1. This is a composite petition, under section 482 of the Cr. P. Code, by PNB Finance & Industries Ltd., for short, the company, its chairman, director and secretary, to quash 220 complaints against them filed by the Income-tax Officer, Company Circle, respondent herein, for offences under section 276B of the Income-tax Act; 1961, for short, the Act, and the orders summoning the petitioners in the complaints to stand their trial not only for an offence under the Act but also for an offence under section 409 of the Indian Penal Code.
2. Prior to July 19, 1969, the company, which was then known as the Punjab National Bank Ltd., was a banking company, and the banking business of the company was transferred to and vested with the Punjab National Bank, a Corporation, wholly owned by the Government, with effect from the aforesaid date by virtue of an ordinance, which was later replaced by the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. The company was paid a sum of Rs. 10.20 crores as compensation for the take-over of its banking business. The company, which has since changed its name and objects, has been carrying on other undertakings. Pursuant to to the acquisition, the company, by a circular of February 28, 1973, gave an option to its shareholders to sell to it shares held by them in it at Rs. 38 per share, inclusive of dividend for the year 1972, in case they did not wish to continue to be its shareholders. It is claimed by the company that before issuing the circular, it had obtained the legal opinion of a former Chief Justice of India to the effect that the amount payable by the company for the purchase of its own shares could not be considered as 'deemed dividend', within the meaning of section 2(22) of the Act. It is further claimed that to put the matter beyond doubt, and before issuing the circular, the company addressed a letter to the Central Board of Direct Taxes seeking their confirmation that the amount would not be deemed dividend'. The Life Insurance Corporation of India and the Unit Trust of India were the major shareholders the company and on their suggestion, the price was raised from Rs. 38 per share to Rs. 40 per share, exclusive of dividend that might be declared till the date of the payment of the price. Pursuant to the circular, share holders holding a total of 11,98,711.5 shares in the company exercised the option to sell the shares, as a result of which the company resolved to purchase these shares at the aforesaid price, subject to consequent reduction of capital being confirmed by this court. This court eventually gave the necessary confirmation. The Central Board of Direct Taxes, however too no decision with regard to the question in spite of a number of reminders. Meanwhile, the Life Insurance Corporation of India expressed the opinion that there was no question of deduction of any tax in the payment of the price since the payment was to be made to the shareholders on the sale of their shares. It was further the view of the Corporation, that the company need not treat the deference between the sale price and the face value of the shares as 'dividend and had no right to deduct tax on such payment at source. This was the view which was generally shared by the shareholders who had exercised the option to sell. It further appears that in the absence of any confirmation from the Board, doubt lingered as to whether the price pay able, or any part of it, could be considered as 'deemed dividend and on the suggestion of the Corporation, the company made pay ments on account at Rs. 33-10 per share to the shareholders, who had exercised the option, and the balance of Rs. 6-90 per share, out of the purchase price payable to them, was retained by the company on the specific condition and understanding that the company will be entitled treat it as 'tax deducted at source', in case it was ultimately held to be subject to tax, failing which, the retained amount would be paid to the erstwhile shareholders. The Board, however, refused to give any decision in the matter on the ground that there was no provision for any 'advance ruling' on a reference. It was in this situation that by an agree ment of January 18, 1975 entered into between the Corporation and the company, it was decided to refer the matter under Order xxxvI rule (I) of the Code of Civil Procedure, 1908, to this court. Accordingly suit was filed in this court under Order xxxvI, rule (I), being Suit No. 98 of 1975, for a decision of the question whether the payment to the share holders, in the circumstances, could be considered 'deemed dividend' or not. Notice of the suit was also issued to the income-tax authorities. The suit was, however, adjourned sine die on the objection of the income tax authorities that the question could be decided only in proceedings under the Act, and-not in any suit. In May 1975, the Income tax Officer, Company Circle, required the company by a notice under section 201(lA) 0f the Act to pay a sum of Rs. 82,17,109 along with interest on the ground that the company had 'deducted' tax at source to the extent of the above amount from the distribution of 'deemed dividend' of Rs. 40 per share but had not paid the amount in Government account within the prescribed time, as required by section 200 of the Act, read with rule 30 of the Rules made under it. In reply to this notice, the company informed the officer concerned that no tax had been deducted at source and that the company had only made on account payment towards the purchase price, and there was, thereforee, no question of payment of tax to the Department. As a sequel to this, the company was called upon to show cause why a penalty be not levied under section 221 of the Act for not depositing the tax deducted at source. This was resisted by the company on which the bankers of the company received a notice under section 226(3) of the Act the effect that the aforesaid amount was due from the company and required the bankers to pay to the Income-tax Officer concerned forthwith, out of any amount held in any of the accounts of the company. The Income-tax Officer thereafter called upon the company to show cause why the entire amount paid to the shareholders be not treated as 'deemed dividend' in terms of section 2(22)(d) of the Act and why the company should not be treated in default for failing to deposit the tax deducted source from the amount paid to the shareholders. The company sent its reply to the notice, inter alia, contending that the payment of the amount could not be termed as deemed dividend as the amount was the purchase price and no amount by way of dividend was paid on the reduction of share capital. Certain other contentions were also raised. The company also relied on a decision of this court reported as  1 ITR 410, in which this court had held that the undertaking of the company, comprising of all the assets and liabilities, had been taken over by the Government, and nothing that could be regarded as constituting accumulated profits of the company was left with it, and it was, thereforee, urged that there was no 'accumulated profit' with the company and no amount could be said to have been paid out of any accumulated profit to erstwhile shareholders, the company having only paid the purchase price out of the compensation received by it and no part of it could be treated as deemed dividend and taxed as such. The Income-tax Officer, however, turned down the plea of the company and by an order made on September 25, 1975, held that the payment made for the purchase of shares to some of the erstwhile shareholders was 'deemed dividend' and the company was in default under section 201 of the Act for not depositing the tax, as found due by him. The order was challenged by the company in appeal before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner of Income-tax partly allowed the appeal and the appellate order was challenged by the company, as well as the Revenue, before the Income-tax Appellate Tribunal. The Tribunal by its order of March 27, 1979, accepted the appeal of the Company and set aside the orders of the Income-tax Officer, and the appellate order of the Appellate Assistant Commissioner of Income-tax on the ground that the proceedings against the company were barred by limitation. The appeal of the Revenue was dismissed. The Tribunal also rejected the Revenue's application for stating a case and referring certain questions of law to this court. This court also rejected the Revenue's application for calling a reference on January 4, 1982. The order of the Income-tax Appellate Tribunal has, thereforee, become final unless it was taken in appeal to the Supreme Court by a petition for special leave. Counsel for the respondent claimed that a petition for special leave had been filed in the Supreme Court but it was still to come up for preliminary hearing. Meanwhile, three different Benches of the Delhi Circle of the Income-tax Appellate Tribunal, by their orders of November 21, 1977, February 27, 1982, and April 17, 1982, arising out of independent proceedings in the assessment of incomes of three different shareholders, who had received the amounts pursuant to the sale of their shares, held that the amounts received by them could not be treated as 'deemed dividends' but were taxable in their hands as 'capital gain' on the sale of the shares and would be liable to be treated accordingly. These orders were not challenged by the Department, and have, thereforee, become final. The first of these orders was made before the complaints were filed, while the other two were made during the pendency of the proceedings in the complaints. The complaints, sought to be quashed, which are in identical terms, were filed on or about March 31, 1978, and are grounded on the allegations that the payment to the shareholders, in excess of the face value of the share, was 'deemed dividend' within the meaning of section 2(22) of the Act and the amount retained by the company was tax deducted at source on the said dividend, which the company and its principal officers, failed to deposit without reasonable cause or excuse in the Government account and were thus liable to be punished under section 276B of the Act. It is further alleged that the retained amount was a 'trust' with the company and the Company neither paid the amount to the credit of the Central Government nor refunded it to the shareholders and has thus 'dishonestly misappropriated' the same and 'converted' it to its own use. By an order of March 28, 1980, the Chief Metropolitan Magistrate summoned the petitioners for offences under section 276B of the Act and section 409 of the I.P.C., in each of these complaints.
3. As the petition was a composite one challenging the validity of 220 complaints and objection was raised as to its maintainability and by an order made by this court on February 1, 1984, this court directed that the petitioners should pay additional court fees on the basis (sic) petitioners have since paid the requisite court fees.
4. According to the petitioners, a finding by an appropriate authority under the Act that payment of dividend has been made and deduction as contemplated under the Act, has either not been made or if it has been made, the company has failed to pay it, without any reasonable cause or excuse, was condition precedent to any complaint of an offence under section 276B of the Act. It is further urged that the order of the Income-tax Officer and of the Appellate Assistant Commissioner having been set aside by the Appellate Tribunal, there was no finding by any authority under the Act to the above effect. Alternatively, it is urged that at least in cases of three shareholders, the Appellate Tribunal had held that the amount paid as price for the shares was neither 'accumulated profit' nor 'deemed dividend' and would not, thereforee, attract any deduction of tax at source. It is urged that these decisions, which have admittedly become final between the revenue and these individual shareholders, were binding decisions of the authorities under the Act, which are clearly contrary to the basis on which the complaints have been filed against the petitioners. It was further urged that the company and principal officers, having dealt with the matter in a bona fide manner, on the basis of authoritative opinion, consistent with its twin obligations to the exchequer, as well as its shareholders, and in consultation with the Government institutions, which were its major shareholders, the proceedings against the petitioner would be a gross abuse of the process of the criminal court and are thus liable to be quashed. On behalf of the respondent it was urged that finding by an authority under the Act, with regard to the liability, was not a condition precedent to the institution of criminal proceedings in respect of any offence under the Act; and that the proceedings in a criminal court were independent proceedings in which it was open to a criminal court to arrive at its own conclusion, both on question of law as also on question of fact, as to the nature of the payment made by the company to the shareholders, as to the liability of the amount to tax, and as to the obligation of the company to make deductions at source and to deposit the same in accordance with the Act. It was further urged that the company and its principal officers were guilty of mala fides in that they deprived the exchequer, as well as the shareholders, of the amount retained by it, and misappropriated and converted the amount so retained to its own use and that having regard to all the circumstances, the intervention of this court at the threshold was not justified.
5. While the conditions on which, and the circumstances in which, this court may interfere in criminal proceedings at the threshold have advisedly not been, legislatively or judicially, delineated or defined with a mathematical precision, it is not difficult to spell out from decided cases broad guidelines in dealing with a challenge to such proceedings at the initial stage, even though it is well-settled that these principles are not of universal application and, as always, each case has to be decided on its own merits. It is, thereforee, well settled that ordinarily criminal proceedings must be tried under the Code and the High Court would be reluctant to interfere at an interlocutory stage, but there are situations where inherent jurisdiction to quash proceedings can and should be exercised, such as :
(1) where it manifestly appears that there is a legal bar against the institution or continuance of the criminal proceedings in respect of the offence alleged;
(2) where the allegation in the first information report or the complaint even if they are taken at their face value and accepted in their entirety do not constitute the offence alleged;
(3) where the allegations do constitute an offence but there is either no legal evidence adduced in support of the case or the evidence adduced clearly, fairly or manifestly fails to prove the charge. In dealing with this class of cases, it is important to bear in mind the distinction between a case where there is evidence which manifestly and clearly is inconsistent with the accusation made and cases where there is legal evidence which on its appreciation may or may not support the accusation in question. In exercising its jurisdiction, the High Court would not embark upon an enquiry as to whether the evidence in question is reliable or not, because that is the function of the trial court and it would not be open to a party to invoke the inherent jurisdiction of the court and contend that on a reasonable appreciation of the evidence, the accusation made against accused would not be sustained. (R. P. Kapoor v. State of Punjab, : 1960CriLJ1239 ). These tests were slightly widened subsequently (Municipal Corporation of Delhi v. Ram Kishan Rohtagi, : 1983CriLJ159 ) and it may safely be said that proceedings may be quashed :
' (1) Where the allegations made in the complaint or the statements of the witnesses recorded in support of the same taken at their face value make out absolutely no case against the accused or the complaint does not disclose the essential ingredients of an offence which is alleged against the accused;
(2) Where the allegations made in the complaint are patently absurd and inherently improbable so that no prudent person can ever reach a conclusion that there is sufficient ground for proceeding against accused;
(3) Where the discretion exercised by the Magistrate in issuing process is capricious and arbitrary having been based either on no evidence or on materials which are wholly irrelevant or inadmissible; and
(4) Where the complaint suffers from fundamental legal defects, such as, want of sanction, or absence of a complaint by a legally competent authority and the like.'
6. It is, thereforee, manifestly clear that proceedings against an accused in the initial stage can be quashed only if on the face of the complaint or the papers accompanying the same, no offence is constituted. In other words, this test is, that taking the allegations and the complaint, as they are, without adding or subtracting anything, if no offence is made out, then, the High Court would be justified in quashing the proceedings in exercise of its power under section 482 of the Code.
7. It is also good to bear in mind the legal requirement in the Code for issue of process and the extent of scrutiny by the court issuing the process, as indeed, by the High Court, when dealing with a challenge to the validity of the proceedings. Section 204 of the Code, which regulated the issue of a process by a Magistrate, taking cognizance of an offence, provides that process may be issued if in the opinion of the Magistrate 'there is sufficient ground for proceeding'. The opinion that there is sufficient ground for proceeding must be distinguished from expressions like 'there is ground for presuming that the accused has committed an offence', used in sections 240, 246 and 228 of the Code, in relation to the stage of framing of charge, in cases instituted on a police report, cases instituted otherwise than on police report and of trial before a court of session respectively. It is likewise distinguishable from the stage at which the court is required to consider, on the conclusion of the trial, if the case against the accused has been proved or not or whether the accused should be convicted or acquitted. While the stage at which the Magistrate decides to summon an accused is, no doubt, an important stage in the proceedings and must be preceded by an application of judicial mind to material before the court to determine if 'there is sufficient ground proceeding', the stage nevertheless, does not call for any in-depth examination of the material or possible defense of an accused, or the mere possibility that on a certain hypothesis being eventually considered and accepted by the court, the trial may end favorably to the accused, either on the existing material, or on the further material that may be expected to be brought by the complainant, or may be produced by the accused in the course of the trial. It is, however, important to bear in mind the two parameters in dealing with that stage. One is if the allegations in the complaint and the material in its support disclose the commission of an offence, the matter must be allowed to proceed, but if it does not, or there are other features, which would justify an inference that the trial would be an exercise in futility or is otherwise mala fide, an innocent person should not be allowed to be subjected to the hardship and humiliation of a full-dress trial, even though on any reckoning, it Would never succeed. The expressions 'ends of justice' and 'to prevent abuse of the process of any court' used in section 482 of the Code, are intended to work both ways, either when an innocent person is unjustifiably subjected to an undeserving prosecution, or if an ex facie well-merited prosecution is throttled at the threshold, without allowing the material in support of it to see the light of the day.
8. It would be convenient to consider at this stage if, in the context the aforesaid principles and in the face of the allegations in the complaints, and the material placed before the court, the proceedings in the court below or the orders summoning the accused, are liable to be quashed.
9. The complaints, which are in identical language, are grounded on the admitted allegation that the shares in the company held by the shareholders concerned of the face value of Rs. 10 were purchased by the company by the device of reduction of its capital, for Rs. 40, but the shareholders were paid on the basis of Rs. 33.10 per share, retaining the balance of Rs. 6.90 per share, and that the total amount so retained was not deposited in the Government account. According to the complaints, the deductions work out to 23 per cent. on the amount in excess of the face value and no part of the amount, payable to the shareholders, was retained in respect of the shareholders who had lodged with the company Income-tax Exemption Certificates under the proviso to section 294 of the Act. It is, thereforee, alleged that 'the amount thus deducted by the company was thus for all intents and purposes tax deducted at source on the dividend payable by the company as required under section 194 of the Act. The company, in fact, paid dividends to its shareholders within the meaning of section 2(22) of the Act and deducted tax thereon at the rate in force', while representing to its shareholders 'that the amount payable was not dividend and no tax was to be deducted under section 194 of the Act and that did so by way of abundant caution'. It is further alleged that amounts so deducted which works out to Rs. 65,49,278.80 was neither 'deposited to the credit of the Central Government within the stipulated period... nor was this amount returned to the shareholders'. It is further alleged that the action was initiated by the tax authorities on complaints received from' some of the shareholders of the company that the company has neither paid the amount deducted from the payments made to them to the Central Government under the Income-tax Act nor returned the amounts to them'. The complaints then refer to the orders of the Income-tax Officer and of the Appellate Assistant Commissioner of Income-tax, which were eventually set aside by the Tribunal on the ground that the proceedings initiated under section 201 of the Act by the Income-tax Officer were barred by limitation. The claim that the amount retained by the company was tax deducted at source is sought to be reinforced not only by the findings of the Income-tax Officer and the Appellate Assistant Commissioner of Income-tax that the amount deducted by the company was tax deducted at source, but also by the further circumstance that while retaining the amount, the company 'furnished pro forma certificates in this respect to its shareholders' and 'company did not deduct tax in respect of those shareholders who lodged with the company Tax Exemption Certificate'. It is further alleged that 'this amount was in trust with the company. The company has neither paid this amount to the credit of the Central Government nor refunded to the shareholders. When it comes to the deposit of the amount to the credit of the Central Government, the company says it is not tax while it is depriving thousands of its shareholders all over the country of the amount of more than Rs. 65 lakhs and by treating this as tax, it is dishonestly misappropriating the same and converting to its own use the said amount. Once the Income-tax Department held the amount to be tax deducted at source, the company ought to have deposited the same to the credit of the Central Government. As far as the shareholders are concerned, the company is allegedly keeping this amount free of interest'. Paragraph 10 of the complaint is in these terms :
10. The act; on of the company from the very beginning was mala fide and the company and its principal officers, the accused, however, had failed to deposit the amount, after deducting the same, without reasonable cause or excuse, as required under the law and are thus liable to punishment under section 276B of the Act. The accused again, without reasonable cause or excuse, failed to deposit the tax when called upon to do so by notice in writing by the Income-tax Officer and subsequently also when stand of the Income-tax Department was made known to them. The company is making false excuses in not complying with the principles of law.'
10. Even though the complaints are described as for an offence under section 276B of the Act, there is a specific allegation in para (?) of these complaints that the retained amounts have been 'dishonestly misappropriated' and 'converted' to its own use by the company. It is probably for this reason that the court seized of the (sic) summoned the petitioners in each of the complaints, not only for an offence under section 276B of the Act, but also for an offence under section 409 of the Indian Penal Code.
11. Section 276B of the Act, which was added by the Taxation Law (Amendment) Act of 1975, makes penal failure to deduct or pay tax and runs thus :
'276B. If a person, without reasonable cause or excuse, fails to deduct or after deducting, fails to pay the tax as required by or under the provisions of sub-section (9) of section 80E or Chapter XVII-B, he shall be punishable, -
(i) in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;
(ii) 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.'
12. Section 194 of the Act, which-deals with deduction of tax on dividend at source, runs thus :
'194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, of any dividend within the meaning of subclause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or subclause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force :
Provided that no such deduction shall be made in the case of any shareholder not being a company, if -
(a) the shareholder is resident in India;
(b) the amount of such dividend does not exceed two hundred and fifty rupees; and
(c) the shareholder furnishes to the person responsible for paying the dividend a statement in writing in the prescribed form and verified the prescribed manner declaring that his estimated total income of the previous year in which such dividend is to be included under the provisions of section 8 will be less than the minimum liable to income-tax :
Provided further that where in the case of any shareholder, not being a company, the Income-tax Officer gives a certificate in writing in the prescribed manner that to the best of his belief the total income of the shareholder will be less than the minimum liable to income-tax, the person responsible for paying any dividend to the shareholder shall, so long as the certificate is in force, pay the dividend without any deduction.'
13. Section 194 in turn provides for deduction at source of tax on any 'dividend' within the meaning of sub-clauses (a) to (e) of clause (22) of section 2 of the Act. Section 2(22) of the Act runs thus :
' (22) 'dividend' includes -
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.'
14. Section 293 of the Act, which incorporates a bar of suits in civil courts to set aside or modify any assessment order made under the Act, and for certain other matters, runs thus :
293. No suit shall be brought in any civil court to set aside or modify any assessment order made under this Act, and no prosecution, suit or other proceeding shall lie against the Government or any officer of the Government. for anything in good faith done or intended to be done under this Act.'
15. On the contentions raised on behalf of the parties, the following four questions arise for determination :
' (a) Whether in the absence of determination of liability by any authority : under the Act, complaints based on such liability are incompetent ?
(b) If so, whether there is any subsisting order of a competent authority under the Act which could be a valid basis for the complaints ?
(c) Whether there is any determination by a competent authority under the Act which may be inconsistent with the liability on which the complaints are based ?
(d) Whether having regard to all the circumstances, the proceeding before the criminal court would be an abuse of the process of the court and would it be in the interests of justice to quash the proceedings ?
16. The question at (a) above must be answered in the negative. There is no provision in the Act which may be construed as expressly or impliedly barring institution of a complaint for an offence under section 276B of the Act in the absence of any determination of a liability by an authority under the Act, which may be the basis of allegations constituting the offence. Section 293 of the Act bars any suit to 'set aside or modify any assessment' made under the Act. The complaints are admittedly outside the scope of this section. In any event, even if the principle of the section was to be applied to criminal proceedings, the complaints will still be outside the mischief of the section because there is no 'assessment order' which is sought to be 'set aside or modified' by the prosecution. Moreover, what section 276B makes penal is not the violation of an order or a direction made under the Act. It seeks to penalise failure to deduct or, if deducted, failure to pay tax, as required, inter alia, by the provision of section 194 of the Act. The deduction under section 194 has to be made, unless excepted by the two provisos to it, in anticipation of any assessment and irrespective of whether the recipient ultimately be liable to pay tax or not. It is an anticipatory deduction which is to be made and, if made, to be deposited. The deduction is, no doubt, to be made only if the payment falls within the terms of any of the sub-clauses(a) to (e) of clause (22) of section 2 of the Act, but here again, the deduction, if at all, has to be made by the person making the payment, on the basis of his bona fide understanding, and if made, to pay in the Government account in anticipation of, as indeed, and independent of the eventual determination of liability of the recipient to pay the tax, on the amount sought to be paid to the assessed. If the person making the payment fails to make the deduction or if having made the deduction fails to deposit, it also attracts section 201 of the Act, which renders the person liable 'to be deemed to be an assessed in default in respect of the tax' but sub-section (I) of that section further provides that this liability is 'without prejudice to any other consequences which he or it may incur'. This clearly shows that the power under the Act to treat the person, who ought to have made the deduction, or to have made the payment, if deducted, as the case may be, as an assessed in default is independent of and without prejudice to any other consequence, which obviously would include, if not merely contemplate, prosecution for an offence under section 276B of the Act.
17. True, the Act is a complete code for the determination of liability to tax or to penalties or to other consequences and provides exhaustive remedies for these, as indeed, various matters incidental thereto, and resort must, thereforee, ordinarily be had to the machinery set up under the Act for relief. (Kamala Mills Ltd. v. Slate of Bombay : 57ITR643(SC) . It is, however, not possible to ignore the distinction between determination of liability to tax and of penalty, etc., the proceedings to realise tax and other penalties, on the one hand, and to administer the other penal provision, on the other. While the first set of proceedings have, by their very nature, to be conducted before the authorities constituted under the Act, the penal provisions for which cognizance has to be taken by a criminal court at the instance of the specified authority under the Act have perforce to be filed in such court. These are concurrent remedies and the invocation of one does not necessarily dispense with, obviate or oust the other. The imposition of penalties under the Act, by the authorities and the conviction in a court of law for an offence created by the Act, do not attract the principle of double jeopardy either. Ordinarily, the decision to prosecute an assessed or a person, who may be deemed to be an assessed, under the various penal provisions of the Act, is a purely administrative decision and may be taken by the office empowered to initiate action being satisfied, on the objective material before him, that there is a case for prosecution without a judicial determination under the Act, as to taxability, quantification of liability, or liability to any penalty, etc. Such a determination is not a condition precedent to the filing of the prosecution. If that were the intention, the Act would have made a specific provision in that behalf. The propriety of institution of prosecution, even before the authorities, under the Act, have arrived at a judicial determination matters, which constitute gravamen of the charge in a prosecution, is a slightly different aspect of the matter, and I would consider it when I come the question at (d) above. I would also have occasion to consider at that time the further question as to the anomaly that may be created if, during the pendency of such a prosecution, the authorities under the Act, themselves return a finding with regard to liability, which may run counter to the allegations in the complaint, and as to the course to be followed in such cases in relation to the prosecution. Prosecution before judicial determination of liability would, however, be rare because their filing is controlled by the provision of section 279 of the Act. But in the absence of an express or an implied provision in that behalf, it is difficult to hold that, in the absence of determination of liability, by the authority under the Act, a complaint, based on such liability, is incompetent and I answer the question accordingly.
18. The question at (b) above must also be answered in the negative. It is no doubt true that the Income-tax Officer, as indeed, the Appellate Assistant Commissioner of Income-tax had, at one stage, determined that the amount paid to the shareholders was 'deemed dividend' and, thereforee, liable to deduction of tax at source, but the contention that these are subsisting orders of competent authorities, notwithstanding the fact that both the orders were set aside by the Tribunal, even though on the ground of limitation is devoid of any force. An order which is set aside by the Tribunal, even though on the ground of limitation, is devoid of any force. An order which is set aside on the ground of limitation ceases to have any legal existence and no advantage can be taken of any finding which it may have returned. One would have perhaps sympathised with the contention if the prosecutions had been filed while the orders of the two authorities were subsisting, but the prosecutions were filed, oddly enough, after the two orders had been set aside by the Appellate Tribunal. In fact, the complaints were filed in March, 1980, after the Tribunal had even turned down the Department's application for a reference to this court. There was, thereforee, no subsisting order of any competent authority, under the Act, which could provide a valid basis of determination of liability, on which the complaints are grounded, even though in view of my conclusion on the question at (a) above such an order was not necessary. I have, however, dealt with this aspect because a contention was raised on behalf of the respondent that the findings in corporated in the two orders survived, as it were, the decision of the Tribunal that the proceedings in which the orders were made, were barred by time. A contention was also raised in this connection that following the dismissal by this court of the Department's application to call for a reference, the Department had filed a petition in the Supreme Court for special leave to appeal against the judgment of this court. This court turned down the plea of the Department in January 1982, and it was contended that the petition for special leave was filed soon thereafter. Counsel was, however, unable to give the particulars of the petition nor any Explanationn how a petition filed in the Supreme Court in the beginning of 1982 had not as yet come up for preliminary hearing, even though more than two years have since expired. Counsel, however, did not even seem to be sure if such a petition had been filed, even though he was given time to make the necessary enquiries and give the particulars. That need not, however, detain me because even if it is assumed that the petition had been filed and was still pending, it could not nevertheless be said that that by itself would revive the two orders, which were held to have been made in the proceedings, which were barred by time.
19. The question at (c) above must be answered in the affirmative. It was not disputed that three individual shareholders, who had received the amount from the company, successfully raised a plea before the Appellate Tribunal that, having regard to the nature of the payments, made by the company to them on account of purchase of shares held by them in the company, the payment was not taxable as 'deemed dividend' and it was not disputed that the orders of the Tribunal in these three cases had become final, not having been challenged by the Department in any further proceedings. The company, no doubt, is not a party to these proceedings, nor are the other three petitioners before this court and the decisions in these three cases, being between the Department, on the one hand, and the individual shareholder, on the other, do not bind the petitioners but the Department is bound by the orders and is certainly not entitled to ignore the determination. At attempt was made on behalf of the respondent to wriggle out of the liability to be bound by these decisions on the ground that each of these matters involved a very meagre amount, as a result of which the Department did not consider it worthwhile to challenge these decisions and that, in the peculiar circumstances, the Department should not be held bound by these decisions and these decisions should not have any impact on the competence or propriety of the proceedings which are challenged in the present petition. While I would consider the question of their impact when I deal with question No. (d) above, there can be little doubt that there is a determination by a competent authority, under the Act, which is contrary to the hypothesis on which the complaints are based and the decisions are not only binding on the Department but have also become final, since they remain unchallenged and the limitation for a challenge has since expired.
20. The question at (d) above has to be answered in the affirmative for a variety of reasons. In the first instance, clamping a criminal prosecution for an offence, which is not part of the normal penal law of the country, but is a creature of a special statute dealing primarily with fiscal matters, designed to collect revenues for the exchequer without determination of liability under the Act, is neither just nor fair, particularly where the prosecution would involve intricate questions of interpretation of taxation concepts. A prosecution even under the ordinary law by the State is invariably preceded by a thorough investigation by an expert agency and filed in a court only after the matter has been examined at different levels for the satisfaction of the prosecution launching agency that the matter was a fit one to be sent to the criminal court. Such a need would be far greater where the prosecution would involve interpretation of taxation laws, which have, by and large, baffled both the taxmen and the tax experts over the years. There are no doubt other fiscal statutes, where prosecutions are, at times, launched either in anticipation of or without even the contemplation of domestic adjudication, but different considerations may perhaps apply to those cases. In cases of offences, under the tax laws, it would be improper for the Department to rush with the prosecution without a proper determination by a competent authority, under the Act, of liability, which is sought to be made the basis for the prosecution, even though such prosecution may not be incompetent in the absence of such determination and I have already come to that conclusion. Such a course could lead to anomalous results. What would happen to the prosecution if during its pendency, the authority under the Act returns a finding of fact or of law which may be inconsistent with the basis on which the complaint proceeds What if the authority under the Act and the criminal court return conflicting findings Secondly, the present prosecutions were improper because they are based on the assumption that the adverse findings arrived at in the course of proceedings under section 221 of the Act constituted judicial determination of liability so as to justify prosecution even though admittedly the prosecutions were filed after the Tribunal had set aside the proceedings, though on the ground of limitation. Once proceedings are set aside on the ground of limitation, the proceedings, as indeed, the orders made in the proceedings are void in the eye of law and the prosecutions were, thereforee, clearly based on an erroneous assumption If the Department still persisted in its contention or had sought special leave from the Supreme Court, the proper course for the Department would have been to await the outcome of the proceedings in that court before launching the prosecution, particularly where the prosecution was immune from any constraints of limitation, by virtue of the provisions of the Economic Offences (Inapplicabilty of Limitation) Act, 1974. Thirdly there were three subsisting orders of the Tribunal in the proceedings between the Department and three individual shareholders of the company, in which three different Benches of the Appellate Tribunal had taken the view of liability, which was inconsistent with the hypothesis, on which the prosecutions were based. It was not disputed that these decisions were not challenged and have, thereforee, become final. True, the petitioners were not parties to any of the three proceedings, but the Department is certainly bound by these decisions and the question which fell for decision in the proceedings directly arose out of transactions forming the subject matter of the prosecutions. It may be, as was sought to be explained, that these three proceedings involved very small amounts and, thereforee, the Department did not consider it feasible to assail the orders, but these orders did raise questions of principle for the Department and the Department could not have overlooked their impact on any proceedings based on the same or similar transactions. Filing prosecutions, in the circumstances, cannot but be open to the criticism of indiscretion, if not impropriety. Fourthly, the penal provision concerned is not absolute in its terms. Failure to deduct or failure to pay, if deducted, has not by itself been made penal. such an act, if done 'without reasonable cause or excuse' alone has been made penal. Ordinarily, it would be for the trial court to determine if an act has been done without reasonable cause or excuse and this court could not interfere merely because this court finds at the threshold that there was a reasonable cause or excuse for what has been done or has not been done, but in the peculiar circumstances of this case, the correspondence between the company and the highest authority under the Act, as indeed, the parleys between the company and its major shareholders, the caution exercised by the company in obtaining prior legal advice from an authoritative source and the safeguard built by it into the manner in which payment was made to the shareholders, it is hardly possible for any judicial authority, duly instructed in the law, to hold that the acts complained of were committed without reasonable cause or excuse. Where there was no determination by a competent authority under the Act, directly between the parties on the question of liability, where the determination of the authorities, in some of the matters was clearly consistent with the stand of the company, where the company had not only sought authoritative legal opinion but had also sought anticipatory views of the highest authority under the Act, whether permissible in law or otherwise, where payment was eventually made in terms of a settlement between the company, on the one hand, and the major shareholders, on the other, who happened to be an institution, which is a State within the meaning of article 12 of the Constitution and where in spite of all that the company still took, the precaution of retaining part of the sale price, lest it be faulted for not making the deduction, or making a provision for payment to the Government, no court or Tribunal would still come to the conclusion that there was no reasonable cause or excuse for the manner in which the company dealt with the matter. Some of these reasons may not by themselves, be enough to render the prosecution liable to be quashed, but I have no doubt in my mind that in their cumulative effect, the prosecutions could hardly be described as being just and fair and are clearly exposed to the criticism of constituting an abuse of the process of the court and are, thereforee, liable to be quashed.
21. I have dealt with the various contentions raised on behalf of the parties at the hearing but that is not the end of the matter because while drawing up the judgment, it occurred to me that there were quite a few other facts of the prosecutions, which were controversial and would, there fore, deserve consideration. Petitioner No. 1 is a corporate body. Section 276B of the Act, as well as section 409 of the Indian Penal Code, make the offences under these provisions punishable with a sentence of imprisonment and with fine. Under section 276B, the sentence of imprisonment shall not be less than six months. It is well settled that a corporate body could not be given corporeal punishment, and if it cannot be punished, would its prosecution be competent If the prosecution of a juristic person may thus be incompetent, could its principal officer or other officers be made vicariously liable under section 278B of the Act without a finding that the company was liable to be punished Could the finding that the company was guilty of an offence and liable to be punished be given in such a prosecution in the absence of the company, if the proceedings against the company are not competent Under section 279 of the Act, prosecution could be filed only at the instance of the Commissioner of Income-tax. The section, however, regulates prosecution for offences under the the Act but not offences under the Indian Penal Code, with the result that sanction of the Commissioner was prima facie unnecessary for a complaint of an offence other than an offence under the Act. The complainant is, however, a public servant. He has not filed the complaints as a private person. Certain duties have been assigned to him as a public servant under the Act. Unless filing prosecution could be considered to be part of his official duty, any prosecution by him for an offence, other than an offence under the Act, must also need the sanction of the authority, under whose control and supervision he discharges his official duties. The authorisation and direction to the complainant, in the present case, is confined to the terms of section 276B and could not extend to an offence under section 409 of the Indian Penal Code, or for that matter to any other offence. Would the complaints, to the extent they contain ingredients of an offence under section 409, Indian Penal Code, be incompetent for that reason, and if that be so, could the Magistrate take cognizance of an offence under section 409 on such a complaint If the prosecutions are liable to be quashed, could this court impose the conditions on the company, such as payment of the retained amount to the shareholders or to the Government Would it be open to the court to direct the company to pay interest on the retained amount as a condition of an order quashing the proceedings If the court is competent to impose these conditions and the company is directed to make the payments to the shareholders or to the Government, could it create complications for the company in view of the pendency of the petition for special leave in the Supreme Court In view of these and certain other controversies, I had the petition listed for further hearing.
22. In the course of further hearing, learned counsel for the parties made their submissions with regard to these questions. In the course of arguments, however, two further questions were thrown up. Section 194 of the Act imposes an obligation to make deduction from payment of any dividend on the 'principal officer' of a company. Section 200 of the Act imposes on the 'person making the deduction' a further duty to pay the amount within the prescribed time to the credit of the Central Government Section 276B makes failure to deduct or failure to pay after deduction penal. If the obligation to deduct and to pay be the obligation under section 194 of the Act of the 'principal officer' of the company, could the company be prosecuted for an offence under section 276B In these complaints, in addition to the company, the chairman, a director and secretary of the company are being proceeded against. The liability to deduct under section 194 is that of the 'principal officer' of the company. The expression 'principal officer' is defined by section 2(35) of the Act to mean 'the secretary, treasurer, manager, or agent' or 'any person connected with the management or administration of the...... company ,... upon whom the Income-tax Officer has served a notice of his intention of treating him as the principal officer thereof'. Could there be more than one principal officer of a company If the chairman and the director of the company would not be principal officers, could they be held liable as principal officers, without serving on them a notice of the Income-tax Officer's intention to treat them as principal officers of the company Some of these questions were also debated at the further hearing.
23. The question if the prosecution of a juristic person is competent where the offence is punishable only with a sentence of imprisonment and of fine, has been the subject-matter of judicial controversy, both in England and in this country. While the position in English law is fairly well-settled, that prosecution in such a case is incompetent, the position in India is not free from doubt. A Division Bench of this court held in the case of Rameshwar Choote Lal, , relying on a decision of the Supreme Court in the case of State of Maharashtra v. Jugmander Lal : 3SCR1 , that prosecution in such a case would not be competent. This view was, however, overruled by a Full Bench of this court in the case of Municipal Corporation of Delhi  Cr. LJ 1148. In taking that view, the Full Bench prima facie read down the decision of the Supreme Court in the case of Jugmander Lal, : 3SCR1 and having regard to the settled legal position in England, and the decision of the Supreme Court in the case of Jugmander Lal, AlR 1966 SC 940, the decision of the Full Bench, with respect, would perhaps need to be reconsidered. A Division Bench of the Allahabad High Court in the case of Modi Industries  144 ITR 497, expressed the view that the decision of the Full Bench of this court appears to be contrary to the decision of the Supreme court in the case of Jugmander Lal, : 3SCR1 . If it was necessary to base the decision in the present case on the question to the competence of the prosecution against the company, I would have perhaps referred the question to a larger Bench, but in the way I have answered the question at (d) above, it is really unnecessary for me to take the matter any further. For the same reason, it is unnecessary far me to deal with some of the other questions raised at the further hearing, even though they are of considerable importance, and of some difficulty and, on one reckoning, introduce further legal infirmities in the prosecution.
24. As for the offence under section 409 of the Code, it is enough to say that the admitted circumstances in which, and the reasons for which, part of the payment of the price was retained, leave no manner of doubt as to the true intention of the company and the other petitioners, or as to the misappropriation or conversion of funds, to the extent they were retained by the company and for the reasons I have already set out above in the other context, it would certainly be an abuse of the process of court to prosecute the petitioners even for an offence under section 409 of the Code, assuming that a complaint of the commission of that offence was otherwise competent or the Magistrate could have taken cognizance of it even without a formal complaint.
25. That leaves for consideration the question if it would be reasonable and proper to impose any condition on the petitioners, while quashing the proceedings. The historical background of the payment and the retention leave none of the parties concerned unaffected and, on one reckoning, all of them come out-battered, to some extent. When the question was initially referred by the company, in its anxiety to be on the right side of law, to the highest authority under the Act, the authority clearly side-tracked the issue on the ground that there was no provision for anticipatory expression of opinion. When the company was advised that there was no need for a deduction and the authorities under the Act were reticent, where was the need for the company to retain any part of the sale price For, if it had paid the entire amount, it would certainly have been acting in a a bona fide manner on the basis of an authoritative opinion. Where was the question of its, nevertheless, retaining part of the purchase price the agreement between the Life Insurance Corporation of India and the company, in the circumstances, also does not stand to reason, even though it does reinforce the claim of the company that it was acting not only bona fide, but with the virtual concurrence of the substantial body of shareholders. In any event, the retained amount was either tax or was non-taxable part of the sale price. If it was purely unpaid part of the sale price, it had to go to the shareholder without. any deduction and if deduction was justified, the company had no business to keep the fund in its account. Even though it took a reasonable step in filing a suit, the retained amount was nevertheless neither paid to the Government nor to the shareholders. The amount was either part of the price or tax deducted at source. Either way it could not be retained by the company. The result has, no doubt, been that if it was not a deduction, the shareholders have been deprived of this amount for all this time, and if it was tax deducted at source, the exchequer has been deprived of it. This court is, however, neither entitled nor called upon to decide the question if tax was liable to be deducted at source but it would certainly be entitled to insist that if the prosecutions are to be quashed, it is but proper that the amount, so far held by the company as the retained part of the price, must forthwith go to the shareholders, subject to whatever legitimate determination may be made eventually by the authorities under the Act. It is also reasonable and proper that the company, which has certainly not kept the amount in a separate fund, but would be deemed to have utilised it for its legitimate business activity, must pay interest on the amount for the entire period at a reasonable rate, even though the payment to the shareholders would be subject to the undertaking of the shareholders concerned that the requisite amount with interest as received from the company would be paid to the exchequer if it is ultimately held that at the payment was subject to deduction at source, as deemed dividend. I was, thereforee, inclined to impose the condition requiring the company to make payment to the shareholders within a reasonable period with interest at a reasonable rate, subject to the shareholders giving an appropriate indemnity to the company and its officers against any claims of revenue against them. But there is substance in the contention of the petitioners that such a course may perhaps create complications for them eventually, unless the income-tax department concurs in the course that they may be asked to follow, or appropriate direction is obtained from the Supreme Court in the proceeding pending before it, or if the proceedings now pending in the Supreme Court, are withdrawn and no controversy survives with regard to the obligation of the petitioners to the shareholders and the Government.
26. Having regard to all the circumstances, I would, thereforee, quash all the complaints and the orders summoning the petitioners in each of these cases subject, however, to the condition that the retained amount would be paid to such persons or authorities and within such time and with such interest as may be directed by the Supreme Court in the proceedings pending before it, unless the aforesaid proceedings are withdrawn by the income-tax authority, in which case the retained amount would be paid to the shareholders concerned, within four weeks of the withdrawal, with interest at 11 per cent. per annum on the amount from the date of retention to the date of payment.