In this part of prosecution series, we take a look at some of the defences which are raised by the partners of the firm and how the courts treat these defences with the help of some important judgments from the High Courts and the Supreme Court.

Is the CIT obligated to give an opportunity to be heard to the assessee before giving sanction for prosecution proceedings?

Can all partners of a firm be prosecuted for an offence committed by the firm?

As noted earlier, the courts have generally tended to rule against the mechanical application of Section 278B to prosecute all partners in a firm. The notable successful defences that have been utilised by partners in a firm to escape penalty proceedings have been as follows –

There have however been multiple instances where the courts have also rejected the above defences. If the complaint makes specific averments against a partner alleging their role in the commission of an offence and the court believes that there is a prima facie case against the person, the HC will likely not quash the proceedings u/s 482 of the CrPC.

Role of the Principal Officer

With respect to notification of “Principal Officer”, there seems to be a judicial schism. The aforementioned case of Shital N Shah was overruled by a full bench of the Madras HC in the case of ITO vs. Dinesh K Shah (223 ITR 68), wherein the court held that for a partnership firm there was no requirement for the revenue to notify a specific “Principal Officer” and any person in charge of functioning of the firm at the time of commission of the offence could be prosecuted.

While Dinesh K Shah would seem to now be the operative case in Madras HC on the matter of issuing notice, other forums (most notably Bombay HC and Punjab and Haryana HC) continue to cite Shital N Shah as a valid precedent to hold that notice appointing a “principal officer” is sine qua non for prosecution of an individual in cases of offences committed by a company.

Interestingly, breaking almost a 20-year trend, a single judge bench of the Madras HC in 2018 in the case of Kalanithi Maran vs. Union of India (405 ITR 356) also followed the reasoning laid down in Shital N Shah to hold that a notice is necessary u/s 2(35)(b) for appointment of “principal officer”. However, it must be noted that Kalanithi Maran’s case involved a company and its directors as opposed to a partnership firm and its partners.

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