Detecon Indian Project Office vs Income-Tax Officer And Others.
1994 Latest Caselaw 378 Del

JUDGMENT

JASPAL SINGH J. - The petitioner is a non-resident (foreign) company incorporated in Germany, having its registered office at Bonn, Germany. It has its project office in New Delhi which is regularly assessed to income-tax. In January, 1986, it entered into an agreement with President of India through the Ministry of Transport, Department of Railways, by which in agreed to act through its New Delhi project office as consultants and to provide consultancy services with regard to architecture and planning for integrated communication network for the Indian Railways. Since for the purpose of executing the said agreement, the petitioner-company required the services of expatriate employees, the question arose with regard to income-tax payable by them. Clause 29 of the agreement took care of that. The said clause reads as under :

"I. R. (Indian Railways) shall take full responsibility for payment of all taxes for which consultant or his expatriate employees are and/or shall be liable under the Indian Income-tax Act and other connected enactments only and not for any other tax. I. R. shall not withhold any payments to the consultant on this account."

It may, at this stage, be noticed that in respect of the salaries payable to the expatriate technicians, their appointment was approved under section 10 (6) (viia) of the Income-tax Act by the Ministry of Railways.

It so happened that the income-tax authorities levied interest on the petitioner-company under section 201 (1A) of the Act for not deducting tax under section 192 out of the salary and perquisites paid. The petitioner took the matter to the Income-tax Appellate Tribunal, Delhi Bench, challenging the order and in support principally relied upon clause 29 of the agreement as reproduced above. The Tribunal, by its order of September 27, 1991, held section 201 (1A) not attracted and while quashing the order observed as under :

"A reading of the above clause (clause 29) clearly implies that the Indian Railways takes care of all the tax liabilities of the foreign company. This means the Indian Railways would be the agent for the non-resident company. Indian Railways have, therefore, the bounden duty of ensuring compliance with Indian Income-tax Act in regard to payment of various salaries and other related matters which as per the agreement have to be paid by them to the employees of the German company after taking into account the exemptions as have been allowed under section 10 (6) (viia). This clause further has been provided Realizing the drawback of any foreign company not being familiar with the Indian laws. Since the Indian Railways have entered into this agreement of obtaining consultancy in regard to communication network, for speedy compliance and effective performance of the foreign company the Indian Railways have taken upon themselves the responsibility of compliance with the Indian income-taxes. Therefore, the proceedings as are initiated against the non-resident company, though it is the employer, would be wrong in view of the Indian Railways having stepped into the shoes as an employer."

This, however, was not destined to bring to an end the troubles of the petitioner-company. Two show-cause notices dated March 6, 1989, and March 16, 1989, for the assessment years 1986-87 and 1987-88 were served calling upon the petitioner-company to show cause why prosecution be not initiated against it under section 276B of the Act. The notices related to the delayed payments of tax on remuneration of the expatriate employees. Both were replied to. The stand taken was that it was the Indian Railways which was responsible for the payment of tax in terms of clause 29 of the agreement and keeping in view the approval granted under section 10 (6) (viia) of the Act. However, the Department remained unconvinced. This led to the grant of sanction under section 279 (1) of the Act and filing of complaints in the Court of the Additional Chief Metropolitan magistrate, New Delhi.

On appearing before the learned Additional Chief Metropolitan Magistrate, the petitioner moved an application under section 245 (2) of the Code of Criminal Procedure quashing of the proceedings relying not only on clause 29 of the agreement but also on the finding of the Tribunal to which reference has already been made by me above. However, it did not find favor with the learned Magistrate who dismissed the same by his order of April 6, 1993. Hence, this petition.

A perusal of the impugned order would go to show that the learned Magistrate felt persuaded to dismiss the application principally on the following grounds :

"(a) The petitioner being the employer and having shown itself to be so in Form No. 24 and having deducted the tax at source, it was its responsibility to pay the tax within the stipulated period.

(b) The agreement with the Indian Railways did not exonerate the petitioner-company from the responsibility of depositing the tax within the prescribed time-limit.

(c) The finding of the Appellate Tribunal was of no help to the petitioner-company as the Tribunal too had held it to be employer and as its findings were on different aspects and not with regard to the matter involved in these complaints."

Before I proceed further, a few facts may be noticed as, to my mind, they do have a bearing on the submissions made with which, of course, I shall be dealing in some details in the succeeding paragraphs.

A perusal of paragraph 13 and 15 of the petition would reveal that as per the petitioner, the salaries and the taxes thereon used to be paid by the Indian Railways and that the petitioner-company acting merely "as a conduit" used to hand over the full salaries so received, to the expatriate employees without deducting any tax and that the income-tax received from the Indian Railways used to be deposited in the Government account. That this was the arrangement is not denied by the Department in its counter-affidavit. The argument of the State is that it is not concerned with any private agreement/arrangement and that for purpose of discharge of tax liability any such agreement is irrelevant. It is in this context that the order of the Income-tax Appellate Tribunal assumes importance. And before I go back to it, I may mention again by way of emphasis that the expatriate employees had enjoyed tax free salary in view of the approval of their service agreements under section 10 (6) (viia) of the Act. This being the position, what does the agreement with the Indian Railways show? As per the Appellate Tribunal and as already noticed above, it is the Indian Railways who have to "take care" of all the tax liabilities of the petitioner-company, it being its "agent and that it is the Indian Railways who took over the duty of "ensuring compliance with the Indian Income-tax Act in regard to payment of various salaries and other related matters which as per the agreement have to be paid by them to the employees of the German company after taking into account the exemptions as have been allowed under section 10 (6) (viia)". The Appellate Tribunal has further held that it is the Indian Railways who "have taken upon themselves the responsibility of compliance with the Indian income-taxes", and that it is the Indian Railways who has "stepped into the shoes as an employer".

The question is : Should the prosecution be allowed to continue in view of the finding of the Income-tax Appellate Tribunal?

It was contended on behalf of the respondent that the finding of the Tribunal to which reference has been made above was erroneous and that the same deserved to be ignored. I am afraid, I cannot sit on such a judgment. Admittedly, the order of the Tribunal has not been challenged and consequently has become final. This being the position I neither see any escape from it nor find any reason as to why it should not be given the weight due to it.

It was contended on behalf of the respondent that even if the order of the Tribunal is taken into consideration, the proceedings before the Tribunal being of civil nature, there was no bar to parallel criminal proceedings and, in support, my attention was drawn to a judgment of the Madras High Court in Associated Industries v. First ITO (1983) 139 ITR 269. What is significant to note is that in the said case, though the assessment order passed by the Income-tax officer which was the basis of the criminal complaint had been set aside by the Appellate Assistant Commissioner, yet the Department had challenged the order of the Appellate Assistant Commissioner before the Income-tax Tribunal and when the petition seeking quashing of the complaint was taken up by the High Court, the Income-tax Tribunal was still seized of the matter. In other words, till then the order of the Appellate Assistant Commissioner had not yet become final. It is this which distinguishes the Madras case from the matter in hand.

Undoubtedly, the order of the Income-tax Appellate Tribunal would not be binding on the criminal court. It is also true that the criminal court has to judge the case independently on the basis of the evidence placed before it, but then I find it difficult to ignore the fact that the order of the Tribunal has a significant bearing on the question in issue in the criminal case and while looking into the matter I do have in my mind two judgments of this court, namely, Rajinder Nath v. M. L. Khosla, ITO [1982] 134 ITR 397, wherein additions to income having been knocked down, prosecution on the basis of concealment of income was held to be not sustainable, and Sequoia Construction Co. P. Ltd. v. P. P. Suri, ITO [1986] 158 ITR 496 (Delhi), wherein penalty imposed under section 201 (1) having been cancelled, the prosecution launched for an offence under section 276B based on the delay in depositing the tax deducted at source was quashed. My thinking on the matter is also persuaded by a decision of the Supreme Court in Uttam Chand v. ITO [1982] 133 ITR 909 which lends approval to the view taken in the above noted two judgments though the situation in the case somewhat different. Therein, the Supreme Court found the genuineness of the firm having been established in the regular assessment. It was held that the assessed under the circumstances could not be prosecuted for filing false return. Uttam Chands case [1982] 133 ITR 909 (SC), provided inspiration to yet another judgment of this court in Ramesh Kumar v. State [1982] Crl. LJ 681 (Delhi). Though a case under the Essential Commodities Act, the following observations made therein and which start with a reference to Uttam Chands case [1982] 133 ITR 909 (SC), need to be noticed :

"The ratio of this judgment, to my mind, is quite clear. It is that where departmental authorities whose task it is to ensure strict compliance with the provisions of the Licensing and Control Order are satisfied that there is ex facie no contravention of the provisions of the relevant Order or the license issued there under, it would be utterly unjust and unfair to prosecute the so-called offender on a criminal charge under section 7 of the Act when the said charge essentially arises out of the alleged infraction of the provision of the Order promulgated under section 3 of the Act or the conditions of the license issued there under."

The above being the position in law, what to do we get out of the Tribunal? It is that the Tribunal while looking into the agreement and more particularly its clause 29 had come to the conclusion that all tax liabilities with regard to the salaries of the expatriate employees were of the Indian Railways and that for that purpose it is the Indian Railways which is to do taken to be the employer and that for all purpose it is Indian Railways which is responsible for payment of the income-tax due. There is no need to be reminded again that the finding has attained finality. Under the circumstances, is not the very bedrock of the prosecution knocked out? In any case, under the circumstances, would it not be, to borrow the expression from Ramesh Kumars case [1985] Crl. LJ 681 (Delhi), "utterly unjust and unfair" to prosecute the petitioner ? I think it would be. And, this being my view, I allow the petition and quash the proceedings.