The Supreme Court has ruled that a company will not be asked to pay a fine for an offence that calls for only imprisonment or imprisonment plus fine under the relevant law.

The judgment is based on the fact that a company is a "juristic person" and not a natural person and, therefore, cannot be imprisoned. Also, under extant laws, a fine cannot be imposed in lieu of imprisonment.

A three-judge Bench ordered this on Tuesday in a case where Velliappa Textiles Ltd had made false income-tax declarations and was prosecuted by the income-tax department.

The court ruled that the company was a "juristic person" and could neither be imprisoned, nor be asked to pay a fine.

However, the ruling does not apply to a company's directors and employees, who can be punished with imprisonment or imprisonment and fine.

Since the punishment prescribed under other economic laws are similar, the ruling can be extended to legislation on wealth tax, banking, drugs and cosmetics, food adulteration, Customs and excise.

The three judges on the Bench wrote separate judgments in this case and differed on the finer points raised by the income-tax department in its appeal against the Karnataka high court's ruling against it.

The dissenting judge, Justice G P Mathur, wrote: "Courts would be shirking their responsibility of imparting justice by holding that the prosecution of a company was unsustainable merely on the ground that being a juristic person it could not be sent to jail. Companies have huge resources and finances at their command. In the course of their business, they may sometimes commit breach of the law and endanger others' lives. More than 4,000 people lost life and thousands of other suffered permanent impairment in Bhopal on account of the gross criminal act of a multinational corporation."

However, two judges concurred on the question of punishment. Justice B N Srikrishna, who wrote the majority judgment, said: "This court cannot, in the garb of the penal provisions of the Income-Tax Act, impose a fine in a situation that calls for no punishment by a virtual rewriting of the statute."

These provisions deal with penalty for evasion of tax and prescribe ordinary or rigorous "imprisonment with fine".

Most economic legislation, like the Income-Tax Act, hold the person "in charge of and responsible for the conduct of the business" punishable for the offence. Therefore, the directors concerned can be sent to jail and asked to pay a fine.

The Supreme Court upheld the view of the Karnataka high court that the company was a juristic person and, therefore, its prosecution was "unpurposeful". The appeals of income-tax authorities were dismissed.

Justice Rajendra Babu, who was in the majority, said, "Corporate criminal liability cannot be imposed without making corresponding legislative changes. For example, the imposition of fine in lieu of imprisonment."

Such legislative changes have taken place in Australia, France, the Netherlands and Belgium. The United States, United Kingdom and Canada also have rules allowing punishment of corporate entities.

But in India, despite two reports of the Law Commission, the law has not been amended. In 1972, the Indian Penal Code [Amendment] Bill was introduced enabling authorities to fine erring companies, but it was allowed to lapse.

Justice Babu concluded: "To bring such a fundamental change in criminal jurisprudence is a legislative function. Only Parliament can do it."

What the court said

• A company is a juristic person and cannot be prosecuted.
• Existing laws do not permit replacing imprisonment with fine.
• The law says so and the court can't usurp the legislative function.
• Directors and employees of a company not to be affected by the decision.
• The dissenting judge said courts would be unfair in holding that a company could not be prosecuted.