QUESTIONS & ANSWERS
Whether mens rea is necessary for tax penalties
The interpretation thus far had been that there is discretion even for technical offences even under the excise law.
You might have noticed a recent Full Bench decision of the Supreme Court in UOI v Dharmendra Textile Processors (2008) 306 ITR 277 (SC), which has decided that the decision of the Supreme Court in Dilip N. Shroff v Joint CIT (2007) 291 ITR 519 (SC) has been incorrectly decided commending its earlier decision in Chairman, SEBI v Shriram Mutual Fund [2006] 131 Comp. Cas. 591 (SC). Will tax penalty become automatic for every default?
The Supreme Court had decided that mens rea in the sense that there should be intent to conceal income for levy of penalty for concealment of income in Dilip N. Shroff v Joint CIT (2007) 291 ITR 519 (SC). In Chairman, SEBI v Shriram Mutual Fund (2006) 131 Comp. Cas. 591 (SC), it was decided that in the matter of violation of SEBI regulations, penalty is exigible for default, even where the default was found to be unintentional and inadvertent. These two decisions were considered to be conflicting so that a case relating to penalty under Sec. 11AC of the Central Excise Act, 1944, was referred to reconcile them to a Full Bench in Union of India v Dharmendra Textile Processors (2007) 295 ITR 244 (SC). It was this reference which had come up in Union of India v Dharmendra Textiles Processors (2008) 306 ITR 277 (SC) before a Bench of three Judges. The penalty provision under different laws is different imposing different conditions for attracting penalty. Sec. 11AC of the Central Excise Act also provides for “intent to evade payment of duty” for levy of penalty. However, the Supreme Court found that for violation of rules, there is no implied requirement of mens rea or culpable mental state, so that there is no discretion for the authorities. The interpretation thus far had been that there is discretion even for technical offences even under the excise law.
Mens rea, however, may not be necessary in its strict sense as has been earlier decided by a Bench of seven Judges for economic crimes and departmental penalties in R. S. Joshi v Ajit Mills Ltd. (1977) 4 SCC 98. Similar view has been taken for late filing of return under Sec. 271(1)(a) (now substituted by interest) in Gujarat Travancore Agency v CIT (1989) 177 ITR 455 (SC). The inferred understanding that mens rea is necessary even for civil penalties like income-tax penalty in Dilip N. Shroff’s case (supra) was considered to be incorrect so that it was held that it was incorrectly decided. But that does not mean that the decision on the fact of the case was incorrectly decided, since it was conceded by the Court that there is discretion under the income-tax law. The Supreme Court in Dilip N. Shroff’s case (supra) had found in the facts of the case that there was no intent to conceal income in the absence of “enough materials to show that the action on the part of the appellant may not be said to be such which would attract penal proceedings under Sec. 271(1)(c) of the Act”. In fact, the Additional Solicitor General who appeared in the excise case with reference to this decision in the income-tax case, conceded that “although on the facts of the case, the decision rendered is correct, the view of the High Court that there should be some evidence to show or some circumstances found for proving such intent was questioned”. It cannot, therefore, possibly be said that it was incorrectly decided.
The view taken by the Full Bench that penalty is automatic for violation of rules under central excise law is rendered in the context of excise law. Reference to an income-tax penalty in such a case cannot be treated as a direct authority on the subject. Revenue itself had not contended with reference to income-tax penalty that it is automatic, but only questioned the onus of proving lack of bona fides on revenue.
As regards approval by the Full Bench of the decision in SEBI’s case (supra), this case dealt with an instance of violation of SEBI regulations, where penalty was considered to be automatic for a default, though such default was found to be non-intentional and in fact inadvertent by the SEBI Tribunal. This decision cannot be applicable to income-tax penalty. Income-tax penalties are governed by provision under the income-tax statute, which, no doubt, do not require mens rea on the part of the assessee as a pre-condition for penalty, but all the same require conditions under the tax statute to be satisfied before any levy of penalty.
If the Supreme Court’s decision in Dharmendra Textiles Processors’ case (supra) now referred by the reader is understood as warranting automatic levy in case of every default even for income-tax defaults, such understanding is not correct. It was conceded by the Supreme Court in Dharmendra Textiles Processors’ case (supra) while referring to Dilip N. Shroff’s case (supra) that “the question relating to discretion was not a basic issue” and that Sec. 271(1)(c) of the Income-tax Act provides for some discretion. Hence SEBI’s case (supra) cannot apply for tax penalties.
For concealment penalties under Sec. 271(1)(c), there is a complete code for such penalty under Explanation 1 to Sec. 271(1)(c), which presumes concealment wherever there is a difference between reported and assessed income but would authorise levy of penalty only where the explanation is not bona fide and all the materials to the computation of his total income has been disclosed by him.
There has been no change in this law. The decision in Dharmendra Textiles Processors’ case (supra) cannot be understood as having brought about any change in the interpretation of the provisions, which are clear not admitting of any controversy. It may also be pointed out that even for initiation of penalty, satisfaction is required. Sec. 273B gives a blanket immunity for various offences listed in the Chapter relating to penalty, if the assessee proves that there is reasonable cause for such failure. It is in this context that there is no scope for apprehension that penalties under the income-tax law will, henceforth, be automatic. All that has been decided is that proof of mens rea is necessary only for prosecution cases.
S. RAJARATNAM
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