In this blog post, Mamta Ramaswamy, a student pursuing her Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the criminal liability of the Directors and the Company on the non-payment of taxes. This article is written only for educational purposes and does not constitute a legal advice.
Introduction
While studying Company and Business Law, it’s pertinent to know if a director of a company and the company can be made criminally liable for non-payment of tax by the company?
Statutes
- Income Tax Act, 1961
- Finance Act, 1994
Discussion
Listed below are few sections which imposes a penalty on the director of the company for non-payment of taxes by the company.
Section 179 of the Income Tax Act, 1961, where any tax is due from a private company in respect of income earned in the previous year cannot be recovered then every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affair of the company.
78A of the Finance Act, 1994, where a company has committed evasion of service tax, the director of the company, who at the time of such contravention was in charge of the and was responsible to, the company for the conduct of business of such company and was knowingly concerned with such contravention, shall be liable to a penalty which may extend to one lac rupees.
Listed below are few sections which provide for penalty imposed on the company for non-payment of tax:
- Section 276B provides that if a person fails to pay to the credit of the Central Government the tax deducted at source by him as required by or under the provisions of the Income Tax Act, 1961, then he shall be punished with rigorous imprisonment for a term which shall not be less than three months and may extend to seven years and with fine. “In every case in which the offence is only punishable with imprisonment or with imprisonment and fine and the offender is a company or other body corporate or an association of individuals, it shall be competent to the Court to sentence such offender to fine only”[1]
- According to section 276C of the Income Tax Act, 1961, if a company evades tax it shall be liable to pay a fine.
- Similarly, other sections of the Income Tax Act, 1961 provides for the provisions wherein the person in default will be punished with imprisonment or fine or both.
A company cannot be held criminally liable but, as it is a juristic person, it can be made liable for payment of fine. The courts have appreciated the concept of corporate criminal liability[2], and if it is proved by the director that non-payment of tax by the company was not because of the director’s fault then the director cannot be held criminally liable[3] expect as provided under the taxing statutes as mentioned above. If the directors are the immediate managers of the company, and the non-payment of tax could not have escaped the directors, then the directors will be considered principle officers and will be prosecuted accordingly[4].
Conclusion
A company can be criminally liable for non-payment of taxes according to corporate criminal liability but it cannot be imprisonment because it is not a natural person but its juristic person can be fined. A director cannot be criminally liable for non-payment of tax by the company unless the director can show that such non-payment occurred due to negligence on his part.
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References:
[1] Angira Singhvi, Corporate Crime and Sentencing in India Required Amendments in Law, VOL 1 ISSUE 2 INTERNATIONAL JOURNAL OF CRIMINAL JUSTICE SCIENCE 8 (July 2006) (http://jcil.lsyndicate.com/wp-content/uploads/2016/03/CORPORATE-CRIMINAL-LIABILITY-Shreya-Bhattacharjee.pdf)
[2] Madhumilan Syntex Ltd. and Ors. vs. Union of India (2007) Criminal Appeal No. 1377 of 1999
[3] Gurudas Hazra vs P.K. Chowdhury And Ors. on 1 December, 1999
[4] Madhumilan Syntex Ltd. and Ors. vs. Union of India (2007) Criminal Appeal No. 1377 of 1999
