Madras High Court Quashes Income Tax Prosecution Against Former Director Who Resigned Before Offence Period

Background of the Dispute

The Madras High Court, in Gautham Vasudev Menon Vs ACIT, dealt with a Criminal Original Petition seeking to quash criminal proceedings in E.O.C. No.24 of 2019 pending before the Additional Chief Metropolitan Magistrate, Egmore, Chennai. The core question was whether a person who had resigned as a Director well before the relevant Assessment Year could still be prosecuted for the company’s failure to file its return of income.

The first accused was a company assessed by the Income Tax Department in the Non-Corporate Circle, holding Permanent Account Number AAFCP2805A. The subsequent accused persons, including the petitioner, were alleged to be Directors of this company. The Department claimed that the company had significant income in Financial Year 2012-2013 and was therefore obliged to file its income tax return under Section 139(1) of the Income Tax Act 1961 for Assessment Year 2013-2014.

When the return was not filed by the prescribed due date and no response followed a show cause notice, the Department launched prosecution alleging an offence under Section 276CC and sought to implicate the petitioner as a person in charge of and responsible for the conduct of the company’s business under Section 278B.

Facts Placed Before the Court

Income and Non-Filing of Return

According to the complaint filed by the Income Tax Department:

  • For Financial Year 2012-2013, the first accused company had:
    • Professional income amounting to Rs.8,28,44,364/-;
    • Contractual income of Rs.24,78,925/-;
    • Cash deposits of Rs.11,50,000/-; and
    • Additional cash deposits of Rs.7,00,000/-.

The Department’s contention was that:

  1. This constituted taxable income requiring mandatory filing of return of income under Section 139(1) for Assessment Year 2013-2014, with the due date being 30.09.2013.
  2. Despite such substantial income, no return was filed within the statutory time limit.
  3. A show cause notice dated 27.04.2016 was issued to the company, but no reply was furnished.
  4. Consequently, the Department alleged wilful failure to file the return, amounting to an offence under Section 276CC of the Income Tax Act 1961.

Based on these allegations, a complaint was lodged and the petitioner was arrayed as Accused No.3 (A3).

Petitioner’s Stand: Resignation Before Relevant Period

The petitioner (A3) did not contest the fact that the company failed to file its return. Instead, he raised a jurisdictional objection to his very inclusion as an accused, contending that:

  • He was inducted as a Director of the first accused company on 01.06.2010.
  • He resigned from the Directorship with effect from 02.05.2011.

To establish this, the petitioner produced before the High Court:

  • Form No.32 submitted to the Registrar of Companies; and
  • Other related documents evidencing acceptance and recording of his resignation.

His core argument was that, because he had ceased to be a Director long before Financial Year 2012-2013 and Assessment Year 2013-2014, he could not be treated as a person in charge of the company’s affairs at the time of the alleged offence and thus could not be prosecuted under Section 276CC read with Section 278B.

Revenue’s Objections