Gauhati HC quashes Income Tax prosecutions, holds directors cannot be separately prosecuted without arraigning the company as an accused

M/s Flamingo Breweries Pvt. Ltd., an IMFL bonded wholesale warehouse, filed its income-tax return for Assessment Year 2016–17 declaring income of ₹8,01,508.

The Assessing Officer, alleging non-compliance with statutory notices, discrepancies in the accounts and concealment of income, completed assessment under Sections 144/143(3) of the Income-tax Act, 1961, determining taxable income at ₹35,66,191 by order dated 21 December 2018.

The Income Tax Department thereafter filed three complaints under Sections 276D and 277 of the Act against the company and its two directors, and separately against each director.

The Magistrate took cognizance and issued summons.

On appeal, the ITAT set aside the appellate order and remanded the matter to the Assessing Officer for fresh adjudication after permitting the assessee to produce accounts, documents and other evidence.

In the subsequent assessment dated 24 March 2022, the income was determined at ₹11,87,032, and separate penalty proceedings under Sections 271(1)(b) and 271(1)(c) were initiated.

The petitioners sought quashing of the pending criminal complaints under Section 482 CrPC, contending that the original assessment forming the foundation of the prosecution had been set aside and the subsequent assessment substantially reduced the assessed income.

Whether criminal proceedings under Sections 276D and 277 of the Income-tax Act could continue after the assessment order forming their basis had been set aside and the matter remanded for fresh assessment?

Whether the subsequent assessment and initiation of penalty proceedings under Sections 271(1)(b) and 271(1)(c) rendered the criminal prosecution impermissible on the ground of double jeopardy or otherwise?

Whether separate complaints against the directors, without treating the company as an accused in those complaints, were maintainable under the vicarious-liability scheme of Section 278B of the Income-tax Act?

The Court applied Sections 276D and 277 of the Income-tax Act, which concern wilful failure to produce accounts or comply with statutory directions and making false statements or delivering false accounts, respectively.

Section 278B permits prosecution of persons in charge of and responsible for a company’s business, while Section 278E creates a rebuttable presumption regarding culpable mental state during prosecution and trial; the presumption is not available to the Assessing Officer at the pre-complaint stage.

The Court relied on P. Jayappan v. S.K. Perumal, holding that tax assessment, penalty and criminal proceedings are generally independent and may proceed simultaneously.

K.C. Builders v. ACIT, G.L. Didwania v. ITO, and Uttam Chand v. ITO establish that where the competent appellate authority conclusively negates the factual foundation of concealment or falsity, the consequential criminal prosecution cannot survive.

The Court also applied Radheshyam Kejriwal v. State of West Bengal, distinguishing between technical exoneration and exoneration on merits, and Aneeta Hada v. Godfather Travels & Tours (P) Ltd., under which arraignment of the company is ordinarily imperative before proceeding against directors on the basis of vicarious liability.

The Court held that although criminal prosecution may ordinarily continue during the pendency of assessment or appellate proceedings, the present case was different because the original assessment order had been set aside by the ITAT and the matter remanded for fresh consideration with permission to produce supporting evidence.

The subsequent assessment substantially reduced the income previously determined and did not preserve the same factual basis for alleging concealment, falsity or wilful non-compliance.

Applying K.C. Builders, G.L. Didwania and Uttam Chand, the Court concluded that once the underlying finding supporting the alleged offences was displaced, continuation of prosecution would amount to an abuse of process.

The Court rejected the double-jeopardy argument based merely on the initiation of penalty proceedings, since assessment and penalty proceedings are civil in nature and criminal prosecution is legally independent.

However, it found that the separately filed complaints against the directors, based on the same assessment order and without arraigning the company as an accused in those complaints, were independently defective under the principle in Aneeta Hada.

It held that the criminal complaints under Sections 276D and 277 could not survive after the assessment order forming their foundation had been set aside and the factual basis for concealment and falsity had been displaced.

The Court further held that the initiation of penalty proceedings did not by itself constitute double jeopardy, but the separate complaints against the directors were also not maintainable without the company being prosecuted as an accused.

Accordingly, the petitions were allowed, and C.R. Case No. 1103C of 2019, C.R. Case No. 1099C of 2019 and C.R. Case No. 1100C of 2019 were quashed and set aside, with each party directed to bear its own costs.