Since the time immemorial, man has had a sense of business and in modern times, a person with faintest of transacting acumen, first thinks about starting a small business/proprietary concern eventually leading into a mammoth Company. As it grows, he is faced with shortage of funds and shortage of managerial skill. To cope up with shortage of resources: tangible or intangible, association of individuals remains the only way out. Thus, down the lines, I will be reflecting upon as to what difference does it make, when offences are committed not by individuals but by an entity evolved out of individuals.
For meeting the shortage of funds and managerial skill, once started as proprietary firm doing business in partnership and this gives birth to partnership firm. Though partnership has no existence apart from its members and it is mere collection of partnership. Partners have unlimited liability. The firm’s property is property of partners and further partnership firm can only be sued only in the name of its partners. Death and insolvency of partner dissolves a firm unless the partnership deed provide otherwise . Registration of partnership firm is optional . It cannot allow to raise public money .
Company is a Distinct Legal Person
On the other hand a company is a distinct legal person. It is born on the day of incorporation when Registrar of the Companies issues certificate of incorporation. In company, liabilities and properties are of company. Further, company can be sued and sue by his own name. Members/Directors of the company have limited liability. Further, death and insolvency of the partner has no effect on the company. A creditor of the company cannot proceeds against the members of the company. Thus there are many advantages are available to members of company.
Transaction of Business- Mostly Through Firms/Companies
It is an admitted fact that under provisions of Customs Law and Allied Acts, business (import/export) are transacted mostly through firms/companies after obtaining of IEC(Importer-Exporter Code) under the provisions of FTP. Therefore, it becomes vital to understand provisions of company law in order to enforce the liabilities arises out of the operation of customs law.
Company has not been defined under Customs Act, but assigned meaning through explanation under Section 140 of the Customs Act.
The word company has not been defined under Customs Act , 1962 but this has been explained in Section 140 of the Customs Act. Here meaning of companies is not restricted to company but includes body incorporate and a firm or other association of individuals. The customs act has extended the meaning of company as usually business transaction is made through limited company , firm and by association of individuals. Accordingly , when we talk about company under Custom Act, it is inclusive of firm or association of individuals.
Now coming to Section 140 which is as under;
Section 140- Offence by Companies:
- If the person committing an offence under this Chapter is a company, every person who, at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of business of the company, as well as the company, shall
- be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly :
Provided that nothing contained in this sub-section shall render any such person liable, to such punishment provided in this Chapter if he proves that the offence was committed without his knowledge or he exercised all due diligence to prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Chapter has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any negligence on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Explanation.- For the purposes of this section,-
(a) ”company” means a body corporate and includes a firm or other association of individuals; and
(b) ”director”, in relation to a firm, means a partner in the firm.”
Perusal of the section reveals that there are two keywords are there in Section 140 company and offence . Company has been explained but under the entire Customs Act, ‘offence” has not been defined . However it has been defined under CrPC , 1973 under Section 2(n) which is as under;
“Offence” means any act or omission made punishable by any law for the time being in force and includes any act in respect of which a complaint may be made under section 20 of the Cattle-trespass Act, 1871.
In Standard Chartered Bank Versus Directorate of Enforcement, 2006 (197) E.L.T. 18 (S.C.) the Supreme Court of India has made observations regarding offence that ;
“An offence only means the commission of an act contrary to or forbidden by law. It is not confined to the commission of a crime alone. It is an act committed against law or omitted where the law requires it and punishable by it. In its legal significance , an offence is the transgression of a law and a breach of the laws established for the protection of the public as distinguished from an infringement of mere private rights.”
The meaning of company also assigned by insertion of explanation to Section 140, but only for the purposes of this section.
Plain reading of the opening words of the Section denote that only in the cases of offence by the companies , this section would be applicable but further reading indicates that it is applicable to directors, partners etc. as companies do not run on their own but by its human agency, it needs flesh and blood in the form of directors and partners.
Mechanism has been provided by the Act to deal with natural person and penalty are appropriately imposed under Section 112, 114 and 117 of the Customs Act, 1962. In addition to this, Section 140 lays down provisions to deal with legal as well as natural person who are director or partner of the company/firm respectively.
Proceedings Against Director/Partner Only When Offence by Company
Careful reading of this section says that director or partner will only be prosecuted for any offence when the company/firm will be held responsible. In other words, without arraigning company/firm, human agency will not held liable to punishment.
It is not the requirement of Section 140 that in case there is the prosecution of the company , every person is liable to punishment but only those who are responsible or controlling the affairs of company. This will preclude unnecessary litigation and disservice to ease of doing business.
Sub-section (1) of Section 140 creates a deeming fiction by which, where a person committing an offence under the Chapter is a Company, every person who, at the time of the commission of the offence was in charge of, and was responsible to the Company for the conduct of the business of the Company, as well as the Company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
No Knowledge no Offence When Taken Reasonable Steps to Prevent
However, by the proviso, the person concerned is required to prove that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence to escape the penalty and prosecution.
Knowledge of commission of offence is pre-condition for taking action under this section. But onus to discharge the burden lies on the person who is alleged to have committed offence means burden of proof likewise section 123 of the Customs Act lies on the director, partner etc.
Under sub-section (2), which is prefaced by a non-obstante clause, it has been enunciated that where an offence under this Chapter has been committed by a Company and it is proved that it has been committed with the consent or connivance of, or is attributable to any negligence on the part of any one of the officers named therein, such other person shall be deemed to be guilty of the offence. The explanation to Section 140 has further expanded the scope of the provision by bringing within the purview of the expression “Company”, a firm or an association of individuals. Similarly, the ambit of the expression “director” has been expanded to mean in relation to a firm, a partner of the firm.
Offence Under Section 140 is Criminal Wrongdoing as well Civil Wrong
It is time and again contested that since Section 140 falls under Chapter XVI of the Act, therefore same is not applicable in adjudication proceedings. This was made clear in following judgments of Apex Court .
In case of Standard Chartered Bank v. Directorate of Enforcement (supra) 2006 (197) E.L.T. 18 (S.C.) , three principles were laid down by Apex Court in respect of provisions of Section 140 of the Act.
(i) The first important principle which has been laid down by the Supreme Court in Standard Chartered is that the essential element both in the case of a criminal prosecution and an adjudication proceeding leading up to the imposition of a penalty is a contravention of the provisions of the Act
(ii) The second important principle which emerges from the judgment of the Supreme Court in Standard Chartered is that the expression “offence” is not confined to a criminal wrong doing.
(iii) The third principle which emerges from the judgment in Standard Chartered is that the deeming fiction is not confined to a criminal prosecution but will also extend to an adjudication proceeding as well.
Where a partnership firm has shown to committed the offence under the Customs Act and the Gold (Control) Act, prosecution of partner is only possible when there is prosecution of firm, which is primarily responsible for the offence so committed.
In Textoplast Industries Versus Additional Commissioner of Customs, reported in 2011 (272) E.L.T. 513 (Bom.) in Customs Appeal No. 29 of 2004, decided on 6-7-2011, it was held by the Bombay H.C that in partnership firm penalty can be imposed both upon partnership firm as well as its partners. For the offence by the firm proceeding can be initiated against person in charge/responsible for conduct of its business at the time of commission of offence wherein contravention is committed with consent/connivance or attributable to negligence of partner of firm, he can also be proceeded against . Explanation to Section 140 of Customs Act, 1962 brings within purview of “Company”, a firm or an association of individuals, and “Director” in relation to firm, includes its partner . It was also held that “Offence” is not confined to a criminal wrong doing, and means commission of an act contrary to or forbidden by law . Deeming fiction in Section 140(2) ibid about liability of Director, Manager, Secretary or other officer of company, is not confined to criminal prosecution but extends to an adjudication proceedings or otherwise, it would lead to anomalous situation where, for criminal prosecution, partner as well as person in charge/responsible for conduct of business of partnership firm would be liable for punishment whereas narrower construction would lead for non-imposition of penalty under adjudication purpose . There was no reason why Parliament would not make stricter provision for adjudication/imposition of penalty as compared to criminal prosecution .Also, Chapter XIV ibid dealing with imposition of penalty, could not be confined to penalty only upon partnership firm or its partner . There is no reason to exclude penalty on partnership firm, particularly when it was consistent with overall scheme and object of the Act.
Penalty on the Firm, When Cannot be Justified
For penalty on partnership firm , culpable mental state would be an essential ingredient but in the law as partnership firm is not recognized as distinct person as company , therefore guilty intention cannot be imputed on it. Therefore penalty on firm under section 112 cannot survive in case of partners being absolved.
Perusal of section 140 of the Customs Act, 1962 reveals that every person who was in charge of the firm at the time of commission of offence would be liable to penalty and penalty would be on firm would be consequent to determination of liability on its partners. In the case one of partners was not issued Notice and other was exonerated from the liability to penalty , therefore penalty on the partnership firm cannot be upheld.
Final Words on the Offence by Companies
knowledge is the essential ingredient of Section 140 and absence must be proved, who is implicated means burden is required to be discharged by director/ partners of the company/firm that they have taken all reasonable steps to prevent the commission of offence. This section is applicable to criminal proceedings as well as quasi judicial proceedings. Lastly , proceedings against directors/partners would only survive in case of offence by companies.
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