February 2020

PROSECUTION UNDER THE INCOME TAX ACT, 1961 LIABILITY OF DIRECTORS

Rahul Hakani
Advocate

INTRODUCTION

It has been observed of late that the Income Tax Department has become very aggressive in initiating prosecution proceedings against assessees for various offences under the Income-tax Act, 1961. As per a CBDT press release dated 12th January, 2018, during F.Y. 2017-18 (up to end-November, 2017) prosecution complaints increased by 184%, complaints compounded registered a rise of 83% and convictions marked an increase of 269% compared to the corresponding period of the previous year. Even the Courts have adopted a proactive approach. In Ramprakash Biswanath Shroff vs. CIT(TDS) [2018] 259 Taxmann 385 (Bom)(HC), where the assessee filed a petition contending that Form No. 16 had not been issued by his employer in time, the Court suggested the Income Tax Department also invoke section 405 of the Indian Penal Code, 1860 which is a non-cognisable offence.

      

When the offence is committed by a company, an artificial juridical person, it is observed that prosecution is launched against all the directors, including independent directors, in a mechanical manner. As per section 2(47) r/w/s 149 of the Companies Act, 2013, independent director means a director other than a Managing Director, or a whole-time director, or a nominee director. Thus, an independent director is not responsible for the day-to-day affairs of the company.

 

Recently, the Court of Sessions at Greater Mumbai, in the case of Eckhard Garbers vs. Shri Shubham Agrawal, Criminal Revision application No. 267 of 2019 dated 16th December, 2019, quashed prosecution proceedings launched against Mr. Eckhard Garbers, an independent director and a foreign national. This decision has received wide publicity in view of several prosecution proceedings launched against directors who had no role in the day-to-day affairs of the company. This article looks at the said decision in addition to analysing section 278B which deals with prosecution against a person/s in charge of or responsible for the conduct of the business of a company.

The provisions regarding the liability of the directors and other persons for offences committed by the company are enumerated under various Acts such as Industries (Development and Regulation) Act; Foreign Exchange Regulation Act; MRTP Act; Securities Contracts (Regulations) Act; Essential Commodities Act

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