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Total Number of Subscribers: 426 |
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Date: 3 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Applicability of provisions relating to prosecution of a
company Introduction : Various provisions with regard to offences and prosecutions
under different situations are found in different economic laws for contravention
of certain provisions of the concerned Law. Accordingly, such provisions are
found in the Income-tax Act (the Act) in Chapter XXII, such as S. 276C which
provides for prosecution in case of wilful attempt to evade tax, penalty, or
interest; S. 277 which provides for punishment for making false
statements in verification under the Act, etc. In these provisions, the
punishment is provided with rigorous imprisonment for a minimum period of
three to six months, which may extend up to three to seven years and with
fine depending upon the quantum of tax involved in the offence. S. 278B of the Act, dealing with the cases of offence committed
by a company, in substance, inter alia, provides that every person
responsible and who has been in charge of the conduct of the business of the
company at the time when the offence was committed as well as the company
shall be deemed to be guilty of offence and shall be liable for punishment
accordingly. In short, in such cases, such persons as well as the company both
have been made liable for punishment. For this purpose, company also includes
a firm, AOP or BOI. In the past, the issue had come up for consideration as to
whether a company, being an artificial entity, can be proceeded against for
punishment under the above referred provisions which provide for
punishment of rigorous imprisonment by way of minimum term of a given
period and with fine. This issue was considered by the Apex Court
(three-Judge Bench) in the case of Velliappa Textiles Ltd., (263 ITR 550)
along with other issues relating to offences committed by the company. There was a sharp division amongst the Judges on interpretation
of such penal provisions under the Act dealing with Criminal offence by a
company where mens rea is a requisite for imposing punishment for an
offence. For the issue referred to in this para, in this
case, the Apex Court (majority view — which
included the view of Justice B. N. Srikrishna) held that a company
cannot be prosecuted for an offence u/s.276C, u/s.277, etc. of the
Act, since each one of these Sections require the imposition of a mandatory
term of imprisonment coupled with a fine and leaves no choice to the Court to
impose only fine. Justice Mathur had taken a different view on this issue. We are
not concerned with the other issues decided in this case for the purpose of
this write-up and therefore, the same are not referred to. This judgement has
been analysed in this column in the February and March 2004 issues of the
Journal. In view of the above referred judgement of the Apex Court with
regard to offence committed by a company, the Law became settled that in a
case where the Law provides for the imposition of a mandatory term of
imprisonment coupled with a fine and leaves no choice to the Court to impose
only fine, even a fine cannot be imposed on a company. S. 56 of the Foreign Exchange Regulations Act, 1973 (since
repealed — hereinafter referred to as FERA) also provided for
prosecution under different situations where on account of contravention of
certain provisions of the FERA, offences are committed. This Section provided
for punishment of imprisonment for a minimum period of six months which may
be extended up to seven years and with fine, if the amount or value involved
in the offence exceeds Rs.1 lakh. In such case, it was also provided that the
Court may impose a sentence of imprisonment for a term less than six months
by mentioning adequate and special reasons in the judgement. In other cases (i.e.,
if the amount or value involved in the offence does not exceed Rs.1 lakh),
the punishment provided was of a term which may extend for three years or
with fine or both. In the context of the provisions of S. 56 of the FERA (referred
to in para 1.5 above), the issue referred to in para 1.3 again came up before
the Bench of three Judges of the Apex Court before whom the appellant had
referred to the view taken by the Apex Court in the case of Velliappa
Textiles Ltd. (supra). The Bench doubted the correctness of the said
decision and the matter was thus placed before the Chief Justice of India for
making reference to a larger Bench and that is how the said issue, in the
context of the provisions of S. 56 of the FERA, came up before the larger
Bench (five Judges) of the Apex Court and that is how the judgement of the
Apex Court in the case of Velliappa Textiles Ltd. came up for reconsideration
[ANZ Grindlays Bank Ltd. v. Directorate of Enforcement, (2004) 6 SCC
531]. Standard Chartered Bank & Others v. Directorate of
Enforcement & Others, 275 ITR 81 (SC) : In the above cases, the Court dealt with the cases of Standard
Chartered Bank as well as other appeals and writ petitions involving
identical issue. In this case, the appellant had challenged various notices
issued to them u/s.50 read with S. 51 of the FERA and contended that the
appellant company was not liable to be prosecuted for an offence u/s.56 of
the FERA. The main contention of the appellant was that no criminal
proceedings can be initiated against the appellant company for an offence
under the said Section as the minimum punishment prescribed under the said
Section is imprisonment for a term which shall not be less than six months
and with fine. In these cases also, the issue referred to in
para 1.3 above has been decided by a
majority view (with two Judges giving dissenting judgement). The dissenting
judgement has been delivered by
Justice B. N. Srikrishna, while the other three Judges
have expressed their views separately. Therefore, we will first consider the
detailed judgement (representing the majority view) given by Justice K. G.
Balakrishnan and then deal with the views expressed by the other two Judges
taking a similar view on the issue under consideration. Judgement of
Justice K. G. Balakrishnan : The Judge noted the majority view expressed in the Velliappa
Textiles Ltd.‘s case (supra) to the effect that
a company cannot be prosecuted for an offence which requires punishment of a
mandatory sentence of imprisonment coupled with fine and in such cases, the
Court cannot impose only a fine. After dealing with this judgement, the Judge
also noted that there is no dispute that a company is liable to be prosecuted
and punished for criminal offences. It is a generally accepted modern rule that except for such crimes
as a corporation is held incapable of committing by reason of the fact that
they involve personal malicious intent, a corporation may be subject to
indictment or other criminal processes, although the criminal act is
committed through its agent. It was also noted that in most of the statutes,
the definition of the term ‘person’ includes company. In S. 11 of the
Indian Penal Code, such definition includes company. Therefore, as regards
corporate criminal liability, there is no doubt that a corporation or a
company could be prosecuted for any offence punishable under law, whether it
is coming under a strict liability or absolute liability. The Judge also noted that it is only in a case requiring mens
rea, that a question arises whether a corporation could be attributed
with requisite mens rea to prove the guilt. But as we are not
concerned with this question in these proceedings, we do not express any
opinion on that issue. It may be noted that in Velliappa Textiles Ltd.‘s case (supra), even this aspect was considered and
again, by majority, in that case, the Court has taken a view that where mens
rea is a requisite in a matter of criminal liability for any offence, a mens
rea of the person-in-charge of the affairs of the company can be
attributed to the company enabling such artificial person to be prosecuted
for such an offence. After referring to the provisions of S. 56(1) of the FERA
referred to in para 1.5 above, the Judge stated as under (page 96) :
The Judge also noted that a legal difficulty arising out of the
above situation was noted by the Law Commission in its 41st as well as 47th
report and it had recommendedfor an amendment
in the Indian Penal Code. However, no such amend-ment
is made though some other amendments have been made on the basis of such
reports. The Judge then referred to various judgements of the High Courts
as well as the Supreme Court dealing with penal provisions. Responding to the
contention that penal provision in the statute is to be strictly construed
[Ref. Tolaram Relumal v. State of Bombay, (1955) 1 SCR 158 and Girdarlial
Gupta v. D. H. Mehta, (1971) 3 SCC 189], he stated that it is true that
all penal statutes are to be strictly construed in the sense that the Court must
see that the thing charged as an offence is within the plain meaning of the
words used and must not strain the words on any notion that there has been a
slip that the thing is so clearly within the mischief that it must have been
intended to be included and would have been included if thought of. Here, the legislative intent to prosecute corporate bodies for
the offence committed by them is clear and the statute never intended to
exonerate them from being prosecuted. He also then stated that distinction
between a strict construction and a more free one has disappeared in modern
times and now mostly the question is ‘what is true
construction of the statute ?’ For this, he drew support from
certain Law books. Having referred to the above, the Judge stated that the
question, therefore, is what is the intention of the Legislature. It is an
undisputed fact that for all the statutory offences, a company also could be
prosecuted, as ‘person’ defined in these Acts includes ‘company or corporation or other incorporated body’. Then he observed as under
(pages 102-103) :
To support the above observations, the Judge further stated as
under (page 103) :
The Judge further stated that if the custodial sentence is the
only punishment prescribed for the offence, then, the contention of the
appellant is acceptable, but when the custodial sentence and fine are the
prescribed mode of punishment, the Court can impose sentence of fine on a
company which is found guilty as the sentence of imprisonment is impossible
to be carried out. It is acceptable legal maxim that the law does not compel
a man to do that which cannot possibly be performed. This Court has applied
this doctrine of impossibility of performance in numerous cases [State of
Rajasthan v. Shamseer Singh, (1985) (Suppl.) SCC 416; Special Reference
No. 1 of 2002, reported in (2002) 8 SCC 237]. The Judge finally concluded as under (pages
104-105) :
Judgement of Justice Arun Kumar : While entirely agreeing with the views expressed by Justice K.
G. Balakrishnan (referred to in para 3 above), the Judge decided to highlight
certain aspects to support the view. Dealing with the principle of strict construction of penal statute,
the Judge noted that if there is any ambiguity or doubt as to whether in a
given case an offence is made out or not or about who can be the offender
with respect to the given offence, the ambiguity is to be resolved in favour
of the person charged. Referring to Maxwell on the interpretation of the
statutes (12th Edition), the Judge stated that various illustrations have
been discussed in Maxwell in this connection and not a single instance has
been brought to our notice about the said rule being applied in relation to
sentencing part of penal statutes. In sentencing, Courts have always enjoyed
a certain amount of discretion. We cannot ignore the fact that prosecution,
conviction and sentencing are different stages in a criminal trial. The stage
for sentencing is reached only after a conviction of guilt is pronounced
after a full-fledged trial. S. 56 of the FERA itself refers to two stages i.e.,
stage up to conviction and thereafter the stage of punishment. Therefore,
sentencing follows conviction. Referring to the two offences mentioned in the said S. 56 (i.e.,
the offence which involves an amount or value up to Rs.1 lakh and another
which involves an amount or value exceeding Rs.1 lakh), the Judge stated that
the second offence is taken very seriously and that is why punishment of
imprisonment is made mandatory which is not the case in the first offence.
Could it be said that for the first offence, a corporation can be prosecuted
and punished while in case of second offence, it goes scot-free because imprisonment
is a mandatory sentence in that case? What follows from this is that for
difficulty in sentencing we need not let the offender escape prosecution. The
law cannot be allowed to result in such absurdity. Such a view will neither
be just nor fair nor in accordance with the law. By a purely technical
process of reasoning, corporations should not be allowed to go scot-free. After discussing the above legal position and its impact on S.
56 of the FERA, the Judge concluded as under (page 111) :
Judgement of Justice Dharmadhikari : While agreeing with the comments of Justices K. G. Balakrishnan
and Arun Kumar, the Judge also decided to support their conclusion with
additional reasons and stated that having full knowledge of the fact that the
definition of ‘person’ in the General Clauses
Act also includes juristic persons like company or a corporation, it is to be
presumed that the Legislature has the knowledge that the juristic
persons like a company or corporation cannot be punished with imprisonment.
In view of this, a further presumption has to be raised that the Legislature
has knowledge that in case of offences involving amount higher than Rs.1
lakh, companies or corporations can be prosecuted and punished with a
sentence which is possibly being imposed on them. While dealing with the rule of interpretation requiring strict
construction of penal statute, the Judge stated that the same does not
warrant a narrow and pedantic construction of a provision so
as to leave a loophole for the offender to escape. A penal statute has also
to be so construed as to avoid a lacuna and to suppress the mischief to
advance the remedy in the light of the rule in Hyddon‘s case. A common sense approach for solving a question of
applicability of a penal statute is not ruled out by the rule of strict
construction. With the above remarks the Judge concluded as under (page
106) :
Conclusion : In the above judgement of the Apex Court (majority view of three
Judges), the earlier judgement of the Apex Court (majority view of two
Judges), in the case of Velliappa Textiles Ltd. (supra) is overruled. From the judgement of the Apex Court (majority view), it is now
clear that while dealing with the provisions relating to offences committed
by a company, even if the provision requires the imposition of mandatory term
of imprisonment coupled with fine, the Court can impose only fine on such
companies notwithstanding the fact that the company being a juristic person,
cannot be given mandatory punishment of imprisonment. The dissenting judgement representing the views of Justices B.
N. Srikrishna and Santosh Hegde is delivered by Justice B. N. Srikrishna [who
was also party to the judgement (majority view) in the case of Velliappa
Textiles Ltd. (supra)] and the reasoning for the dissenting views are
more or less the same as discussed in the said judgement. Therefore, to avoid
repetition and for the constraint of space, that part of the judgement has
not been dealt with in this write-up. Coutesy
: Kishor Karia , Rajendra Chitale Chartered Accountants |
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