Case Law Details
Rakesh Bhailalbhai Gandhi Vs ITO (Bombay High Court)
Summary : The Bombay High Court quashed the criminal proceedings initiated under Sections 276CC and 278B of the Income Tax Act against a former director, holding that he had ceased to be a director before the alleged offence of non-filing of the company’s income tax return arose. The Court examined Form 32 and the Registrar of Companies’ master data, which established that the petitioner’s resignation had been accepted with effect from 30 December 2013. Since the alleged default related to the company’s failure to file its return for Assessment Year 2014-15 within the prescribed period ending on 30 September 2014, the petitioner was not responsible for the company during the relevant period. The Court held that prosecution could not continue against a person who was no longer a director when the cause of action arose. It also rejected the Revenue’s reliance on compounding guidelines, observing that such guidelines apply only where an offence has actually been committed. Proceedings against the remaining accused were allowed to continue.
Core Issue: The principal issue before the Bombay High Court was whether prosecution under sections 276CC read with 278B of the Income-tax Act for failure of a company to file its return of income could be sustained against a former director who had resigned and ceased to hold office before the period during which the default occurred. The Court also considered the scope of vicarious criminal liability under section 278B.
Facts: The petitioner, a former director of M/s Brand Connect Communication (India) Pvt. Ltd., challenged the order of the Additional Chief Metropolitan Magistrate issuing process against him under sections 276CC read with 278B of the Income-tax Act and the revisional order affirming the same. The prosecution alleged that the company had failed to file its return of income for AY 2014-15 within the time prescribed under section 139(1) and had also failed to file a belated return under section 139(4), thereby committing an offence under section 276CC.
The petitioner contended that he had resigned as director with effect from 30.12.2013, as evidenced by Form 32 and the Company Master Data maintained by the Registrar of Companies. Since the alleged default related to the period after the close of FY 2013-14 and up to the due date for filing the return, i.e., 30.09.2014, he was no longer a director when the offence, if any, was committed. The Revenue argued that the issue regarding resignation should be decided during trial and further submitted that the petitioner could avail the remedy of compounding of offences under the CBDT’s compounding guidelines.
Findings of the High Court: The Court closely examined the complaint and found that the prosecution was founded exclusively on the company’s alleged failure to furnish its return of income for AY 2014-15 within the statutory due date under section 139(1). Consequently, the relevant period for determining criminal liability was the period during which the obligation to file the return existed, namely after 31.03.2014 up to 30.09.2014.
The Court noted that Form 32, uploaded with the Registrar of Companies, clearly established that the petitioner’s resignation had been accepted by the Board and that he had ceased to be a director with effect from 30.12.2013. The Company Master Data also described him as a former director from the same date. Therefore, throughout the period during which the alleged default occurred, the petitioner was no longer in charge of or responsible for the affairs of the company.
The Court held that section 278B, which creates vicarious criminal liability for directors and officers of a company, can operate only against persons who were in charge of and responsible for the conduct of the company’s business at the time the offence was committed. Since the petitioner had ceased to be a director before the relevant period, the foundational requirement for invoking section 278B was completely absent.
The Court rejected the Revenue’s contention that the issue should be left to trial, observing that the resignation was conclusively established by undisputed statutory records. Applying the principles laid down by the Supreme Court in State of Haryana v. Bhajan Lal, the Court held that permitting prosecution to continue in such circumstances would amount to an abuse of the process of law.
The Court also rejected the argument based on the CBDT Compounding Guidelines, holding that compounding presupposes the commission of an offence. Since no offence under sections 276CC read with 278B could legally be attributed to the petitioner, the question of seeking compounding did not arise.
Decision: The Bombay High Court allowed the writ petition and quashed the order issuing process as well as the revisional order only qua the petitioner. It held that as the petitioner had ceased to be a director with effect from 30.12.2013, well before the company’s alleged default in filing its return for AY 2014-15, prosecution under sections 276CC read with 278B was not maintainable against him. The criminal proceedings were directed to continue against the remaining accused, and the trial court was requested to dispose of the case expeditiously.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1) In this Petition filed under Article 227 of the Constitution of India, the challenge is to the legality and validity of the order dated 7th March, 2019 passed by learned Additional Chief Metropolitan Magistrate, 38th Court, Ballard Pier, Mumbai below Exhibit 1 in C.C. No. 690/SW/2018 (“Impugned Order”) as also to the order dated 12th August, 2022 passed by the Learned Additional Sessions Judge, Greater Mumbai in Criminal Revision Application No. 1208 of 2019.
2) By the Impugned Order dated 7th March, 2019, the learned Additional Chief Metropolitan Magistrate, by observing that prima facie case is made out against the Accused Nos. 1 to 8 under Section 276CC r/w 278B of the Income Tax Act, 1961 (“the IT Act”) issued process against the Accused Nos. 1 to 5. The Petitioner is Accused No.4.
3) It is the main contention of Mr. Mishra, learned counsel appearing for the Petitioner that as per the case of the Income Tax Department, the Company-M/s. Brand Connect Communication (India) Pvt. Ltd., i.e., Accused No. 1, has not filed the income tax return for the Financial Year 2013-14. Learned Counsel submits that the said financial year ends on 31st March, 2014 and the income tax return is to be filed before 30th September, 2014. To substantiate the said contention, Mr. Mishra has relied on Form 32 of the Companies Act [Pages 85 to 87-Exhibit D] and submitted that the Petitioner has resigned from the directorship of the said Company on 1st September, 2013 and his resignation has been accepted by the Board Resolution dated 30th December, 2013. He also relied on the Company Master Data report available on the website of the Company Registrar. He, therefore, submitted that the Petitioner is not responsible for the said offence as before the end of Financial Year, i.e., 31st March, 2014, and before the due date for filing the income tax return, i.e. 30th September, 2014, he has resigned from the directorship of the Accused No. 1-Company with effect from 30th December, 2013.
4) On the other hand, Mr. Viraaj Bhate, learned counsel appearing for the Respondent No. 1 submits that the learned Additional Sessions Judge has correctly observed that whether the Petitioner has resigned from the directorship of the Company will be decided on the basis of the evidence which has been laid. He further submits that there are various Circulars issued by the Ministry of Finance regarding guidelines of compounding of offences under the IT Act, and therefore, the Petitioner can apply for compounding of offences by complying with the requirements as per the said Circulars. He more particularly, relied on the Circular dated 17th October, 2024 and particularly clause No. 11 of the said circular.
5) Before considering the rival contentions, it is necessary to set out certain factual aspects. The complaint bearing C.C. No. 690/SW/2018 initiated by the Income Tax Department in the Court of Additional Chief Metropolitan Magistrate, Ballard Pier at Mumbai specifically in paragraph No. 3 states that Accused No. 1, i.e., M/s. Brand Connect Communication (India) Pvt. Ltd. has not filed its Return of Income for A.Y. 2014-15 as per the provisions of Section 139(1) of the Income-Tax Act, 1961 and also failed to file belated return u/s. 139(4) of the Income Tax Act, 1961. It is further stated that as the return of income was required to be filed as per Section 139(1) of the IT Act within the prescribed limit and failure of the same resulted into commission of offence under Section 276CC of the IT Act, which provides for punishment by imprisonment for a term of 3 months to 2 years and with fine.
6) Various averments are also set out in the said complaint and it is stated that the accused has been willfully evaded its tax liability and failed to furnish the return of income as required u/s. 139(1) of the IT Act and /or offence punishable u/s. 276CC r/w 278B and 278E of the IT Act. Thus, perusal of the complaint clearly shows that the entire emphasis on the non-filing of the return of income within the stipulated time as per Section 139(1) of the IT Act and which is an offence u/s. 276CC of the IT Act. The allegations are pertaining to the Assessment Year 2014-15, i.e., Financial Year 2013-14.
7) Perusal of the record further shows that Form 32 [Pages 85 to 87- Exhibit D] which has been annexed to the Petition, shows that resignation letter of the Petitioner is dated 1st October, 2013 and the same has been uploaded on the website of the Company Registrar. The said Form 32 which has been uploaded on the website of the Company Registrar shows that the said resignation has been accepted by the Board of Directors by its resolution No. 5 dated 30th December, 2013. The Form 32 also shows that the Petitioner has been ceased to be director of the Company i.e. of the Accused No. 1 with effect from 30th December, 2013.
8) The Petitioner has also produced on record the Company Master Data report available on the website of the Company Registrar wherein the Petitioner’s name is mentioned as former director and it has been specifically stated that he is ceased to be the director with effect from 30th December, 2013. Thus, it is very clear that the period during which the offence is alleged to have been committed, i.e., between 31st March, 2014 and 30th September, 2014, the Petitioner was not the director the Accused No. 1-Company. Thus, following the parameters and the guidelines set out by the Supreme Court in the case of State of Haryana and Others Vs. Bhajan Lal and Others 1992 Supp (1) SCC 335, the Petitioner is entitled for the reliefs.
9) Although, Mr. Bhate, learned counsel appearing for Respondent No. 1 has relied on guidelines in the Circular for compounding of offence under the IT Act, the same will not apply to the Petitioner as the same are the guidelines for compounding of offences, which assumes, that the offence is committed. This is a case where as the Petitioner has resigned and ceased to be the director of the Accused No. 1-Company even before the cause of action has taken place. Thus, there is no offence committed by the Petitioner.
10) Accordingly, the following order is passed :
i. The order dated 7th March, 2019 passed by the learned Additional Chief Metropolitan Magistrate, 38th Court, Ballard Pier, Mumbai below Exhibit 1 in C.C. No. 690/SW/2018 (“Impugned Order”) is quashed and set aside only qua the Petitioner, i.e., Accused No. 4.
ii. In view of above, order dated 12th August, 2022 passed by the Learned Additional Sessions Judge, Greater Mumbai in Criminal Revision Application No. 1208 of 2019 is also quashed and set aside only qua the Petitioner, i.e., Accused No. 4.
iii. It is specifically clarified that the process issued by the learned Additional Chief Metropolitan Magistrate, 38th Court, Ballard Pier, Mumbai below Exhibit 1 in C.C. No. 690/SW/2018 is set aside only qua the Petitioner, i.e., Accused No. 4.
iv. As far as Accused Nos. 1, 2, 3 and 5, the said criminal case bearing C.C. No. 690/SW/2018 shall continue.
v. As the case is of the year 2018, learned Trial Court is requested to dispose of the said proceedings expeditiously.
11) The Writ Petition is disposed of in the aforesaid terms.
Note:
11992 Supp (1) SCC 335
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