filed against the petitioners for committing offences punishable under sections 276C and 277 of the Income Tax Act and Section 420 of the Indian Penal Code. An application was filed on behalf of the petitioners before the learned trial court for discharging then on the ground that petitioner no. 1 is a firm and it cannot be punished with sentence of imprisonment as provided under the Income Tax Act under those sections. It was further asserted that as the firm cannot be prosecuted and sentenced, petitioner no. 2 and 3, who are partners of the petitioners no. 1 firm would also be not liable to be prosecuted and punished. The learned trial court rejected the said application with the observation that there is sufficient ground for framing of charge, as the complainant's evidence before the charge had already been recorded. Feeling aggrieved the petitioners have filed the present applications under section 482 of the Code of Criminal Procedure for quashing the entire criminal proceedings including the cognizance order dated 29.3.1984 and the order dated 23.7.1986 rejecting the petition of the petitioners for discharge. The criminal proceedings against the petitioners in Cases No. 332(M)/94, Tr. No. 241/86, 331(M)94, Tr. No. 240/86 and 330(M) 84,Tr. No. 236/86 were pending in the Special Court (Economic Offences), Muzaffarpur. The learned counsel for the petitioners has stated that the cases are now pending an the court of Special Judge (Economic Offences), Patna.

    3. It has been contended by the learned counsel for the petitioners that case No. 332/(R)84, Tr. No. 241/86 is in respect of offence committed on 30.7.1974 He has referred to the date of occurrence as given in the complaint (Annexure-2). It is contended that the present Section 276C of the Income Tax Act (hereinafter referred to as ‘the Act’) was substituted in place of original Section 276C by Taxation Laws (Amendment) Act, 1975, with effect from 1.10.1975 and it is pointed out that section 276C as it stood from the date of offence of the case in 1974 related to the offence in respect of failure to furnish return of income, while the present Section 276C substituted with effect from 1.10.1975 is an respect of an offence regarding wilful attempt to evade tax etc.

    4. I find the said contention to carry force. The relevant part of the earlier Section 276C was as follows:

    “276C. Failure to furnish returns of income.—If a person wilfully fails to furnish in due time the return of income which he is required to furnish under sub-section (1) of section 139 or by notice given under sub-section (2) of section 139 or section 148 he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at a rate which shall not be less than four rupees or more than ten rupees for every day during which the default continues, or with both…”

    5. The present Section 276C, which was substituted with effect from 1.10.1975 runs as follows:

    “276C. (1) If a person wilfully attempts in any manner whatsover to evade any tax, penalty or interest chargeable or imposable under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable,

    (i) in a case where the amount sought to be evaded 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 imprisonemnt for a term which shall not be less than three months but which may extend to three years and with fine.

    (2) If a person wilfully attempts in any manner whatsoever to evade the payment of any tax, penalty or interest under this Act, he shall, without prejudice to any penalty that may be imposable on him under any other provision of this Act, be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and shall, in the discretion of the court, also be liable to fine.

    Explanation.—For the purpose of this section, a wilful attempt to evade any tax, penalty or interest charegable or imposable under this Act or the payment thereof shall include a case where any person—

    (i) has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement; or

    (ii) makes or causes to be made any false entry or statement in such books of account or other documents; or

    (iii) wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or

    (iv) causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof.”

    6. Thus, it is evident that the offence punishable under Section 276C before 1.10.1975 was on failure to file return, while the offence punishable under the present section 276C, which becomes effective since 1.10.1975, is in respect of wilful attempt to evade tax etc. The complaint has been filed in the year 1984. A person could not be convicted under the present Section 276C of the Act in respect of an offence committed before 1.10.1975 If an act is not an offence earlier but is made an offence subsequently, the subsequent creation of liability for such act would only be an offence after the date when the offence has been created by the statute. I agree with the contention of the learned counsel for the petitioners that the petitioners could not be prosecuted for the offence under Section 276C in respect of an act done on 30.7.1974

    7. However such circumstance exists only in respect of Complaint Case No. 332(M)/84 and in the remaining two cases the date of offence is after 1.10.1975 Therefore, the complaint could be maintainable in these two cases for punishment of offence under section 276C, if ingredients of offence are made out.

    8. The next contention of the learned counsel for the petitioners is that the other offence, which the petitioners were said to have committed, is alleged to be punishable under Section 277 of the Act, which relates to the false verification made in the statement of return filed earlier or for submitting false account. It is contended that the petitioner no. 1 is a partnership firm and it cannot be sentenced with imprisonment. It is pointed out that the sentence provided for the offence under Sections 276C and 277 of the Act are sentences of imprisonment with fine.

    9. I agree with the contention that the petitioner no. 1 being a partnership firm cannot be punished in its name. Liability, if any, would be only of its partners. The Act has made specific provision in respect of offence by the companies, which include partnership firm as well. Under Section 278B it has been provided that where an offence under the 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. By the proviso to such provisions it has been provided that nothing contained therein shall render any such person liable to such 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. In the complaint there is bald statement that petitioners no. 2 and 3 are partners of the petitioners no. 1 and each of them are in charge of the conduct of the business of the firm and responsible for the day to day business. It has been contended by the learned counsel for the petitioners that merely such bald statement would not be sufficient, as the law requires that it should be specifically covered that in what manner the particular person was responsible and was conducting the business of the company.

    10. The learned counsel for the petitioners has placed reliance on a decision of the Apex Court in the case of Sham Sundar v. State of Haryana (AIR 1989 S.C 1982), wherein the provision of section 10 of the Essential Commodities Act, which was pari materia with the provision of section 278B of the Act was considered. The Apex Court held that it is true that under the Indian Partnership Act a ‘firm’ or ‘partnership’ is not a legal entity but is merely an association of persons to carry on business and is only a collective name of the petitioners carrying on business in partnership. It was further observed that each partner is a representative of other partners and each partner is an agent as well as a principal. However, it was observed for the purpose of criminal liability that the penal provision must be strictly construed and there is no vicarious liability in the criminal law unless the statute takes it also within its fold. It was held that section 10 of the Essential Commodities Act does not provide for such liability and does not make all the partners liable for the offence whether they do business or not. Then the Apex Court made observations that there may be situation whether some of the partners may not be even knowing what was going on day to day in the firm and there may be ladies and minors, who were admitted for the benefit of the partnership and they might not be knowing anything about the business. It was observed that:

    “……It would be a travesty of justice to prosecute all 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 for 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 in charge of the business. In the absence of any such proof, no partner could be convicted….”

    11. Following the dictum of the Apex Court the Madras High Court in the case of TMT. Thangalakshmi v. Income-Tax Officer [(1994) 205 I.T.R 176] while considering the provision of Section 273B of the Act held that there must be specific averments in the complaint to the effect that the partner of the firm at the time the offence was committed was in charge of, and was responsible for, the conduct of the business of the firm and particulars regarding conduct of and responsibility should be stated in the complaint, in order to make him liable for the offence and in its absence no partner could be convicted. It was observed that the complaint is bound to provide indication, though not evidence, as to in what manner a particular partner of the firm was in charge of and responsible for the conduct of business and merely reproduction of the words of the section is not enough. In that case the Court quashed the proceedings in respect of one of the accused in absence of specific averments regarding specific overt acts alleged against him.

    12. The learned counsel for the petitioners has placed reliance on a decision of the Punjab and Haryana High Court in the case of Mahar Chand Om Prakash v. Income-Tax Officer [(1994) 209 I.T.R 494]. In the said case it has been held that where a firm is prosecuted for filing an erroneous return, a partner against whom there is no specific allegation, cannot be held liable. Relying on this observation it has been contended that none of the petitioners can be held liable without any specific allegation for filing erroneous or false return. The said decision supports the petitioners contention.

    13. The learned counsel for the petitioners has next placed reliance on a decision of the Delhi High Court in the case of Parameet Singh Sawney… v. Dinesh Verma & Another… [(1998) 169 I.T.R 5], wherein it has been observed that mere reproduction of the expression in section 278B in the complaint does not meet a requirement of law and the complaint is bound to provide indication, though not evidence, as to in what manner a particular partner of the firm is supposed to be in charge of and responsible for the conduct of the business.

    14. Considering the principles laid in the case laws cited above, I am of the opinion that petitioners no. 2 and 3 could not have been proceeded against in the absence of any averment in the complaint as to in what manner each of them was responsible to the company or responsible for the conduct of the business of the company. The evidence adduced by the complainant before charge also does not show as to what is the specific role of each of the partners or in what manner they were responsible to the company for the conduct of the business to the company or that who was in charge of the business when the offence was committed. In absence of such averments the learned trial court ought not to have taken cognizance and ought not to have proceeded against petitioners no. 2 and 3. Petitioners no. 2 and 3 could not be prosecuted merely because they happened to be partners of the partnership firm, unless it is alleged by specific averments as to in what manner they were responsible for the conduct of the business of the partnership firm. There is no averment in the complaint as to who had signed the verification of the statements contained in the return filed earlier or who had delivered an account of statement, which he knew or believed to be false. It is not clear from the complaint as well as from the evidence before charge as to who had signed the verification in the return. In absence of such averment petitioners no. 2 and 3 could not be proceeded against for the offence under section 277 of the Act. It may be pointed out that the petitioners no. 1 is the partnership firm and it could not by itself sign the verification. The firm must act through some persons and such person might sign the verification.

    15. Petitioner no. 1 is the firm and it could not be punished with sentence of imprisonment and it has been held in the case of Dunlop India Ltd. v. Arun Chandra Sinha [(1995) 211 I.T.R 79 (Calcutta)] that proceedings under section 277 of the income Tax Act cannot be initiated against a company because imprisonment is compulsory punishment for an offence under that section and company cannot be sent to prison nor is it open to a court to impose a sentence of fine and not award any imprisonment if the court finds the company guilty under that section. I agree with the said principles laid down in the said case. I hold that the prosecution against petitioners no. 1 for the offences under Sections 276C and 277 could only be futile exercise when no punishment of imprisonment as provided under the said sections could be imposed on petitioner no. 1, which is not even legal entity.

    16. Considering the entire facts and circumstances of the case and in view of the discussions made above, in my opinion taking cognizance against the petitioners and passing the impugned order rejecting application for discharge of the petitioners and the entire criminal proceedings pending against the petitioners on the basis of the complaint filed by the Income Tax Officer are illegal and it will be abuse of the process of the court, if further proceedings are allowed to continue in the case. No useful purpose would be served if the prosecution continues. It appears to be a fit case for exercise of the power of the court under section 482 of the Code of Criminal Procedure to quash the entire criminal proceedings including the order taking cognizance and the order rejecting the petition for discharge.

    17. Accordingly, the criminal proceedings in Cases No. 332(M)84, Tr. No. 241/86. 331(M)84, Tr. No. 240/86 and 330(M)84, Tr. No. 238/86 of the Muzaffarpur Court, now pending in the court of Special Judge (Economic Offences), Patna are quashed including the order taking cognizance and the order rejecting the petition for discharge.

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    Comments

    M/S Quality, A Registered Partnership Firm v. Md. Ejaz
    (Nov 26, 1998)