In a significant judgment reinforcing the principle of corporate liability, the Delhi High Court has ruled that a company must be made a party to criminal proceedings before its directors can be prosecuted under the Income Tax Act, 1961. The Court held that omission to implead the company is not a mere technical defect but a fundamental jurisdictional flaw that renders prosecution against its directors unsustainable.
The ruling came in a case where the Income Tax Department initiated prosecution against the directors of M/s SNR Buildwell Pvt. Ltd. for allegedly transferring a company-owned asset to a relative without consideration, purportedly to defeat tax recovery proceedings. However, the company itself was not named as an accused in the complaint. Citing the Supreme Court’s landmark decision in Aneeta Hada v. Godfather Travels & Tours Pvt. Ltd. (2012), the Delhi High Court quashed the proceedings, observing that vicarious liability under Section 278B of the Act arises only when the company, as the principal offender, is arraigned as an accused.
This judgment provides critical clarity on the scope of prosecution under the Income Tax Act and serves as an important reminder that directors cannot be made scapegoats for offences attributable to the company unless statutory prerequisites are fulfilled.
Facts
- The Income Tax Department alleged that SNR Buildwell Pvt. Ltd. (the Company) had outstanding tax liabilities for assessment years 2014-15, 2015-16, 2016-17.
- During pendency of recovery, it was found that the Company, via its Director (Rakesh Agarwal), transferred an Audi car in favour of his daughter-in-law without adequate consideration.
- The Department treated this transfer as void under Section 281 of the Income Tax Act, 1961, and proceeded to prosecute the Directors under Section 276 of the Act (for removal, concealment, transfer or delivery of property to thwart tax recovery)
- Importantly, the complaint was filed only against the Directors, and the Company itself was not arrayed as a party / accused.
Procedural History & Issue
- The Directors challenged the complaint and the summoning order on the ground that in absence of impleading the Company, prosecution against them was unsustainable.
- The Trial Court rejected that contention and proceeded.
- The case was taken up by the Delhi High Court under the power of quashing (Section 482 CrPC / Section 528 BNSS.
- The principal legal question before the High Court was: Can the Directors be prosecuted in isolation (without the Company being made a party)?
Holding of the Delhi High Court
- The High Court held that the omission to implead the Company as an accused is not a mere technical defect but goes to the root of jurisdiction.
- The Court emphasized that Section 278B (a deeming provision) of the Income Tax Act provides that when an offence is committed by a Company, the “company as well as every person in charge” shall be deemed guilty. The Court interpreted this to mean that the Company must first be prosecuted; only then vicarious liability may be extended to its officers.
- The High Court placed reliance on Aneeta Hada v. Godfather Travels & Tours (2012, 5 SCC 661), wherein the Supreme Court held that in vicarious liability contexts, the Company must be impleaded as an accused before its officers can be prosecuted.
- Accordingly, the High Court quashed the complaint proceedings against the Directors (i.e. refused to allow the prosecution to proceed) for lack of maintainability.
Thus, in short, the Delhi High Court established that a Company must be made a party in prosecutions under the Income Tax Act before its directors can be prosecuted — failing which, the prosecution is held to be invalid / an abuse of process.
Legal Context & Implications
Statutory Basis: Section 278B and Vicarious Liability
- Section 278B, Income Tax Act, 1961 is a deeming provision: when an offence is committed by a Company, the Company and “every person in charge of, and responsible to the Company for the conduct of its business” are deemed guilty.
- This sets up a regime of vicarious liability (i.e., liability by virtue of office), but such liability is contingent on proving that the Company committed the offence.
- The logic is: the underlying “offence” must first be attributed to the Company itself; only then may liability be extended to officers.
Precedents & Judicial Principle
- The Supreme Court decision in Aneeta Hada is pivotal: it held that in proceedings under a vicarious liability provision (e.g. Section 141 NI Act, analogous to 278B), a complaint against directors alone without impleading the Company is impermissible.
- Other High Court and Tribunal jurisprudence have similarly held that mere label “directors” is insufficient; the complaint must allege and show how the director was ‘in charge of’ or ‘responsible for’ day-to-day business, had consent or connivance, etc.
- In older cases involving TDS default (Section 276B), courts have insisted on service of a notice under Section 2(35)(b) (treating a person as principal officer) before prosecuting directors who are not by default principal officers.
Recent Extension: Section 276 (Transfer etc.)
- The Agarwal case is significant in that it applies the same principle (must implead Company first) to prosecutions under Section 276 (removal, concealment, transfer of assets to thwart tax recovery), not just only in TDS cases.
- The High Court’s decision indicates that this principle is not limited to TDS prosecutions but more broadly to prosecutions under the Act where vicarious liability is invoked.
Practical Consequences & Caveats
- Any complaint/prosecution against a director under Income Tax Act, invoking vicarious liability (via 278B), should include the Company as an accused; omission could lead to quashing.
- The complaint should also contain detailed averments showing how the director was in charge / responsible, or had connivance or neglect, especially in relation to the alleged act.
- The ruling strengthens the safeguards for directors — preventing them from being prosecuted in isolation for acts attributable to the Company.
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However, whether this ruling will be followed by other High Courts or the Supreme Court remains to be seen; also, in cases where statutes differ in wording, the same principle may not apply identically.