The Delhi High Court on Wednesday has set a precedent regarding the prosecution for non-compliance with Tax Deducted at Source (TDS) regulations, emphasizing the necessity of establishing an administrative connection for such actions against corporate office holders. The bench, comprising Justice Yashwant Varma and Justice Purushaindra Kumar, underscored that mere possession of a title within a corporation does not automatically render an individual as a principal officer liable for TDS prosecution under the Income Tax Act, 1961.
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This ruling came in response to a petition challenging the designation of the petitioner as the “Principal Officer” for the purposes of initiating prosecution under Section 276B of the Income Tax Act. The petitioner, who had served as the Chief Executive Officer (CEO) and later as the Managing Director (MD) of M/s Healthfore Technologies Ltd., contested this designation, arguing that his roles did not encompass oversight of financial or tax-related matters within the company.
The crux of the matter revolved around the interpretation of Section 2(35) of the Income Tax Act, which defines a principal officer as someone involved in the management or administration of the company, specifically in contexts where financial and tax obligations are concerned. The court observed,
“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.”
The petitioner’s argument highlighted his appointment timeline and responsibilities, clarifying that his tenure and role did not align with the financial years for which the TDS defaults were noted. He asserted that his responsibilities did not include managing the company’s accounting or financing activities, challenging the basis on which he was deemed the “Principal Officer.”
Addressing these arguments, the Delhi High Court directed the respondent department to reassess the issue, taking into consideration the petitioner’s responses and conducting a thorough inquiry into his actual involvement in the company’s management or administration related to financial matters.
This decision not only grants the petitioner relief from the immediate threat of prosecution but also sets a significant precedent for future cases involving corporate officers and TDS compliance. It underscores the importance of a clear, administrative connection between the individual’s role within the company and their responsibility for financial management and tax compliance.
The court’s directive for a fresh examination of the case, starting from the issuance of the notice under Section 2(35), reflects a judicious approach to ensuring that prosecutions for TDS non-compliance are founded on solid legal and factual grounds. This ruling is poised to influence how corporate roles are scrutinized in relation to tax obligations, potentially affecting a wide range of professionals in corporate management positions.
Counsel for the petitioner, Sachit Jolly, successfully argued the case titled Varun Sood Versus ACIT, marking a noteworthy development in the interpretation of tax law and its application to corporate governance and responsibilities.
CASE DETAILS
Case title – Title: Varun Sood Versus ACIT Case No.: W.P.(C) 8577/2019
Counsel For Petitioner: Sachit Jolly
Counsel For Respondent: Puneet Rai Case
