The Delhi High Court quashed criminal proceedings initiated against two Directors of M/s SNR Buildwell Pvt. Ltd., holding that prosecution cannot be sustained when the company, being the principal offender, is not arraigned as an accused. The Court emphasised that vicarious liability of Directors cannot be invoked in isolation and observed that omission to implead the company strikes at the root of jurisdiction.
The Income Tax Department initiated complaints alleging that M/s SNR Buildwell Pvt. Ltd. failed to discharge significant tax liabilities over multiple assessment years. During recovery proceedings, it was discovered that an Audi car belonging to the company was transferred by one of the Directors to his daughter-in-law, purportedly to defeat tax recovery. Treating this transfer as void under Section 281 of the Income Tax Act, prosecution was launched against the Directors under Section 276. However, the company itself was not named as an accused.
The trial court rejected the Directors’ objections regarding maintainability and proceeded toward framing of notice, prompting them to seek quashing before the High Court.
The petitioners contended that the prosecution is legally untenable as the company, being the principal offender, has not been impleaded. Relying on Section 278B of the Income Tax Act and the Supreme Court’s ruling in Aneeta Hada v. Godfather Travels & Tours, it was argued that prosecution of Directors alone, without the company, is impermissible. It was further urged that the alleged transfer of assets could not form the basis of criminal prosecution without proper civil proceedings.
Whereas, the counsel for the Income Tax Department argued that the Directors had deliberately attempted to frustrate recovery by alienating company assets. It was submitted that non-impleadment of the company was a curable technical defect and could not invalidate the proceedings. Reliance was placed on judgments permitting amendment of complaints to correct procedural lapses.
The Court framed the central issue as whether Directors alone can be prosecuted when the company is not impleaded. Referring to Section 278B of the Income Tax Act, the Court held that the statutory framework mirrors Section 141 of the Negotiable Instruments Act, making arraignment of the company indispensable.
Quoting Aneeta Hada, the Court reiterated that prosecution founded on vicarious liability cannot survive without the company being an accused, “The company being a juristic person has to be impleaded as an accused, and without it, the Directors cannot be prosecuted. Commission of the offence by the company is the foundation.”
The Court noted that the complaints and show cause notices themselves recognised that the petitioners were being proceeded against solely in their capacity as Directors, with no independent allegations against them personally. Therefore, omission to implead the company was not a mere irregularity but a jurisdictional defect.
The Court rejected reliance on Modi Distillery and other cases cited by the respondent, holding that none could override the binding principles laid down in Aneeta Hada and subsequent rulings.
Allowing the petitions, the High Court set aside the summoning orders dated 06.06.2024 and quashed Complaint Case. The Court, however, clarified that the Income Tax Department remains at liberty to pursue appropriate legal remedies in accordance with law.
Case Title: Nilesh Agarwal & Anr. vs. Income Tax Office (ITO)
Case No.: CRL.M.C. 8535/2024
Coram: Justice Ravinder Dudeja
Advocate for Petitioner: Adv. Arjun Dewan, Akash Arora, Jasraj Singh Chhabra
Advocate for Respondent: Adv. Sunil Agarwal (Sr. Standing Counsel), Viplav Acharya, Priya Sarkar (Jr. St. Counsels), Utkarsh Tiwari
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