The income tax law relating to foreign enterprises has been so carved that before any income could be remitted from India, the tax due on income is deducted at source.
These provisions, which are contained in Chapter XVII of the Income Tax Act, hardly leave any area where a foreign enterprise can get any income from India without paying adequate tax. In fact, in majority of cases, the tax deducted at source prior to remittance may be higher than what is ultimately found payable by the non-resident.
Despite stringent provisions for deducting tax in advance, a foreign company is obliged to file its return of income in India and undergo the tedious process of assessment.
The only exception is that where the income comprises dividend and interest only, no return needs to be filed. But in all other cases return of income has to be filed even if the maximum possible amount of tax has already been deducted at source and paid in advance.
The income tax law is rather harsh in case of wilful failure to furnish the return of income. The law provides for monetary penalty as well as imprisonment, but no prosecution proceedings can be launched if the return is furnished before the expiry of assessment year or the tax payable after adjustment of tax already paid or deducted at source does not exceed Rs 3,000.
Section 278 B of the Income Tax Act specifically provides that where an offence under the Income Tax Act has been committed by a company, the company as well as the person(s) incharge and responsible for the conduct of company's business shall be liable to be proceeded against and punished accordingly.
In the above context, an interesting question arose before the Supreme Court in the case of Velliappa Textiles Ltd, 263 ITR 550, as to whether a company can be prosecuted. A company being an artificial juristic person is incapable of being punished with a sentence of imprisonment.
Several provisions of Income Tax Act require the imposition of mandatory term of imprisonment coupled with a fine. There is no choice with the court to impose only a fine.
It was, therefore, held, by a majority decision that since it was difficult to impose punishment of fine in lieu of imprisonment on a company, the prosecution against the company could not be sustained.
The above issue has again been considered by a five-judge Bench of the apex court in the Standard Chartered Bank's case ((2005) 275 ITR 81). The apex court considered the question whether a company could be prosecuted for offences for which the sentence of imprisonment is a mandatory punishment.
The apex court took note of the Velliappa Textiles case where by majority it was held that a company could not be prosecuted for offences, which required imposition of a mandatory term of imprisonment coupled with fine.
It was argued that if majority view in the Velliappa's case is upheld, it would be impossible to prosecute a number of offenders in several statutes. After considering detailed arguments on both sides, it was held by the Supreme Court that there could be no immunity to a company from prosecution merely because the prescribed is in respect of offences for which the punishment described is mandatory imprisonment.As the company cannot be sentenced to imprisonment, the court cannot impose that punishment. But when imprisonment and fine is the prescribed punishment, the court can impose the punishment of fine, which could be enforced against the company.