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TMI Blog1981 (7) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... that fell due on completion of the provisional assessment under s. 23B of the Act. The ITO overruled the explanation and came to the conclusion that there was no reasonable cause for the delay in filing the return and, consequently, a penalty of Rs. 63,602 was imposed by him under s. 271(1)(i) of the Act. On appeal, the AAC reduced the penalty from Rs. 63,602 to Rs. 57,244. The assessee filed an appeal before the Appellate Tribunal. The Tribunal found that no reasonable cause existed, but relying on the observations made in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), held that a refund of Rs. 3,676 fell due to the assessee and thus no tax was payable by the assessee with reference to which the penalty could be computed. The following two questions have been referred to this court for its opinion at the instance of the revenue : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in holding that the penalty leviable under section 271(1)(i), Income-tax Act, 1961, had to be worked out with reference to the tax that remained payable by the assessee after being allowed credit for the tax paid under section 23B of the Indian I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there cannot be any dispute that the provisions of s. 271(1)(a) of the Act were attracted. But, at the same time, the Bench made the observation that the doctrine of mens rea had no application to such situations under the taxing statutes. On the other hand, Mr. S. S. Mahajan, learned counsel for the assessee, places reliance on a decision of their Lordships of the Supreme Court in Khemka Co. (Agencies) Pvt. Ltd. v. State of Maharashtra [1975] 35 STC 571, wherein their Lordships observed as under : " The Income-tax Act, 1961, imposes penalty under sections 270 and 271. These sections in the Income-tax Act provide for imposition of penalty on contumacious or fraudulent assessees. " The learned counsel contends that mens rea is one of the relevant considerations while deciding whether penalty under s. 271(1)(a) of the Act is leviable or not. Mr. Awasthy, on the other hand, relies on the following cases in support of his contention : 1. CIT v. Gujarat Travancore Agency [1976] 103 ITR 149 (Ker) [FB], 2. Addl. CIT v. Dargapandarinath Tuljayya Co. [1977] 107 ITR 850 (AP) [FB], 3. Nemichand Ganeshmal v.CIT [1979] 124 ITR 438 (MP) and 4. R. S. Joshi, STO v. Ajit Mills Ltd. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s imposed by him under s. 271(1)(a) of the I.T Act, 1961, which by that time had come into force and is hereafter called " the Act". The assessee then preferred an appeal before the AAC. He also took the view that the delay of eleven months in filing the return was without reasonable cause and, therefore, the penalty under s. 271(1)(a) of the Act was exigible. However, he reduced the penalty by Rs. 6,358 because the assessee had paid before the date of assessment Rs. 23,590 under s. 23B of the Indian I.T. Act, 1922, and Rs. 5,323 had been paid by way of tax deducted at source and these two payments had not been taken into account by the ITO for working out the amount of tax that would have been payable by the assessee-firm treating it as an unregistered firm. Apparently dissatisfied with the small reduction in the quantum of penalty, the assessee then preferred a second appeal before the Income-tax Appellate Tribunal, Chandigarh. On his behalf, the issue was pointedly raised that because no finding of existence of any mens rea had been recorded against the assessee, therefore, the order imposing penalty was bad in law. It was also urged that the assessee had a reasonable cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the doctrine of mens rea was equally attracted to the tax field even under s. 271(1)(a) of the Act, were relied upon with regard to question No. (2) aforesaid. A firm stand to the contrary was taken on behalf of the revenue. The Division Bench noticed the headlong conflict of judicial opinion on the point and also observed that the same was one of substantial importance and was likely to arise in a large number of cases. It has, therefore, referred the larger question whether mens rea is one of the relevant considerations for the levy of penalty under s. 271(1)(a) of the Act or not for decision by a larger Bench and that is how the matter is before us. As has been said at the outset, it is even more manifest from the reference order, that there undoubtedly exists a sharp divergence of judicial opinion on the basic issue before us. Therefore, before one inevitably enters the thicket of the case law and it is indeed a deep one-it becomes apt and indeed necessary to examine the issue on larger principle and with regard to both the scheme and the particular language of the statutory provisions. Now the maxim actus non facit reum nisi mens sit rea is rooted in the antiquity of Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the act, is an essential ingredient in every offence; but that presumption is liable to be displaced either by the words of the statute creating the offence or by the subject-matter with which it deals, and both must be considered. The aforesaid view has the stamp of approval by their Lordships of the Supreme Court in Hariprasada Rao v. State AIR 1951 SC 204, and State of Maharashtra v. Mayer Hans George [1965] 35 Comp Cas 557; AIR 1965 SC 72. However, the more meaningful authoritative enunciation in this context is that by Krishna Iyer J. in R. S. Joshi, ITO v. Ajit Mills Ltd. [1977] 40 STC 497; AIR 1977 SC 2279, in the following terms (pp. 507, 508 of STC): " Even here we may reject the notion that a penalty or a punishment cannot be cast in the form of an absolute or no-fault liability but must be preceded by mens rea. The classical view that 'no mens rea, no crime' has long ago been eroded and several laws in India and abroad, especially regarding economic crimes and departmental penalties, have created severe punishments even where the offences have been defined to exclude mens rea. Therefore, the contention that section 37(1) fastens a heavy liability regardless of faul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the penalty is not a part of the tax, and that will not be regarded as a legal incident to a tax. It is merely a method of enforcing payment of the tax." This issue came up for pointed consideration before the Supreme Court of the United States in Murray R. Spies v. United States (317 US 492 at 495) and it was held as follows: " The penalties imposed by Congress to enforce the tax laws embrace both civil and criminal sanctions. The former consist of additions to the tax upon determination of fact made by an administrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offences enforced by the criminal process in the familiar manner. Invocation of one does not exclude resort to the other ... The failure in a duty to make a timely return, unless it is shown that such failure is due to reasonable cause and not due to wilful neglect, is punishable by an addition to the tax of 5 to 25 per cent. thereof depending on the duration of the default ... The offence may be more grievous than case for civil penalty. Hence, the wilful failure to make a return, keep records, or supply information when required, is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... war [1977] 107 ITR 832 (AP). In view of the aforesaid authoritative enunciations, it is unnecessary to elaborate the matter further and it would be evident that generally penalty proceedings in a taxing statute are civil proceedings of remedial or coercive nature imposing an additional tax as a sanction for the speedy collection of revenue. Therefore, the imposition of penalty for a tax delinquency cannot possibly be equated with the conviction and sentence for a criminal offence. Once it is found that penalty proceedings in a taxing statute are, in essence, of a civil nature, it would follow that the doctrine of mens rea, which is essentially applicable in the arena of crimes alone cannot be possibly attracted to such proceedings and in any case should not be easily invoked in a field altogether different. Penalty proceedings of a civil nature for a tax delinquency and punishment for a crime stricto sensu are things poles apart. Bringing considerations which are applicable basically as the essential ingredients of an offence, or as a rule of construction of criminal statutes, into the field of penalty proceedings in a taxing statute, which in essence are a coercive civil sanct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elled for a tax delinquency. It is to this pointed issue that we now propose to address ourselves. The larger argument on behalf of the revenue ably projected by Mr. D. N. Awasthy and which appears to us as having patent merit is that the scheme of the Act visualised three distinct kinds of sanctions against any infraction of its provisions with regard to the non-filing or the delayed filing of income-tax returns. The first amongst these is spelt out by the relevant provisions of s. 139 which may be read at the very outset: " 139. Return of income.-(1) Every person, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed (a) in the case of every person whose total income, or the total income of any other person in respect of which he is assessable under this Act, includes any income from business or profession, befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the other sub-sections) makes it plain that the law obliges the furnishing of the requisite income-tax returns on the assessees who come within its ambit and prescribes the date and time within which they are to be filed. Any infraction of this obligation is just provided for by sub-s. (8). This sanction appears to be at the lowest pedestal and involves a liability to pay interest in the case of either non-filing or the delayed furnishing of income-tax returns. In a way it is merely commercial equivalent for the delayed payment of revenue which may well ensue as a necessary consequence of the delayed or non-filing of returns by a delinquent assessee. Reference in this connection may also be made to the statutory rules framed in this context and in particular to r. 117A. These statutory rules again refer to and provide for the liability to pay interest in the contingency spelt out therein. Proceeding further, it would appear that at a higher level than the liability to pay the commercial equivalent for the possibility of the loss to the public revenue, for the delayed or non-furnishing of income-tax return (under s. 139 and the relevant rules), are the provisions of penalti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to any tax payable by him, a sum which shall not be less than ten per cent. but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income ; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income : Provided that, if in a case falling under clause (c), the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner ......... " Without attempting any close analysis of the aforesaid provision, at this stage, the heading of s. 271 itself calls for significant notice. This itself classifies the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, in view of the fact that sub-s. (4A) and sub-s. (4B) have been omitted by the T.L. (Amend.) Act, 1975, with effect from October 1, 1975, it is now wholly unnecessary to advert thereto. Even from the aforesaid bird's eye view of the statutory provision, it is manifest that s. 271(1)(a) read with sub-cl. (i) is separate and distinct from its other clauses and, as said earlier, we intend to focus ourselves entirely thereon. A reading of this provision would show that what is provided herein is a civil sanction far above the mere liability to pay interest as a commercial equivalent of delayed and non-filing of returns as stands earlier provided under s. 139(8) of the Act. The difference between the mere imposition of interest under s. 139 and the imposition of penalty under s. 271(1)(a) are patent. The latter provision goes a step further and deals with a somewhat graver situation. A penalty as provided in cl. (i) may be imposed only when the ITO or the AAC is satisfied that the delay has occurred without reasonable cause. The quantum of the penalty is heavier than the interest that is collectable under s. 139(8). Under s. 271(1)(a), both a power and discretion is vested in the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith effect from April 1, 1971, by Act No. 42 of 1970. It would thus be plain that the insertion of the word " wilful " had been deliberately made to incorporate into this statutory offence a clear requirement of a guilty mind or mens rea. When s. 276C came to be substituted by the present s. 276CC, the same mens rea was incorporated in the successor provision as well. Now, it is against the aforesaid larger perspective of the basic scheme of the I.T. Act, 1961, for providing three distinct sanctions for the non-filing or delayed filing of returns that Mr. D. N. Awasthy's contention on behalf of the revenue is to be tested. He had plausibly and forcefully contended that the doctrine of mens rea, which essentially is one from the realm of criminal law, can be strictly and directly attracted only under the last and the highest sanction provided by s. 276CC of the Act, which creates a statutory offence for this tax delinquency. Herein, both because the Legislature has chosen to make it a crime and also because in its wisdom, it has introduced the mental element of wilfulness in the section itself, a guilty state of mind or to put it technically mens rea is an essential ingredient of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt added with fine. Equally significant is the distinction between the word " penalty " as contemplated by s. 271(1)(a) and the stringent punishments provided by s. 276CC. Reference to s. 271(1)(a)(i) of the Act would indicate that the Legislature itself viewed this " penalty " as an addition to the amount of tax, if any, payable by the assessee and the same is calculated in relation to the amount of the assessed tax. It would be thus obvious that the penalty imposed here is in a way related to tax and as was authoritatively said in C. A. Abraham's case [1961] 41 ITR 425 (SC) is part of the assessment proceedings. Now, what is imposed under s. 276CC of the Act is altogether different in nature. The proceedings therein are neither part of the assessment proceedings nor are they directly proportionate to the amount of tax leviable. The offender under cls. (i) and (ii) thereof can be visited with rigorous imprisonment which may extend to seven years or three years respectively with an addition of fine as well. It seems unnecessary to elaborate the point because the difference which the statute maintains between the penalty leviable under s. 271(1)(a) and the punishment imposable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as dealer acted in the honest and genuine belief that the company was not dealer. Granting that they erred, no case for imposing penalty was made out. " Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings (Hindustan Steel Ltd. v. State of Orissa). In England also it has never been doubted that such proceedings are penal in character: Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioner [1942] AC 643; [1943] 11 ITR (Suppl) 50 (HL)." Now a close reading of the judgment in Anwar Ali's case [1970] 76 ITR 696 (SC), would show that their Lordships were therein construing the provisions of s. 28(1)(c) of the Indian I.T. Act, 1922, which is broadly equivalent to the present s. 271(1)(c) though not being in pari materia therewith. To put it squarely under the said provision, it has to be a case of concealment of income. As has been already noticed in considerable detail, the provisions of s. 271 (1)(c) stand on an altogether different footing from those under s. 271(1)(a) of the Act. The language of cl. (c) does mention concealment of the particulars of income or furnishing inaccurate particulars thereof. It is obvious that concealment or deliberate furnishing of wrong particulars has a clear mental element which is laid down in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thers v. Union of India [1970] 77 ITR 107 (SC) said that penalty is not a continuation of assessment proceedings and that penalty partakes of the character of additional tax." What calls for pointed notice in Khemka's case [1975] 35 STC 571 (SC) is the fact that their Lordships were construing the specific provisions of s. 9 of the Central Sales Tax Act and the corresponding provisions of the Bombay Sales Tax Act and the Mysore Sales Tax Act, and in the context of invoking those provisions for the imposition of penalty. The specific issue of penalties under s. 271(1)(a) did not remotely fall for consideration. Even as regards penalties under cl. (c), such cases of concealment of income may well stand on an entirely different footing. We are clearly of the view that the general observations made by way of analogy in Khemka's case, are not even remotely attracted to the basic issue which falls for determination here. Having individually distinguished the trilogy of the three Supreme Court cases, it deserves highlighting with regard to them collectively that the limited point before us specifically under s. 271 (1)(a) of the Act was never even remotely before their Lordships in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. " In the light of the above it would appear that any overly reliance on the passing and general observations in Hindustan Steel Ltd.'s case [1972] 83 ITR 26 (SC), Amwar Ali [1970] 76 ITR 696 (SC) and Khemka Co.'s case [1975] 35 STC 571 (SC), as being conclusive on the point before us is totally unwarranted. Lastly, in this context, it is now plain that even in the realm of the precedents of the final court, the death knell to the theory that mens rea is a necessary ingredient of all penalty proceedings in taxing statutes, has now been sounded in the seven-judges Bench judgment of their Lordships in R. S.Joshi v. Ajit Mills Ltd. [1977] 40 STC 497; AIR 1977 SC 2279, 2287. Therein what fell for pointed consideration were the provisions of s. 37 of the Bombay Sales Tax Act, 1959, as applicable in the State of Gujarat. This provision provided that if any person or dealer collected tax under the Act or in contravention of the provisions of the section or in excess of the amounts provided therein, he would be liable to pay in addition to any tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty can be levied in a taxing statute, has now been authoritatively and conclusively negatived by their Lordships of the Supreme Court themselves. Even if the trilogy of the earlier three cases of Hindustan Steel Ltd. [1972] 83 ITR 26 (SC), Anwar Ali [1970] 76 ITR 696 (SC) and Khemka [1975] 35 STC 571 (SC), had made any passing observation to the contrary, those must now give way to the categoric statement of the law by the larger Bench of seven judges in R. S. Joshi's case [1977] 40 STC 497 (SC). It remains now to advert to the divergent streams of judicial opinion in various High Courts. As of today, the locus classicus for the view that the doctrine of mens rea is not attracted to the limited field under s. 271(1)(a) of the I.T. Act, 1961, is the exhaustive and illuminating judgment of the Full Bench of the Andhra Pradesh High Court in Addl. CIT. v. Dargapandarinath Tuljayya Co. [1977] 107 ITR 850. In view of the already elaborate discussion of the issue, it would suffice to say that we are in respectful and total agreement with the lucid judgment recorded by Sambasiva Rao J. therein. The Andhra Full Bench in turn has followed or is in agreement with the broad line of reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment becomes inevitable. With the greatest respect it appears to us that the basic approach which seems to have been assumed as axiomatic is not necessarily warranted in the penalty proceeding under s. 271(1)(a) of the Act. The conclusions of the Bench stems from the following assumption (p. 225): " In the penalty proceedings under section 271(1)(a), the assessee upon whom the penalty is sought to be imposed, is in the position of an accused in a criminal trial and, therefore, all the ingredients of the offence for which the penalty can be imposed must be established by the department. It is from this aspect that one has to consider the question whether these words " failure without reasonable cause " constitute an ingredient of the offence or not. Since the gravamen of the offence is failure without reasonable cause to file one or the other of the returns mentioned in section 271(1)(a), the prosecutor, that is, the department, must establish the absence of the reasonable cause. It is not for the assessee to show in the first instance that there was reasonable cause on his part. It is for the department to show the absence of reasonable cause." With respect, the assumption, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary departmental proceedings for the imposition of penalties for a tax delinquency. The issue must turn on the broad language of the provisions and not on abstract generalization. Even if it be said that proceedings are penal in nature, it does not follow logically therefrom that the doctrine of mens rea with regard to criminal offences must be inducted therein even when the language of the statute is specific and objective and rules out any subjective or mental element there in s. 37A. Lastly with the greatest deference it appears that I.M. Patel's case [1977] 107 ITR 214 (Guj) [FB] seems to proceed on an abstract generalization of all penalty proceedings. To us, it appears to be not possible to apply a common yardstick in the wide variety of tax delinquency which may attract a penalty provision. For example, there may be an innocuous and wholly excusable delay of a day or two in furnishing an income-tax return after the prescribed date. As against this there may be a designed and fraudulent concealment of millions of rupees of income. Both such tax delinquencies may attract a penalty by separate provisions but to say that identical considerations would apply to both, is, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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