(1) This is a composite petition, under Section 482 of the Code, by P.N.B. Finance & Industries Ltd, for short, the Company, its Chairman, Director, and Secretary, 'to quash 220 complaints against them by the Income-tax Officer, Company Circle, respondent herein, for an offence 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 Companies (Acquisition & Transfer of the Undertakings) Banking 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 the acquisition, the Company, by a Circular of February 28, 1973, gave option to its shareholders to sell to it shares held by them in it at Rs. 381- 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 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 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 share-holders of the Company, and on their suggestion the price was raised from Rs. 381- per share to Rs. 40.00 per share, exclusive of dividend that might be declared till the date of the payment of the price. Permanent to the Circular,sharehoders 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 the consequent reduction of capital being confirmed by this Court. This Court eventually gave necessary confirmation. The Central Board of Direct Taxes, however, took no decision with regard to the question 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 sale of their shares. It was further the view of the Corporation that the Company need not treat the difference 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 shoreholders, 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 payable, or any part of it, could be considered 'deemed dividend' and on the suggestion of the Corporation, the Company made payments on account @Rs. 33,10 per share In 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 to 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 agreement of January 18, 1975, entered into between the Corporation and the Company, it was decided to refer the matter under Order xxxvi Rule (1) of the Code of Civil Procedure to this Court. Accordingly, a suit was filed this Court, under Order xxxvi Rule (1) being Suit No. 98 of 1975, for a decision of the question whether the payment to the shareholders, 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, that the question could only be decided is proceedings under the adjourned sine die on the objection of the Income-tax authorities Act, and not in any suit. In May 1975 the Income-tax Officer, Company Circle required the Company by a Notice under Section 201(IA) of the Act to pay a sum of Rs. 82,17,1091- 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. 401- 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 an 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 up on 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 to the effect that the aforesaid amount was due from the Company and required the bankers to pay 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 at 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 this Court reported as I.L.R. 1975 Del 410. in which this Court had held that the under- taking of the Company, comprising of all the assets and liabilities, had been taken over by 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 the 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 share holders 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 Revenues, 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 based 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 Batches of the Delhi Circle of the Income-tax Appellate Tribunal, by their order 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 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 composit one challenging the validity of 220 complaints, an 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 of 220 complaints within a specified period. The petitioner have since paid the requite 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 a 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 profits' 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 Revenues 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 its principal officers, having dealt with the matter in a bona fide manner, on the basis of authoritative opinion, consistent with its twin obligation to the Excheque'. as well as its shareholders, and in consultation with the Government institutions, Which were its major shareholders, the proceedings against the petitioners 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 a 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 proceeding 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 shoreholders, of the amount retained by it, and mis-appropriated 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 arc 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 is manifestly and clearly 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 liable 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 the accused would not be sustained(1).
These tests were slightly widened subsequently(2) and it may lately Bald 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 the 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 legally competent auth Code. the of 482 Section under power its exercise, in proceedings quashing justified be would .Court High then, out, made is offence no if anything, subtracting or adding without are, they as complaint, and allegations taking that is, test this words, other In constituted. .no same, accompanying papers complaint face on only quashed can stage initial accused an against clear manifestly thereforee, 10 'The action of the Company from the very beginning was mala fide and the company and its principal officers, the accused -however, had fail 'to deposit the amount, after deducting the same, without reasonable cause or excuse, as required under law and are thus liable to punishment under Section 176B 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 of Income-tax Officer and subsequently also when the 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.'.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 subsection (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 may 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.'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 sub-clause (a) or sub-clause (b) or sub- clause (e) or sub-clause (d) or sub-clause (e) of clause (22) of Section 2, deduct from the amount of such dividend, income-tax at the rates in force : 318 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 in 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.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 319 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) 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 possesses accumulated prompts which ther 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, or any such shareholder, to the extent to which the company in either case possesses accumulated profits.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'.(a) Whether in the absence of determination of liability by any authority under the Act complaints, based on such liability, are incompliant ?(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 proceedings before the criminal court would be an abuse of the process of the court and it would he in the interests of justice to quash the proceeding