The Delhi High Court (HC) has quashed criminal proceedings initiated by the income-tax (I-T) department against two company directors, ruling that directors cannot be prosecuted without the company itself being arraigned as an accused. The HC, while allowing two petitions filed by Nilesh Agarwal and Rakesh Agarwal, held that arraignment of the company is a sine qua non, a necessary precondition, for imposing vicarious liability on its directors under Section 278B of the Income Tax Act, 1961.
Justice Ravinder Dudeja, delivering the judgement last month, set aside the complaint cases as well as the summoning orders issued by the additional chief metropolitan magistrate (special acts), Tis Hazari Courts, on 6 June 2024. The HC observed that the prosecution of the directors, in the absence of the company, SNR Buildwell Pvt Ltd, “goes to the root of jurisdiction and is not a mere technical defect.”
"...on both settled law and the facts of this case, the continuation of prosecution against the petitioners as directors alone without impleading the company as an accused would be contrary to law and amount to an abuse of process," the order says.
The case arose from an I-T department prosecution alleging that SNR Buildwell failed to discharge tax liabilities of Rs4.44 crore for the assessment years (AY)14–15 to AY16–17. During recovery proceedings, the department claimed to have discovered that the company, acting through director Rakesh Agarwal, transferred an Audi car to his daughter-in-law without adequate consideration to avoid seizure. The department treated the transaction as void under Section 281 of the I-T Act and initiated prosecution against the company’s directors under Section 276 of the Act.
However, the prosecution was launched only against the directors, omitting the company itself from the list of accused. The directors argued before the HC that the prosecution was legally unsustainable as they were being held vicariously liable for an alleged act of the company which was never made a party to the case.
Counsel for the petitioners contended that the entire case rested on the acts and liabilities of the company, and therefore, the company’s non-inclusion rendered the proceedings null and void. They cited Section 278B of the I-T Act which explicitly provides that both the company and those in charge of its operations shall be deemed guilty when an offence is committed by the company. Relying on key Supreme Court precedents—Aneeta Hada vs Godfather Travels & Tours (2012), Sharad Kumar Sanghi vs Sangita Rane (2015) and Sushil Sethi vs State of Arunachal Pradesh (2020), the petitioners argued that the prosecution of directors alone is impermissible without the company being arraigned.
The I-T department opposed the petitions, arguing that the omission to implead the company was a curable technical defect. The department maintained that the directors, as officers of the company, are directly responsible for the transfer of assets intended to frustrate recovery proceedings. It urged the court not to quash the proceedings on procedural grounds and cited decisions, including UP Pollution Control Board vs Modi Distillery (1987) and Bansal Milk Chilling Centre vs Rana Milk Food Pvt Ltd to support its position.
Rejecting the department’s argument, justice Dudeja held that the legal foundation of such prosecutions requires the company to be the primary accused. “The legislative intent is clear that the company must first be arraigned; only then can its officers be fastened with vicarious liability,” the Court observed, adding that Section 278B of the I-T Act mirrors Section 141 of the Negotiable Instruments Act, 1881, under which similar principles of vicarious liability have been established.
The Court further emphasised that the show-cause notices (SCNs) and complaints themselves revealed that the directors were being prosecuted solely in their capacity as office-bearers of the company. The HC noted that paragraph 19 of the complaint explicitly stated that the prosecution was being pursued 'as a director of SNR Buildwell'. Likewise, the SCN issued by the tax department was addressed only to the company, confirming that the alleged acts were attributable to the company and not to the directors personally.
In view of these findings, the Court ruled that the failure to implead the company is not a mere procedural irregularity but a jurisdictional defect that rendered the proceedings against the directors void. “The omission to implead the company is not a mere technical irregularity but goes to the root of jurisdiction,” the court held.
Consequently, the HC quashed the case along with all consequential proceedings and allowed both petitions. However, the Court clarified that the judgement would not prevent the I-T department from pursuing other remedies available under law.
