The recent Supreme Court decision rendered in the case of Union of India vs Dharamendra Textile Processor (2008-TIOL-192-SC-CX-LB) has held that proving of bonafide by the taxpayer is not a pre-requisite in case of levy of penalty under a fiscal statute, since the same constitutes a civil liability.
Although the decision was rendered in the context of Section 11AC of the Central Excise Act, 1944 (the Act), the Court, nevertheless, distinguished its earlier decision rendered in the case of Dilip N Shroff vs JCIT (291 ITR 519). The Court observed that, it is significant to note that the conceptual and contextual difference between Section 271(1) (c) and Section 276C of the Income Tax Act, 1961 (“IT Act”) was lost sight of in Dilip Shroff's case. At this juncture, it is pertinent to note that the Apex Court in Chairman, SEBI vs Shriram Mutual Fund and Anr (5 SCC 361) held that “penalty is imposable as soon as violation of the regulation is established--statue does not entail establishment of mens rea.”
As a result of divergent views, the matter was referred to a larger bench of the Supreme Court in Dharamendra Textile and the question for determination in all the said appeals was whether Section 11AC of the Central Excise Act, 1944 [271(1)(c) of the IT Act is similar to section 11AC of the Act] envisages imposing of mandatory penalty on persons who have evaded payment of tax and the same should be interpreted in a manner which pre-suppose mens rea and whether there is a scope of discretion for levying penalty below the prescribed minimum.
Under section 271 (1) of the IT Act, the tax department may direct the person in default for imposition of penalty which is a civil liability. Meanwhile section 276C is a clear and specific provision dealing with wilful evasion of tax etc which has a criminal consequence. Furthermore, section 273B specifically carves out cases where penalty need not be imposed, where a reasonable cause for failure is demonstrated by the tax payer.
Interestingly, in the recent decision of the Supreme Court in the case of CIT, Ahmedabad vs Sarabhai Holding Pvt Ltd (Civil Appeal No. 482-483 of 2003), the issue was imposition of penalty in case of wrong estimate of advance tax liability under the IT Act. The apex court observed that “the Interest under section 215 of the IT Act is automatic, that is not the case with the penalty under section 273 (2) (a) of the IT Act, where the mens-rea on the part of tax payer would have to be proved to the extent, it has been indicated in the language of the section, where, therefore, was some scope for the assessee to justify the estimate given by it an that the penalty could not be inflicted”.
The above two decisions of the Apex Court are bound to influence pending penalty proceedings initiated under fiscal statutes. The courts and appellate authorities need to apply the dicta of Dharamendra Textile in the relevant context only, otherwise the same would potentially have far reaching implications.
Aseem Chawla is a partner at Amarchand Mangaldas and Gagan Kumar is a senior consultant at Amarchand Mangaldas
