Offences by companies.

487(1)

If an offence under this Act has been committed by 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.

487(2)

The provisions of sub-section (1) shall not apply if the person referred in the said sub-section proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

487(3)

If it is proved that an offence under this Act has been committed by a company 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, then irrespective of the provisions of sub-section (1), 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.

487(4)

Where an offence committed by a company under this Act is punishable with imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or (3), such company shall be punished with fine and every person referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (3), shall be liable to be proceeded against and punished as per the provisions of this Act.

487(5)

In this section,—

• (a) “company” means a body corporate and includes— (i) a firm; and (ii) an association of persons or a body of individuals, whether incorporated or not; and
• (b) “director”, in relation to— (i) a firm, means a partner in the firm; (ii) any association of persons or a body of individuals, means any member controlling the affairs thereof.

Explanation

Section Summary:

Section 487 of the Income Tax Act deals with offences committed by companies. It outlines the liability of individuals responsible for the company's business conduct, including directors, managers, secretaries, and other officers, in case of tax-related offences. The section also provides exceptions for individuals who can prove they had no knowledge of the offence or exercised due diligence to prevent it.

Key Changes:

1. Expanded Liability: The section now explicitly includes not just companies but also firms, associations of persons, and bodies of individuals, whether incorporated or not.
2. Individual Accountability: Directors, managers, secretaries, and other officers can be held personally liable if the offence was committed with their consent, connivance, or due to their neglect.
3. Defense Mechanism: Individuals can avoid liability if they prove the offence was committed without their knowledge or that they exercised due diligence to prevent it.

Practical Implications:

1. For Companies and Firms: Companies, firms, and other entities must ensure robust internal controls and compliance mechanisms to prevent tax offences. Failure to do so can result in fines and imprisonment for both the entity and responsible individuals.
2. For Directors and Officers: Individuals in leadership roles must actively oversee compliance and maintain records to demonstrate due diligence. Negligence or involvement in offences can lead to personal liability.
3. For Associations of Persons (AOPs) and Bodies of Individuals (BOIs): These entities are now explicitly included under the definition of "company," making them subject to the same liabilities as incorporated entities.

Critical Concepts:

1. Company: Broadly defined to include firms, AOPs, and BOIs, whether incorporated or not.
2. Due Diligence: The effort made by individuals to ensure compliance with tax laws and prevent offences. This can be demonstrated through documentation, policies, and procedures.
3. Consent or Connivance: Active involvement or tacit approval of an offence by a director, manager, or officer.
4. Neglect: Failure to take reasonable steps to prevent an offence, even if not directly involved.

Compliance Steps:

1. Internal Controls: Establish and maintain robust internal controls to prevent tax offences.
2. Documentation: Keep detailed records of compliance efforts, such as audits, training, and policy implementation, to demonstrate due diligence.
3. Leadership Oversight: Directors and officers should actively monitor compliance and ensure adherence to tax laws.
4. Legal Review: Regularly review company practices to ensure alignment with tax regulations and identify potential risks.

Examples:

1. Scenario 1: A company fails to file its tax returns on time. The tax department investigates and finds that the CFO was aware of the delay but did nothing to rectify it. The CFO could be held personally liable under Section 487(3) for neglect.
2. Scenario 2: A firm underreports its income, and the tax authorities determine that the managing partner was directly involved in the decision. The managing partner could face penalties and imprisonment under Section 487(3).
3. Scenario 3: An association of individuals (AOP) fails to deduct TDS on payments made to contractors. The member responsible for financial oversight can avoid liability by proving they had no knowledge of the lapse and had implemented proper TDS deduction procedures.

This section emphasizes the importance of proactive compliance and accountability at all levels of an organization.