SOME IMPORTANT CASES-RELATED TO CRIMINAL LIABILITY OF A DIRECTORS.

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SOME IMPORTANT CASES-RELATED TO CRIMINAL LIABILITY OF A DIRECTORS.

 

 

SOME IMPORTANT CASES-RELATED TO CRIMINAL  LIABILITY OF A DIRECTORS.

 

CASE-I

The Hon’ble Supreme Court in the case of National Small Industries Corp. Ltd. vs. Harmeet Singh Paintal and Ors., 010(2)AC R1221(SC )/ MANU/SC/0112/2010 has enumerated certain principles for arraigning director as an accused in a criminal complaint filed against the company, which are as under:

  1. The primary responsibility is on the complainant to make specific averments as are required under the law in the complaint so as to make the accused vicariously liable.

 

For fastening the criminal liability, there is no presumption that every Director knows about the transaction.

 

  1. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.

 

  • Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make accused therein vicariously liable for offence committed by company along with averments in the petition containing that accused were in-charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.

 

  1. Vicarious liability on the part of a person
    1. must be pleaded and
    2. proved and
    3. not inferred.

 

  1. If accused is Managing Director or Joint Managing Director then it is not necessary to make specific averment in the complaint and by virtue of their position they are liable to be proceeded with.
  2. If accused is a Director or an Officer of a company who signed the cheques on behalf of the company then also it is not necessary to make specific averment in complaint.

 

  • The person sought to be made liable
    1. should be in- charge of and responsible for the conduct of the business of the company at the relevant time.
    2. This has to be averred as a fact as there is no deemed liability of a Director in such cases.

 

 CONCLUSION:the Apex Court held that it is responsibility  of the complainant to prove averment made in complaint before the court. Any vicarious liability on part of any person must be pleaded and proved and must not be inferred. A person is responsible for some act ,which involve criminal intention or vicarious liability must the substantiated with appropriate proof and evidences. The Hon’ble court further stated that in case of Managing Director or Joint MD it is not necessary to make specific averment in the complaint , by virtue of their position and power they enjoyed in the company , they are liable to be proceeded with.

Reference:(https://main.sci.gov.in/supremecourt/2020/17576/17576_2020_46_1501_30986_Judgement_29-Oct-2021.pdf ),

 

 

 

 

 

 

 

 

CASE-II

In the case of Confident Projects (India) Pvt. Ltd. and Ors. vs. The Income Tax Department, MANU/KA/0205/202, the Hon’ble High Court of Karnataka at Bengaluru, while dealing with the question of the liability of the directors in an income tax prosecution case, held as under:

“……that all the Directors of the Company cannot be automatically prosecuted for any violation of the Income Tax Act. There has to be specific allegations made against each of the Directors who is intended to be prosecuted and such allegation would have to amount to an offence and satisfy the requirement of that particular provision under which the prosecution is sought to be initiated, more so when the prosecution is initiated by the Income Tax department who has all the requisite material in its possession, and a preliminary investigation has been concluded by the Income Tax department before filing of the criminal complaint.”

FACTS OF THE CASE:

  • The petitioner was a Company carrying on the business of construction of apartments and development and sale of plots.
  • The Company followed the accrual accounting system. The sale was entered into the books when the agreement to sell was entered into with the customer rather than when the money/cash was collected.
  • Irrespective as to whether the purchaser paid the amount or not, the income was shown in the books of account of the Company and tax is paid thereon.
  • The Company had submitted its returns for the assessment year 2013-14 on 30.09.2013 declaring a total income of Rs. 17,98,20,900/-. As per the income declared, the tax payable thereon was Rs. 6,41,89,214.
  • However, since the Company did not have the money to make the payment of tax and they had a negative balance in the bank account of the petitioner Company, the said tax amount was not paid.
  • The Assessing Officer, i.e., the Deputy Commissioner of Income Tax passed a penalty order under Section 221(1) of the Income Tax Act imposing a penalty of Rs. 46,36,961 and issued two notices

OBSERVATIONS OF HIGH COURT (HC)

  • Respondent contended that there was reverse burden of proof under Section 277 of the Income Tax Act inasmuch as requiring the assessee to support the statements made in the returns.
  • Though that may be the case, it could not be contended that the statements made by the assessee were wrong until proven right.
  • For the purposes of contending that there was a misstatement and that misstatement was made to evade tax, it would be required for the Income Tax Department to prove the said circumstances.
  • In the present case, the misstatement was stated to be as regards the income tax having been paid even though such payment was not made since the uploaded returns reflected the BSR code, challan number as also the amount paid as income tax.
  • It was alleged that if not for the reconciliation, the petitioner-Company would have got away with non-payment of the taxes.
  • HC was unable to accept such a submission. It was not that there was non-payment of any tax before uploading of the returns.
  • The 26 AS returns indicated payment of substantial amount of money due to tax deduction at source.
  • Apart there from, the petitioner-Company also made several payments on account of the income tax dues.
  • However, on account of non-availability of funds, the entire amount could not be paid before the returns were to be uploaded and/or filed.
  • If at all the petitioner-Company wanted to default on payment, the petitioner- Company could have not even filed its returns and/or filed its return without payment of monies earlier.
  • The fact that the petitioner-Company had made payments would indicate and establish the authenticity of the petitioner-Company.
  • It was also not disputed that the Petitioner company borrowed money to make payment of the Income tax due, since the amounts accounted on the basis of accrual system of accounting was not received by the Petitioner company.
  • It was required for the Income Tax Department who had provided the facility for an assessee to upload its returns with the actual amount paid and for the system to accept the said returns even though the complete amounts had not been paid.
  • The assessee in the present case was forced to upload the returns by mentioning that the entire amount was paid since without doing so the returns would not have been accepted by the software system set up by the Income Tax Department.
  • Therefore, in HC’s view the said statement made was forced upon the assessee by the Income Tax Department and could not be said to be misstatement within the meaning and definition thereof under Section 277 of the Income Tax Act.
  • For an offence to be said to be committed under Section 277 of the Income Tax Act, the misstatement was required to be wilful made with a mala-fide or dishonest intention in order to prosecute the assessee.

PROVISIONS OF SECTION 277 OF INCOME TAX ACT

According to Section 277, if a person makes a statement in any verification under this Act or under any rule made thereunder, or delivers an account or statement which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable:

  • in a case where the amount of tax, which would have been evaded if the statement or account had been accepted as true, exceeds Rs 100,000, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine
  • in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

 

 

DECISION OF COURT

The Income Tax Department was directed to consider the provisioning of a facility in its software to upload Income Tax Returns with the actual amount paid and for the system to accept the said returns even though the complete amounts had not been paid. In simple words, ITR software should allow filing of return despite non payment of tax.

The Hon’ble Supreme Court of India has held that if there is no specific allegations about the role played by the Director sought to be held vicariously liable then prosecution of such Director is not maintainable being abuse of process of law.

CONCLUSION:  the Hon’ble court held that there has to be specific allegations made against each of the Directors who is intended to be prosecuted and such allegation would have to amount to an offence and satisfy the requirement of that particular provision under which the prosecution is sought to be initiated, more so when the prosecution is initiated by the Income Tax department who has all the requisite material in its possession, and a preliminary investigation has been concluded by the Income Tax department before filing of the criminal complaint.

Reference:(https://facelesscompliance.com/tag/confident-projects-india-pvt-ltd-vs-income-tax-department-karnataka-high-court)

 

 

 

 

 

 

 

 

 

CASE-III

In the case OF SUNIL BHARTI MITTAL V CENTRAL BUREAU OF INVESTIGATION (2015) 4 SCC 609, the Hon’ble Supreme Court held that;

“When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect.”

In the case of Sunil Bharti Mittal (supra), it is further observed by the Supreme Court in paragraphs 42 to 44 as under:

“42.

  • No doubt, a corporate entity is an artificial person which acts through its officers, Directors, Managing Director, Chairman, etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy.

 

  • However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so.

43.

  • Thus, an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent.

 

  • Second situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.

44.

  • When the company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence of any statutory provision to this effect. One such example is Section 141 of the Negotiable Instruments Act, 1881.

 

 

 

 

  • In AneetaHada v. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661, the Court noted that if a group of persons that guide the business of the company have the criminal intent, that would be imputed to the body corporate and it is in this backdrop, Section 141 of the Negotiable Instruments Act has to be understood. Such a position is, therefore, because of statutory intendment making it a deeming fiction. Here also, the principle of “alter ego”, was applied only in one direction, namely, where a group of persons that guide the business had criminal intent, that is to be imputed to the body corporate and not the vice versa.Otherwise, there has to be a specific act attributed to the Director or any other person allegedly in control and management of the company, to the effect that such a person was responsible for the acts committed by or on behalf of the company.”

 

Section 141 of the Negotiable Instruments Act,1881 provides  –  Offences by companies. —

 

(1) If the person committing an offence under section 138 is 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 person liable to 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: 

 

Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.

 

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

 

Explanation.— For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.

 

 

  • This very principle is elaborated in various other judgments. We have already taken note of Maharashtra State Electricity Distribution Co. Ltd. (supra) and S.K. Alagh (supra).

 

  • Few otherjudgments reiterating this principle are the following:

 

  1. JethsurSurangbhai v. State of Gujarat12 (1984) Supp. SCC 207

“9. With due respect what the High Court seems to have missed is that in a case like this where there was serious defalcation of the properties of the Sangh, unless the prosecution proved that there was a close cohesion and collusion between all the accused which formed the subject matter of a conspiracy, it would be difficult to prove the dual charges particularly against the appellant (A-1). The charge of conspiracy having failed, the most material and integral part of the prosecution story against the appellant disappears. The only ground on the basis of which the High Court has convicted him is that as he was the Chairman of the Managing Committee, he must be held to be vicariously liable for any order given or misappropriation committed by the other accused.

 

The High Court, however, has not referred to the concept of vicarious liability but the findings of the High Court seem to indicate that this was the central idea in the mind of the High Court for convicting the appellant. In a criminal case of such a serious nature mens rea cannot be excluded and once the charge of conspiracy failed the onus lay on the prosecution to prove affirmatively that the appellant was directly and personally connected with acts or omissions pertaining to Items 2, 3 and 4.

 

 

 

 

 

It is conceded by Mr Phadke that no such direct evidence is forthcoming and he tried to argue that as the appellant was Chairman of the Sangh and used to sign papers and approve various tenders, even as a matter of routine he should have acted with care and caution and his negligence would be a positive proof of his intention to commit the offence.

 

We are however unable to agree with this somewhat broad statement of the law. In the absence of a charge of conspiracy the mere fact that the appellant happened to be the Chairman of the Committee would not make him criminally liable in a vicarious sense for items 2 to 4.

 

There is no evidence either direct or circumstantial to show that apart from approving the purchase of fertilisers he knew that the firms from which the fertilisers were purchased did not exist.

 

Similar is the case with the other two items. Indeed, if the Chairman was to be made liablethen all members of the Committee viz. Tehsildar and other nominated members, would be equally liable because all of them participated in the deliberations of the meetings of the Committee, a conclusion which has not even been suggested by the prosecution. As Chairman of the Sangh the appellant had to deal with a large variety of matters and it would not be humanly possible for him to analyse and go into the details of every small matter in order to find out whether there has been any criminal breach of trust. In fact, the hero of the entire show seems to be A-3 who had so stage-managed the drama as to shield his guilt and bring the appellant in the forefront. But that by itself would not be conclusive evidence against the appellant. There is nothing to show that A-3 had either directly or indirectly informed the appellant regarding the illegal purchase of fertilisers or the missing of the five oil engines which came to light much later during the course of the audit. Far from proving the intention the prosecution has failed to prove that the appellant had any knowledge of defalcation of Items 2 to 4. In fact, so far as item 3 is concerned, even Mr Phadke conceded that there is no direct evidence to connect the appellant.”

 

 

 

 

 

 

  1. Sham Sunder v. State of Haryana[1989) 4 SCC 630]

 “9. But we are concerned with a criminal liability under penal provision and not a civil liability. The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold. Section 10 does not provide for such liability. It does not make all the partners liable for the offence whether they do business or not.”

 

  1. Hira Lal Hari Lal Bhagwati v. CBI [2003) 5 SCC 257]

“30. In our view, under the penal law, there is no concept of vicarious liability unless the said statute covers the same within its ambit. In the instant case,the said law which prevails in the field i.e. the Customs Act, 1962 the appellants have been thereinunder wholly discharged and the GCS granted immunity from prosecution.”

 

  1. MaksudSaiyed v. State of Gujarat[2008) 5 SCC 668]

“13. Where a jurisdiction is exercised on a complaint petition filed in terms of Section 156(3) or Section 200 of the Code of Criminal Procedure, the Magistrate is required to apply his mind. The Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the Company. The learned Magistrate failed to pose unto himself the correct question viz. as to whether the complaint petition, even if given face value and taken to be correct in its entirety, would lead to the conclusion that the respondents herein were personally liable for any offence. The Bank is a body corporate. Vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.”

 

  1. Kalyani v. Janak C. Mehta[2009) 1 SCC 516]

“32. Allegations contained in the FIR are for commission of offences under a general statute. A vicarious liability can be fastened only by reason of a provision of a statute and not otherwise. For the said purpose, a legal fiction has to be created. Even under a special statute when the vicarious criminal liability is fastened on a person on the premise that he was in charge of the affairs of the company and responsible to it, all the ingredients laid down under the statute must be fulfilled. A legal fiction must beconfined to the object and purport for which it has been created.”

CONCLUSION: the Apex Court held that an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent.Second situation in which he can be implicated is in those cases where the statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.

 

Reference : https://main.sci.gov.in/judgment/judis/42239.pdf)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE-IV

Recently, the Hon’ble Supreme Court in the case titled RAVINDRANATHA BAJPE VS. MANGALORE SPECIAL ECONOMIC ZONE LTD & ORS. 2021 SCC ONLINE SC 806 , held that an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent.

It was contended by the complainant that accused No.1 intended to lay water pipeline by the side of Mangalore-Bajpe Old Airport Road abutting the schedule properties. In that regard, he had obtained permission from the Department of Public Works, Mangalore. Accused No.2 on behalf of accused No.1 appointed accused No.6 as a contractor for execution of the said project of laying the water pipe line. Accused No.6 in turn authorized accused Nos. 7 and 8 to execute and oversee the said work. They in turn had appointed accused No.9 as site supervisor and the accused No.10 being the sub-contractor engaged accused Nos. 11 to 13 as labourers. Accused Nos. 4 and 5 were entrusted the work of supervision and overseeing the pipeline works carried out by accused Nos. 6, 7 and 8 through accused Nos. 9 and 10 to 13. Accused Nos. 6 to 8 had put into service heavy machineries and excavators and their vehicles for carrying out the work.

It was contended that accused Nos. 2 to 5 and 7 to 13 had conspired with common intention to lay the pipeline beneath the schedule properties belonging to the complainant without any lawful authority and right whatsoever. In furtherance thereof, they had trespassed over the schedule properties and demolished the compound wall which was having the height of 7 feet and foundation of 2 feet to a distance of 500 metres. They had cut and destroyed 100 valuable trees and laid pipeline beneath the schedule properties. It was contended that when this high-handed act was committed by the accused, the complainant was out of station and he came back on 21.4.2012 and noticed the destructive activities.

The accused have committed the act of mischief and waste and caused pecuniary loss of more than Rs.27 lakhs to the complainant. All the accused are jointly and severally liable to make good the loss to the complainant.

 

 

 

The court has considered below mentioned decided cases

  1. As observed by this Court in the case of Pepsi Foods Ltd. v. Special Judicial Magistrate, (1998) 5 SCC 749 and even thereafter in catena of decisions, summoning of an accused in a criminal case is a serious matter. Criminal Law cannot be set into motion as a matter of course. In paragraph 28 in Pepsi Foods Limited (supra), it is observed and held as under:

“28. Summoning of an accused in a criminal case is a serious matter. Criminal law cannot be set into motion as a matter of course. It is not that the complainant has to bring only two witnesses to support his allegations in the complaint to have the criminal law set into motion. The order of theMagistrate summoning the accused must reflect that he has applied his mind to the facts of the case and the law applicable thereto.

He has to examine the nature of allegations made in the complaint and the evidence both oral and documentary in support thereof and would that be sufficient for the complainant to succeed in bringing charge home to the accused. It is not that the Magistrate is a silent spectator at the time of recording of preliminary evidence before summoning of the accused. The Magistrate has to carefully scrutinise the evidence brought on record and may even himself put questions to the complainant and his witnesses to elicit answers to find out the truthfulness of the allegations or otherwise and then examine if any offence is prima facie committed by all or any of the accused.”

  1. In the case of MaksudSaiyed v. State of Gujarat, (2008) 5 SCC 668, in paragraph 13, it is observed and held as under:

“13. Where a jurisdiction is exercised on a complaint petition filed in terms of Section 156(3) or Section 200 of the Code of Criminal Procedure, the Magistrate is required to apply his mind. The Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company when the accused is the company. The learned Magistrate failed to pose unto himself the correct question viz. as to whether the complaint petition, even if given face value and taken to be correct in its entirety, would lead to the conclusion that the respondents herein were personally liable for any offence. The Bank is a body corporate.

 

 

Vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the statute. Statutes indisputably must contain provision fixing such vicarious liabilities. Even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.”

  1. As held by this Court in the case of India Infoline Limited (supra), in the order issuing summons, the learned Magistrate has to record his satisfaction about a prima facie case against the accused who are Managing Director, the Company Secretary and the Directors of the Company and the role played by them in their respective capacities which is sine qua non for initiating criminal proceedings against them. Looking to the averments and the allegations in the complaint, there are no specific allegations and/or averments with respect to role played by them in their capacity as Chairman, Managing Director, Executive Director, Deputy General Manager and Planner & Executor.

THE DECISION OF THE COURT

From the order passed by the learned Magistrate issuing the process against the respondents herein – accused nos. 1 to 8, there does not appear that the learned Magistrate has recorded his satisfaction about a prima facie case against respondent nos. 2 to 5 and 7 & 8.

Merely because respondent Nos. 2 to 5 and 7 & 8 are the Chairman/Managing Director/Executive Director/Deputy General Manager/Planner & Executor, automatically they cannot be held vicariously liable, unless, as observed hereinabove, there are specific allegations and averments against them with respect to their individual role.

Under the circumstances, the High Court has rightly dismissed the revision applications and has rightly confirmed the order passed by the learned Sessions Court quashing and setting aside the order passed by the learned Magistrate issuing process against respondent nos. 1 to 8 herein – original accused nos. 1 to 8 for the offences punishable under Sections 427, 447, 506 and 120B read with Section 34 IPC.

 

 

 

CONCLUSION

In view of the above judgments, it can be concluded that

  1. the vicarious criminal liability can be fastened only on those directors who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company and not every director.

 

  1. Further, specific averments are required to be pleaded in a criminal complaint against such a director. In the absence of the specific averments or role attributed to a particular director in the criminal complaint, the criminal complaint cannot sustain against such a director.

 

PLEASE NOTE THAT : However, the aforesaid principle is not applicable in the case of a Managing Director or Joint Managing Director as due to their position they are considered to be person responsible for the affair of the company.

Reference: (https://main.sci.gov.in/supremecourt/2016/6009/6009_2016_43_1501_30333_Judgement_27-Sep-2021.pdf )

 

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