By TIOL News Service

CHENNAI, APRIL 06, 2018: THE ISSUE BEFORE THE WRIT COURT IS - Whether a Non-Executive Chairman can be prosecuted u/s 278 for an offence committed by the company without establishing a prima facie case against his liability and obligation as Principal Officer in the company's day-to-day affairs. NO is the verdict.

Facts of the case:

The Assessee, an individual, is a Non-Executive Chairman of the Sun Group and he owns television channels, newspapers, weeklies, FM radio stations, DTH services and a movie production house. During the relevant year, a survey operation was conducted by the Revenue, wherein statement of Chief Financial Officer of the company, namely Mr.R.Neelakantan was recorded, in which he stated that one Mr.Manish Jain, Assistant Manager (Taxation) was responsible for TDS. Accordingly, the ACIT issued SCN to the Assessee at his Chennai residence and to one Mr.Rakesh Kumar, DGM (Finance & Taxation) at IGI Airport, Delhi. In reply, the Assessee stated that the Managing Director, CFO and COO were involved in the day-to-day affairs of the company. Accordingly, the ACIT had issued a SCN to the Managing Director, namely, Mr.K.Natrajhen mentioning that the reply sent by the Assessee stated that the company was professionally run by the Managing Director, who was in-charge of the day-to-day affairs of the company. Further, the ACIT also informed the Managing Director that prosecution u/s 276B would be taken against him. In reponse, the Managing Director stated that the Assessee was only a Non-Executive Director in the company and was not involved with the day-to-day management of the company and had not made any visits to the company. Further, the Managing Director, also stated that the Assessee was not at all responsible for the administration and the management of the company and he did not drew any salary or remuneration, and attended the board meetings only in the Non-Executive capacity. Therefore, the Managing Director had urged that the order issued against the Chairman holding him to be the Principal Officer within the meaning of Section 2(35) deserves to be recalled.

High Court held that,

++ admittedly, the order in dispute was served on the Assessee at his residential address at Chennai. Though the authority is at Delhi, it is clear that part of cause of action had arisen at Chennai. As per Article 226(2) of the Constitution of India, the writ petition is maintainable before a High Court within which the cause of action wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories. That apart, though the company's registered corporate office is at Delhi and the TAN number is at Delhi assessment, the Assessee in this writ petition has not challenged the assessment order, but, has challenged only the order naming him as the Principal Officer. In these circumstances, this Court has jurisdiction to entertain the writ petition;

++ the provision of Section 278B clearly states that it shall not render any such person liable to any punishment, if he proves that offence was committed without his knowledge. The ACIT has not produced any material to establish that the Assessee was responsible for the day-to-day affairs of the company. In the absence of any material, the ACIT should not have come to the conclusion that the Assessee is the Principal Officer. The reasoning given by the ACIT are without any materials to substantiate the same. Unless the ACIT make out a prima facie case against the Assessee of his liability and obligation as Principal Officer in the day-to-day affairs of the company as Chairman-cum-Director of the company, u/s 278B, the Assessee could not be prosecuted for the offence committed by the company. In the absence of any material, the SCN itself, prima facie disclosing the Assessee's responsibility for the running of the day-to-day affairs of the company process, could not have been issued against him. The Assessee cannot be made to undergo the ordeal of a trial unless it could be prima facie disputed that he was legally liable for the failure of the company in paying the amount deducted to the credit of the company. A mere allegation that the Assessee is incharge of the conduct of the company is not sufficient to hold that the Assessee is the Principal Officer;

++ the Managing Director, viz., Mr.K.Natrajhen, himself has stated that he is responsible for the day-to-day affairs of the company. That apart, a SCN was also issued to the Managing Director by the ACIT. The Chief Financial Officer of the company, viz., Mr.R. Neelakantan has also stated that one Mr. Manish Jain, Assistant Manager (Taxation) is responsible for the TDS. Further, to the SCN sent to Mr.Rakesh Kumar, Deputy General Manager (Finance & Taxation), the company has sent a detailed reply wherein the company has stated that the said Rakesh Kumar should not be treated as the Principal Officer, which was accepted by the ACIT and the said Rakesh Kumar was not named as the Principal Officer. On the contrary, even without any materials and also not considering the stand taken by the Managing Director and also the Chief Financial Officer of the Company, the ACIT arrayed the Assessee as the Principal officer. The ACIT has not given any reason for rejecting the stand of the Managing Director and the Chief Financial Officer of the company. There was a meeting between the company officials and the Revenue in order to facilitate to pay the TDS on a payment plan basis and the company has submitted its plan and the said plan was accepted by the ACIT. Thereafter, the company has also made payments towards TDS and it is informed to this Court by the Counsel for the Assessee that the company had paid the entire arrears of TDS and as on date, there are no TDS arrears payable by the company;

++ though the Assessee and his company were holding more than 50% shares, in the absence of any material to establish that the Assessee was in charge of the day-to-day affairs, management, and administration of the company, the ACIT should not have named him as the Principal Officer. The main criteria treating a person as the Principal Officer is he should have been in charge of the management, administration and day-to-day affairs of the company. It was also stated by the Managing Director that the Assessee is only a Non-Executive Director in the company, who is based at Chennai and is not involved with the day-to-day management of the company and has not made any visits to the company till date as he does not draw any salary or remuneration from the company and attends the Board Meetings only in the Non-Executive capacity, for which, he does not even get any sitting fees. Hence, it is clear that the Assessee was not involved in the management, administration and the day-to-day affairs of the company, therefore, the Assessee cannot be treated as Principal Officer.

(See 2018-TIOL-628-HC-MAD-IT)