Allowed

Sri Prakash R Kota v. State of Karnataka

Karnataka HC27 Jun 2022CRL.P/677/2022

Case brief

AI extract

What is this about?

This Criminal Petition challenged the maintenance of criminal proceedings against directors of a company for employer's default in provident fund contributions. The Court held that under Section 14A of the EPF Act, vicarious liability attaches only if the company is also arraigned. The proceedings were quashed for failure to implead the company as an accused. The Court also rejected the argument t

What did the court decide?

The proceedings in C.C.No.6761/2016 and C.C.No.7288/2017 against the petitioners were quashed for failure to implead the company as co-accused.

Sri Prakash R Kota Vs State of Karnataka — Corruption | Karnataka HC (2022)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 27^TH DAY OF JUNE, 2022

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BEFORE

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THE HON’BLE MR. JUSTICE M.NAGAPRASANNA

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CRIMINAL PETITION NO.677 OF 2022

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BETWEEN:

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Sri Prakash R. Kota Managing Director Kerox Chemicals Pvt. Ltd., R/a No.298, 1^st Cross, 7^th Main MICO Layout 2^nd Phase Bengaluru-560 076 (As per Charge Sheet)

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Also: Son of Late K.V Ramanath Aged about 53 years R/a No.298, 1^st Cross, 7^th Main MICO Layout 2^nd Phase Bengaluru-560 076.

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Smt K. Saroja Ramanath Director, Kerox Chemicals Pvt. Ltd., R/a No.298, 1^st Cross, 7^th Main MICO Layout 2^nd Phase Bengaluru-560 076. (As per Charge Sheet)

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Also: Wife of Late K.V Ramanath Aged about 76 years R/a No.298, 1^st Cross, 7^th Main MICO Layout 2^nd Phase Bengaluru-560 076.

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Sri Mallesh D.R Director, Kerox Chemicals Pvt. Ltd., R/a No.816, 19^th Cross Banashankari 2^nd Stage Bengaluru-560 050 (As per Charge Sheet) Also: Son of Rangaswamy Aged about 60 years R/a No.816, 19^th Cross Banashankari 2^nd Stage Bengaluru-560 050.

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…Petitioners

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(By Sri Tomy Sebastian, Senior Advocate for Sri Shashank Nagendran, Advocate)

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AND:

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State of Karnataka by Hulimavu Police Station Bengaluru City

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Represented by the State Public Prosecutor High Court Buildings Bengaluru-560 001.

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Sri Suresh Babu Enforcement Officer Employees Provident Fund Organization Sub Regional Office, Bommasandra “Bhavishya Nidhi Bhavan” Annapoorneshwari Complex No.37/1, 6^th Main, Singasandra Bengaluru-560 068.

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…Respondents

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(By Sri K.S. Abhijith, HCGP for R1

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Smt. M.R. Shalamala, Advocate for R2)

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This Criminal Petition is filed under Section 482 Cr.P.C, praying to quash the proceedings in C.C. No.6761/2016 registered against them for the offence P/U/S 420,178,187,189,506 read with 34 of IPC, pending on the file of IV Addl.C.M.M, Bengaluru arising out of Cr.No.803/2014 of the Hulimavu Police Station.

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This Criminal Petition coming on for admission this day, the Court made the following:

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ORDER

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Heard the learned senior counsel Sri. Tomy Sabestian, appearing for the petitioners and the learned counsel Smt. M.R. Shalamala, representing the 2^nd respondent - Provident Fund Authority.

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The petitioners are before this court calling in question the proceedings in C.C.No.6761/2016 for the offences punishable under Sections 420, 178, 187,189 and 406 r/w 34 of IPC. The petitioners are Managing Director

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and Directors of M/s Kerox Chemical Private Limited, a Company which is alleged to have defaulted in payment of the provident fund at the relevant point of time and are thus indulged in offences as afore quoted. It is not in dispute that the proceedings were instituted by the authorities against the Company and thus have ended in closure of the proceedings by the reasoned order of attachment, which was for an amount of Rs.76,091/-. After closure of the proceedings therein, though there is no bar to initiate the proceedings under the IPC offences as afore quoted, there cannot be any vicarious liability for the offences under the IPC as the Company which had to deposit the provident fund account is not made a party to these proceedings. The issue in this regard is no longer res integra as several judgments of this court on the issue rendered from time to time has considered the same. One being a judgment rendered by the co-ordinate bench as in Crl.P.No.8544/2018 disposed of on 22.07.2021 wherein the co-ordinate bench considering these issues is held as follows:

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“3. Under para 38 of the Employees’ Provident Funds Scheme, 1952 (‘the Scheme’ for short) the employer-company was required to collect employees’ share of provident fund and add its share to that and remit the same to the provident funds’ account within 15 days of the close of every month. The company committed default in such remittance for the months of May to August 2015 in all amounting to Rs.5,81,329/-. Therefore, the Assistant Provident Fund Commissioner issued notice dated 19.10.2015 as per Annexure-E under Section 7A of the Act, 1952 calling upon the Directors, Golden Gate Ventures Pvt. Ltd to show cause why action should not be taken against them for not depositing the amount due from the establishment. For that the company submitted representation as per Annexure-F dated 14.11.2015 claiming that it has paid the entire dues. However, the fact

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remains that the company paid the dues of two months on 19.10.2015 and other two months on 10.11.2015.

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The second respondent filed

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complaint as per Annexure-C before the first respondent Police alleging that the petitioners have committed misappropriation and criminal breach of trust by withholding the remittance of the employees share of Provident Fund for the months of May 2015 to August 2015.

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On that basis the first respondent registered FIR in Crime No.637/2015 for the offences punishable under Section 406 and 409 of IPC. On investigation, the first respondent submitted charge sheet against the petitioners as per Annexure-B to the trial Court for the offences punishable under Sections 409 and 420 IPC.

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On that basis the learned

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Magistrate vide order Annexure-A dated 15.02.2017 took cognizance of the offences and issued non-bailable warrant against the petitioners.

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Sri Alwyn Sebastian, learned counsel for the petitioners challenged the order Annexure-A on the following grounds:

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i) The offence was allegedly committed by the company. Without arraigning the company as the accused, the cognizance of the offence against the petitioners could not have been taken;

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ii) There was remittance of the amount within a short time. Therefore, no dishonest intention or misappropriation can be imputed to the petitioners;

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iii) Explanation (1) to Section 405 of IPC covers only the employer, that is the company.

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Therefore, the said provision does not attract the petitioners;

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iv) Having initiated the recovery proceedings under the Act and recovered penalty with interest the second respondent was not justified in initiating the criminal complaint.

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In support of his contentions, he relies upon the following judgments:

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i) Aneeta Hada vs. Godfather

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Travels and Tours Pvt.Ltd¹

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ii) Rajiv Jajodia and another vs. State of West Bengal and another²

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iii) Malhati Tea and Industries Ltd and others vs. State of West Bengal and another³

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iv) Employees State Insurance

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Corporation vs. S.K.Aggarwal and others⁴

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1 (2012)5 SCC 661

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2 2017 SCC Online Cal 15563

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3 2019 SCC Online Cal 2274

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v) Hindustan Times Ltd. vs. Union

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of India and others⁵

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Smt.Shwetha Anand, learned

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counsel for the second respondent and Sri K.S.Abhijith,, learned HCGP oppose the petition on the following grounds:

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i) Once the default is committed, that constitutes the offence and subsequent payments do not undo the offence committed;

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ii) The petitioners were responsible for the conduct of the business of the company. Therefore, they were liable to be proceeded against;

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iii) Explanation 1 to Section 405 IPC imputes the dishonest intention to the employer, the moment he commits default in remittance of the contribution. It is for the accused to rebut the said presumption in trial

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4 AIR 1998 SC 2676

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5 AIR 1998 SC 688

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and on that ground the proceedings cannot be quashed;

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iv) As per Section 2(e) of the Act 1952

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in relation to accused establishment the petitioners were the persons who had the ultimate control over the affairs of the establishment. They are covered under the explanation ‘employer’. Therefore Section 405 of IPC applies to them;

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v) The proceedings under the Act, 1952 and the criminal proceedings are two independent distinct proceedings. Therefore initiation of recovery proceedings has no bearing on the criminal complaint.

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In support of her contention, Smt.Shwetha Anand, learned counsel relies on the following judgment:

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i) Srikanta Datta Narasimharaja Wodiyar vs. Enforcement Officer, Mysore⁶

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6 (1993)3 SCC 217

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Regarding subsequent payment of contribution:

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The period of default was from May 2015 to August 2015. Admittedly, the establishment/employer remitted the dues of two months on 19.10.2015 and another two months on 10.11.2015. Thus there was delay of 5 to 6 months in payment of the amount. Therefore, the complaint was filed for the offences punishable under Sections 409 and 420 IPC. The trial Court took cognizance of the said offences.

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Explanation 1 to Section 405 says that an employer of establishment under the Act who deducts employees’ contribution from the wages payable to the employee for credit to provident fund under a particular law shall be deemed to have been entrusted the amount of the contribution and if he makes default in payment of such contribution to the said fund in violation of the said law, shall be deemed to have dishonestly used the amount of the said contribution.

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Thus there is a statutory presumption about dishonest misappropriation. Therefore the mere subsequent remittance of the amount does not exonerate the accused. Exonerating the accused or quashing the proceedings on such ground defeats the purpose of the Act. Therefore there is no merit in the said contention.

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Regarding liability of the Directors without arraigning the company as the accused.

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Admittedly the registered establishment was the company by name Golden Gate Ventures Pvt.Ltd. At the relevant time, the petitioners were the Directors of the said company.

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Section 14A of the Act, 1952 is analogous to Section 141 of Negotiable Instruments Act, 1881 and Section 85 of the Information Technology Act, 2000. The said provisions read as follows:

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Section 14A of the Act 1952:

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14A. Offences by companies .—

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(1) If the person committing an offence under this Act [,the Scheme or [the [Pension] Scheme or the Insurance Scheme]] 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 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:

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Provided that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

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(2) Notwithstanding anything contained in subsection (1), where an offence under the Act [,the Scheme or [the [Pension] Scheme or the Insurance Scheme]] 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 neglect on the part of, any director or manager, secretary or other officer of the company, such director, manager, secretary or other officer shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

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Explanation.—For the purposes of this section,— (a) “company” means any body corporate and includes a firm and other association of individuals; and

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(b) “director”, in relation to a firm, means a partner in the firm.

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Section 141 of N.I. Act :

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[ 141 Offences by companies . — (1) If the person committing an offence under section 138 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 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: PROVIDED that nothing contained in this subsection shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:

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[PROVIDED FURTHER that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central

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Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.]

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(2) Notwithstanding anything contained in subsection (1), where any offence under this Act 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 neglect 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.

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Explanation: For the purpose of this section,— (a) “company” means any body corporate and includes a firm or other association of individuals; and

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(b) “director”, in relation to a firm, means a partner in the firm.]

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Section 85 of IT Act:

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85. Offences by companies.-

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(1) Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was

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in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be guilty of the contravention 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 punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention.

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(2) Notwithstanding anything contained in subsection (1), where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect 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 the contravention and shall be liable to be proceeded against and punished accordingly.

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Explanation.-For the purposes of this section,-

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(i) "company" means any body corporate and includes a firm or other association of individuals; and

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(ii) "director", in relation to a firm, means a partner in the firm.”

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In similar circumstance, interpreting Section 141 of the NI Act and Section 85 of the IT Act, the Hon'ble Supreme Court in Aneeta Hada’ s case in para Nos.58 and 59 of the judgment held as follows:

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“58. Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, the words “ as well as the company ” appearing in the Section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability. If a finding is recorded against it, it would create a concavity in its reputation. There can be situations when the corporate reputation is affected when a director is indicted.

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In view of our aforesaid analysis, we arrive at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the dragnet on the touchstone of vicarious liability as the same

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has been stipulated in the provision itself . We say so on the basis of the ratio laid down in C.V. Parekh (supra) which is a three-Judge Bench decision. Thus, the view expressed in Sheoratan Agarwal (supra) does not correctly lay down the law and, accordingly, is hereby overruled. The decision in Anil Hada (supra) is overruled with the qualifier as stated in para 51. The decision in Modi Distillery (supra) has to be treated to be restricted to its own facts as has been explained by us hereinabove.”

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(Emphasis supplied)

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Learned counsel for the respondents contended that the provisions of Section 141 of the NI Act and Section 85 of the IT Act and the Act of 1952 are not analogous, therefore the said judgment is not applicable. Section 6 of the Act and para 38 of the scheme are the regulatory provisions.

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Regarding provident fund contribution, both of them say that the employer refers to the ‘employer’ and ‘establishment’. Even the penal provision under Section 141 (a) of the NI Act refers to the term “employer”. The employer is defined under Section 2(e) of the Act 1952 reads as follows:

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“[2(e) “employer” means-

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i) in relation to an establishment which is a factory, the owner or occupier of the factory, including the agent of such owner or occupier, the legal representative of a deceased owner or occupier and, where a person has been named as a manager of the factory under clause (f) of sub-section (1) of section 7 of the Factories Act, 1948 (63 of 1948), the person so named; and

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ii) in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment, and where the said affairs are entrusted to a manager, managing director or managing agent, such manager, managing director or managing agent;]”

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The aforesaid definition indicates that the employer in relation to an establishment which is a factory, the owner or occupier of the factory including the agent of such owner or occupier or who was in ultimate control of the affairs of the establishment. Therefore the said definition is an inclusive definition and not an independent definition. If at all the agent or occupier or person in control is to be prosecuted, the principal employer has to be arraigned in the case.

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Under such circumstances, Aneeta Hada’ s case is wholly applicable to the case on hand. In the light of the said judgment of the Hon'ble Supreme Court which is rendered on reference, the judgments relied upon by the learned counsel for the respondents cannot be justifiably applied.

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In the light of the aforesaid discussion, the learned Magistrate was not justified in taking cognizance against the petitioner without impleading the company as the co-accused. Therefore the petition is allowed.

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The proceedings in C.C.No.7288/2017 on the file of IV Addl. Chief Metropolitan Magistrate, Bengaluru against the petitioners are hereby quashed.”

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In the light of the judgment rendered by the coordinate bench which in itself follows the judgments rendered by the Apex Court on the issue, permitting further proceedings to continue against the petitioners herein would become an abuse of process of law. For the aforesaid reasons, the proceedings in C.C.No.6761/2016 (Cr.No.803/2014) on the file of IV Addl. CMM, Bengaluru stands quashed.

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Sd/JUDGE

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Sri Prakash R Kota v. State of Karnataka

Case brief

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Sri Prakash R Kota v. State of Karnataka

Case brief

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