Nilesh Agarwal Vs ITO (Delhi High Court)
Taxman Forgot the Main Culprit! Delhi HC Quashes Case—But Leaves Door Open: Add the Company Try Again
The Delhi High Court delivered a significant judgment in two connected criminal petitions filed by Directors of M/s SNR Buildwell Pvt. Ltd., seeking quashing of prosecution launched under Section 276 of the Income-tax Act. The Department had initiated criminal complaints against the Directors for allegedly transferring a company-owned Audi car to a family member to defeat tax recovery of about ₹4.44 crores. However, the Company itself – which owed the tax & owned the car – was not made an accused in the complaint. The Directors challenged the maintainability of the prosecution on the ground that they were being prosecuted only in their capacity as Directors, based solely on vicarious liability, & in the absence of the Company, such prosecution was legally unsustainable.
The core issue before the High Court was whether Directors alone can be prosecuted when the principal offender – the Company – is not arrayed as an accused. The Court examined Section 278B of the Income-tax Act, which is pari materia to Section 141 of the Negotiable Instruments Act. The provision states that when an offence is committed by a company, the company as well as persons in charge shall be deemed guilty. The Court held that the legislative intent is clear – the company must be prosecuted first, & only then can vicarious liability be extended to its directors. Thus, arraignment of the company is a condition precedent.
