Take the chains off business


Recent moves to decriminalize violations of corporate and tax law are welcome, writes Nitin Mittal

With the Central Board of Direct Taxes (CBDT’s) recently introduced circular, on 9 September, which eases norms for initiating prosecution for delay in depositing tax deducted at source (TDS) and filing of income tax returns, among others, hopefully the stage has been set for the decriminalization of business laws.

Finance Minister Nirmala Sitharaman set the tone by tweeting: “I have instructed the revenue secretary to come up with measures to ensure that honest taxpayers are not harassed, and those who commit minor or procedural violations are not subjected to disproportionate or excessive action.” Similarly, the Ministry of Corporate Affairs is looking to decriminalize two-thirds of the Companies Act and introduce a bill in the winter session of parliament.

Nitin Mittal

India’s criminal law is unique for the serious sanctions of incarceration and public condemnation that it imposes for violation of its rules. Each country defines what constitutes a crime or a criminal offence. One could argue that a crime or a criminal offence is an act harmful not only to some individual but also to a community, society or the state. For an act to be criminal, both actus reus (the act of doing something criminal) and mens rea (the intention to do something criminal) are necessitated. Actus non facit reum nisi mens sit rea means the act does not make a person guilty unless there is a criminal intent.

The moot point is whether non-compliance with commercial laws entails a criminal intent coupled with a public wrong, and whether criminal sanction should be imposed for an action that is not defrauding the public or harmful to the society at large. Should there not be a distinction for regulatory and administrative violations vis-à-vis more serious public crimes?

Penalties, not punishments

One of the key functions of criminal law is to deliver punishment that is justifiable, as per the punitive view theory. Overcriminalization of laws in recent years has led to rise of legislation mandating punishment for offences in business laws that would not in a true sense be accompanied by the twin principles of actus reus and mens rea, unless the principle of strict liability is incorporated.

One can see over-criminalization in important commercial laws such as the Companies Act, 2013, Income Tax laws, the Legal Metrology Act and rules, and the Foreign Exchange Management Act. It is imperative to examine whether a person’s personal liberty can be put at stake for such errors or omissions, which could easily be penalized through fiscal penalties.

For the sake of argument – and demonstrating how overcriminalization of laws has led to criminalizing even non-compliance of a routine nature, or even genuine or administrative errors or omissions – let us examine a few key pieces of business legislation.

The Irani Committee, constituted in 2005, made the following observations in the context of the Companies Act, 1956, which can also be applied contemporaneously to the current act: “Under the present law, all lapses, however trivial, are required to be tried by the trial court as criminal offences. Most violations are procedural in nature. However, there is no structure to deal with such offences speedily. The delayed processing of complaints leads to enormous administrative burden and high cost to the economy. The process of prosecution gets prolonged and the deterrent effects of the penal provisions get diluted.”

Under the Companies Act, 2013, offences can be classified under three categories: offences punishable with only a fine; offenses punishable with imprisonment, or a fine, or both; and lastly, the gravest offences, which are punishable with imprisonment and a fine, are non-compoundable, which means that no compromise is allowed and a full court trial must follow.

All these prosecutions are initiated in the name of the directors and key managerial personnel. Most of these offences are technical or procedural in nature, but to present a balanced argument, some are grave, like impersonation of a shareholder, violating deposit and dividend rules, tampering with minutes, non-compliance with loans and investment rules, disobeying orders by tribunals or inspectors, and furnishing false evidence, among others, which may require a different sanction.

However, there is a silver lining. The Ministry of Government Affairs appointed a committee in July 2018 to review the offences under the Companies Act, 2013. The committee presented its report on 14 August 2018, and made recommendations to the government such as re-categorizing certain acts punishable as compoundable offences to acts carrying civil liabilities, and improvements in the in-house adjudication mechanism.

Jail time for honest mistakes

With these, the wheels have been set in motion for decriminalizing a substantial number of provisions in the Companies Act, 2013 that are technical or procedural in nature, and to replace the punishment of imprisonment with civil liabilities and/or monetary fines. Only serious offences will attract a jail term. Recently, the government moved to criminalize non-compliance with corporate social responsibility (CSR) provisions, which resulted in an immediate outcry from industry. But better sense prevailed, and it was clarified that CSR violations would be treated only as a civil liability.

The dreaded income tax act incorporates more draconian and onerous provisions including jail terms for serious offences like evading taxes and filing false returns, but also for failure to pay tax deducted at source or tax collected at source (with jail terms of up to seven years). Recently, a film producer was sentenced to imprisonment for three months and fined for a delay in depositing TDS, in spite of his having later deposited the entire amount. This is because section 276B entails prosecution irrespective of the period of delay, and does not make a distinction in quantum. These delays could be due to a bona fide error, or due to an administrative glitch, but that does not stop overzealous tax officials from initiating criminal prosecution for defaults, even in cases of minor delays.

There are numerous such instances of prosecutions in the past. Should there not be a system of adjudication for such errors that are bona fide, instead of straitjacketing all offences with a common scale? A start has been made with the CBDT’s circular, but more needs to be done in this area.

Take the case of the Legal Metrology Act, 2009, and the Legal Metrology (Packaged Commodities) Rules, 2011, which have become the bane of FMCG (fast-moving consumer goods) companies selling packaging products. These companies deal with thousands of different products, with each requiring a different declaration as per their specification. Due to the volume, a few inadvertent errors may crop up in the manner and style of declaration, without any intent to mislead or defraud consumers. For example, mentioning of the quantity in pieces: “Quantity = 1” or “Quantity = 1 pcs” instead of “Quantity = 1N” or “1U”; or mentioning maximum retail rice (MRP) = 900/- (inclusive of all taxes), instead of Rs 900/- (inclusive of all taxes), or other trivial errors and omissions.

But even for such minor so-called offences, if a business entity is found to have violated the rules a second time within a period of three years, the second offence is not compoundable and the business entity and its directors or partners face criminal prosecution, which mandates a jail term. This act is one of the most draconian and misused acts to harass companies and its directors.

Furthering ease of doing business

It would also be prudent to point out that violations of certain laws – like environmental, health and safety laws, and labour legislations – that do not fall foul of the actus reus and mens rea principles are better off handled by the civil system, with the imposition of adequate fines and penalties as a deterrent.

Decriminalization of some of these business laws would have twin benefits of adding to the “ease of business” climate in the country, which the government has already set in motion by examining the Companies Act, 2013, but also lowering the burden of the judiciary. There is no proven evidence to suggest that criminal sanction reduces the propensity of non-violations in business, and it may just set the stage for arriving at a judicious balance between criminal sanction and civil liability.

It would be worthwhile to heed the advice of the standing committee on finance, while examining the Companies Bill, 2009, which stated in its 21st report, dated 31 August 2010, that: “Transgressions, purely procedural or technical in nature, should be viewed in a broader perspective, while serious non-compliances or violations including fraudulent conduct should invite stringent/deterrent provisions”, and also, as tweeted earlier by our finance minister, doing away with “disproportionate and excessive actions” for certain violations.

Nitin Mittal is the head of legal and company secretary at Signify India. The author’s views are personal.