Introduction: – One of the most controversial and debatable issues under taxation law is, perhaps the application of mens rea while imposing penalty for violation of statutory provisions. A penal liability can arise either from a criminal or civil wrong. There are three aspects in penal liability and those are conditions, incidence and the measure of penal liability. Mens era is a guilty mind state of a person, if a person mind is guilty or doing anything with malafide intention, then it is considered that he doesn’t that work with intention and liable for penalty as prescribed in the law. Like a person does murder with intention then Sec 302 apply but a person do murder without intention/does self defense, then Section 304 applies.
Cases in the Favor of Revenue:-
Director of Enforcement v. MCTM Corpn. (P) Ltd. It was held that 13. We are in agreement with the aforesaid view and in our opinion, what applies to `tax delinquency’ equally holds good for the `blameworthy’ conduct for contravention of the provisions of FERA, 1947. We, therefore, hold that mens rea (as is understood in criminal law) is not an essential ingredient for holding a delinquent liable to pay penalty under Section 23(1)(a) of FERA, 1947 for contravention of the provisions of Section 10 of FERA, 1947 and that penalty is attracted under Section 23(1)(a) as soon as contravention of the statutory obligation contemplated by Section 10(1)(a) is established. The High Court apparently fell in error in treating the `blameworthy conduct’ under the Act as equivalent to the commission of a `criminal offence’, overlooking the position that the `blameworthy conduct’ in the adjudicatory proceedings is established by proof only of the breach of a civil obligation under the Act, for which the defaulter is obliged to make amends by payment of the penalty imposed under Section 23(1)(a) of the Act irrespective of the fact whether he committed the breach with or without any guilty intention.”
J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers: (SCC p. 692, Para 42) “42. The offences under the Act are not a part of general penal law but arise from the breach of a duty provided in a special beneficial social defense legislation, which creates absolute or strict liability without proof of any mens rea. The offences are strict statutory offences for which establishment of mens rea is not an essential ingredient.
Similar type of offences based on the principle of strict liability, which means liability without fault or mens rea; exist in many statutes relating to economic crimes as well as in laws concerning the industry, food adulteration, prevention of pollution, etc. in India and abroad. `Absolute offences’ are not criminal offences in any real sense but acts which are prohibited in the interest of welfare of the public and the prohibition is backed by sanction of penalty.”
It was held in the R S joshi Vs Ajit Mills Ltd SC in the Para 19) “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 fault has no force in depriving the forfeiture of the character of penalty.
SEBI v. Cabot International Capital Corpn: (Comp Cas pp. 862 & 864-65, paras 47, 52 & 54) “47. Thus, the following extracted principles are summarized:
(A) Mens rea is an essential or sine qua non for criminal offence.
(B) A straitjacket formula of mens rea cannot be blindly followed in each and every case. The scheme of a particular statute may be diluted in a given case.
(C) If, from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature, in contradistinction to criminal or quasi-criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word `penalty’ by itself will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravener and the delinquency.
(D) Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities.
(There can be two distinct liabilities, civil and criminal under the same Act.)
UOI Vs Dharmendra Textiles Processors , 2008 3 Judge Bench in the Hon‟ble Supreme court has held that penalty u/s 271(1)(c) is a civil liability and that “willful concealment” and “means rea” are not essential ingredients for attracting the civil liability as is the case in the matter of prosecution u/s 276 of the Act. It has further been held in that case that mens rea is not an essential ingredient for imposing the penalty. The Hon‟ble Supreme Court in this case nowhere held that if the addition is made, penalty is automatic.
In Chairman, SEBI v. Shriram Mutual Fund [(2006) 5 SCC 361], SC held:
“35. In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention must be made by the defaulter with guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea , it is wholly unnecessary to ascertain whether such a violation was intentional or not. On a careful perusal of Section 15-D( b ) and Section 15-E of the Act, there is nothing which requires that mens rea must be proved before penalty can be imposed under these provisions. Hence once the contravention is established then the penalty is to follow.
Bharjatiya Steel Industries vs Commissioner, Sales Tax, U.P on 5 March, 2008 SC held in Para 19
19. It is, therefore, difficult to accede to the contention of Mr. Banerjee that under no circumstances absence of mens rea would not be a plea for levy of penalty. An assessing authority has been conferred with a discretionary jurisdiction to levy penalty. By necessary implication, the authority may not levy penalty. If it has the discretion not to levy penalty, existence of mens rea becomes a relevant factor. We may notice that in the show cause notice itself, the authorities stated: “You have sold away 239.966 tons of iron and steel without payment of any sales tax with the assistance of the Form No. 3(B), amounting to Rs. 10,73,850.89, whereas the receipt thereof was also issued under the provisions of Section 4-Bon the basis of full exemption from the tax, with the assistance of the Form No. 3(B). In this way, the material purchased for the purposes of production under the provisions of Section 4-B, while utilizing the same for the same purposes, was sold away in the same condition, which is a violation of the provisions of Section 4-B, and is punishable under the aforesaid sub-section of the Act.
Favor of the assessee:-
Maya Devi v. Raj Kumari Batra, the Supreme Court has held that where an authority is vested with discretionary powers, discretion has to be exercised by application of mind and by recording reasons to promote fairness, transparency and equity. SC has observed in the Para 14 of the judgment that
14. It is in the light of the above pronouncements unnecessary to say anything beyond what has been so eloquently said in support of the need to give reasons for orders made by Courts and statutory or other authorities exercising quasi judicial functions. All that we may mention is that in a system governed by the rule of law, there is nothing like absolute or unbridled power exercisable at the whims and fancies of the repository of such power. There is nothing like a power without any limits or constraints. That is so even when a Court or other authority may be vested with wide discretionary power, for even discretion has to be exercised only along well recognized and sound juristic principles with a view to promoting fairness, inducing transparency and aiding equity.
Hindustan Steel Limited v. State of Orissa where it has been held that “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 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…..” It is elementary that section 43 of the Madhya Pradesh General Sales Tax Act, 1958 providing for imposition of penalty is penal in character and unless the filing of an inaccurate return is accompanied by a guilty mind, the section cannot be invoked for imposing penalty.
State of M.P. and Ors. v. Bharat Heavy Electricals (1997 (7) SCC 1) to contend that even if this Court held that it appears to give the expression that the imposition of penalty is mandatory, yet there was a scope for exercise of discretion.
In Nathulal Vs. State of Madhya Pradesh, while dealing with the question whether to constitute an offence under Section 7 of the Essential Commodities Act, 1955 which provides for levy of penalty for contravention of any order made under Section 3 of the State Act mens rea is an essential ingredient, a three-Judge Bench of this Court observed as follows:
“Mens rea is an essential ingredient of a criminal offence. Doubtless a statute may exclude the element of mens rea, but it is a sound rule of construction adopted in England and also accepted in India to construe a statutory provision creating an offence in conformity with the common law rather than against it unless the statute expressly or by necessary implication excluded mens rea. The mere fact that the object of the statute is to promote welfare activities or to eradicate a grave social evil is by itself not decisive of the question whether the element of guilty mind is excluded from the ingredients of an offence. Mens rea by necessary implication may be excluded from a statute only where it is absolutely clear that the implementation of the object of the statute would otherwise be defeated. The nature of the mens rea that would be implied in a statute AIR 1966 SC 43 creating an offence depends on the object of the Act and the provisions thereof.
M/s. Hindustan Steel Ltd. vs. The State Orisa [AIR 1970 SC 253] it was observed by the SC that
“Under the Act penalty may be imposed for failure to register as a dealer: Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a 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 a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.
It is held that there is a presumption that mens rea is an essential ingredient in every offence but the 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. (See: Sherras Vs. De Rutzen9 and State of Maharashtra Vs. Mayer Hans George10).
Bharjatiya Steel Industries vs Commissioner, Sales Tax, U.P on 5 March, 2008 SC was in the favour of the revenue, decision was in the Para 19, but after the Para 19, SC gives some relief to the assessee as follows
21. We, however, are of the opinion that in the facts and circumstances of this case, existence of mens rea on the part of the appellant is evident.
Show cause notice is mandatory:-
M.P. High Court in the matter of Commissioner of Sales Tax, M.P. v. M/s Eastern Air Products (P) Ltd., Bhopal 10 in which Their Lordships have held that if assessee has not been given opportunity to show cause for the defaults committed by the dealer, penalty is not justified. It is observed in the judgment
“4. … It will be clear from the aforesaid provisions that if a registered dealer fails without sufficient cause to furnish a return under sub-section (1) of section 17 for any period in a manner and by the date prescribed there under or while furnishing a return fails to furnish proof of payment as required by sub-section (1-A) of section 17, the Commissioner may, after giving him a reasonable opportunity of being heard, direct him to pay by way of penalty the amount stipulated in clause (ii) of section 17(3). It is thus clear that where sufficient cause is shown by the registered dealer for not filing the return within the prescribed date or for not furnishing along with the return proof of payment of tax due, such penalty cannot be imposed. In fact, the requirement in the provision for giving a reasonable opportunity of being heard is for the purposes of enabling the dealer to establish before the Commissioner that he had sufficient cause for not filing return by the date prescribed or for not furnishing along with the return proof of payment as required by sub-section (1-A) of section 17 of the Act. The word “may” in the provision further makes it clear that the Commissioner may or may not impose penalty under section 17(3) of the Act in any particular case. In other words, where sufficient cause is shown by the registered dealer by the date prescribed for not furnishing the return or for not furnishing proof of payment along with the return as required.
If assessee paid tax and interest before the issue of SCN, then penalty can’t be imposed on the assesee, it can be charged as token penalty only, it was held in the case of J.K. Sugar Ltd. vs. CCE – 2011 (270) E.L.T. 225 (Tri. – Del.) in the Para 6 of the judgment that
6. We find that the Commissioner vide his impugned order has imposed penalties upon M/s. Jay Jagdish Sugar of amounts equivalent to the amounts of duties, which the appellants have paid themselves before issuance of the show cause notice. However, since there has been a lapse on their part, inasmuch as the requisite permission from the competent authority was not obtained before diverting the goods for home consumption we are of the view that the said appellant is required to be imposed with a certain amount of penalty. Taking into account the overall facts and circumstances we reduce the penalty from Rs. 78,34,195/- (rupees seventy eight lakh thirty four thousand one hundred and ninty five) in Appeal No. E/1201/2003 to Rs. 1,00,000/- (rupees one lakh) and from Rs. 15,68,250/- (rupees fifteen lakh sixty eight thousand two hundred and fifty) in Appeal No.E/1159/2003 to Rs. 50,00/- (rupees fifty thousand). But for the modification in the quantum of penalties in the above two appeals the same are otherwise rejected.
Conclusion: – as per the decided case laws, still there is dispute and debate between department and assesseee for the application of the Mens Ear before the imposition of the penalty under the law, mostly these decision are pertain to the SC, so one should use judgment in their favor for the purpose of impose of penalty which is itself a very heavy side in the CGST Act.