In the case of Varun Sood [1] (Taxpayer), the issue before the High Court was whether for the purpose of initiating prosecution proceedings for withholding tax default by the company, the Taxpayer being designated as the CEO/Managing Director (MD) of the company can be treated as its “Principal Officer” (PO). In case of non-deposit of withholding tax (as also non-deduction in some cases), both company and its PO can be prosecuted under the Income Tax Law (ITL). Section 2(35) of the ITL, inter-alia, defines PO in relation to a company as any person connected with the management or administration thereof, upon whom the tax authority has served a notice of its intention of treating him as PO thereof.
In the facts of the case, the relevant tax years are 2016-17 and 2017-18, during which the Taxpayer was designated as CEO for some time and MD for some time. The company committed some default in deposit of withholding tax and was accordingly tried for prosecution proceedings under section 276B of the ITL. In addition to the company, the taxpayer, being designated as CEO or MD of the company was also sent notice to be considered as PO under section 2(35) of the ITL.
The taxpayer agitated such action of being considered as the PO of the company, on the ground that while he held such designations, he was not connected with finance or tax functions of the company in any manner.
The High Court (HC) observed that the tax authority had proceeded on the assumption that any person can be treated as PO merely by serving a notice by tax authority intending to treat that person as a PO.
The HC examined the definition of PO in section 2(35) of the ITL and certain prior decisions [2] expounding such definition. The HC held that merely because a person holds an office in a corporate entity would not be sufficient to designate him as PO. Further, the tax authority’s intention to treat an individual as PO is not sufficient. It is mandatory for tax authority to first establish with substantial material that the person was connected with the management or administration of the company and such basis should be reflected in the notice issued intending to treat such person as PO.
In light of the above principle, the HC directed the tax authority to re-examine whether taxpayer can be considered as PO of the company after affording reasonable opportunity of being heard to the taxpayer and until then, the HC continued interim stay on prosecution proceedings.
[1] [TS-118-HC-2024(DEL)] dated 31 August 2023
[2] SC’s decision in KPG Nair vs. Jindal Menthol India Ltd. [(2001) 10 SCC 218] and Karnataka HC’s decisions in A. Harish Bhat vs. ACIT [2019 SCC Online Kar 3998]
