2014 (9) TMI 552 - HC - Income Tax

Penalty order passed u/s 13 of Interest Tax Act Interest on Banks-Bills Re-discounting Scheme - Held that - When two legal interpretations were plausible and there was honest and bona fide difference of opinion, penalty for concealment/furnishing of inaccurate particulars, should not and cannot be imposed - If the view taken by the assessee required consideration and was reasonably arguable, he should not be penalized for taking the position - The tax statutes are complex and there can be a bona fide difference of opinion on legal interpretation and understanding of a provision - even when the interpretation placed by the Revenue is accepted, penalty should not be imposed if the contention of the assessee was plausible and bona fide. Establishment of mens rea is not the requirement or a condition precedent to impose penalty - The question of mens rea etc. is important and relevant in the criminal proceedings but not for the purpose of civil penalty u/s 13 of the Act - The nature and character of the two proceedings is different - Presence of mental element or mens rea in most criminal proceedings is mandatory unless the legislature mandate is to the contrary but not so in the penalty proceeding under Section 13 of the Act - the Tribunal has not erred in upholding the order of the CIT(A) in deleting the penalty relying upon National Insurance Company Limited versus Commisioner of Income Tax and Another 2011 (6) TMI 123 - CALCUTTA HIGH COURT - Section 2(5) would override and interest earned on bill discounting with credit institutions would not be included in interest u/s 2(7) of the Act the order of the Tribunal is upheld Decided against revenue.

Issues Involved:
1. Legitimacy of the penalty imposed under Section 13 of the Interest Tax Act, 1974.
2. Interpretation of "interest" under Section 2(7) of the Interest Tax Act.
3. Applicability of Section 2(5A)(1) concerning transactions with the Reserve Bank of India.
4. The role of mens rea in penalty proceedings under Section 13 of the Act.

Detailed Analysis:

1. Legitimacy of the Penalty Imposed under Section 13 of the Interest Tax Act, 1974:
The Revenue appealed against the order of the Income Tax Appellate Tribunal (Tribunal) which upheld the Commissioner of Income Tax (Appeals) decision to delete the penalty of Rs. 44,42,839/- imposed by the Assessing Officer under Section 13 of the Interest Tax Act, 1974. The Tribunal and the Commissioner of Income Tax (Appeals) found that the respondent-assessee's interpretation and reliance on Section 2(5A)(1) were not baseless or without merit, despite being ultimately incorrect. The Tribunal concluded that the penalty could not be imposed as the respondent-assessee's stance was reasonably arguable and bona fide.

2. Interpretation of "Interest" under Section 2(7) of the Interest Tax Act:
The Assessing Officer referred to the definition of "interest" in Section 2(7) of the Act, which includes interest on loans and advances made in India, commitment charges on unutilized portions of any credit sanctioned, and discount on promissory notes and bills of exchange drawn or made in India. The Tribunal noted that the definition of "interest" had been expanded to include bill discounting charges on promissory notes or bills of exchange. However, the respondent-assessee argued that the interest earned under the Banks-Bills Rediscounting Scheme did not fall under this definition, as it was not on "loans and advances."

3. Applicability of Section 2(5A)(1) Concerning Transactions with the Reserve Bank of India:
The respondent-assessee contended that interest on transactions with the Reserve Bank of India should not be taxed under Section 2(7) as the Reserve Bank of India is not a "credit institution" but a statutory authority. The Assessing Officer disagreed, stating that the Reserve Bank of India does not qualify as a credit institution under the Act, and therefore, the interest earned from such transactions is taxable. The Tribunal upheld this interpretation but acknowledged that the respondent-assessee's argument was plausible and not devoid of merit.

4. The Role of Mens Rea in Penalty Proceedings under Section 13 of the Act:
The Court reiterated that mens rea, or a guilty mind, is not a prerequisite for imposing penalties under Section 13 of the Interest Tax Act. The Court referred to its previous judgment in Commissioner of Income Tax-IV versus Fortis Financial Services Limited, which clarified that the absence of an "Explanation" in Section 13 means the onus does not shift to the assessee. However, penalties should not be imposed if the assessee's interpretation was bona fide and reasonably arguable, even if ultimately incorrect. The Court emphasized that the penalty provisions aim to address tax delinquency as a civil obligation rather than a criminal offense requiring proof of mens rea.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming the Tribunal's decision to delete the penalty imposed on the respondent-assessee. The Court found that the respondent-assessee's interpretation of the relevant provisions was arguable and made in good faith, thus not warranting a penalty under Section 13 of the Interest Tax Act. The Court also highlighted the distinction between civil penalties and criminal penalties, noting that the former does not require proof of mens rea.

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