The revenue must respect and regard the taxpayers who comply with voluntarily even if after some delay.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Sections 76, 77, 78, 80 and 84 of the Finance Act, 1994 

Section 234A, 234b, 234C and 244A of the Income-tax Act, 1961- rate of interest for example.

MAJESTIC MOBIKES PVT. LTD. ND OTHERS Versus COMMR. OF SERVICE TAX, BANGALORE 2008 TMI - 30790 - CESTAT BANGLORE  

Penalty provision is not in lieu of tax but a restraint and an administrative measure:

Under any tax law or other civil law penalty provisions are made to ensure compliance of law and to put the defaulters on an alert and alarm that in case of default the defaulter shall have to pay penalty. Even in commercial contracts we find clauses for penalty or damages in case any party commit breach of contract or any terms of contract. The intention of parties is to ensure timely performance of contracts and not to recover penalty from defaulting party.

Similarly in tax laws penalty provision are prescribed mainly:

a. to ensure compliance of procedures relating to filing of returns and information etc.

b. and also to inculcate honesty amongst taxpayers  while declaring taxable value of any taxable item like income, wealth,  value of taxable services, taxable turnover etc. as the case may be not to levy penalty as damages

Penalty is not damages to the revenue but interest is damage or compensatory:

We find provisions for payment of interest by taxpayers for delay in payment of tax. The interest is calculated at prescribed rate usually for each month of default or delay in payment of tax. Therefore by nature interest is definitely as damages of loss suffered by the revenue when a taxpayer do not pay tax on due date. Such interest is also at higher rate than normal rate. In fact the rate of interest payable by tax payer is usually higher than the rate of interest payable by government in case of refund of excess tax paid. Thus, we find that the interest levied itself has elements of damages as well as penalty. However, considering banking practices and business the difference between rate of interest charged and paid can be considered as spread and therefore entire interest can be considered as damages for late payment. But the question is whether such spread is justified? The answer is clearly no, because government is not acting as a money lender or banker when a tax payer delays in payment of tax. Therefore there should not be any difference between two rates. However, we find significant difference. For example under income tax rate of interest payable by tax payer (1% PM) is much higher (presently double) than the rate of interest payable by government (0.5% PM). Thus we find that the Government is already penalizing the taxpayer for delay in payment of tax.

Higher rate of interest charged for delay so penalty should be lenient:

As the government charges higher rate of interest on delayed payment of tax, so there should be leniency in levy of penalty as it is not compensatory or in nature of damages.

Voluntary compliance- an indication of honesty:

In case a taxpayer comply with law voluntarily but belatedly and pay interest for delay in payment of tax, if any, there should be general tendency to be lenient towards levy of penalty. This is because the taxpayer has complied with law voluntarily and has also compensated the government by paying interest. The voluntary compliance and honesty must be respected and the taxpayer should not be burdened with penalty.

If a taxpayer who has complied with voluntarily and paid tax with interest is further burdened with penalty, then there will be promotion to tendency not to comply with law voluntarily, when a breach has already taken place. This is because when the taxpayer complies with voluntarily he is burdened with penalty and if he dos not comply with, he may not be caught by revenue officials. Therefore, as a general rule voluntary compliance must be regarded as a honest intentions and penalty should not be levied, of if levied, it should be nominal so that the taxpayer has some alarm to avoid default.      

Litigation on penalty:

It is unfortunate that revenue officials do not fully respect and regard voluntary compliance by taxpayers. In fact they consider such taxpayers as a person in his clutches and want to exploit as much as possible by demanding unreasonable tax, interest and penalty. The other taxpayer who does not come forward and pay tax voluntarily, may move freely without paying tax. The officers usually want to levy maximum penalty on a person even if he has complied with voluntarily. This leads to litigation.

A recent case about enhancement of penalty:

IN MAJESTIC MOBIKES PVT. LTD. Versus COMMR. OF SERVICE TAX, BANGALORE  2008 TMI - 30790 - CESTAT BANGLORE   in revision the  Commissioner Enhanced amount of  penalty  and the taxpayer has to move an appeal before the Tribunal. There were doubts and difference of opinion as to whether the service rendered by the taxpayer was taxable or not. To be particular, whether the whether commission received from Financial Institutions by an automobile dealer is taxable as business auxiliary service or not was not clear. The service provider has also ignorance and as and when he became aware of the liability he paid tax and complied with law voluntarily.

On appeal Tribunal considered sections 76, 77, 78, 80 and 84 of the Finance Act, 1994 and general rule about penalty as laid down by courts and Tribunals in various cases cited before it. Tribunal considered and held that   when non-payment of tax by assessee is on account of ignorance of law and there is no intention to evade payment of duty, no further action would be warranted on his part to prove reasonable cause within meaning of section 80.

Just because Commissioner's power with regard to imposition of penalty is unlimited, he cannot blindly impose savage penalty

In this case the taxpayer did not discharge its service tax liability within stipulated time period  however, as soon as said lapse was pointed out by revenue authorities, without any protest, the taxpayer paid service tax along with interest before issue of show-cause notice.

In view of these facts including the voluntary compliance the original authority did not impose any penalty under sections 76 and 77 and imposed only a nominal penalty under section 78.

In revision proceedings the Commissioner reviewed adjudication order and imposed penalty under sections 76 and 77 and enhanced the amount of penalty imposed under section 78 to amount more than service tax.

 Tribunal also noted that it was found that there was doubt in trade circles as to whether activity of assessee was taxable under category of 'Business auxiliary services' and Board issued a Circular No. 87/05/2006-ST, dated 6-11-2006, clarifying that same was a taxable service.

The compliance by taxpayer by making good payment of tax immediately after being pointed out by revenue, showed that it was ready to comply with law and under such circumstances, original authority was justified in granting waiver of penalty under sections 76 and 77 in terms of section 80 and imposing a nominal penalty under section 78.  

Furthermore, when there was genuine doubt about taxability of services provided, no mala fide could be attributed to assessee and, hence, in terms of section 80, penalty in question was required to be waived.

Readers are requested to read relevant judgments from the links of TMI and references provided in the judgment.

 Conclusion:

The revenue authorities must respect and give due regard to the taxpayer who come forward and make voluntary compliance. The taxpayer should also try to make voluntary and timely compliance. In case of delay the taxpayer must show that he was alert enough and had bonafide reasons for delay. In case of delay ground work for establishing reasons and bonafide of delay and relevant evidences should be obtained and kept ready on real time basis to avoid doubt by  the revenue authorities about their genuineness.

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Other judgments referred to:

Rashtriya Ispat Nigam Ltd. v. Commissioner of Central Excise, Visakhapatnam- 2003 (161) E.L.T. 285 (Tri.-Bang.) It was urged that the above decision was upheld by the Supreme Court -2004 (163) E.L.T. A53 (S.C.). The decision of the Hon'ble High Court of Karnataka in the case of Commissioner of Central Excise, Mangalore v. Shree Krishna Pipe Industries - 2004 (165) E.L.T. 508 (Karnataka) was also cited. The learned SDR relied on the following decisions, which are in favour of the Revenue.

(a) CCE & STC, Bangalore v. First Flight Couriers Ltd .- 2007 -TMI - 2250 - HIGH COURT , BANGALORE

(b) CCE, Delhi -IV v. Ilpea Paramount Pvt. Ltd. - 2007 -TMI - 1505 - CESTAT, NEW DELHI

(c) CCE, Delhi-III v. Machino Montell (I) Ltd. - 2006 -TMI - 687 - HIGH COURT OF PUNIAB & HARYANA (CHANDIGARH)

(d) Sai Machine Tools Pvt. Ltd. v. CCE & C, Indore - 2006 -TMI - 711 - HIGH COURT OF JUDICATURE OF MADHYA PRADESH (INDORE)

(e) CCE & C, Aurangabad v. Padmashri V.V. Patil S.S.K. Ltd. - 2007 -TMI - 1645 - HIGH COURT, BOMBAY

(f) CCE, Meerut v. Parmarth Steel & Alloys (P) Ltd. - 2007 -TMI - 1082 - CESTAT,NEW DELHI

(g) PinkCity Communications v. CST, Delhi-III - 2007 -TMI - 1849 - CESTAT, NEW DELHI

(h) Insurance & Provident Fund Department v. CCE, Jaipur-I - 2005 -TMI - 41 - CEGAT, NEW DELHI

(i) CCE, Ludhiana v. Omkar Steel Tubes (P) Ltd. - 2008 -TMI - 2816 - HIGH COURT, PUNJAB AND HARYANA

(k) CCE & C, Aurangabad v. Bageshwari Sahakari Sakhar Karkhana Ltd. - 2008 -TMI - 3032 - HIGH COURT, BOMBAY