Quantum of Penalty – How And When – Whether Mens Rea Is One of The Essential Ingredient.

QUANTUM OF PENALTY – HOW AND WHEN – WHETHER MENS REA IS ONE OF THE ESSENTIAL INGREDIENT.

In the recent past, the Department is threatening the assessee with the imposition of the penalty for infraction of various provisions of law –however grave or mild it may be notwithstanding the fact that Central Goods & Service Act, 2017 is at nascent stage and on most of the occasions, because of technical glitches, bonafide mistake, or for some unintentional reasons, there is a venial or technical breach of the provisions of law. However, at the same time, it must also be placed on record that the Government has also extended the time for (i) payment of taxes and also (ii) for filing of returns to mitigate the hardships being faced by the members from the trade and industry.

2: To begin with, we may have to understand the distinction between (i) mandatory penalty and (ii) discretionary penalty. In case of mandatory penalty – for example, under Section 11AC of Central Excise Act, 1944, there is no discretion left with the adjudicating authority about the quantum of penalty and Section 11AC says that the penalty should be equal to the amount of duty/taxes. The discretionary penalty could be under Section 9 of the Central Excise Act and/or Rule 15A of Central Excise Rule,2004. Under the CGST Act, primarily penalty is imposable under various provisions as follows:-

a) Section 122 for certain offenses;

b) Section 123 Failure to furnish information/return;

c) Section 124 Fine for failure to furnish statistics

d) Section 125 General Penalty

e) Section 126 General Discipline relating to penalty

f) Section 127 Power to impose the penalty in certain cases;

g) Section 128 Power to waive penalty, fee or both;

3: Section 73(9) of CGST Act, talks of penalty of 10% of tax or ten thousand which is ever higher. Section 74 (1) talks of penalty equal to the amount of tax specified in the SCN which is some-what identically worded as that of Section 11AC of CEA Act. The Section 126 speaks of general principles to be kept in mind by the Adjudicating Authority while imposing penalty upon the Noticee for violation of various provisions of the Act.

4: However, it is very heartening to note that Section 126(3) Act says that no penalty shall be imposed on any person without giving him an opportunity of hearing but there is no negative covenant in other Sections for not serving any SCN before imposition of penalty. With this background, let us discuss and deliberate some of the celebrated judgments of the Supreme Court and that of High Courts.

5: In a most celebrated judgment of the Hon’ble Supreme Court in the case of Hindustan Steel Limited v. State of Orissa MANU/SC/0418/1969 and CST v. Sanjiv Fabrics MANU/SC/0698/2010 wherein it has been held that mens rea was an essential ingredient for imposition of penalty. The Supreme Court in Bharjatiya Steel Industries v. Commissioner Sales Tax, U.P. MANU/SC/7288/2008 observed as under:-

“An assessing authority has been conferred with a discretionary jurisdiction to levy penalty. By necessary implication, the authority may not levy penalty. If it has the discretion not to levy penalty, existence of mens rea becomes a relevant factor.”

6: However, it may be kept in mind that in case of mandatory penalty which is generally equal to the amount of duty or tax, the Court/ Tribunal has no jurisdiction to reduce the quantum of penalty than prescribed under law.

Related Topic:
Adjudication of Penalties under the Companies Act, 2013

GENERAL PRINCIPLE OF LEVY OF PENALTY

7: The Supreme Court in the case of C Maya Devi v. Raj Kumari Batra MANU/SC/0731/2010 has held that where an authority is vested with discretionary powers, discretion has to be exercised by application of mind and by recording reasons to promote fairness, transparency and equity.

8 The CESTAT in the case of Sumeet Industries Ltd. v. CCE, MANU/CM/1001/2003: 2004 (164) E.L.T. 335 (Tri – Mumbai)], in has held as under:-

“power to levy the penalty should not be ordinarily imposed unless there is a deliberate defiance of law or contumacious or dishonest conduct or a conscious disregard to an obligation is established in the facts of a case”.

9: The Supreme Court in the case of Karnataka Rare Earth and Ors. vs. Department of Mines and Geology and Ors. MANU/SC/0057/2004 In spite of a minimum penalty prescribed, the authority competent to impose the penalty may refuse to impose penalty if the breach complained of was a technical or venial breach or flew from a bona fide though mistaken belief.

MANDATORY PENALTY EQUAL TO AMOUNT OF TAX EVADED.

10: The Bombay High Court in the case of CCE Mumbai v. Hindustan Petroleum Corporation Ltd. MANU/MH/2959/2016: 2017 (347) ELT 229 has observed that “in case of non-payment or short payment of duty, penalty gets automatically attracted and the authority had no discretion. The Bombay High Court relied upon judgment of the Hon’ble Apex Court in the case of Union of India v. Dharmendra Textile Processors MANU/SC/4448/2008: 2008 (231) ELT 3 (S.C.). The Hon’ble Supreme Court in the case of Rajasthan Spinning and Weaving Mills has held that the penalties under Section 11AC (Section 74 of CGST Act) is a punishment for an act of deliberate deception by the assessee, with the intent to evade duty by adopting any of the means mentioned in such statutory provision. If the conditions enumerated in Section 11AC (Section 74 CGST Act) are fulfilled, then there is no discretion vested with the authorities to reduce the amount of penalty, which can be equal to the duty liability, which was confirmed on the appellant.

PENALTY MUST BE COMMENSURATE WITH THE GRAVITY OF OFFENCE.

11: It is well settled law that punishment must fit the crime, otherwise it will be hit by Wednesbury principle of unreasonableness and rule of proportionality. It is well settled law that no penalty ought to be imposed for a technical and venial breach of statutory obligations. In support of the above contentions, I may refer to judgments in Bharjatiya Steel Industries vs. CST MANU/SC/7288/2008, Maharashtra Land Development System Vs. State of Maharashtra MANU/SC/0940/2010, and All India Railway Recruitment Board vs. K. Shyam Kumar MANU/SC/0342/2010.

NOMINAL PENALTY

12: The CBIC has issued Circular No. 64/38/2018-GST: MANU/GSCU/0041/2018 dated 14.9.2018 (covering GST era) clarifying that in case of technical errors in the documents accompanying the goods, provisions of Section 129 of the GST Acts may not be resorted to but instead goods may be released on payment of nominal penalty under Section 125 of the GST Acts.

13: The Allahabad High Court in the case of Rajavat Steels vs. State of U.P. (27.09.2018 – ALLHC) : MANU/UP/4633/2018 has observed, in case under GST era, that two authorities below failed to appreciate that it was bonafide mistake in putting the vehicle number (there is a mistake in putting last digit of vehicle number) and penalty was wholly unwarranted.

14: The DB of Madras High Court in Aeon Formulations Private Limited vs. CCE (21.11.2019 – MADHC) : MANU/TN/9468/2019 has observed as under:- Therefore, imposition of the 100% penalty under Rule 26 of the Central Excise Rules, 2002 was in our view excessive under the circumstances because the appellant has paid the amount together with interest before the issue of Show Cause Notice, hence 100% penalty is not imposable.

15: The CESTAT in the case of Nature’s Essence Pvt. Ltd. vs. CCE : MANU/CE/0683/2017 wherein the issue was mainly interpretational issue and, therefore, appellate authority has already reduced the penalty from Rupees Six lakh to Rupees Three lakh and CESTAT reduced the same to token penalty of Rs.1 lacs only since the issue pertain to interpretation of provision of law and where two interpretation were possible.

16: The CESTAT in Hindustan Motors Ltd. vs. CCE: MANU/CC/0190/2019 has observed that admittedly the appellants have availed wrong credit by taking credit twice on the same invoices. Taking note of the fact that the credit availed by them was reversed with interest on being pointed out, I am of the view that the situation does not warrant imposition of penalties.

17: The Tribunal in Gujarat Pipavav Port Ltd. vs. CCE, Bhavnagar – MANU/CS/0390/2008 set aside the penalty where there was a procedural lapse on the part of the appellant in availing advance service tax credit prior to the payment of service tax of input service availed by them but ultimate credit is available to them in the next month. They are ready to pay interest for the intervening period. Taking a lenient view, the tribunal set aside the penalty levied under impugned order.

18: The Hon’ble High Court of Gujarat in the case of M/s. Vimal Enterprises v. UOI – MANU/GJ/0470/2005 has, while dealing with case of Cenvat Credit, observed that the entire endeavour of the Revenue should be to make the scheme effective and not to deny the beneficial provisions on the basis of technical breaches and hence no justification for imposition of penalty.

19: The Rajasthan High Court in the case of Assistant Commercial Taxes Officer v. Rishab Special Yarns Limited MANU/RH/0658/2004t has held as under:-

A mere contravention of provisions of Section 78(2) of the Act of 1994 cannot authorize the assessing officer to impose penalty under Section 78(5) of the Act of 1994 unless there is mens rea on the part of the trader. Apart from this, mens rea is an essential ingredient for imposing penalty. The word “mens rea” does not bear a literal meaning (i.e. “bad mind” or guilty mind) because one who breaks the law even with the best of motives still commits a crime.

20: The MP High Court in the case of Commissioner of Sales Tax. Vs. Eastern Air Products (P) Ltd MANU/MP/1432/2006 in relation to non-filing of return and non-payment of sales tax while considering imposition of imposing penalty, has observed as under:-

It is thus clear that where sufficient cause is shown by the registered dealer for not filing the return within the prescribed date or for not furnishing along with the return proof of payment of tax due, such penalty cannot be imposed. In fact, the requirement in the provision for giving a reasonable opportunity of being heard is for the purposes of enabling the dealer to establish before the Commissioner that he had sufficient cause for not filing return by the date prescribed or for not furnishing along with the return proof of payment as required by sub-section (1-A) of section 17 of the Act. The word “may” in the provision further makes it clear that the Commissioner may or may not impose penalty under section 17(3) of the Act in any particular case.

21: In view of the above discussions, it could be summarized that in respect of mandatory penalty prescribed under the law, it has been repeatedly held by the Hon’ble Supreme Court that no court can reduce the quantum of penalty than what is prescribed under the law. However, where there is a discretion vests in the Adjudicating Authority, AA is well within its rights to either impose the penalty or not to impose depending upon the facts and circumstances of each case.