2008 (9) TMI 52 - SC - Central Excise

Whether Section 11AC of the Central Excise Act, 1944 (in short the Act ) inserted by Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient? Whether there is a scope for levying penalty below the prescribed minimum? Held that - In Union Budget of 1996-97, Section 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given. Object behind enactment of Section 271(1)(e) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act.

Summary

Issues Involved:
1. Interpretation of Section 11AC of the Central Excise Act, 1944.
2. Applicability of mens rea in the imposition of penalties under Section 11AC.
3. Comparison with Section 271(1)(c) of the Income Tax Act, 1961.
4. Discretion in the imposition of penalties under Rules 96ZQ and 96ZO of the Central Excise Rules, 1944.
5. Vires of Rule 96ZQ(5).

Issue-wise Detailed Analysis:

1. Interpretation of Section 11AC of the Central Excise Act, 1944:
The primary issue was whether Section 11AC, introduced by the Finance Act, 1996, mandates a penalty for tax evasion without discretion. The revenue argued that the section imposes a mandatory penalty for statutory offenses, with no discretion for the adjudicating authority. The assessee contended that Section 11AC should be read similarly to Section 271(1)(c) of the Income Tax Act, allowing for discretion in penalty imposition.

2. Applicability of Mens Rea in the Imposition of Penalties under Section 11AC:
The court examined whether mens rea (guilty mind) is an essential ingredient for penalties under Section 11AC. The revenue argued that Section 11AC does not reference mens rea, indicating penalties for statutory offenses without requiring proof of intent. The court noted that the extended period of limitation under Section 11A of the Act implies a statutory offense where mens rea is not necessary. The court concluded that mens rea is not essential for imposing penalties under Section 11AC, aligning with the principle that penalties for civil obligations do not require proof of intent.

3. Comparison with Section 271(1)(c) of the Income Tax Act, 1961:
The assessee compared Section 11AC with Section 271(1)(c) of the Income Tax Act, arguing for similar discretion in penalty imposition. The court distinguished between the two, noting that Section 271(1)(c) involves some discretion, whereas Section 11AC mandates penalties without discretion. The court emphasized that the conceptual and contextual differences between the two sections were not adequately considered in previous judgments, particularly in Dilip N. Shroff's case.

4. Discretion in the Imposition of Penalties under Rules 96ZQ and 96ZO of the Central Excise Rules, 1944:
The court examined whether Rules 96ZQ and 96ZO allow for discretion in penalty imposition. The revenue argued that these rules do not reference mens rea and mandate penalties for non-compliance. The court agreed, stating that the rules are clear and unambiguous, leaving no room for discretion. The court referenced the statutory scheme and previous judgments, concluding that penalties under these rules are mandatory.

5. Vires of Rule 96ZQ(5):
The court noted that the Gujarat High Court had held Rule 96ZQ(5) to incorporate the requirement of mens rea. The Division Bench clarified that if the larger bench finds the penalty under this rule mandatory, the assessee could still challenge its vires. The court did not address the vires directly but remitted the matter to the Division Bench for further consideration in light of the present judgment.

Conclusion:
The court concluded that Section 11AC of the Central Excise Act, 1944, mandates penalties for tax evasion without requiring mens rea. It distinguished this section from Section 271(1)(c) of the Income Tax Act, emphasizing the lack of discretion in penalty imposition under Section 11AC. The court also affirmed that Rules 96ZQ and 96ZO mandate penalties without discretion. The matter was remitted to the Division Bench for further proceedings in cases challenging the vires of Rule 96ZQ(5). Appeals were allowed, except for specific cases listed for further consideration.