Facts of the Case

The petitioners, including Rakesh Agarwal, were Directors of M/s SNR Buildwell Pvt. Ltd. The Income Tax Department alleged that the company failed to discharge its 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, acting 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, 1961 and initiated prosecution proceedings under Section 276 of the Act. Sanction for prosecution was granted, and complaints were filed before the trial court against the Directors. Notably, the company itself was not arrayed as an accused. By orders dated 06.06.2024, the trial court rejected the objection regarding maintainability and proceeded to list the matter for framing of notice, leading to the present petitions seeking quashing of the complaints and summoning orders.

Issues Involved

Whether prosecution of Directors alone is maintainable under Section 278B of the Income-tax Act without impleading the company as an accused, whether omission to arraign the company is a curable procedural defect or a jurisdictional infirmity, and whether continuation of such prosecution amounts to abuse of process of law.

Petitioners’ Arguments

The petitioners contended that the prosecution was fundamentally flawed as the alleged offence was attributable to the company, and the Directors were arraigned solely on the basis of vicarious liability. Reliance was placed on Section 278B of the Income-tax Act, which mandates that where an offence is committed by a company, both the company and the persons in charge must be deemed guilty.

The petitioners relied on the Supreme Court judgment in Aneeta Hada v. Godfather Travels & Tours (2012) 5 SCC 661 and subsequent decisions including 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 prosecuting Directors. It was further argued that reliance on Section 281 was misconceived in view of the Supreme Court decision in TRO v. Gangadhar Vishwanath Ranade.

Respondent’s Arguments

The Revenue opposed the petitions contending that omission to implead the company was a mere technical defect curable by amendment and that the Directors had deliberately transferred the company asset to frustrate recovery proceedings. Reliance was placed on decisions such as UP Pollution Control Board v. Modi Distillery and Bansal Milk Chilling Centre to argue that prosecution should not fail on account of procedural lapses. It was further contended that post-amendment of Section 281, parallel civil and criminal proceedings are permissible.

Court Order / Findings

The Delhi High Court identified the core issue as whether Directors alone can be prosecuted when the company, being the principal offender, is not arraigned as an accused. The Court examined Section 278B and held that the legislative intent is clear that the company must first be impleaded, as vicarious liability of Directors arises only upon commission of an offence by the company.

The Court applied the ratio of Aneeta Hada and held that the omission to implead the company is not a mere technical irregularity but goes to the root of jurisdiction. The Court noted that the complaints themselves stated that prosecution was being launched against the petitioners only in their capacity as Directors and that no independent allegations were made against them in their personal capacity. The reliance placed by the Revenue on judgments permitting amendment of complaints was held to be misplaced and incapable of overriding binding Supreme Court precedent.

Important Clarification

The Court clarified that where the offence alleged is attributable to the company, its officers cannot be prosecuted in isolation. Arelying on vicarious liability provisions without impleading the company is impermissible in law and amounts to abuse of process.

Final Outcome

The petitions were allowed. The Delhi High Court set aside the summoning orders dated 06.06.2024 and quashed Complaint Case Nos. 3067/2020 and 3068/2020 titled “ITO v. Nilesh Agarwal” and “ITO v. Rakesh Agarwal”, along with all proceedings emanating therefrom. The Court clarified that the judgment would not preclude the Revenue from pursuing other remedies in accordance with law.

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