Developments in Corporate Litigation

Corporate criminal liability

An unfortunate incident resulting in the murder of a woman employee of Hewlett Packard’s BPO business allegedly by her cab driver has resulted in prosecution being initiated against the Managing Director of the Company. The charge against him is alleged violation of a provision of the Karnataka Shops and Establishments Act (the Karnataka Act), in regard to security to be provided to women working on night shifts. A petition seeking quashing of the same before the High Court was dismissed and the case was taken on appeal to the Supreme Court. A two-Judge Bench of the Supreme Court while differing on legal issues and referring the same to the Chief Justice for consideration, has dismissed the appeals.

This case raises the interesting issue of vicarious liability in criminal law. Vicarious liability in criminal law, is an exception and not the rule. Therefore where a company is guilty of an offence under law, no officer of the company however high ranking he may be, can be accused of having committed the offence unless he or she has done any act or failed to do any act which resulted in the commission of the offence, in other words, unless the person concerned is guilty of actus reus which constitutes the offence, he or she cannot be held liable for this. This is the reason why innumerable enactments such as the Prevention of Food Adulteration Act, the Negotiable Instruments Act and the Foreign Exchange Regulation Act specifically have provisions which provide that where a company is guilty of an offence, every person in charge of and responsible for the affairs of the company shall also be deemed to be guilty of the offence unless they prove that they had no knowledge of the same.

However, in the case of the Managing Director of Hewlett Packard the interesting fact to be noted is that the Company itself has not been made a party and only the Managing Director is being prosecuted. Further, the Karnataka Act nowhere provides for vicarious liability of an officer of the company where the company is guilty of an offence. Where the statute does not automatically hold liable the officers of the company who are in charge of and responsible for the conduct of the affairs of the company, is it permissible to prosecute the Managing Director when no specific allegation has been made vis-à-vis as to how he is personally guilty for the omission or commission of the offence?

The Supreme Court, however, has not gone into any of these issues and has dismissed the appeal on the ground that interference is not called for under Section 482 of the Code of Criminal Procedure at this stage. It is, however, interesting to note that while both the Judges concurred on dismissing the appeal, one of the Judges dissented from the other Judge on the reasoning and further also observed that prima facie he is of the view that the penal provisions do not apply to the Managing Director in view of Section 3(1)(h) of the Karnataka Act which states that the Act shall not apply to persons in management positions. However, the judgment nowhere discusses the vicarious liability of the Managing Director and has left all legal issues to be decided during trial. The Managing Director will therefore have to go through the process of trial which may take years before the legal issue as to whether he can at all be proceeded against in view of the absence of a vicarious liability provision in the Karnataka Act is decided.

However, since the Judges differed on certain legal issues and have referred the same to the Chief Justice, the case was argued before a three Judge Bench headed by the Chief Justice of India where reopening of the judgment was sought in view of the conflict and the Bench has reserved the judgment.

ESOPs cannot be taxed as perquisites during Assessment Years 1997-2000 under the Income Tax Act, 1961

The Supreme Court in a recent judgment delivered on 4-1-2008 (CIT v. Infosys Technologies) considered the issue as to whether during Assessment Years 1997-2000, shares/stocks under the Employees Stock Option Scheme floated would fall under the head of “perquisites” under Section 17 of the Income Tax Act, 1961 and would therefore be liable to income tax. The Supreme Court after considering the law prevailing during the relevant years, has finally concluded that during the said years, stock options were not a taxable benefit. This is for the reason that, there was uncertainty as to why the said perquisite could be said to accrue in the case of ESOPs i.e. whether it could be said to have accrued at the time when the warrants were granted or at the time when the options stood exercised or at the time when the lock-in conditions were removed or at the time when the shares were to be sold in the share market. Another vital consideration which weighed with the Supreme Court while deciding the issue was that there was no mechanism for valuation of the benefit. The charging section and the computation provisions being an integral code, even if a benefit can be said to be a perquisite, if there is no method of computation, no tax can be levied.