Supreme Court quashes FIR against HDFC Bank in Income Tax violation case (22 October 2024)

Introduction

Date of the Judgment: 22 October 2024

Citation: 2024 INSC 807

Judges: B.R. Gavai, J. and K.V. Viswanathan, J.

Can a bank be held criminally liable for an inadvertent error by its staff in misinterpreting an order from the Income Tax Department? The Supreme Court of India recently addressed this question in a case involving HDFC Bank, where an FIR was filed against the bank and its officials for allegedly violating a restraint order. The Court examined whether the FIR disclosed the necessary ingredients of the alleged offenses under the Indian Penal Code, 1860.

The Supreme Court bench, comprising Justices B.R. Gavai and K.V. Viswanathan, delivered the judgment, with Justice B.R. Gavai authoring the opinion.

Case Background

In October 2021, the Income Tax Department conducted a search and seizure operation at the premises of several income tax assessees, including Shri Sunil Khemka (HUF), Smt. Sunita Khemka, and Smt. Shivani Khemka. During this operation, it was discovered that Smt. Sunita Khemka held a bank locker (No. 462) at the Exhibition Road Branch of HDFC Bank in Patna.

On 5th October 2021, the Income Tax Department issued an order under Section 132(3) of the Income Tax Act, 1961, directing HDFC Bank to stop the operation of bank lockers, bank accounts, and fixed deposits belonging to the aforementioned individuals and entities. The bank complied with this order, blocking the accounts and sealing the locker.

Subsequently, on 1st November 2021, the Income Tax Department issued another order revoking the restraint on the bank accounts of Smt. Sunita Khemka and three other persons. This order was received by the bank on 8th November 2021. However, on 9th November 2021, the bank allowed Smt. Sunita Khemka to operate her bank locker, based on a misinterpretation of the revocation order, which only pertained to bank accounts and not lockers.

On 20th November 2021, the Income Tax Department conducted another search and seizure operation at the bank locker and found that Smt. Sunita Khemka had operated the locker with the assistance of bank officials. This was confirmed by bank records and CCTV footage. Consequently, the Income Tax Department filed a complaint, leading to an FIR against Smt. Sunita Khemka and the bank staff.

Timeline

Course of Proceedings

The High Court of Judicature at Patna dismissed the writ petition filed by HDFC Bank, which sought to quash the FIR. The High Court held that the writ petition was devoid of merit. Aggrieved by this decision, HDFC Bank appealed to the Supreme Court of India.

Legal Framework

The case involves several sections of the Indian Penal Code, 1860 (IPC), and the Income Tax Act, 1961. The key provisions are:

• Section 132(1) of the Income Tax Act, 1961: This section empowers the Income Tax Department to conduct search and seizure operations.
• Section 132(3) of the Income Tax Act, 1961: This section allows the Income Tax Department to issue orders to stop the operation of bank lockers, bank accounts, and fixed deposits.

  The source document quotes the order as:
  
  “In connection with search operation conducted under sub -section (1) of section 132 of the Income -Tax Act, 1961, in the office/residential/business premises of the under noted person, you are directed to STOP OPERATION, immediately, of Bank Lockers, Bank Accounts and Fixed Deposits, if any, standing in the below mentioned names(s) either singly or jointly, in terms of provisions of sub section (3) of section 132 of the Income -Tax Act, 1961.”

• Section 275A of the Income Tax Act, 1961: This section specifies the penalty for contravention of orders issued under Section 132(3) of the Income Tax Act, 1961.

  The source document quotes the order as:
  
  “The contravention of this order shall render you liable , under section 275A of the Income -Tax Act, 1961, to punishment of rigorous imprisonment which may extend to two years and also render you liable to fine.”

• Section 420 of the IPC: This section deals with cheating and dishonestly inducing delivery of property.
• Section 409 of the IPC: This section deals with criminal breach of trust by a public servant or banker, etc.
• Section 406 of the IPC: This section deals with punishment for criminal breach of trust.
• Section 462 of the IPC: This section deals with punishment for being entrusted with a closed receptacle containing property.
• Sections 201, 206, and 217 of the IPC: These sections deal with offenses related to causing disappearance of evidence, fraudulent removal or concealment of property, and disobedience of law by a public servant.
• Sections 34, 37, and 120B of the IPC: These sections deal with acts done by several persons in furtherance of common intention, cooperation by doing one of several acts constituting an offence, and criminal conspiracy.

Arguments

Appellant (HDFC Bank)’s Arguments:

• The FIR does not disclose any mens rea (guilty mind) on the part of the bank officials.
• The FIR fails to disclose the commission of any offense.
• There is no specific allegation of collusion between the bank staff and Smt. Sunita Khemka.
• The bank officials misinterpreted the revocation order, believing it applied to both bank accounts and lockers.
• The continuation of the prosecution would cause undue hardship and miscarriage of justice.
• The allegations in the FIR do not meet the requirements of Sections 420, 409, 406, 462, 206, 217, 201, 34, 120B, and 37 of the IPC.

Respondent (State of Bihar & Income Tax Department)’s Arguments:

• The High Court cannot conduct a mini-trial under Section 482 of the Cr.P.C.
• Allowing access to the bank locker in violation of Section 132(3) of the IT Act attracts the offense under Section 409 read with Section 405 of the IPC.
• The High Court cannot thwart any investigation into a cognizable offense.
• The court cannot inquire into the reliability of the allegations in the FIR.

The innovativeness of the argument by the Appellant was to highlight the absence of mens rea and the misinterpretation of the order, which was crucial in the court’s decision to quash the FIR.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the FIR registered against HDFC Bank and its officials discloses the necessary ingredients of the offenses under Sections 34, 37, 120B, 201, 206, 217, 406, 409, 420, and 462 of the Indian Penal Code, 1860.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal filed by HDFC Bank and quashed the FIR against the bank. The Court held that the FIR did not disclose the necessary ingredients of the offenses under the Indian Penal Code, 1860.

How each authority was viewed by the Court:

• Arnab Manoranjan Goswami v. State of Maharashtra and others [(2021) 2 SCC 427]:* The Supreme Court relied on this case to emphasize the need for the High Court to conduct a prima facie evaluation of the FIR to ascertain if the ingredients of the offense are met.
• Delhi Race Club (1940) Ltd. and others v. State of Uttar Pradesh and another [2024 SCC OnLine SC 2248]:* The Supreme Court relied on this case to reiterate the need for a prima facie evaluation of the FIR to ascertain if the ingredients of the offense are met.
• State of Haryana and others v. Bhajan Lal and others [1992 Supp. (1) SCC 335]:* The Supreme Court relied on this case to outline the categories of cases where the power to quash a criminal proceeding can be exercised, particularly when the FIR does not disclose an offense.
• R. Venkatkrishnan v. Central Bureau of Investigation [(2009) 11 SCC 737]:* The Supreme Court distinguished this case, noting that the present case did not involve illegal use of money, which was the basis for attracting Section 405 of the IPC in the cited case.
• Neeharika Infrastructure Private Limited v. State of Maharashtra and others [(2021) 19 SCC 401]:* The Supreme Court distinguished this case, stating that the present case did not involve any cognizable offence.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the absence of key elements required to establish the alleged offenses under the Indian Penal Code, 1860. The Court emphasized that the FIR did not demonstrate any mens rea (guilty mind) on the part of the bank officials, nor did it show any fraudulent inducement or dishonest misappropriation of property. The Court also noted that the bank officials had misinterpreted the Income Tax Department’s revocation order, believing it applied to both bank accounts and lockers.

The Court’s reasoning focused on the legal requirements of the offenses, emphasizing the absence of key elements such as mens rea, dishonest intention, and entrustment of property. The factual aspect of the case, such as the misinterpretation of the order, was also considered but was secondary to the legal analysis.

The Court did not consider any alternative interpretations that would have supported the continuation of the criminal proceedings against the bank. Instead, it focused on the lack of essential elements for the alleged offenses.

The Court’s decision was based on a thorough analysis of the FIR and the legal requirements of the alleged offenses. The Court concluded that the FIR did not disclose a cognizable offense, and therefore, the criminal proceedings against the bank were not justified.

The Supreme Court’s decision was unanimous, with both Justices B.R. Gavai and K.V. Viswanathan agreeing on the outcome. There were no dissenting opinions.

The Court’s reasoning was based on the principle that criminal liability cannot be imposed without proof of a guilty mind (mens rea) and that a misinterpretation of an order, without any dishonest intention, does not constitute a criminal offense.

This decision sets a precedent that criminal proceedings should not be initiated against banks or their officials for inadvertent errors, especially when there is no evidence of dishonest intent or criminal conspiracy. It emphasizes the importance of a prima facie evaluation of the FIR by the High Court to ascertain if the ingredients of the offense are met.

The court quoted the following from the judgment:

“In the present case, the FIR does not show that the appellant -bank had induced anyone since inception.”

“In the present case, there is not even an allegation of entrustment of the property which the appellant -bank has misappropriated or converted for its own use to the detriment of the respondent No.5. As such, the provisions of Section 406 and 409 IPC would also not be applicable.”

“We find that the present case would squarely fall within categories (2) and (3) of the law laid down by this Court in the case of Bhajan Lal and others (supra).”

Key Takeaways

• Criminal liability requires proof of mens rea (guilty mind) and cannot be imposed for inadvertent errors.
• An FIR must disclose the necessary ingredients of the alleged offenses for criminal proceedings to be justified.
• High Courts have a duty to conduct a prima facie evaluation of the FIR before allowing criminal proceedings to continue.
• Banks and their officials should not be subjected to criminal proceedings for misinterpreting orders, especially when there is no evidence of dishonest intent.
• The absence of entrustment of property and dishonest misappropriation are key factors in determining whether offenses under Sections 406 and 409 of the IPC are applicable.

Directions

The Supreme Court directed the quashing of the FIR against HDFC Bank.

Development of Law

The ratio decidendi of this case is that an FIR against a bank and its officials can be quashed if the FIR does not disclose the necessary ingredients of the alleged offenses, particularly when there is no evidence of mens rea, dishonest intention, or entrustment of property. This case clarifies that a misinterpretation of an order, without any dishonest intent, does not constitute a criminal offense. This decision reinforces the principle that criminal liability cannot be imposed without proof of a guilty mind. This case also reiterates the principles laid down in State of Haryana and others v. Bhajan Lal and others regarding the circumstances under which an FIR can be quashed.

Conclusion

The Supreme Court’s decision to quash the FIR against HDFC Bank underscores the importance of establishing mens rea and other essential elements for criminal liability. The judgment provides clarity on the circumstances under which an FIR can be quashed and emphasizes the need for a thorough evaluation of the allegations by the High Courts. This ruling protects banks and their officials from undue harassment in cases of inadvertent errors and clarifies the scope of criminal liability in such matters.