Companies can be fined on criminal charge

Directors and other officials can be imprisoned; SC laments financial irregularities.

A five-judge Constitution bench of the Supreme Court, by a split verdict 3:2, ruled today that companies committing criminal offences can be imposed fine, though they could not be imprisoned as they are juristic persons. Directors and others in charge of the companies which committed the offences can, of course, be imprisoned.

In a 2003 judgment, a three-judge bench had ruled that since companies have no body or soul, they cannot be imprisoned or punished with fine. This view has now been overruled by a majority of one.

A large number of corporates which are facing criminal charges under taxation and foreign exchange laws had appealed to the Supreme Court challenging their criminal prosecution. Standard Chartered Bank, Grindlays, Motorola Inc, Iridium India, National Fertilisers are some of the names listed.

Justice K G Balakrishnan, writing the majority judgement, said that although companies, not being natural persons, could not be imprisoned, they could be ordered to pay fine.

In view of the large-scale financial irregularities witnessed in the country and its bad effect on the economy as well as society, it was necessary that companies should face prosecution along with those who perpetrated the crime.

The problem arose in the case of some economic laws which used ambiguous phrases in the punishment clause. In the case of Acts which said that companies committing crimes could be punished with "imprisonment or fine" there was a choice for the court and they could be asked to pay fine.

But in some laws, like the Income Tax Act, the phrase is "imprisonment and fine" or imprisonment alone. The argument put forward by the companies was that since they could not be imprisoned, the punishment could not be enforced and had no force.

The Union government had argued that Section 276 of the Income Tax Act and Section 56 of the Foreign Exchange Regulation Act should be read harmoniously so that companies were brought within the parameters of prosecution. Imposing fine was an option, according to it.

Depending upon the phrase used in the laws, the present judgment could affect those covering wealth tax, banking, drugs and cosmetics, food adulteration, customs and excise.

The judgment has deep implications for the general public also, as companies could be endangering the lives of the people by discharging toxic substances or selling dangerous goods or medicines.

A dissenting judge in the Velliappa Textile judgment recalled the Bhopal disaster and said: "Companies are growing in size and have huge resources and finances at their command. In the course of their business activity, they may sometimes commit breach of the law and endanger others' lives. More than 4,000 persons lost life and thousands of others suffered permanent impairment in Bhopal on account of the gross criminal act of a multinational corporation."

In the dock

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• Directors and other officials can be imprisoned
• SC laments large-scale financial irregularities
• Ambiguous phrases in economic laws was a problem
• Govt says Section 276 of IT Act and Section 56 of FERA be read together