TDS Prosecution Can't Be Initiated Against Any Office Holder In Corporate Without Establishing Administrative Connection: Delhi High Court

The Delhi High Court has held that TDS prosecution can't be initiated against any office holder in a corporation without establishing an administrative connection.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar has observed that merely because a person holds an office in a corporate entity, it would not be sufficient to place him as a principal officer until and unless he is established to be connected with the management or administration of the company. The bench stated that the department assumed that any person who has been served a notice embodying an intent to treat that person as a principal officer would be sufficient for the purposes of Section 2(35) of the Income Tax Act. As per Section 2(35), the secretary, treasurer, manager, or agent thereof would be liable to be treated as the principal officer; however, he should be “connected with the management or administration of the company.”.

The petitioner has challenged the order as well as a corrigendum passed by the respondent department holding the petitioner as the “Principal Officer” of the company for the purposes of initiating prosecution under Section 276B of the Income Tax Act, 1961.

The petitioner was appointed as the Chief Executive Officer (CEO) of M/s Healthfore Technologies Ltd. on January 1, 2016. The petitioner was thereafter appointed as its managing director (MD). The petitioner resigned from the position of MD. Although he held the offices of CEO and MD, he was not in charge of any finance or tax-related matters pertaining to the company.

The petitioner was served with the first of the various show cause notices, treating him to be the “Principal Officer” and asking him to show cause in respect of a default by the company to deposit TDS for Financial Years 2016-17 and 2017-18 within the stipulated statutory period.

The petitioner responded to the notice and pointed out that he was appointed as the MD only on May 2, 2017 and had resigned from that post on March 2, 2018. He could not possibly be held to be the person responsible for FY 2016–17, at least. Insofar as the other FY in question is concerned, it was submitted that he was not connected with or in charge of the accounting or financing activities pertaining to the company, and therefore the department had illegally treated him as the “Principal Officer.”.

The issue raised was whether the petitioner could be said to be a person connected with the management or administration of the company.

The court has directed the department to examine the issue afresh from the stage of issuance of notice under Section 2(35) after considering the petitioner's response and upon due inquiry as to whether the petitioner could be said to be a person connected with the management or administration of the company.

The court allowed the writ petition with the continuation of an interim stay on prosecution and consequential proceedings, subject to the final decision that the department will now take pursuant to the directions.

Counsel For Petitioner: Sachit Jolly

Counsel For Respondent: Puneet Rai

Case Title: Varun Sood Versus ACIT

Citation: 2024 LiveLaw (Del) 199

Case No.: W.P.(C) 8577/2019

Click Here To Read The Order