Facts of the Case

The petitions were filed by Nilesh Agarwal and Rakesh Agarwal seeking quashing of Complaint Case Nos. 3067/2020 and 3068/2020 titled “ITO v. Nilesh Agarwal” and “ITO v. Rakesh Agarwal”, along with summoning orders dated 06.06.2024 passed by the learned ACMM (Special Acts), Central District, Tis Hazari Courts, New Delhi. The prosecution alleged that M/s SNR Buildwell Pvt. Ltd. failed to discharge income-tax liabilities for Assessment Years 2014–15, 2015–16 and 2016–17, resulting in outstanding tax dues of ₹4,44,82,912. During recovery proceedings, it was alleged that the company, through its Director Rakesh Agarwal, transferred an Audi car owned by the company to his daughter-in-law without adequate consideration. The Department treated the transfer as void under Section 281 of the Income-tax Act and initiated prosecution under Section 276 against the Directors. Notably, the company itself was not arrayed as an accused in the complaints.

Issues Involved

Whether Directors can be prosecuted under the Income-tax Act in the absence of the company being impleaded as an accused, whether Section 278B mandates arraignment of the company as a condition precedent for fastening vicarious criminal liability on Directors, and whether continuation of prosecution against Directors alone amounts to abuse of process of law.

Petitioner’s Arguments

The petitioners contended that the prosecution was fundamentally flawed as the company, which was the principal alleged offender, had not been impleaded as an accused. It was argued that the allegations were entirely premised on acts and liabilities of the company and that the petitioners were arraigned only in their capacity as Directors. Reliance was placed on Section 278B of the Income-tax Act and authoritative precedents including Aneeta Hada v. Godfather Travels & Tours, Sharad Kumar Sanghi v. Sangita Rane, Sushil Sethi v. State of Arunachal Pradesh, and Dayle De’Souza v. Union of India to submit that arraignment of the company is a sine qua non for prosecution of Directors. It was further argued that reliance on Section 281 was misconceived in light of the Supreme Court judgment in TRO v. Gangadhar Vishwanath Ranade, which held that a Tax Recovery Officer has no jurisdiction to declare a transfer void under Section 281.

Respondent’s Arguments

The Revenue opposed the petitions contending that the omission to array the company as an accused was a curable technical defect and that prosecution against Directors was maintainable. Reliance was placed on decisions such as UP Pollution Control Board v. Modi Distillery, S.R. Kumar v. S. Sunaad Raghuram, and Bansal Milk Chilling Centre v. Rana Milk Food Pvt. Ltd. to argue that amendment of complaints could cure such defects. It was also submitted that post-amendment of Section 281, civil and criminal proceedings could proceed in parallel.

Court Order / Findings

The Delhi High Court held that the core issue was whether Directors alone could be prosecuted when the company, being the principal offender, was not arraigned as an accused. The Court analysed Section 278B of the Income-tax Act and held that it creates a deeming fiction whereby both the company and persons in charge are deemed guilty, making arraignment of the company mandatory. The Court observed that the provision is pari materia to Section 141 of the Negotiable Instruments Act and that jurisprudence under that provision squarely applies. Relying on the settled law laid down in Aneeta Hada and subsequent decisions, the Court held that omission to implead the company is not a mere technical defect but goes to the root of jurisdiction. The Court found that the complaints and show cause notices clearly established that the petitioners were being prosecuted only in their capacity as Directors on the basis of vicarious liability. Consequently, continuation of prosecution without impleading the company was held to be contrary to law and an abuse of process.

Important Clarification

The Court clarified that while the criminal complaints and summoning orders were liable to be quashed for non-impleadment of the company, the judgment would not preclude the Income Tax Department from pursuing other remedies in accordance with law, if otherwise permissible.

Final Outcome

The petitions were allowed. The summoning orders dated 06.06.2024 passed by the learned ACMM (Special Acts), Central District, Tis Hazari Courts, New Delhi were set aside. Complaint Case No. 3067/2020 titled “ITO v. Nilesh Agarwal” and Complaint Case No. 3068/2020 titled “ITO v. Rakesh Agarwal”, along with all proceedings emanating therefrom, were quashed. All pending applications were disposed of accordingly.

Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769505580_NILESHAGARWALVsINCOMETAXOFFICEITO.pdf

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