The Indian Income tax law provides for strict penal provisions, besides mandatory interest where tax payers have assessments resulting in additional tax. The discretion to levy penalty, between 100 per cent and 300 per cent of additional tax, is exercised on fulfillment of two primary conditions — ‘attempt to conceal information or submission of inaccurate information’.
This arm of law has witnessed innumerable legislative changes motivated towards sharpening the penalty razor, and acting as a source of disincentive for errant tax payers. Besides amends to law, multiplicity of conflicting Court decisions including Supreme Court’s recent review has in my view rendered this piece of legislation as most uncertain and continues causing anxiety to tax payers.
Discretionary power to Revenue
Firstly, the levy is subject to ‘satisfaction’ that the tax payer‘ has concealed information or deliberately submitted inaccurate information’. The scheme of the law is clear in the sense that levy of penalty is not a matter of routine affair as compared to levy of penal interest, which is mandatory. The usage of the word ‘may’ indicates an element of discretion.
At the same time, it ought to be preceded by a proper application of mind; the very essence of the requirement of recording ‘satisfaction’ by Revenue. Since the statute does not prescribe any prescribed formula for recording ‘satisfaction’, it depends upon the facts of each case.
The controversy therefore is whether mechanically saying ‘I am satisfied’ without discussing how that ‘satisfaction’ has been arrived at becomes debatable. There cannot be a straight jacket formula for detection of defaults. Courts have held that charge must be precise and imposition of penalty must be only on that footing.
The most debatable issue of course is the principle of ‘bonafide belief’. A tax payer’s declaration cannot be deemed as false unless there is an element of deliberate attempt or he is under a bonafide belief that his position is sustainable.
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Divergent views of Courts and principle of Mens rea
In Chairman, SEBI, vs Shriram Mutual Fund, the Supreme Court, in the context of interpreting non-tax law held that penalty is attracted on contravention of a statutory obligation and hence intent for committing such violation becomes wholly irrelevant.
The Court further clarified that a breach of civil obligation immediately attracts penalty, irrespective of whether contravention was with guilty intention or not. Hence, unless the language of the statute suggests need to establish mens rea, it is unnecessary to ascertain whether a violation was intended.
However in the landmark decision in 2007, in the case of Dilip Shroff, the Supreme Court put to rest the controversy and observed that an offence of tax concealment is a direct attempt to hide income from the knowledge of Revenue.
Further, Revenue is required to arrive at a finding that the explanation offered by the tax payer is false, prove that it is not bonafide and the true facts were not disclosed. Later in 2007, the same court approved some principles in Ashok Pais case
SC reviews its decision
In a two-bench judgment rendered in Dharamendra Textiles case, referring the case to a Larger bench, the Court held that there was a conflict of opinion between the judgments of the Division Bench in the case of Dilip Shroff and Shriram Mutual Fund cases.
The Court held that if evidence can sustain the finding that there has been concealment, it would be adequate ground for levy of penalty.
The Court further clarified that explanatory amendments indicate an element of strict liability on the taxpayer . Hence, principles laid down in Dilip Shroff’s case needs to be reconsidered by a Larger Bench of the Supreme Court.
In pursuance thereto, the larger bench has held that the decision in the Dilip Shroff’s case to be incorrect.
Review by SC raises more questions
My personal view is that in the most recent decision, the Court has taken a narrow interpretation of law and ignored the rationale and intent of different statutory provisions, under corporate and tax laws. The Income tax law suggests that no penalty can be imposed if the tax payer proves that there was a reasonable cause for failure, irrespective of intent.
This is a non obstante clause and overrides the provisions for such levy. Since this provision was not considered, by the court, taxpayers can still seek relief under the statutory provisions (273B) by demonstrating reasonable cause. Further, the Shriram principle is in the context of a stock exchange law.
The fact is tax penalties are above mandatory interest provisions. In Dharamendra Textiles case, the Court merely has taken away discretion to reduce penalty.
International Practice on tax penalties
Under French regulations, ‘Bad faith’ penalties amount to 40 per cent. It applies only in the context of significant compliance departure. Under second tier, ‘Abuse of law’ penalty is 80 per cent where the goal of a taxpayer was to avoid tax. Such penalties are rare. In Brazil, the standard penalty for tax assessments is 75 per cent and doubled in case of fraud, tax evasion or collusion.
Under the UK regime, penalties vary from 10 to 30 percent for un-prompted disclosure, 20 to 30 for prompted disclosure and finally 100 per cent for prompted and deliberate concealment.
I think there is wisdom in reviewing the legislative provisions and judicial decision. We need and deserve a simpler version of penalty provisions and reduce the discretion at the hands of tax man. There are some learnings from international practices and we should consider embracing some of those principles.
Since our entire tax collection scheme is target driven, I fear an onslaught of penalty cases in years we witness slow voluntary tax collections.
The author is a partner with BMR & Associates and views expresses herein are personal.