Karnataka High Court Reinstates Prosecution Proceedings Against Director for TDS Default under Section 276B

In a significant judicial development concerning corporate tax compliance and the vicarious liability of directors, the Karnataka High Court has delivered a crucial judgment in the case of Income Tax Department Vs Srikar Reddy Vempati. The High Court allowed the Criminal Revision Petition filed by the Revenue, thereby setting aside the order of the Special Court for Economic Offences which had previously discharged a director from prosecution proceedings related to offences under Section 276B of the Income Tax Act, 1961.

This ruling underscores the stringent nature of compliance required regarding Tax Deducted at Source (TDS) and clarifies that directors cannot be summarily discharged at the preliminary stage merely on the assertion of non-involvement in day-to-day affairs when co-ordinate benches have ruled otherwise for similarly placed accused persons.

Factual Matrix of the Case

The legal controversy originated from a prosecution initiated by the Income Tax Department against a corporate entity and its key management personnel. The complaint, filed as C.C. No.77/2018, alleged the commission of offences punishable under Section 276B of the Income Tax Act, 1961. This section specifically deals with the failure to pay the tax deducted at source to the credit of the Central Government.

The hierarchy of the accused in the original complaint was as follows:

  • Accused No. 1: The Company.
  • Accused No. 2: The Managing Director.
  • Accused Nos. 3 to 6: Other Directors (including the Respondent in the present petition, who was Accused No. 6).

The Trial Court’s Decision

The matter was first heard by the Special Court for Economic Offences, Bengaluru. In its order dated 01.10.2019, the Trial Court undertook an examination of whether charges should be framed. The Trial Court formulated two primary points for determination:

  1. Whether sufficient material existed to frame charges against the Company (Accused No. 1) for offences under Section 276B.
  2. Whether Accused Nos. 2 to 6 had successfully demonstrated that they were not in charge of the day-to-day affairs of the Company and thus warranted a discharge.