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The Indian Partnership Act, 1932
Section 2 in The Code Of Criminal Procedure, 1973
Section 2 in The Indian Partnership Act, 1932
The Code Of Criminal Procedure, 1973
M.R. Pratap vs V.M. Muthukrishnan, Ito Central ... on 29 April, 1992

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Madras High Court
Income Tax Officer & Anr. vs Dinesh K. Shah & Ors. on 12 August, 1996
Equivalent citations: (1997) 138 CTR Mad 297
Author: A R Lakshmanan

ORDER

A. R. LAKSHMANAN, J. :

The ITO, Headquarters, TDS, and the ITO, Salaries Circle, Madras, have preferred three complaints before the Addl. Chief Metropolitan Magistrate, (Economic Offences I) Madras-8, against the respondents herein under ss. 276B and 276B r/w s. 278B of the IT Act, 1961 (hereinafter referred to as the Act) for their failure to deduct income-tax at source from the interest amounts paid to various persons as per s. 194A of the Act. The 1st respondent is the firm and the 2nd respondent is the partner of the 1st respondent firm.

2. The 1st respondent-company in EOCC Nos. 232 to 360 of 1987 (Crl. R. C. No. 417 of 1987) furnished its return of income, which was signed by the 2nd respondent, in the form of trading, P&L a/c and balance sheet for the accounting year 30th Sept., 1982 (asst. yr. 1983-84) on 30th Dec., 1985. In the statement accompanying the return, the firm claims to have paid interest to the extent of Rs. 6,64,565-98 to various parties. Of these, there were payments over Rs. 1,000 in aggregate during the financial year in respect of 68 parties. The respondents have failed to deduct tax of Rs. 2,400, on the interest credited to Sri Finance Corporation on various dates. Since the 1st respondent had failed to deduct the tax at source as per the provisions of s. 194A of the Act, show cause notice under s. 276B of the Act was issued on 31st Oct., 1986 calling for the assessees explanation for non-deduction of tax at source under s. 194A of the Act. There was no response from the firm. For the failure on the part of the 1st respondent-firm to deduct tax at source from the amount of interest paid to the creditors and thereafter to remit the same within seven days from the last day of the month in which deduction was made or within two months of the expiration of the month in which the date of crediting to the parties, amount falls to the credit of the Government of Indias account as stipulated in r. 30(1)(b) of the IT Rules, 1962, which is without reasonable cause or excuse, the Department seeks to prosecute the 1st respondent-firm under s. 276B of the Act. The 2nd respondent being the managing partner of the 1st respondent-firm at the material time, is responsible for the conduct of the business of the firm, and has committed the offence under s. 276B r/w s. 278B of the Act. Therefore, the above complaint was filed requesting the trial Magistrate to take the complaint on file, issue process to the accused/respondents and deal with them in accordance with law.

3. The 1st accused/1st respondent in CC Nos. 361 and 362 of 1987 on the file of the Addl. Chief Metropolitan Magistrate (Economic Offences-I), Madras-8 (Crl. R. C. No. 415 of 1987) is a partnership firm carrying on the business of marketing quality eyewares and the 2nd accused, who is its partner, has signed the firms annual return in Form 24, under s. 206 of the Act. For the asst. yr. 1986-87, relevant for the financial year ended 31st March, 1986, the firm filed an annual return in Form No. 24 under s. 206 of the Act on 21st April, 1986. It also furnished the particulars in Form No. 24. According to the particulars furnished, even though the employees had a taxable income, tax was not deducted at source in accordance with the provisions of s. 192 of the Act. Therefore, a letter was issued on 17th Feb., 1987 by the complainant to the assessee-firm requiring them to furnish monthly remittance particulars. The assessee in its reply dt. 20th Feb., 1987 has stated that since the annual income under this head does not exceed the minimum amount liable to tax, the monthly remittance particulars in Form No. 24 are shown as Nil. It is stated that the failure on the part of the firm to deduct tax at source under s. 192 of the Act and to remit the same within the time stipulated is an offence punishable under s. 276B of the Act. The 2nd accused/respondent being the partner of the 1st accused firm who had signed its annual return in Form No. 24 and answerable to the 1st accused firm for the conduct of the business of the firm is equally liable under s. 276B r/w s. 278B of the Act.

4. The 1st accused in CC Nos. 268 to 291 of 1987 on the file of the Addl. Chief Metropolitan Magistrate (Economic Offence I) Madras-8 is the firm functioning at Madras and accused 2 and 3 respondents 1 and 2 are the partners, who are responsible for the conduct of the business of the firm. They filed the return for the year ended on 31st March, 1980 and trial final accounts in the form of trading, P&L a/c and balance sheet. In the statement of interest paid account, the firm had claimed to have paid interest to the extent of Rs. 99,000 to eight persons. It is stated that the accused have delayed the remittance of the tax deducted at source to Government of Indias account from the interest. The firm remitted the TDS amount after a delay of nearly two months. Therefore, summons under s. 131 of the Act were issued to the assessee on 13th Nov., 1986 asking them to appear on 21st Nov., 1986 with books of accounts for the years ended 31st March, 1980 to 31st March, 1983. On 19th Dec., 1986, the assessee filed a letter dt. 12th Dec., 1986 relating to the asst. yr. 1980-81 along with the particulars of interest paid, TDS paid, etc. The assessee in their explanation had stated that all the depositors were already on the list of assessee and due to misapprehension, the depositors themselves paid advance tax on these interest payments. It is therefore, stated that the failure on the part of the firm to deduct tax at source from the amount of interest paid to the creditors and thereafter remit the same within the time stipulated is without reasonable cause or excuse, and as such, the 1st accused/firm has committed the offence punishable under s. 276B of the Act and accused 2 and 3/respondents have committed the offence punishable under s. 276B r/w s. 278B of the Act.

5. The learned trial Magistrate heard the learned special public prosecutor for IT Department on the question of maintainability of the complaints against the 2nd accused (managing partner) without statutory notice under s. 2(35)(b) of the Act treating the 2nd accused as principal officer of the firm. The following point was formulated by the learned magistrate for determination :

"Whether, without statutory notice under s. 2(35)(b) of the IT Act, cognizance can be taken of the offence under s. 276B r/w s. 278B of the IT Act against the 2nd accused, the managing partner of the firm".

6. It was argued before the learned magistrate on behalf of the Department that under s. 2(35)(b) of the Act, since the principal officer includes agent and since a partner under the Indian Partnership Act is an agent for the business of the firm, no notice under s. 2(35)(b) of the Act to treat such partner as principal officer of the firm is necessary. Rejecting the said contention, the learned magistrate held that there is a legal lacuna in not issuing notice under s. 2(35)(b) of the Act to the 2nd accused, who is a partner of the 1st accused firm, and who is sought to be made liable by virtue of s. 278B of the Act and because of that lacuna, complaint cannot be taken cognizance of against the 2nd accused. Therefore, rejecting the contention of the Department, the magistrate held that the managing partner of a firm will not come under the meaning agent in s. 2(35)(b) of the Act and that the complaints are not legally sustainable against the 2nd accused for non-issue of statutory notice under s. 2(35)(b) of the Act, to make him liable under s. 278B of the Act. Thus, the complaints were taken on file only against the 1st accused-firm.

7. Aggrieved against the order of the Addl. Chief Metropolitan Magistrate (Economic Offences I) Madras-8, the ITO, Headquarters, TDS, and salary circle have filed the three revisions under ss. 397 and 401 of the CrPC.

8. The matter came up before E. J. Bellie, J, on 10th March, 1994. Before the learned judge, the learned counsel for the 1st accused/firm cited two decisions of this Court reported in Shital N. Shah vs. ITO (1990) LW (Crl.) 478 by T. S. Arunachalam, J, as he then was) and G. Anantharamiah vs. ITO 1992, LW (Crl.) 173 by K. A. Swamidurai, J, wherein it has been held that for prosecution of a partner of a firm for the offence of non-deduction of tax at source from the interest payable by the firm, a notice under s. 2(35)(b) of the Act is a precondition. E. J. Bellie, J. felt that the said decisions are not correct and that no question of notice under s. 2(35)(b) of the Act to a partner arises at all. The learned judge has also felt that it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the purview of s. 2(35) of the Act. Therefore, the learned judge thought it necessary to refer the matter to a Division Bench to have an authoritative binding judgment. That is how the matter is posted before this Bench.

9. The following is the order of reference by E. J. Bellie, J. :

"This Criminal Revision Petition case is by the ITO, Headquarters, TDS, Office of the CIT, Madras-34, hereinafter referred to as the ITO against an order passed by the Addl. Chief Metropolitan Magistrate, Economic Offences I, Egmore, Madras, in Crl. MP No. 242 of 1987 refusing to take cognizance of an offence complained against the 2nd accused in the case.

Para 2. The complaint was filed by the ITO against the 1st accused-firm and against the 2nd accused its managing partner under s. 276B r/w s. 278B of the IT Act for an offence of failure to deduct income-tax at source from the interest payable by the partnership firm.

Para 3. Before the case was taken cognizance, the learned magistrate suo motu observing that as regards the 2nd accused, the ITO should have issued statutory notice to him under s. 2(35)(b) of the IT Act and such a notice having not been issued, the prosecution is incompetent against him, he took cognizance of the offence only against the 1st accused. Aggrieved by this order the ITO has come up with this criminal revision case.

Para 4. Mr. K. Ramasamy, learned counsel appearing for the revision petitioner/ITO contends that the order of the Court below is erroneous since no notice under s. 2(35)(b) to 2nd accused is warranted.

Para 5. Mr. V. Gopinath, learned counsel appearing for the 2nd respondent/managing partner of the 1st respondent-firm cites two decisions of this Court i.e., (i) Shital N. Shah & Ors. vs. ITO 1990 LW (Crl) 478) and (ii) G. Anantharamiah vs. ITO 1992 LW (Crl) 173 wherein as ordered by the magistrate, it has been held that for prosecution of a partner of a firm for the offence of non-deduction of tax at source from the interest payable by the firm, a notice under s. 2(35)(b) is a pre-condition.

Para 6. On a careful analysis of the relevant sections in the IT Act, I am clearly able to see that the said decisions of this Court are not correct and no question of notice under s. 2(35)(b) to a partner arises at all.

Para 7. Now s. 194A of the IT Act provides for deduction of income-tax from interest payable. Sec. 200 provides for payment of the deducted amount to the Government. These two sections cast a duty for deduction and payment of tax upon a person responsible for paying interest. Here it would be relevant to note that as per s. 2(31) a person includes a firm. Under s. 204, the meaning of person responsible for paying has been given. In this section, there are three clauses in respect of interest is cl. (iii). As per this clause, the person responsible for paying is the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.

Para 8. Now in our case, the payer is undoubtedly a partnership firm. Company has been defined in s. 2(17) of the Act.Firm has been defined in s. 2(23). Therefore, a firm cannot be said to be a company. They are in nature different from each other. Hence when the sub-cl. (iii), reads, If the payer is a company itself including the principal officer thereof, it refers only to a company defined under s. 2(17) and not to a firm defined under s. 2(23).

Para 9. Sec. 276B is a penal section for failure to deduct or pay tax. As per this section, if a person fails to deduct, or after deducting fails to pay the tax, as required by or under the provisions of sub-s. (9) of s. 80E or Chapter XVII-B, he shall be punishable. It is seen above that the person responsible for paying in our case is the firm itself. Therefore, for non-deduction of tax from interest payable, the firm is punishable.

Para 10. Under s. 278B 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. In this section itself, there is an explanation according to which for the purpose of this section, a company included a firm. As regards the firm, the partners thereof are the persons who are in charge of the firm and they are responsible for the conduct of the business of the firm. Therefore, under s. 278B for the offence committed by the firm, the partners are deemed to be liable. Hence if the allegation that tax has not been deducted from the interest payable by the firm is true, then under s. 278B along with the firm, the partners also would have committed an offence. This being the case, no notice under s. 2(35)(b) arises at all.

Para 11. Firm does not come within the purview of s. 2(35). This section relates to the local authority or a company or any other public body or any AOP or and BOI Here it must be noticed that under s. 2(31) person includes :

(i) An individual

(ii) An HUF

(iii) A company

(iv) A firm

(v) An AOP or BOI whether incorporated or not

(vi) A local authority, and

(vii) Artificial juridical person not falling within any of the preceding sub-clauses. Company, Public Body or an AOP or BOI mentioned in s. 2(35) all come within the meaning of person under s. 2(31) and they are besides a firm. From this, it is clear that a firm is not within the ambit of s. 2(35). Therefore, as said above, no question of giving any notice under s. 2(35) arises in the case of a firm.

Para 12. In the abovesaid two judgments of this Court, it is discernible that there is an error committed in having taken the view that a partner of a firm comes within the purview of s. 2(35). In this position, I think it is necessary to refer the matter to a Division Bench to have an authoritative binding judgment.

Para 13. Therefore, the office is directed to place the matter before My Lord the Honble Chief Justice to post the matter before a Division Bench or Full Bench".

10. It is also to be noticed that the 2nd accused in EOCC Nos. 292 to 360 of 1987/2nd respondent in Crl. RC No. 415 of 1987 filed Crl. MP No. 7697 of 1987 under s. 482 of the Cr. PC to direct the Registry to issue notice to him for an opportunity being given to be heard on the question at issue. On 5th Aug., 1987 notice was ordered and Mr. V. Gopinath, Advocate, entered appearance on his behalf.

11. We have heard Mr. K. Ramaswami, learned special public prosecutor for the IT Department/petitioner and Ms. Nappinnai, learned counsel for the respondents. She also argued the case on behalf of the managing partners of the 1st accused firm.

12. It is contended by the learned special public prosecutor Mr. K. Ramaswami as follows :

(a) The learned magistrate has misdirected himself on the question of law relating to s. 2(35) of the Act and has failed to note that the principal officer defined under s. 2(35)(b) of the Act relates to only the obligations under ss. 194 and 204 of the Act and they relate to a company and not to a firm.

(b) The Court below ought to have held that the 1st accused, a partnership firm, is not a company and, therefore, there is no question of any principal officer being appointed or notices being served under s. 2(35) of the Act. As such, the Court below has completely erred in applying s. 2(35)(b) of the Act to s. 278B of the Act just because s. 278B includes a firm.

(c) The Court below had failed to note that the decision reported in M. R. Pratap vs. V. M. Muthuramalingam, ITO (1984) 149 ITR 798 (Mad) applies only to a company and its employees and does not apply to a firm.

(d) The Court below had failed to note that the words company and director have been given wider connotation only for the purpose of the other sections of the Act.

13. Countering the arguments of the learned special public prosecutor, Ms. Nappinnai, learned counsel appearing for the respondents in all these cases contended that the complaints suffered from fundamental legal defects of non-issuance of the statutory notice under s. 2(35) of the Act to the 2nd respondent/partner, treating him as the principal officer, so as to bring him within the meaning of s. 278B of the Act. It is further submitted that s. 276B of the Act, with which the 2nd respondent is sought to be charged, prescribes stringent punishment of rigorous imprisonment which may extend to three years and fine, and in any event, it shall be for a minimum period of three months. The penal provisions of the Act have to be strictly observed and non-observance of the statutory procedure is illegal and any proceedings that are sought to be taken are vitiated and hence unsustainable.

14. The following decisions were cited before us :

Shital N. Shah vs. ITO, (supra) G. Anantharamiah vs. ITO (supra) M. R. Pratap vs. V. M. Muthuramalingam, (supra) M. R. Pratap vs. V. M. Muthukrishnan, ITO (1992) 196 ITR 1 (SC) by the Supreme Court.

15. The points that arise for consideration in these revisions are :

"(i) Whether the 2nd accused in his capacity as the partner is liable for prosecution under s. 276B r/w s. 278B of the Act ? and

(2) Whether notice under s. 2(35)(b) of the Act to a partner is a precondition ?"

16. Sec. 2(17) of the Act defines company, which runs thus :

"2(17).Company means -

(i) any Indian company, or

(ii) any body corporate incorporated by or under the laws of a country outside India, or

(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian IT Act, 1922 (11 of 1922), or which is or was assessable or was assessed under....

this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or

(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company;

Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before 1st April, 1971, or on or after that date) as may be specified in the declaration".

17. Sec. 2(23) of the Act defines firm. It runs thus;

"2(23).Firm, partner and partnership have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932) but the expression partner shall also include any person who, being a minor has been admitted to the benefits of partnership".

Two essential conditions necessary to form the relation of partnership are (i) there should be an agreement between persons to share the profits as well as the losses of the business; and (ii) the business must be carried on by all or any of them acting for all, within the meaning of the definition of partnership under s. 4 of the Indian Partnership Act. The principle of agency has been held to be implicit in the second requirement.

18. Sec. 2(31) of the Act defines person as follows :

"2(31) person includes -

(i) an individual

(ii) an HUF,

(iii) a company,

(iv) a firm

(v) an AOP or a BOI, whether incorporated or not;

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses;"

19. Sec. 2(35) of the Act defines principal officer as follows :

"2(35) Principal officer, used with reference to a local authority or a company or any other public body or any AOP or any BOI, means -

(a) the secretary, treasurer, manager or agent of the authority, company, association or body or

(b) any person connected with the management or administration of the local authority, company, association or body upon whom the AO has served a notice of his intention of treating him as the principal officer thereof".

20. Sec. 192 of the Act deals with deduction at source in the case of salaried people. Sec. 194A of the Act deals with interest other than interest on securities. Sec. 200 of the Act deals with duty of person deducting tax. When the tax has been deducted at source, it does not lie at the risk of the Revenue and unless the tax so deducted is deposited or paid, the person who has deducted, continues to be responsible. A default in payment of tax deducted at source to the credit of the Central Government attracts penalty under s. 201(1) r/w s. 221, interest under s. 201(1A) and prosecution under s. 276B of the Act. The relevant rule for this section is r. 30 of the IT Rules, 1962, which provides for time and mode of payment to Government account of tax deducted at source.

21. Sec. 201(1A) of the Act provides for payment of simple interest at 15 per cent per annum if any such person, principal officer or company, does not deduct or after deducting fails to pay the tax as required by or under the Act. Sec. 221(1) of the Act provides for penalty in case of default in payment of tax.

22. Sec. 276B of the Act reads as follows :

"276B. Failure to pay the tax deducted at source. - If a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions or Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine."

23. The above section was substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989. Prior to its substitution, s. 276B as inserted by the Finance Act, 1968, w.e.f. 1st April, 1968 and later on substituted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st Oct., 1975 and amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 10th Sept., 1986, stood as under.

"276B. Failure to deduct or pay tax. - If a person fails to deduct or after deducting, fails to pay the tax as required by or under the provisions of sub-s. (9) of s. 80E, or Chapter XVII-B, he shall be punishable -

(i) in a case where the amount of tax which he has failed to deduct or pay 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 imprisonment for a term which shall not be less than three months but which may extend to three years and with fine."

24. Under the amended provisions, s. 276B of the Act now provides for prosecution only in respect of a failure to pay to the Government the tax deducted at source. The offence of failure to deduct tax at source under the provisions of Chapter XVII-B now attracts penalty under s. 271(c) of the Act. Reference to s. 80E has been omitted consequent on the omission of s. 80E. A uniform punishment has been provided for the offences, which is rigorous imprisonment for at least three months extending upto seven years and fine. Even under the old section, the burden of proving the existence of reasonable cause or excuse was shifted to the assessee w.e.f. from 10th Sept., 1986. Under the new section also, the position continues to be the same. Prior to 1st April, 1989, the breach or contravention which attracted prosecution under this section related to the failure of a person without reasonable cause or excuse, to deduct, or, after deducting to fail to pay, the tax as required by or under the provisions of sub-s. (9) of s. 80E or Chapter XVII-B of the Act. It provided that a person failing without reasonable cause or excuse to deduct or after deducting the tax as required by the provisions hereinbefore mentioned, shall be punishable with rigorous imprisonment for a term which may extend to six months and shall also be liable to fine, which shall not be less than a sum calculated at 15 per cent per annum on the amount of such tax from the date on which such tax was deducted, to the date on which such tax was actually paid. An imposition of rigorous imprisonment at least for a fraction of six months was imperative under the provision. In fixing the amount of fine, the Court may take into account circumstances such as the recurrent nature of the defaults and the interest lost by the Government due to the failure.

25. Under s. 278B, a limited company as well as 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.

26. Sec. 278B of the Act runs thus :

"278B. (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-s. (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 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 AOP or a BOI whether incorporated or not; and

(b) director, in relation to -

(i) a firm, means a partner in the firm;

(ii) any AOP or a BOI, means any member controlling the affairs thereof."

This section, which was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st Oct., 1975, does not apply to an offence committed prior to that date. A person in charge of the business is the person who is in overall control of the day-to-day business.

27. The effect of this section is to make every person who was in charge of and was responsible to the company for the conduct of the business of the company at the time the offence was committed, apart from the managing director, who signed the return, liable to be proceeded against and punished. The position earlier was that only the principal officer (which term included the managing director in case of a company) could be prosecuted and punished. Under s. 278B of the Act, the basic requirement is that the prosecution must prove that the persons concerned were in charge of, and were responsible to, the company or the firm as the case may be for the conduct of the business of the company or the firm at the time when the offence was committed. It is only then that they can be vicariously prosecuted along with the company or the firm as the case may be. The proviso to sub-s. (1) will come into operation only after the initial onus cast on the prosecution under the main section gets discharged. In view of the provisions of this section, non-issuance of individual notices to any of the partners is of no consequence, rather not necessary to issue any such notice. Sec. 2(35) of the Act as pointed out earlier defines the expression "principal officer" only with reference to a local authority or a company or any other public body or any AoP or any BoI. The Act adopts the definition of the terms "firm", "partner", and "partnership" as contained in the Indian Partnership Act, 1932. Each partner is an agent of another. Consequently, all the partners are jointly and severally liable to the acts of one or other of the partners of the firm and are also entitled to share the profits and losses. (vide the decision reported in Geethanjali Mills Ltd. vs. Thiruvengadathan (1989) 179 ITR 558 (Mad).

28. A consistent view has been expressed by Courts that a company being a juridical person cannot be made liable for corporeal punishment like imprisonment. It is also held that if the contravention is by a company, the persons who may be held guilty and punished are (i) the company itself, (ii) 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 (in short, the person in charge); and (iii) any director, manager, secretary or other officer of the company with whose consent or connivance or acts of neglect attributable to whom the offence had been committed, i.e., an officer of the company. Any one or more or all of them may be prosecuted and punished. The person in charge may also be prosecuted.

29. It is seen from the Expln. to s. 278B of the Act that the partner of a firm or, as the case may be, a member of other association, is also liable to be convicted for an offence committed by the firm or other association if he is in charge of and is responsible to the firm or other association for the conduct of the business of the firm or association or if it is found that the offence is committed with the consent or connivance or is attributable to any neglect on the part of the partner or member concerned. The expression a person in charge and responsible for the conduct of the affairs of a company appearing in sub-s. (1) of s. 278B would also refer to a firm or other association in view of the Expln. to s. 278B. The test, therefore, to be applied to a director in charge of a company must also necessarily apply to the partner of a firm or, as the case may be, member of other association, in charge of a business. In that context, a person in charge must mean a person in overall control of the day-to-day business of the company or firm or other association.

30. Sec. 4 and 18 of the Indian Partnership Act, 1932 should also be beneficially noticed in this context. Sec. 4 reads as follows :

"4. Definition of partnership, partner, firm and firm name, - Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name."

31. The components of the definition of partnership consists of (a) persons, (b) a business carried on by all of them or any of them acting for all, and (c) an agreement between those persons to carry on such business and to share its profits. It is the relationship between those persons which constitutes the partnership. In other words, the following important elements must be there in order to establish partnership. (a) there must be an agreement entered into by all parties concerned, (b) the agreement must be to share profits of business, and (c) the business must be carried on by all or any of the persons concerned acting for all.

32. Sec. 18 of the Indian Partnership Act runs as follows :

"18. Partner to be agent of the firm -

Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm."

33. Sec. 18 of the Indian Partnership Act makes a partner the agent of the firm for the purposes of the business of the firm. It is thus clear that a partner is liable for the acts of the other partners vice versa as principal is liable for the acts of his agent done in the ordinary course of business. The effect of s. 18 is to make every partner as agent of the firm and make him jointly and severally liable for all acts of the firm.

34. In the light of the above discussion and analysis of the relevant sections of the IT Act, and the Indian Partnership Act, we have to see whether the decisions of this Court in 1990 LW (Crl), 478, and 1992 LW (Crl), 173, are correct and whether the notice under s. 2(35)(b) of the Act to a partner is a pre-condition.

35. All the three complaints given by the Department relate to the partnership firms. All of them have been rejected by the magistrate on the ground that the complaints against the partners are not legally sustainable for the non-issue of statutory notice under s. 2(35)(b) of the Act to make them liable under s. 278B of the Act. We have already seen the scope of ss. 194A, 200, 204, 276B and 278B of the Act. Sec. 194A and 200 of the Act cast a duty for deduction and payment of tax upon a person responsible for paying interest.

36. In Shital N. Shah vs. ITO (supra), T. S. Arunachalam, J., as he then was, who decided the case on 27th Aug., 1990, had taken the view that the words "any person who is responsible for paying" found in s. 194A of the Act had to be read in conjunction with s. 204 of the Act, which furnishes the meaning of "person responsible for paying". We are unable to endorse and subscribe to the views of the learned judge in the above case. It is not necessary that prosecution under s. 278B of the Act can be launched only against the company and "its principal officer". There is no warrant to give a restricted meaning to the following expression found in s. 278B of the Act, "Every person who was in charge and was responsible to the company for the conduct of the business of the company at the time when the offence was committed would be liable. Such person, who was in charge of and was responsible to the company and for the conduct of the business may be the "principal officer" as defined in s. 2(35) of the Act or "person responsible for paying".

37. The interpretation placed by the learned judge (T. S. Arunachalam, J., as he then was) is contrary to the express language of s. 278B of the Act. Therefore, any person who at the time the offence was committed was in charge of and was responsible to the company, which includes a firm, for the conduct of the business, can be proceeded against under s. 278B of the Act notwithstanding the fact that the person proceeded against may not be either "principal officer" or "person responsible for paying". The intention of the Parliament is, therefore, not to confine the prosecution under s. 278B of the Act only against the "principal officer" and "person responsible for paying".

38. We also came across another decision of T. S. Arunachalam, J. (as he then was) reported in G. Ramaswami Moopanar vs. E. S. I. Corporation 1990 LW (Crl.), 414 decided on 8th Aug., 1990. The learned judge had considered the question of law as to whether a director of a company or a partner of a firm be prosecuted as a "principal employer" falling within the fold of s. 2(17) of the ESI Act as it stood prior to its amendment by Central Act 29 of 1989, in and by which s. 86A of that Act was introduced in the said Act (Amended w.e.f. 20th Oct., 1989).

39. Sec. 86A of the E. S. I. Act reads as follows :

"86A. Offences by Companies - (1) if the person committing an offence under this Act is 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 person liable to any punishment, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-s. (1), where an offence under this Act has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director or manager, secretary or other officer of the company, such director, manager, secretary or other officer shall 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 -

(i) company means any body corporate and includes a firm or other association of individuals; and

(ii) director in relation to -

(a) a company, other than a firm, means the managing director or a whole time director;

(b) a firm means partner in the firm."

40. On a comparison of s. 86A of the E. S. I. Act with s. 278B of the Act, it is seen that they are verbatim the same. Sec. 86A of the E. S. I. Act has been inserted by the E. S. I. (Amendment) Act 29 of 1989. This provision is analogous to similar provisions contained in various statutes such as Essential Commodities Act, Electricity Act, Prevention of Food Adulteration Act, etc., in which for the offences under such Acts, prosecution can be launched against both natural and artificial persons. It is provided that if a person committing the offence is a company, then, 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 prosecuted against and punished accordingly. The provision to sub-s. (1) safeguards the interest of the persons who can prove that the offence was committed without his knowledge or that he exercised due diligence to prevent such offence. The onus is upon such person to prove any one of the above circumstances and if he so proves, he shall not be liable for punishment.

41. Sub-s. (2) of s. 86A of the E. S. I. Act contains a deeming provision. It states, where an 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 be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. For the purpose of this section, company has been given an extended meaning. It means any body corporate and includes a partnership firm or other association of individuals. This means that "company" will include not only public or private limited companies registered under the Indian Companies Act, but also statutory corporations, partnership firm or any Society registered under the Societies Registration Act or any State Societies Registration Act.

42. In interpreting similar provisions in Drugs and Cosmetics Act, 1940, the Supreme Court in the decision reported in Rajasthan Pharmaceutical Laboratory vs. State of Karnataka AIR 1981 SC 809 : 1981(2) SCR 604, has held that the Director who are not directly in charge of the management of the company cannot be held liable.

43. In this context, we may also beneficially refer to s. 10 of the Essential Commodities Act, 1955. Sec. 10 of the said Act contains similar provisions to s. 86A(1) of the E. S. I. Act.

44. Two things have to be proved viz.,

(i) the company must be charged for the same offence; and (ii) the persons, besides the company sought to be made liable, must be in charge of and responsible to the company for the conduct of the business.

45. While dealing with a similar situation with reference to the provisions of the Prevention of Food Adulteration Act, 1954, the Allahabad High Court in the decision reported in D. K. Jain vs. The State AIR 1965, All 525 held that a reading of s. 17(2) of the Prevention of Food Adulteration Act, makes it obvious that the legislature has taken care to provide that natural persons made vicariously liable for an offence under the Act, committed by a company or anyone of its employees are to be punished only when it is established that they had some nexus with the crime either because of their connivance with it or due to their criminal negligence which had resulted in its commission. The Allahabad High Court has further held that to make a person liable for the offence committed by the company or its salesman, who was physically present on the scene, it must be proved that the offence was committed with his connivance.

46. In the decision reported in G. Ramaswami Moopanar vs. E. S. I. Corporation (supra) T. S. Arunachalam, J., as he then was, had observed as follows :

"By this provision, if a person committing an offence under the Act was a company, it makes 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, liable to be proceeded against and punished. A similar provision regarding vicarious liability, is found in several Acts, for example, the Prevention of Food Adulteration Act, Essential Commodities Act, Indian Explosives Act, Indian Electricity Act, etc. The liability is sought to be fastened only when such person was in charge of and responsible for the conduct of the business of the company at the time when the offence was committed. If such a person were to be prosecuted after satisfying the basic requirement of the section, even then, it would be open to such a person to prove that the offence was committed without his knowledge or he was unable to prevent the commission of the offence in spite of his having exercised all due diligence. It is, therefore, fairly clear that the legislature had taken note of the defence, which may be feasible. On the contrary, if the principal employer fails to pay the contribution he is liable to pay under the Act, the offence is complete and prima facie there appears to be no defence open for him. Therefore, it is possible to hold, that the legislature, when it introduced this welfare legislation, did not intend to punish every partner or every director for non-payment of the contribution, for apart from being directors or partners, they may not have the ultimate control over the affairs of the factory. In that context, it is quite possible, that under s. 2(17) of the Act, the meaning to the word principal employer refers to the owner or the occupier or the manager of the factory if he had been so named. The liability, therefore, in such event, will rest on such person, who has complete control over the affairs of the factory. If the partners and directors were liable to be proceeded against under s. 2(17) of the Act, it appears to my mind, that there was no need for the legislature to introduce s. 86A by Act 29 of 1989, making the company and persons in charge of and responsible for the conduct of the business or the company liable for offence under the Act. A similar provision in s. 278B was introduced in the IT Act, on 1st Oct., 1975."

47. The Delhi High Court while considering the insertion of s. 278B in the IT Act, in the decision reported in Parmeet Singh Sawhney vs. Dinesh Verma 1988 (I) Crimes 153 held as follows :

"Before the introduction of this section (s. 278B) a firm alone could have been proceeded against. Mr. Jolly states that firm includes its partners and they as well could be prosecuted. I must at once point out that Mr. Jolly is labouring under misconception. Under Partnership Act, partners of course will be liable for all the liabilities but we are in a different field. Sec. 278B, which was brought into existence on 1st Oct., 1975 for the first time, made every person connected with the affairs of the company liable for prosecution. The fact of the matter is that earlier to the introduction of s. 278B the partners could not be prosecuted and the firm alone could be prosecuted. The person referred to in s. 276B is in the context of the definition of person as contained in s. 2(31) of the IT Act. Otherwise also, Mr. Sethis contention seems to be strong that in case the partners were to be proceeded against in the absence of s. 278B, there was no need for the legislature to introduce s. 278B as has been done in the year 1975."

48. It may be relevant at this stage to refer to the observations of the Supreme Court in the decision reported in Sham Sundar vs. State of Haryana AIR 1989 SC 1982. While considering the provisions similar to s. 86A of the E. S. I. Act (introduced by Act 29 of 1989), it was stated as follows :-

"But we are concerned with a criminal liability under penal provisions and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Sec. 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not.

It is, therefore, necessary to add an emphatic note or 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 part in the business of the firm. There may be ladies and minors who were admitted for the benefit of partnership. They may not know everything about the business of the firm. It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-s. (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-s. (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."

49. The Supreme Court in M. R. Pratap vs. M. Muthukrishnan, ITO (supra) while affirming the decision of the Madras High Court in M. R. Pratap vs. V. M. Muthukrishnan, ITO (1977) 110 ITR 655 (Mad) stated as follows :

"The word person used in s. 277 of the IT Act, 1961 (as the Act stood prior to its amendment w.e.f. 1st Oct., 1975), refers not only to the assessee but also to the person who has made the false verification in the return on behalf of the assessee. The managing director who verifies the return filed on behalf of the company, which is the assessee, would be the principal officer within the meaning of the definition in s. 2(35). In view of s. 139 r/w s. 140(c), the return has to be signed by the principal officer of the company. A statutory obligation is cast on the principal officer to sign the tax returns filed on behalf of the company. The subsequent amendments made by the Taxation Laws (Amendment) Act, 1975, will not in any way alter the position with regard to the operation of the provisions of the IT Act as against the managing director of a company when he has signed the return in such capacity. The effect of the new s. 278B, inserted by the Amendment Act of 1975, is to make every person connected with the affairs of the company, apart from the managing director who had signed the return, liable to be proceeded against and punished in relation to an offence by the company."

50. S. Natrajan, J., (as he then was) in the decision reported in M. R. Pratap vs. V. M. Muthuramalingam, ITO (supra), held as follows :-

"Sec. 276B of the IT Act, 1961, does not refer to a managing director but only to a person. The definition of person, as contained in s. 2(31), refers to the various categories of assessees who can be treated as persons within the meaning of the IT Act. The principal officer as defined in s. 2(35) will automatically take in the secretary, treasurer, manager or agent of, inter alia, a company but as far as the meaning director is concerned, he can be treated as the principal officer of the company only if the ITO gives notice to him of his intention to treat him as such. Consequently, if anyone connected with the company is not the secretary, treasurer, manager or agent, then he cannot be treated as the principal officer of the company unless the ITO has served a notice on him as envisaged under s. 2(35)(b) of the Act. Sec. 192(1) does not refer to a director or managing director but only to a person responsible for paying income chargeable under the head salaries. Consequently, the managing director of a company cannot be held liable under s. 276B unless the ITO has served a notice on him under s. 2(35)(b) and informed him of his intention to treat him as the principal officer of the company."

51. The decision reported in G. Anantharamiah vs. ITO (supra) was decided by K. Swamidurai, J. In that case, the 1st accused was a partnership firm carrying on business as film exhibitors. The 2nd accused is the managing partner and the 3rd accused was the joint managing partner of the 1st accused firm and the 4th accused was an employee of the 1st accused firm, in charge of financial borrowings, bank transactions, interest payments, etc. The ITO Madras-34, filed a complaint under s. 276B r/w s. 278B of the Act for failure to remit tax deducted at source to the credit of the Govt. of India within the time prescribed under s. 200 of the Act r/w 30(1)(b)(2) of the IT Rules, 1962. The main contention raised by the 4th accused was, that he was not the person responsible to and is in charge of the company for the conduct of the business of the company as well as the company and so, he should not be charged for the alleged offences. The learned judge, after referring to ss. 200, 276B and 278B of the Act, and following the decision in 1990 LW (Crl) 478 (supra) held that the prosecution has failed to prove that the 4th accused is a person responsible for payment of tax deducted to the Government and is also a person in charge of and responsible for paying the said amount. Therefore, the learned judge held that the charge as against the 4th accused under ss. 276B and 278B of the Act is not maintainable.

52. As already seen, T. S. Arunachalam, J., as he then has, was decided two cases reported in 1990 LW (Crl) 414 (supra) on 8th Aug., 1990 and 1990 LW (Crl) 478 (supra) on 27th Aug., 1990. Undoubtedly, the decision in 1990 L. W. (Crl) 414, dt. 8th Aug., 1990, and in particular the passage extracted by us, has not been brought to the notice of the learned judge at the time of hearing of the case reported in 1990 LW (Crl.) 478. It is seen that s. 278B of the Act was introduced only on 1st Oct., 1975. The decision of T. S. Arunachalam, J., as he then was, in 1990 LW (Crl.) 414 (supra) has been rendered after the introduction of s. 86A of the E. S. I. Act, under which persons in charge of and responsible for the conduct of the business are liable for the offence under the Act, and the offence in question in that case had taken place after the introduction of s. 86A of the E. S. I. Act. Though prior to the introduction of s. 86A of the E. S. I. Act, the director of a company and partner of a firm by virtue of being a director or partner is not a "principal employer" as contemplated by s. 2(17) of the E. S. I. Act and, therefore, not personally liable to pay the contribution under the E. S. I. Act. The position came to be altered as pointed out above on the introduction of s. 86A of the E. S. I. Act. Therefore, we find it difficult to subscribe to the view expressed in 1990 LW (Crl)

478.

53. As already seen, s. 276B of the Act provides that if a person fails to pay to the credit of the Central Government the tax deducted at source by him as required by the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. Sec. 278B of the Act deals with offences committed by the companies. The definition company for the purpose of the said section includes a firm. Therefore, the expression company used in s. 278B of the Act has to be understood so as to include a firm. If an offence is committed by a firm, only the person who was in charge of and was responsible to the firm for the conduct of the business of the firm at the time when the offence was committed, as well as the firm shall be proceeded against and punished accordingly. Sub-s. (2) of s. 278B of the Act, which opens with non obstante clause, provides that where an offence under the 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 officers shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Sub-s. (2) of s. 278B of the Act takes away the burden cast on the prosecution by sub-s. (1) thereof, to prove that at the time the offence was committed by a company or a firm, persons against whom the prosecution is launched were in charge of and were responsible to the company or the firm as the case may be for the conduct of the business of the company or the firm. At the same time, sub-s. (2) of s. 278B casts a burden on the prosecution to prove that the offence has been committed with the consent or connivance of, is attributable to any neglect on the part of any director, manager, Secretary or other officer of the company. In such an event, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. In a case falling under sub-s. (2) of s. 278B of the Act, whether the persons prosecuted were in charge of and were responsible for the company for the conduct of the business of the company need not be proved. Such proof is necessary only when the case falls under s. 278B(1) of the Act. In the event the prosecution proves the essential ingredients of s. 278B(1) of the Act, the accused would have a right to prove that the offence was committed (without his knowledge or that he exercised) all due diligence to prevent the commission of such offence. That is the distinction between the two sections.

54. Sec. 204 of the Act enumerates as to who are the "persons responsible for paying" for the purposes of ss. 192, 193, 194, 194A and 194B of the Act. For the purposes of prosecution under s. 278B of the Act, the only requirement is that the person proceeded against should have been in charge of and responsible to the firm and for the conduct of the business of the firm at the time when the offence was committed. It may be that such person may also be "person responsible for paying" as contemplated in s. 204 of the Act or a "principal officer" as defined in s. 2(35) of the Act. It is not as if the prosecution under the section can be launched only against the "principal officer" as defined in s. 2(35) of the Act or against the "person responsible for paying". The person proceeded against for prosecution under s. 278B of the Act should have been in charge of and was responsible to the firm for the conduct of the business of the firm, even though such a person may not satisfy the definition of "principal officer". In other words, it is not as if prosecution is contemplated only against a "principal officer". If that were the intention of the Parliament, then, the language of the section would be different and the section would have stated that the prosecution can be launched only against the "principal officer".

55. In the light of the above discussion, we are of the view, that the order of the Court below is contrary to law. The Court below has misdirected itself on the question of law relating to ss. 2(35) and 2(35)(b) of the Act. On a careful analysis of the relevant sections of the Act and the provisions of the allied Acts and of the decision referred to supra, we are of the view, that the finding of the Court below is not correct. Accordingly, we hold that no question of issuing notice under s. 2(35)(b) of the Act to a partner arises at all. We are unable to subscribe to the views expressed by T. S. Arunachalam, J., as he then was, in Shital N. Shah vs. ITO (supra) and K. Swamidurai, J., in G. Anantharamiah vs. ITO (supra) since the said decisions do not lay down the correct proposition of law. Therefore, in the light of the aforesaid discussion we over-rule both the above decisions. The reference is answered accordingly.

56. For the fore-going reasons, all the revisions are allowed. The orders of the Court below are set aside. The Court below is directed to proceed with the cases in accordance with law and in the light of the observations made in this order.