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TDS Payment Default Penalty: Can independent director be held liable? Court decides

Rajeev Kumar
tds default

TDS Payment Rules 2020: An independent director of a company, who is not responsible for running the day-to-day operations of a company, is not liable for criminal prosecution in case of TDS default, a session court in Mumbai held last month. He can be held responsible only if his day-to-day involvement in the business of the company is established in the complaint. In the Eckhard Garbers vs. DCIT case, the Sessions Court set aside the previous order of a lower court that had allowed criminal complaint against an independent director of a company, along with others, in case of TDS defaults.

The Case

The Deputy Commissioner of Income Tax had filed a criminal case against several persons of a company, alleging the company had deducted Income Tax by way of TDS from the several parties and the total amount for the financial year 2016­2017 was Rs 1,87,18,459. However, said Income Tax amount was not credited to the Central Government immediately. The amount was subsequently credited to the government with delays between 1 month to 11 months. The Deputy Commissioner said that this was an offence punishable under Section 276­B r/w. 278­B of the Income Tax Act,1961.

In the complaint, the six accused were impleaded as directors of the company and one of them as its chief finance officer. However, one of the accused sought revision in the criminal application claiming that he was a foreign national and an independent director, not involved in the day-to-day business of the company. He also claimed to have submitted his resignation before filing of the case.

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The tax department opposed the revision application, saying the directors of the company were "n­charge and responsible to the Company for the conduct of the business and as such, along with the Company and ChiefFinance Officer, all the Directors are also vicariously liable for prosecution…"

Section 278-B of Income Tax Act says:

(1) Where an offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to, be proceeded against and punished accordingly: Provided that nothing contained in this sub­ section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence."

Independent director not responsible for TDS default

The Sessions Court took note of previous judicial pronouncements, notably the Bombay High Court’s decision in Homi Phiroz Ranina and others Vs. State of Maharashtra and others reported in 2003. In the said judgement, the HC had held, "Unless the complaint disclosed a prima facie case against the applicants/accused of their liability and obligation as principal officers in the day to day affairs of the company as directors of the company under section 278(b) the applicants cannot be prosecuted for the offences committed by the company."

"In the absence of any material in the complaint itself prima facie disclosing responsibility of the accused for the running of the day to day affairs of the company process could not have been issued against them. The applicants cannot be made to undergo the ordeal of a trial unless it could be prima facie showed that they are legally liable for the failure of the company in paying the amount deducted to the credit of the company."

In view of the higher courts’ judgements, the Session Court order noted, "…in view of the aforesaid legal ratio laid down by Their Lordships of the Hon’ble Supreme Court and the Hon’ble BombayHigh Court, in the complaint, there must be detail averment showing how the particular Director/accused was participating in day to day conduct of the business of the Company and that he was in­charge of and responsible to the Company for its business and if such averment sare missing, the Court cannot issue process against such Director."

The Sessions Court allowed the appeal while setting aside previous order of the Additional Chief Metropolitan Magistrate against the appellant.