CA Dr Arpit Haldia
Longstanding and never ending has been the debate regarding what is penalty and whether mens rea is an essential ingredient in levy of penalty or bonafide belief that “what was being done was correct” would hold good and save the offender from penalty. Over the years the law has evolved and Courts of Law have tried to lay down a law providing clarity in this regard.
Starting, it would be appropriate to quote an observation of Hon’ble Apex Court in the matter of Commissioner of Sales Tax, Uttar Pradesh Vs. Sanjiv Fabrics, Civil Appeal Nos. 2344-2347 of 2004 Judgement Dated 10th September 2010, wherein Hon’ble Apex Court while examining whether mens rea is an essential element of an offence created under a taxing statute, held regard must be had to the following factors;
“(i) the object and scheme of the statute
(ii) the language of the section; and
(iii) the nature of penalty.”
It was held that
“Although in relation to the taxing statutes, this Court has, on various occasions, examined the requirement of mens rea but it has not been possible to evolve an abstract principle of law which could be applied to determine the question. As already stated, answer to the question depends on the object of the statute and the language employed in the provision of the statute creating the offence. There is no gain saying that a penal provision has to be strictly construed on its own language.”
Hence critical factors relevant for levy of penalty are
All these factors go a long way in evolving a principle that whether or not penalty is leviable in the given circumstances.
With the above backdrop, I would try to analyse in this article various issues with regard to the levy of penalty and liabilities and punishment thereon.
In normal parlance, penalty means a resultant of wrong which has been committed by the offender. Penalty can be both in form of monetary punishment or prosecution. The measure of penalty has been more often co-related with the nature of crime or fault committed. Penalty has been defined at various places and some of the definitions are as follows:
a) The Oxford Dictionary provides the definition of Penalty as
“a loss, disability or disadvantage of some kind … fixed by law for some offence.”
b) Hon’ble Supreme Court in the matter of M/s Gujarat Travancore Agency, Cochin vs. C.I.T. , (1989) 3 SCC 52.
“The creation of an offence by statute proceeds on the assumption that society suffers injury by the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence.”
c) Hon’ble Supreme Court in the matter of Karnataka Rare Earth & Anr vs The Sr.Gelt.,Dep.Of Mines And … on 23 January, 2004
“Penalty is a liability composed as a punishment on the party committing the breach. The very use of the term ‘penal’ is suggestive of punishment and may also include any extraordinary liability to which the law subjects a wrong-doer in favour of the person wronged, not limited to the damages suffered.”
Conclusion: It can be summarized from above that penalty is a kind of punishment which is imposed for an act which
The levy of penalty is intended to work as a deterrent in committing the act or compensatory for loss caused to revenue.
The next question which comes across is the nature of liability which a person incurs while committing an offence in a statute. This categorization of the liability forms the very basic of the nature of proceedings to be initiated against the person committing the act against provisions of the statute. There are three kinds of liability which can broadly classified as follows i.e. Civil, Criminal and Quasi Criminal Liability.
a) Nature and Difference between Civil and Criminal Liability : In 85, Corpus Juris Secundum, Paragraph 1023, it is stated :
“A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is for different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws.”
In a Land Mark Decision by the Hon’ble Apex Court in the matter of M/s Gujarat Travancore Agency, Cochin vs. C.I.T. , (1989) 3 SCC 52, the difference between a Civil Liability and Criminal Liability has been provided. The Hon’ble Court stated that
” It is sufficient for us to refer to Section 271(1)(a), which provides that a penalty may be imposed if the Income Tax Officer is satisfied that any person has without reasonable cause failed to furnish the return of total income, and to Section 276-C which provides that if a person willfully fail to furnish in due time the return of income required under Section 139(1), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine. It is clear that in the former case what is intended is a civil obligation while in the latter what is imposed is a criminal sentence.”
The Hon’ble Court further went on to following necessary ingredients of a criminal liability:
“There can be no dispute that having regard to the provisions of Section 276-C, which speaks of willful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established. In most cases of criminal liability, the intention of the legislature is that the penalty should serve as a deterrent. The creation of an offence by statute proceeds on the assumption that society suffers injury by the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence.”
The Hon’ble Court further went onto hold following necessary ingredients of a civil liability:
“In the case of a proceeding under Section 271(1)(a), however, it seems that the intention of the legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. In this connection, the terms in which the penalty falls to be measured is significant.”
b) Quasi Criminal Liability: The third nature of liability other than the Civil and Criminal liability is the liability which have the characteristics of both Civil and Criminal Liability and is known as Quasi Criminal Liability:
In the case of Pearks, Gunston and Tee, Ltd. Vs. Ward, reported in 1902 (2) KB 1 it was held that
“But there are exceptions to this rule in the case of quasicriminal offences, as they may be termed, that is to say, where certain acts are forbidden by law under a penalty, possibly even under a personal penalty such as imprisonment, at any rate in default of payment of a fine; and the reason for this is, that the Legislature has thought it so important to prevent the particular act from being committed that it absolutely forbids it to be done; and if it is done the offender is liable to a penalty whether he had any mens rea or not, and whether or not be intended to commit a breach of the law. Where the act is of this character then the master, who, in fact, has done the forbidden thing through his servant, is responsible and is liable to a penalty. There is no reason why he should not be, because the very object of the Legislature was to forbid the thing absolutely”
Hence Quasi Criminal offence is an offence forbidden by law. The punishment prescribed in the statue on being found guilty for committing such offence consists of punishment personal in nature such as prosecution and also punishment in the nature of monetary penalty such as fine. The main reason behind prescribing such a penal provision is that the law makers intend that person on being found guilty of committing such default should be punished even if there is absence of mens rea and whether or not it was intended to commit the default.
Therefore it becomes all the more important to analyze what the statute intend to achieve and what is the liability which it intends to inflict upon the wrong doer.
a) What is meant by Mens Rea:
Mens Rea has been considered extensively in matters relating to levy of penalty. It has been a matter of debate that whether or not mens rea is a necessary ingredient for levy of penalty in case of civil, criminal offences and Quasi Criminal Offences. It has not been possible to lay down a clear guideline in this matter and its presence or absence has always been an issue of greater debate.
Mens Rea is Latin Word meaning a “guilty mind”; guilty knowledge or intention to commit a prohibited act.”
Hon’ble Rajasthan High Court in the matter of Parasnath Granite India Ltd vs State Of Rajasthan And Anr on 2 June 2004 144 STC 271 made following observation with regard to mens rea
“25. Mens rea in its technical sense means knowledge of the wrongfulness of the Act. In the context of offences entailing punishment for a crime, the mens rea is ordinary construed as an essential ingredient of offence. Absence of mens rea really consists in honest and reasonable belief entertained by the accused of the existence of facts which, in turn, would make the act charged against him innocent.”
The Hon’ble Court further went on to clarify as follows:
“But the term has often been used to draw distinction between honest and bona-fide conduct in breach of statutory obligation on the one hand and dishonest and contumacious conduct on the other.”
The Apex Court in the case of Director of Enforcement vs. M.C.T.M.Corporation Pvt. Ltd.- 2 SCC 471 has stated that: “Mens rea” is a state of mind. Under the criminal law, mens rea is considered as the “guilty intention”…………..”
In the Book of Williams on Criminal Law referring to the elements of mens rea:
“the mere commission of a criminal act (or bringing about the state of affairs that the law “provides against) is not enough to constitute a crime, at any rate in the case of more serious crime. This generally require, in addition, some element of wrongful intent or other fault.”
Mens rea is an intention or presence of a guilty mind to commit offence. Therefore, where an act is committed with knowledge of wrong doing or with guilty mind knowing that something wrong is being done then in such case it can be ascertained that there was mens rea intention in committing that act. Mens rea signifies presence of guilty or wrong intention, absence of which would in general mean consisting of honest or reasonable belief of existence of a fact which would make the act charged against him as an innocent act.
Mens rea is something which has to be proved to exist and absence of which would negate or diminish relevant penal consequences if the presence of mens rea is an essential ingredient. Existence of mens rea has to be proved against the accused in clear terms where mens rea is an essential ingredient.
b) Meaning of Actus Reus
This term many times has been used in conjunction with mens rea but the term has now gained importance as oft late presence of mens rea in civil offence has not been held to be an essential ingredient. “Actus Reus” has been defined as accused committed the offence.
The maxim relevant for criminal offence “actus non facit reum, nisi mens sit rea” means both actus reus i.e. wrongful act and mens rea i.e. presence of guilt mind has to be proved in a criminal act. Therefore, for someone being punished for a criminal offence it has to be proved that wrongful act was committed with guilt intent.
c) Meaning of Furnishing of Inaccurate Particulars and Concealment
The Apex Court in the case of RELIANCE PETRO PRODUCTS reported in 322 ITR 165 has explained the meaning of the words, ‘furnish inaccurate particulars of income’.
It is stated that reading the words in conjunction, they must mean the details supplied in the return which are not accurate, nor exact or correct, not according to truth or erroneous. When an item has not been shown at all, it would fall in the limb of concealment and an item which has been shown in the return but wrongly, would come under the limb of furnishing inaccurate particulars of income.
It has been stated by Hon’ble Supreme Court in the matter of K.C. Builder v. C.I.T. dated 28th January 2004 that it is implicit in the word concealment that there has been a deliberate act on the part of the assessee.
d) Meaning of False:
It was stated by the Hon’ble Supreme Court in the matter Commissioner of Sales Tax, Uttar Pradesh Vs. Sanjiv Fabrics Civil Appeal Nos. 2344-2347 Judgement Dated 10th September 2010 as follows:
“The word ‘false’ under Section 10(b), has two distinct and well-recognised meanings, namely (i) intentionally or knowingly or negligently untrue, or (ii) untrue by mistake or accident, or honestly after the exercise of reasonable care. A thing is called ‘false’ when it is done, or made with knowledge, actual or constructive, that it is untrue or illegal, or it is said to be done falsely when the meaning is that the party is in fault for its error.
Likewise, P. Ramanatha Aiyar in Advance Law Lexicon (3rd Edition, 2005) explains the word “false” as:
“In the more important uses in jurisprudence the word implies something more than a mere untruth; it is an untruth coupled with a lying intent……or an intent to deceive or to perpetrate some treachery or fraud. The true meaning of the term must, as in other instances, often be determined by the context’.”
As per the decision of Hon’ble Apex Court in the matter of Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore & Ors.1980 SCR (1)1098 it has been stated that
“What section 43 of the Madhya Pradesh General Sales Tax Act, 1958 requires is that the assessee should have filed a ‘false’ return and a return cannot be said to be ‘false’ unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the Court may, in a given case, infer deliberateness and the return may be liable to be branded as a false return….”
Therefore it can be ascertained that predominantly any act done intentionally or knowingly or negligently untrue is termed as false but in some cases looking to relevant context of the statute, an act done incorrectly due to want of care on the part of the assessee without justifiable explanation can also be termed as False.
e) Meaning of Good Faith:
This term has been defined in the General Clauses Act 1857 in following manner:
(i) “A thing shall be deemed to be done in “good faith” where it is in fact done honestly whether it is done negligently or not.”
It can be ascertained that if any act has been committed honestly then it would be termed as an act done in good faith. There must be some positive intent from the person committing the act that what he is believing to be true is being done by him. If act is done honestly and even if due care and attention is not taken even then benefit of good faith would be available to the person charged with committing an offence.
(ii) The above definition is a general definition, specific definition may be provided in statutes which would then govern the proceedings under relevant act. In case of IPC, good faith has been negatively defined as follows:
“nothing is said to be done in or believed in “good faith” which is done or believed without due care and intention.”
Therefore due care and honest intention are required to be shown for person claiming the act to be done in or believed to be done in good faith.
Hence it would always be appropriate to ascertain the context in which the words are appearing and the provisions of the relevant statute.
a) Hon’ble Apex Court in the matter of Nathulal Vs. State of Madhya Pradesh, AIR 1966 SC 43 while dealing with the question whether mens rea is necessary to constitute an offence under Section 7 of the Essential Commodities Act, 1955 which provides for levy of both fine and prosecution for contravention of any order made under Section 3 of the State Act. The Hon’ble three judge bench stated 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 creating an offence depends on the object of the Act and the provisions thereof.”
b) In the matter of SEBI vs. Cabot International Capital Corporation, (2005) 123 Comp. Cases 841 (Bom) Hon’ble Bombay High Court, held that
i. “Mens rea is an essential or sine qua non for criminal offence.
ii. Strait jacket formula of mens rea cannot be blindly followed in each and every case. Scheme of particular statute may be diluted in a given case.”
Conclusion: It can be ascertained from above that mens rea is an integral part in case of criminal offence and unless it has been specifically excluded from the statute, common law prescribes that mens rea has to be looked into criminal offence. Merely the fact that the statute is for general public welfare or to eradicate social evils, it would not make the offender automatically charged with the penalty in case of criminal offence unless mens rea has been specifically excluded from the statute or by necessary implication it is excluded from the statute as implementation of the statute would be defeated otherwise.
a) It was stated by the Hon’ble Apex Court in the matter of The Chairman, Sebi vs Shriram Mutual Fund & Anr on 23 May, 2006 Anr.[2006(5) SCC 361
“In our opinion, mens rea is not an essential ingredient for contravention of the provisions of a civil act. In our view, the penalty is attracted as soon as contravention of the statutory obligations as contemplated by the Act is established and, therefore, the intention of the parties committing such violation becomes immaterial. In other words, the breach of a civil obligation which attracts penalty under the provisions of an Act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not. This apart that unless the language of the statute indicates the need to establish the element of mens rea, it is generally sufficient to prove that a default in complying with the statute has occurred.”
b) The Apex Court in the case of Commissioner of Income Tax vs. Atul Mohan Bindal, reported in (2009) 317 ITR 1 (SC) relying on Rajasthan Mil l ’s case explained the scope of Section 271 (1) (c) as under:
“The penalty spoken of in Section 271(1)(c) is neither criminal nor quasi-criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, means rea is not essential.”
c) In the matter of SEBI vs. Cabot International Capital Corporation, (2005) 123 Comp. Cases 841 (Bom) Hon’ble Bombay High Court held that:
“Strait jacket formula of mens rea cannot be blindly followed in each and every case. Scheme of particular statute may be diluted in a given case.
Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities.”
The Hon’ble Court further went on to hold that
“The SEBI Act and the Regulations, are intended to regulate the Security Market and the related aspects, the imposition of penalty, in the given, facts and circumstances of the case, cannot be tested on the ground of “no mens rea, no penalty”. For breaches of provisions of SEBI Act and Regulations, according to us, which are civil in nature, mens rea is not essential.”
d) In the matter of Guljag Industries Vs. Commercial Taxes Officer, (2007) 7 SCC 269, decided on 03.08.2007, Hon’ble Apex Court while dealing with the issue relating to carrying of blank or incomplete declaration while importing goods from outside the state of Rajasthan and imposition of fix penalty of 30% on the value of goods imported stated that;
“Default or failure to comply with Section 78(2) is the failure/default of statutory civil obligation and proceedings under Section 78(5) is neither criminal nor quasi-criminal in nature. The penalty is for statutory offence. Therefore, there is no question of proving of intention or of mens rea as the same is excluded from the category of essential element for imposing penalty. Penalty under Section 78(5) is attracted as soon as there is contravention of statutory obligations. Intention of parties committing such violation is wholly irrelevant.”
It was further held by the Hon’ble Apex Court that
“The penalty imposed under the said Section 78(5) is a civil liability. Willful consignment is not an essential ingredient for attracting the civil liability as in the case of prosecution. Section 78(2) is a mandatory provision. If the declaration Form 18A/18C does not support the goods in movement because it is left blank then in that event Section 78(5) provides for imposition of monetary penalty for non-compliance.”
Conclusion: Breach of civil liability would qualify for penalty for statutory offence unless context requires otherwise. The presence of mens rea is not at all relevant in case of civil liabilities. In contradistinction with the criminal liability where mens rea was specifically required to be excluded, in case of civil liabilities mens rea would be required to be specifically included in the statute if the legislature requires mens rea as essential ingredient for levy of penalty.
The Hon’ble Apex Bench held as follows:
“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.”
This judgement is a land mark judgement and in most of the judgement for levy of penalty, this judgement has been often quoted. However the applicability of the judgement in case of civil liabilities had been considered by the Hon’ble Apex Court in the matter of The Chairman Sebi vs Shriram Mutual Fund & Anr on 23 May, 2006 Anr.2006(5) SCC 361. The Hon’ble Apex Court held that the said decision is not applicable in case of civil liabilities where mens rea has not been prescribed as an essential ingredient:
“The Tribunal has erroneously relied on the judgment in the case of Hindustan Steel Ltd. Vs. State of Orissa, AIR 1970 SC 253 which pertained to criminal/quasi-criminal proceeding. That Section 25 of the Orissa Sales Tax Act which was in question in the said case imposed a punishment of imprisonment up to six months and fine for the offences under the Act. The said case has no application in the present case which relates to imposition of civil liabilities under the SEBI Act and Regulations and is not a criminal/quasi-criminal proceeding.”
Principle of Strict Liability has been applied in various judgments to impose penalty in civil offences or economic crimes or absolute offences. This principle has also been applied in case of offences in special beneficial social defence legislation if otherwise basic objective of implementation of such statute would be defeated.
a) It was stated by Hon’ble Rajasthan High Court in the matter of Parasnath Granite India Ltd vs State Of Rajasthan And Anr. On 2 June, 2004 144 STC 271
“In some cases, penal consequences follow in absolute terms on principle of strict liability, such as penalty is considered compensatory for loss caused to revenue or a token or light penalty is provided commensurating with the nature of breach, where such distinction may not be present. It ultimately depends on the consideration of scheme of relevant Statute, its object and machinery provisions to implement it.
In a given case, where nexus of breach with the object for which provision is made is established, the penalty is to be imposed otherwise discretion may be exercised otherwise, unless principle of absolute liability is discernible clearly from the object of the provision.”
b) It was stated by the Hon’ble Apex Court in the matter of The Chairman, Sebi vs Shriram Mutual Fund & Anr on 23 May, 2006 Anr. 5 SCC 361
“The impugned order sets the stage for various market players to violate statutory regulations with impunity and subsequently plead ignorance of law or lack of mens rea to escape the imposition of penalty. The imputing mens rea into the provisions of Chapter VI A is against the plain language of the statute and frustrates entire purpose and object of introducing Chapter VIA to give teeth to the SEBI to secure strict compliance of the Act and the Regulations.”
This is considered as a landmark judgement in case of civil offences and mens rea has sought to be specifically excluded otherwise the very objective of implementation of the statue would be defeated. The Hon’ble Apex Court held that statute has been incorporated to protect the right of investors and allowing benefit on the contention of mens rea would defeat the very objective of the Statute and would set a wrong precedence.
c) The issue before the Hon’ble Apex Court in the matter of J.K. Industries Ltd. & Ors. Vs. Chief Inspector of Factories and Boilers & Ors., (1996) 6 SCC was
“It was argued that since Section 92 imposes a liability for imprisonment and/or fine, both on the occupier (the notified director) and the manager of the factory, jointly and severally, for the contravention of any of the provisions of the Act or any rule made thereunder or of any order in writing given thereunder, irrespective of the fact whether the occupier (the notified director) or manager, had any mens-rea in respect of that contravention or that the contravention was not committed by him or was committed by any other person in the factory without his knowledge, consent or connivance, it is an unreasonable restriction.”
It was held by the Hon’ble Apex Court that
“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 defence 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. The omission or commission of the statutory breach is itself the offence. Similar type of offences based on the principle of strict liability, which means liability without fault or mensrea, 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. Such offences are generally knows as public welfare offences. A seven Judge Bench of this Court in R.S. Joshi Vs. Ajit Mills [AIR 1977 (SC), 2279, at page 2287] observed:
“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 proceeded 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 or fault has no force……”
What is made punishable under the Act is the ‘blameworthy’ conduct of the occupier which resulted in the commission of the statutory offence and not his criminal intent to commit that offence. The rule of strict liability is attracted to the offences committed under the Act and the occupier is held vicariously liable alongwith the Manager and the actual offender, as the case may be. Penalty follows actus reus, mens-rea being irrelevant.”
Conclusion: It can be observed from above that Principle of Strict Liability seeks to evolve following principles wherein the liability is fixed upon committing the offence irrespective of the guilt intention or otherwise:
a. Penalty has to be levied wherein there is Nexus of breach with the basic object of the provision.
b. Discretion to levy penalty cannot be exercised in cases where in Principle of Strict Liability is clear from the objects of the provision.
c. The classical view that ‘ no mens rea no crime’ has long ago been eroded and several laws in India and abroad. What has been made punishable under the principle of strict liability is the ‘blameworthy’ conduct of the person committing the offence which resulted in the commission of the statutory offence and not his criminal intent to commit that offence.
a) It has been stated by the Hon’ble Apex Court in the matter of Director of Enforcement vs. MCTM Corporation Pvt. Ltd. & Ors. , (1996) 2 SCC 471
“Therefore, unlike in a criminal case, where it is essential for the “prosecution” to establish that the “accused” had the necessary guilty intention or in other words the requisite “mens-rea’ to commit the alleged offence with which he is charged before recording his conviction, the obligation on the part of the Directorate of Enforcement, in cases of contravention of the provisions of Section 10 of FERA, would be discharged where it is shown that the “blameworthy conduct” of the delinquent had been established by wilful contravention by him of the provisions of Section 10, FERA, 1947.”
The Hon’ble Court further went on to hold that
“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 adjudicator 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.”
b) In the matter of Guljag Industries Vs. Commercial Taxes Officer, (2007) 7 SCC 269, decided on 03.08.2007, it was stated by the Hon’ble Apex Court that;
“A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is different from the penalty for a crime.”
Conclusion: Presence of mens rea is essential for the punishing criminal offence unless otherwise stated but in case of civil offence, presence of mens rea is not relevant unless otherwise stated expressly in the statute.
It was stated by the Hon’ble Apex Court in the matter of The Chairman, Sebi vs Shriram Mutual Fund & Anr on 23 May, 2006 Anr.[2006(5) SCC 361
“The legislature in its wisdom had not included mens rea or deliberate or wilful nature of default as a factor to be considered by the Adjudicating Officer in determining the quantum of liability to be imposed on the defaulter. Sections 15A to 15H and 15HA employ the words “shall be liable” and, therefore, mandatorily provides for imposition of monetary penalties for respective breaches or non-compliance of provisions of the SEBI Act and the Regulations.”
The Hon’ble Court further observed that
“In the provisions and scheme of penalty under Chapter VI A of the SEBI Act, there is no element of any criminal offence or punishment as contemplated under criminal proceedings. Therefore, there is no question of proof of intention or any mens rea by the appellants and it is not essential element for imposing penalty under SEBI Act and the Regulations.”
Conclusion: In case of civil offence there has to be a clear mandate in the statute for inclusion of mens-rea unless otherwise, mens rea cannot be sought to be included as an essential ingredient in the civil offence.
The most common example and which has been deliberated number of times is of Section 11AC of the Central Excise Act. The issue is a classic example of how mens rea is incorporated in a statute and thereby in case of civil offence where before levy of penalty, guilt intention has to be proved.
Section 11AC of Central Excise Provides as follows:
“11AC. Where any duty of excise has not been levied or paid or has been short- levied or short-paid or erroneously refunded by reasons of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub- section (2) of section 11A, shall also be liable to pay a penalty equal to the duty so determined:”
a) It was stated by Hon’ble Supreme Court in the Matter of Commnr. Of Central Excise, … vs M/S. Pepsi Foods Ltd on 10 December, 2010 Appeal No. 1921-1923 of 2003
“20. It is well settled that when the statutes create an offence and an ingredient of the offence is a deliberate attempt to evade duty either by fraud or misrepresentation, the statute requires `mens rea’ as a necessary constituent of such an offence. But when factually no fraud or suppression or mis- statement is alleged by the revenue against the respondent in the show cause notice the imposition of penalty under Section 11 AC is wholly impermissible.
The Hon’ble Court further went on to provide that
22. In Vane (supra), the word `knowingly’ was used in the statute as a condition of creating liability.
23. The aforesaid dictum of Lord Reid has been followed by this Court also. A reference in this connection may be made to the decision in Union of India v. Rajasthan Spinning & Weaving Mills reported in 2009 (238) E.L.T. 3 (S.C.). This Court considering Section 11 AC of the Act held in para 19 at page 12 of the report as follows:
“19. From the aforesaid discussion it is clear that penalty under Section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section.”
b) In Commissioner of Sales Tax v. Rama and Sons, General Merchant, Ballia, 1999 UPTC 25 the Allahabad High Court observed as under:-
“We have words like ‘voluntarily’, ‘intentionally’, ‘negligetly’, ‘knowingly’, fraudulently’, ‘dishonestly’, ‘rashly’, ‘omits’, ‘without lawful authority’ ect., ‘omits’ used in various sections of the Indian Penal Code defining various offence. Proof of the State of mind or of the conduct of the person as indicated by the aforesaid word establishes the offence and no further guilty intent or mens rea need be proved.”
c) The matter of levy of penalty where mens rea has been incorporated in the Law was before the Hon’ble Rajasthan High Court in the matter of Commercial Taxes Officer, AE Zone-I Jaipur Vs. M/s. Shyam Agency (S.B. Sales Tax (VAT) Revision Petition No.42/2014)
The provisions of Erstwhile Section 61 of the Rajasthan Value Added Tax Provided as follows:
“61. Penalty for avoidance or evasion of tax. (1) where any dealer has
a) concealed any particulars from any return furnished by him or
b) has deliberately furnished inaccurate particulars therein or
c) has concealed any transaction of sale or purchase from his accounts, registers or documents required to be maintained by him under this Act or
d) has avoided or evaded tax in any other manner,
the assessing authority or any officer not below the rank of an Assistant Commercial Taxes Officer as may be authorised by the Commissioner, may direct that such dealer shall pay by way of penalty, in addition to the tax payable by him under this Act, a sum equal to two times of the amount of tax avoided or evaded.”
It was held by the Hon’ble Court that
“However the principle of ejusdem generis would require the words in issue i.e. “or has avoided or evaded tax in any other manner” to be interpreted in a limited manner with reference to the three conditions for the levy of penalty earlier detailed in Section 61 of the 2003 Act prior to the general words.
The aforesaid three situations for levy of penalty constitute a class by themselves, inasmuch as they provide for levy of penalty in cases of active concealment and deliberate misinformation by the assessee (fraud). In such a situation the words in the later part of Section 61 of the 2003 Act “has avoided or evaded tax in any other manner” cannot be construed as an open-ended power to levy penalty but have to be limited to levy of penalty in situations similar/ akin to those detailed in (i) and (ii) above. That is, where the assessee is held to have deliberately sought to defraud the revenue by its fraudulent act/ conduct. This would include a reckless, malafide and mischievous classification of goods for a rate of tax which no reasonable man could conceivably assert. The words “any other manner” in the later part of Section 61 of the 2003 Act would therefore mandate specific finding of deliberate wrong doing attributable to the assessee to defraud the department and without that the assessee could not be made liable to penalty under Section 61 of the 2003 Act. The sequitur is that where the liability of tax or additional liability of tax is visited upon an assessee on the basis of a bonafide dispute as to liability/ classification being decided in favour of sales tax authorities and against the assessee, without any deliberate fraudulent act/ reckless and malafide claims as to classification being attributed to assessee, it would not be liable to penalty under Section 61 of the 2003 Act.”
Conclusion: We can see from the above that when statute specifies an offence as civil offence and for classifying the essential ingredient for an offence, it uses language such as deliberate attempt to evade or conceal taxes by fraud, misrepresentation, knowingly, willfully, false representation or similar words, thereby it can be concluded that statute requires `mens rea’ as a necessary constituent of such an offence.
a) The Apex Court in the case of Director of Enforcement vs. M.C.T.M.Corporation Pvt. Ltd.- 2 SCC 471 has stated that:
“The officers of the Enforcement Directorate and other administrative authorities are expressly empowered by the Act to ‘adjudicate’ only. Indeed, they, have to act ‘judicially’ and follow the rules of natural justice to the extent applicable but, they are not ‘Judges’ of the ‘Criminal Courts’ trying an ‘accused’ for commission of an offence, as understood in the general context. They perform quasi-judicial functions and do not act as ‘Courts’ but only as ‘administrators’ and ‘adjudicators’. In the proceedings before them, they do not try ‘an accused’ for commission of ‘any crime’ (not merely an offence) but determine the liability of the contrevenor for the breach of his ‘obligations’ imposed under the Act. They imposed ‘penalty’ for the breach of the ‘civil obligations’ laid down under the Act and not impose any ‘sentence’ for the commission of an offence.
When penalty is imposed by an Adjudicating Officer, it is done so in adjudicalory proceedings’ and not by way of fine as a result of ‘prosecution’ of an ‘accused’ for commission of an ‘offence’ in a criminal Court. Therefore, merely because ‘penalty’ clause exists in Section 23(1)(a) FERA, 1947, the nature of the proceedings under that Section is not changed from ‘adjudicatory’ to ‘criminal’ prosecution. An order made by an adjudicating authority under the Act is not that of conviction but of determination of the breach of the civil obligation by the offender.”
a) It was stated by the Hon’ble Apex Court in the matter of The Chairman, Sebi vs Shriram Mutual Fund & Anr on 23 May, 2006 [2006(5) SCC 361
“Under a close scrutiny of Section 15 D(b) and 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, we are of the view that once the contravention is established, then the penalty has to follow and only the quantum of penalty is discretionary. Discretion has been exercised by the Adjudicating Officer as is evident from imposition of lesser penalty than what could have been imposed under the provisions.”
b) Hon’ble Apex Court in the matter of Indo China Steam Navigation Co. Ltd. v. Jasjit Singh, Addl. Collector of Customs, Calcutta and Ors. (13) 1964 AIR 1140,, laid down the following principle that how the penalty is to be imposed where there is discretion available to the officer adjudicating levy of penalty:
“The Court held that so far as confiscation of vessel of a description stated under Section 52 A found in Indian water is concerned, the consequence under Section 167 (12-A) is absolute in terms and no extenuating circumstances are to be taken into consideration.
Section 183 confers discretion on the officer to determine what amount of fine should be imposed in lieu of confiscation and in doing so, he will undoubtedly have to take into account all relevant and material circumstances, including the extenuating factors on which the owners may rely. Thus, the confiscation of the offending vessel is indirectly brought within the discretion of Customs Officer under Section 183 though it was taken out of the domain of the Customs Officer’s discretion under clause 12A of Section 167. This made it clear that though penalty was to be imposed in lieu of confiscation, it would commensurate with the gravity of default and not with the value of confiscated property.”
c) In the Matter of Mahaveer Conductors Versus Assistant Commercial Taxes Officer, Ward III, Circle C, Jodhpur, Rajasthan, 104 STC 65 Hon’ble Rajasthan High Court stated that
“Even assuming the alternative, that whatever a breach is found, to have been committed, of the provisions of Section 22-A, penalty has to be levied and it is lawful for the authority to levy penalty and, the question germane in the enquiry is the quantum of penalty to be imposed, inasmuch as the law provides only the maximum limit upto which penalty can be imposed and leaves actual quantum of penalty to be levied on the discretion of the authority concerned. Assuming that to be so, even in that event, the guidelines inhibiting the discretion of authority under the provisions is, the purpose for which the provisions have been enacted and the relation of the breach to the purpose, can furnish the criteria for varying the quantum. Obviously, in such circumstances, where the alleged breach is mere technical, not infested with any want on default committed with a view to evade or avoid tax by concealing the transaction, only a token penalty would be justified for technical breach. On the other hand, if it is found that the breach is deliberate, with a view to evade for avoid tax, the quantum of penalty have to be substantial within the maximum limit provided, depending upon the other attending facts and circum- stances, which may vary from case to case.”
d) Hon’ble Rajasthan High Court in the matter of Parasnath Granite India Ltd. vs State Of Rajasthan And Anr. on 2 June, 2004 144 STC 271 has laid down the guidelines as follows:
“In a given case, where nexus of breach with the object for which provision is made is established, the penalty is to be imposed otherwise discretion may be exercised otherwise, unless principle of absolute liability is discernible clearly from the object of the provision.”
Conclusion: Therefore provisions where discretion has been provided in the statute by providing maximum penalty only and leaving the quantum to be decided then although while deciding the question of committing of offence, mens rea may or may not be relevant as per the language of the statute and the intention of the legislature but while deciding question of quantum of penalty to be levied, the consideration would have to be given to following factors:
a) Gravity of the default and the relevant extenuating factors on which the offenders may rely.
b) Hon’ble Apex Court in the matter of Indo China Stem Navigation held that the relevance has to be made to the gravity of the default and not the value of the confiscated property.
c) Rajasthan High Court also held in the matter of Mahaveer Conductors that where the breach is of technical nature and not carried out with intention of evasion or avoidance of taxes then in such cases a token penalty would be sufficient.
d) The discretion can only be exercised wherein principle of absolute liability is not clearly discernible from the statute.
It is the intention of the legislature which has to be followed in true spirit and consideration to all the applicable factors need to be given while exercising the discretionary powers.
It would be appropriate here to discuss the judgement of Hon’ble Apex Court in the Matter of Union Of India & Ors vs MS. Dharamendra Textile…_on 29_September, 2008 306 ITR 277 and subsequent analysis of the said judgment in Union Of India vs M/S Rajasthan Spinning & Weaving … on 12 May, 2009 and C.I.T,Delhi vs Atul Mohan Bindal on 24 August, 2009.
a) It was observed by the Hon’ble Apex Court in the matter of Union Of India & Ors vs MS. Dharamendra Textile…_on 29_September, 2008 306 ITR 277 with regard to section 271(1)(c ) of the Income Tax Act:
“25. The Explanations appended to Section 272(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilp N. Shroof’s case (supra) has not considered the effect and relevance of Section 276C of the I.T. Act. 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.”
b) It was then held by Hon’ble Supreme Court in the matter of Union Of India vs M/S Rajasthan Spinning & Weaving … on 12 May, 2009 while analyzing the decision in the matter of Dharmendra textile Processor as follows:
“20. At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam,J.) was a party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner.”
The Hon’ble Court then further went on to hold that
“21. From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that Section 11C would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.
23. The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of; the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of Section 11A. That is what Dharamendra Textile decide.”
c) This principle was again reiterated by Hon’ble Apex Court in the matter of I.T,Delhi vs Atul Mohan Bindal on 24 August, 2009 with regard to the provision of Section 271(1)(c ) of the Income Tax Act as follows:
“It goes without saying that for applicability of section 271(1) (c) , the conditions stated therein must exist.”
d) It was further stated by the Hon’ble Bench of Supreme Court in the matter of Guljag Industries Vs Commercial Taxes Officer (2007) 9 VST 1 that
“We are not concerned with non-filing of statements before the A.O. We are concerned with the goods in movement being carried without supporting declaration forms. The object behind enactment of Section 78(5) which gives no discretion to the competent authority in the matter of quantum of penalty fixed at 30 per cent of the estimated value is to provide to the State a remedy for the loss of revenue. The object behind enactment of Section 78(5) is to emphasise loss of revenue and to provide a remedy for such loss. It is not the object of the said Section to punish the offender for having committed an economic offence and to deter him from committing such offences. The penalty imposed under the said Section 78(5) is a civil liability.”
e) It was stated in the matter of Swedish Match AB and Anr. Vs. SEBI & anr. , (2004) 11 SCC 641.
“____The provisions of Section 15-H of the Act mandate that a penalty of rupees twenty five crores may be imposed. The Board does not have any discretion in the matter and, thus the adjudication proceeding is a mere formality. Imposition of penalty upon the appellant would, thus, be a forgone conclusion. Only in the criminal proceedings initiated against the appellants, existence of mens rea on the part of the appellants will come up for consideration.”
f) Hon’ble Apex Court in the matter of State Of Rajasthan & Anr vs M/S D.P. Metals on 4 October, 2001 held the requisite importance of opportunity of hearing as follows:
“Once the ingredients of Section 78(5) are established, after giving a hearing and complying with the principles of natural justice, there is no discretion not to levy or levy lesser amount of penalty.”
Conclusion: The critical issue which arises in case of statutory provisions providing fixed penalty has been highlighted by the Hon’ble Apex Court in the matter of Rajasthan Spinning and Weaving Mills. The Hon’ble Apex Court held that it was never the intention of the decision in the matter of Dharmendra Textiles to mandatorily levy penalty in each and every case of short payment of taxes. The decision in Dharmendra Textiles only provided that once the conditions prescribed in the law for levy of penalty are fulfilled then if there is no discretion given to the adjudicating authority for quantification of penalty, fixed amount of penalty as prescribed in law has to be levied. This view has been consistently held where quantum of penalty is fixed, then in such case once the conditions provided in the section are satisfied, the adjudicating authority is left with no other option but to levy penalty equal to the amount prescribed in the statute.
a) Hon’ble Apex Court in the matter of State Of Rajasthan & Anr vs M/S D.P. Metals on 4 October, 2001 Appeal No. 5085 of 2000 while dealing with the issue relating to requisite declaration not available at the time of checking while importing the goods from outside the state of Rajasthan held the requisite importance of opportunity of hearing as follows:
“If by mistake some of the documents are not readily available at the time of checking, principles of natural justice may require some opportunity being given to produce the same.”
b) In a recent case before the Larger Bench of the Rajasthan High Court in the matter of DB SALES TAX REVISION- 92/1999 & OTHER CONNECTED MATTERS Order Dated 26th February 2015, while dealing with the issue relating to carrying of blank, incomplete or forged or false declaration while importing the goods from outside the state of Rajasthan and imposition of fix penalty of 30% on the value of goods imported observed that
“It is only when a person despite giving such an opportunity, is not able to produce the document and/or declaration forms completed in all respects, when the goods enters or leaves the nearest check-post of the State, or the documents are found to be false or forged, after enquiry, that a penalty may be imposed, which is a civil liability for compliance of the provisions of the Act for the purposes of checking the evasion of tax. It is thus not correct to submit that penalty for submission of false or forged document or declaration, necessarily involves adjudication, for which mens rea is relevant, and is a necessary ingredient.”
c) It was observed in by Hon’ble Karnataka High Court in the matter of The Income Tax Officer Ward-I AND: M/s. Manjunatha Cotton and Ginning Factory Andral Road Bellary (2013) 359 ITR 565 (KARN) 565
“Once a penalty proceedings is validly initiated, then under Section 274(1) an obligation is cast on the person initiating the proceedings to issue notice to the assessee. When such a notice is issued, it is open to the assessee to contest the accusation against him that he has concealed income or he has furnished inaccurate particulars. As there is an initial presumption of concealment, it is for the assessee to rebut the said presumption. The presumption found in Explanation 1 is a rebuttable presumption.”
d) In the Matter of Mahaveer Conductors Versus Assistant Commercial Taxes Officer, Ward III, Circle C, Jodhpur, Rajasthan, 104 STC 65 Hon’ble Rajasthan High Court stated that
“When the law requires giving of opportunity to a person against the proposed levy of penalty, it is not mere empty formality to make an order as a matter of course as foregone conclusion but it implies that the person against whom the action is proposed has a fair opportunity to show that no penalty can be levied in the facts and circumstances of the case….. .The finding that the goods are unaccompanied with the requisite documents, is a accomplished fact and if penalty was to be levied only on that account, then the provisions of Section 21-A(7) requiring an opportunity to be given to the owner or person in whose in charge the goods were and enjoining a duty on the authority to hold an inquiry as it deems fit, would be a meaningless formality, resulting in nothing. That obviously cannot be intention of the provision.”
Conclusion: An opportunity of hearing provided in the statute cannot be merely an empty formality and its principle of natural justice which has to be followed unless specifically excluded by the statute. If opportunity of hearing would have been merely a formality, then such opportunity would not have been provided.
Broadly we can divide civil offences in two categories where the opportunity of hearing is provided:
a) Penalty Proceedings where discretion is provided regarding quantum of levy of penalty: This category covers the cases where discretion is provided for levy of penalty. The offender firstly gets opportunity to contest the accusation or charges levied against him and prove that conditions prescribed for levy of the penalty has not been fulfilled and therefore penalty is not leviable. In addition to the above even though the charges against him are proved then he may put forth situations which lead to committing of offence, gravity of the offence and why the penalty quantum of penalty should be minimum on being technical or venial breach etc. Thereby meaning that the opportunity of hearing provides him with much latitude to argue his case and either drop the proceedings or reduce the levy of penalty to minimum possible.
b) Penalty Proceedings where no discretion has been provided regarding quantum of levy of penalty: This category covers cases where no discretion is provided and fix amount has been prescribed in the statute for levy of penalty. Similar to the first category, the offender firstly gets opportunity to contest the accusation or charges levied against him to prove that conditions prescribed for levy of the penalty has not been fulfilled and therefore penalty is not leviable.
As has been put forth by Hon’ble Bench of Supreme Court in the matter of Guljag Industries Vs Commercial Taxes Officer (2007) 9 VST 1as follows:
“In the present case also the statute provides for a hearing. However, that hearing is only to find out whether the assessee has contravened Section 78(2) and not to find out evasion of tax…”
The Larger Bench of the Hon’ble Rajasthan High Court in the matter of DB SALES TAX REVISION- 92/1999 & OTHER CONNECTED MATTERS Order Dated 26th February 2015, after following the above decision has further held categorically that
“The amendment to Rule 55 of the RST Rules, 1995, in pursuance to the decision of the Hon’ble Supreme Court in State of Rajasthan And Another Vs. M/s. D.P. Metals(supra), authorises the authority empowered, to make an enquiry of violation of Section 78(2), and not to adjudicate as to whether the mens rea was present in violation of sub-section (2) of Section 78, for imposing penalty under sub-section (5) of Section 78 of the RST Act, 1994.”
However, once it is proved that the conditions prescribed in the section has been fulfilled and penalty is leviable as offence has been committed, the opportunity of hearing comes to an end and officer has no other option but to levy penalty at the prescribe rate nothing more and nothing less.
As has been held by Hon’ble Supreme Court in the matter of Union Of India vs M/S Rajasthan Spinning & Weaving … on 12 May, 2009
“once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of Section 11A. That is what Dharamendra Textile decide.”
Hence the basic difference between the two categories is that in the former case even if the default is proved, then opportunity of hearing provides the offender with a chance to mitigate the penalty proceedings to minimum but in the latter case once conditions prescribed in the statute are proved, the penalty as prescribed under the statute would be levied nothing more and nothing less.
a) In the matter of SEBI vs. Cabot International Capital Corporation, (2005) 123 Comp. Cases 841 (Bom) before the Hon’ble Bombay High Court, the issue was as follows:
The issue before the Hon’ble High Court was that whether the SAT was justified in deleting the penalty under Section 15A(b) reproduced herein below when the statute mandated a penalty with the words “shall be liable”
“15A Penalty for failure to furnish information, return, etc.–If any person, who is required under this Act or any rules or regulations made thereunder:–
(b) to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulation, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues;”
The Hon’ble Bombay High Court held that
“(G) Though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite, that in the statute minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to bona fide belief that he was not liable to act in the manner prescribed by the statute or there was too technical or venial breach, etc.”
Another very important finding of the Hon’ble Court was :
“On particular facts and circumstances of the case, proper exercise or judicial discretion is a must, but not on a foundation that mens rea is an essential to impose penalty in each and every breach of provisions of the SEBI Act.”
The Hon’ble High Court on the reasoning for Non Levy of Penalty for the default in Filing of Report under Regulation 3(4), of SEBI Takeover Regulations, 1997 held as under:
“It appears that there was no intention of the respondents to avoid filing of such a Report with the appellants, as the respondents had in fact complied with and notified the relevant details to all other concerned Authorities, like Registrar of Companies, Reserve Bank of India and Stock Exchange in respect of the preferential allotment and the relevant details. Therefore, SAT, cannot be said to have erred in the factual background of the case that the respondents never intended or consciously or deliberately avoided to comply with the obligations under the SEBI Act and the Regulations and the non-filing of the Report in question was a technical and a minor defect or breach based on bona fide belief that respondents were not liable or required to submit the said Report in view of the admitted exemption available under the SEBI Act and the Regulations. In the facts and circumstances of the present case the reversal of the order of the Adjudicatory Authority, by the SAT cannot be faulted.
32. However, we are not in agreement with the Appellate Authority in respect of the reasoning given in regard to the necessity of mens rea being essential for imposing the penalty. According to us, mens rea is not essential for imposing civil penalties under the SEBI Act and Regulations.”
The Hon’ble Bombay High Court has sought to distinguish the word mens rea and bona fide. Although Hon’ble Bombay High Court rejected contention of SAT to drop the penalty as Mens rea was absent but itself dropped the penalty holding that default of the respondent was a technical and a minor defect or breach based on bona fide belief.
It can be observed from the above that the principle which is laid down is that in case of civil offence where the penalty has to be levied, if mens rea has not been made an essential ingredient then penalty cannot be dropped providing that mens rea was absent but penalty can be dropped considering the facts in relevant case that the act was committed under a bonafide belief or offence involved a technical or minor defect.
It would be appropriate here to point out that this judgment was also referred to in the judgement by the Hon’ble Supreme Court in the matter of The Chairman Sebi vs Shriram Mutual Fund & Anr on 23 May 2006 [2006(5) SCC 361.
b) The Hon’ble Bench of Supreme Court in the matter of Guljag Industries Vs Commercial Taxes Officer (2007) 9 VST 1 while dealing with the provisions of Section 78(5) of the Rajasthan Sales Tax Act 1994 regarding carrying of the Road Permit observed that incase of Civil liabilities the assessee has to show special circumstances for non-levy of penalty but excuses cannot be special circumstances. The relevant extract of the judgement is as follows:
“The explanation given by the assessee’s in most of the cases is that they are not responsible for the misdeeds of the consignors. The other explanation given by the assessees is regarding the language problem. There is no merit in these defences. They are excuses.
It has been repeatedly argued before us that apart from the declaration forms the assessees possessed documentary evidence like invoice, books of accounts etc. to support the movement of goods and, therefore, it was open to the assessees to show to the competent authority that there was no intention to evade the tax. We find no merit in this argument.
Moreover, in the present case, there were no special circumstances indicated by the assessee as to why the forms which were duly signed were not filled in. Therefore, in our view the above judgment in the case of D.P. Metals (supra) has no application to the facts of the present case.”
The Hon’ble Court then held that
27 For the aforestated reasons, we hold that Section 78(5) of the RST Act 1994 (Section 22A(7) of the RST Act 1954) is the section enacted to provide remedy for loss of revenue and it is not enacted to punish the offender for committing economic offence and, therefore, mens rea is not an essential ingredient for contravention of Section 78(2) of the RST Act 1994. “
It can be observed from above that Hon’ble Apex Court has highlighted that presence of special circumstances. It is noteworthy here to see that even though the Hon’ble Court provided that mens rea is not an essential ingredient in such defaults but if the assessee would have been able to show special circumstances which lead to form duly signed but not filled in then such case the penalty might have been dropped. The circumstances should have been very special. Some of the Instances like
a) language problem,
b) responsibility of the misdeeds of consignor
c) explanation like that all documents were with the goods except the declaration form shows that there was no means rea
were not held to be special circumstances but only excuses. Therefore, in the view of decision of Hon’ble Apex Court for penalty to be dropped, the circumstances should have been special and not being ordinary one which the assessee had knowledge and he could have taken sufficient safeguard against the same.
c) As per the decision of Hon’ble Apex Court in the matter of Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore & Ors. 1980 SCR (1)1098, where a question was whether a penalty under Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 can be imposed on the dealer on the ground that he had furnished false returns by not including the amount of freight in the taxable turnover disclosed in the returns. Allowing the appeal of the dealer, this Court had observed as under:
“Now, it cannot be said that this was a frivolous contention taken up merely for the purpose of avoiding liability to pay tax. It was a highly arguable contention which required serious consideration by the Court and the belief entertained by the assessee that it was not liable to include the amount of freight in the taxable turnover could not be said to be malafide or unreasonable.
But where the assessee does not include a particular item in the taxable turnover under a bonafide belief that he is not liable so to include it, it would not be right to condemn the return as a ‘false’ return inviting imposition of penalty.
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. If the view canvassed on behalf of the Revenue were accepted, the result would be that even if the assessee raises a bonafide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the Court to be not acceptable. That surely could never have been intended by the Legislature.”
However this judgement has to be seen in the context of words used in the above provision which are concealment, furnishing of inaccurate particulars and false return. All these words provide for intentional concealment and further the provision also provides for a discretion to the assessing officer to may or may not levy penalty and if penalty is levied then in such case it shall not be less than 20% of the tax avoided and should not be more than 150% of the tax avoided. The concluding observations of the Apex Court are important and would hold its own if the tax at a lesser rate has been shown on bona fide belief.
The observation of the Court that where there is a bonafide belief of the assessee that the particular goods are to be taxed at a lower rate or are exempt from levy of tax, if the contention of the department is accepted that each and every default is liable for penalty then in such case, the dealer would be first forced to pay the tax and include the same in his return and then raise the question of law for levy of lesser rate of tax or for claim of exemption. This is never the intention of law and where there is a bonafide belief that particular goods being taxable at lower rate or good being exempt from tax then even though the contention of the assessee is found incorrect, there should be no levy of penalty.
d) In a matter before Hon’ble Supreme Court of E.I.D. Parry (I) Ltd vs Asst. Commr. Of Commercial Taxes … on 17 December, 1999 Appeal No. 7517-18 of 1998 that
The penalty under the matter was levied under section 12(3) and 16(2) of the Tamil Nadu General Sales Tax Act 1959. Section 12 of the Act provided for mandatory levy of penalty and Section 16 of the Act provided for levy of penalty only in case of escapement from assessment due to willful non-disclosure.
Section 12(3) provided that
“In addition to the tax assessed [under sub-section (1) or (2),] the assessing authority shall, in the same order of assessment passed [under sub-section (1) or (2) or by a separate order, direct the dealer to pay by way of penalty, a sum –
a) which shall be, in the case……………..”
Section 16(2) provided that
“In making an assessment under clause (a) of sub-section (1), the assessing authority may, if it is satisfied that the escape from the assessment is due to willful non-disclosure of assessable turnover by the dealer, direct the dealer, to pay, in addition to the tax assessed under clause (a) of sub-section (1), by way of penalty a sum which shall be ……”
Hon’ble Madras High Court in its order provided that
“Further, we modify the assessment orders wherever there is penalty levied under section 12(3) or section 12(5)(iii) or section 16(2) of the Tamil Nadu General Sales Tax Act and the penalty levied there shall be reduced to 50 per cent of the tax assessed.”
The penalty which were reduced to 50% by the Madras High Court were set aside by the Hon’ble Apex Court holding that the non-inclusion of the two items was not intentional or deliberate or dishonest or conscious disregard of their obligations albeit it was lack of clarity regarding the taxation of the two items that lead to the non-inclusion of the turnover.
“But so far as levy of penalty is concerned, we do not think that the Sales Tax Authorities were justified in levying it. Till the judgment of the Madras High Court, on 15.7.1991, in Perambalur Sugar Mills Ltd v. State of Tamil Nadu, (1992) 86 S.T.C. 17, the correct position of law within the State of Tamil Nadu was not free from doubt. Even thereafter, the Sales Tax Tribunal had in subsequent orders held that transport subsidy was not includible in the taxable turnover. Such a view held by the Tribunal till 19.3.1993. It appears that on bona fide belief that planting and transport subsidies were not includible in the taxable turnover, the appellants had not included those amounts in their turnover and for that reason non- inclusion of these two items in the turnover do not seem to be intentional. Though we have now held that the appellants were not right in not including the amounts of planting subsidy and transport subsidy in the taxable turnover, considering the facts and circumstances of the case, it would not be correct to say that they had acted deliberately in defiance of law or that their conduct was dishonest or they had acted in conscious disregard of their obligation under the Sales Tax Act The Sales Tax Authorities were, therefore, wrong in passing the orders of penalty and upholding the same. The High Court also, in our opinion, committed an error in upholding the orders of penalty.”
It would be pertinent here to observe that both the penalty under Section 12 and Section 16 of the Tamil Nadu General Sales Tax Act were deleted by the Hon’ble Apex Court on the ground of bona fide belief and lack of clear legal picture.
The critical aspect to analyze here is that Section 16 of the Tamil Nadu General Sales Tax provided condition regarding “wilful nondisclosure” thereby meaning mens rea intention was incorporated under the section and bonafide belief and lack of clear legal scenario would always hold a valid ground for dropping of penalty proceedings.
However, Penalty under Section 12 of the Tamil Nadu General Sales Tax Act which was a mandatory levy was also deleted on the ground of bonafide belief and lack of clear legal position on the ground that there were decisions both in favour and against the assessee.
Therefore, bonafide belief of the assessee and lack of clear legal scenario could hold a valid ground for non levy of penalty in cases where the statute prescribes mandatory levy of penalty in case of civil offences.
e) The Hon’ble Apex Court in the matter of R.S. Joshi v. Ajit Mill’s case 1978 SCR 338 was faced with Constitutional Validity of Section 37, 46, 63 of Bombay Sales Tax Act 1959 regarding prohibition of collection of any sum not payable by way of sales tax or in excess of tax payable- and whether Amounts so collected can be forfeited and whether such Forfeiture was within the legislative competence of the State Legislature. Further it was also before the Hon’ble apex court that whether Forfeiture is in the nature of a penalty.
Relevant Abstract of Section 46 (2) is provided as follows:
No person, who is not a Registered dealer and liable to pay tax in respect of any sale or purchase, shall collect on the sale of any goods any sum by way of tax from any other person and no Registered dealer shall collect any amount by way of tax in excess of the amount of tax payable by him under the provisions of this Act.
Relevant abstract of Section 37(1)(a)(i) is as follows:
If any person, not being a dealer liable to pay tax under this Act, collects any sum by way of tax in excess of the tax payable by in, or otherwise collects tax in contravention of the provisions of section 46, he shall be liable to pay, in addition to any tax for which he may be liable, a penalty as follows :
(i)where there has been a contravention referred to in clause (a), a penalty of an amount not exceeding two thousand rupees;.’. . and, in addition,. . . . any sum collected by the person by way of tax in contravention of section 46 shall be forfeited to the State Government
The Hon’ble Apex Court first analyzed that how Forfeiture of the Excess Tax Collected is equivalent to Penalty Proceedings:
“The Hon’ble Apex Court held that Dictionary states that ‘to forfeit’ is ‘to lose, or lose the right to, by some error, fault, offence or crime’, ‘to incur a penalty.’ ‘Forfeiture’, as judicially annotated, is ‘a punishment annexed by law to some illegal act or negligence. . . ., ‘something imposed as a punishment for an offence or delinquency. ‘The word, in this sense, is frequently associated with the word ‘penalty’, According to Black’s Legal Dictionary.”
“The terms ‘fine’, ‘forfeiture’, and ‘penalty’, are often used loosely, and even confusedly; but when a discrimination is made, the word ‘penalty’ is found to be generic in its character, including both fine and forfeiture. A ‘fine’ is a pecuniary penalty, and is commonly (perhaps always) to be collected by suit in some form. A ‘forfeiture’ is a penalty by which one loses his rights and interest in his property.”
Thereafter the Hon’ble Court went ahead to provide that even though there is an arithmetical accuracy in amount excess collected and amount forfeited but still the forfeiture is in the nature of penalty:
“This word ‘forfeiture’ must bear the same meaning of a penalty for breach of a prohibitory direction. The fact that there is arithmetical identity, assuming it to be so, between the figures of the illegal collections made by the dealers and the amounts forfeited to the State cannot create a conceptual confusion that what is provided is not punishment but a transference of funds.”
The Hon’ble Apex Court further went on to hold that
“And so, when s. 37 (1) expressly says that the wrongful collections shall be forfeited it means what it says. Forfeiture being penal, terminologically, it must bear the same sense here too. Moreover, so far as the Act of 1959 is concerned, there is no case of outwitting any anterior judicial verdict. The fact that mens rea is excluded and the penal forfeiture can be enormous are germane to legislative policy, not for judicial compassion. A limited penalty, without forfeiture, may prove illusory where the illegal collections run into millions. The inevitable conclusion is that the forfeiture in s. 37(1) is competent legislation.”
The Hon’ble Apex Court then provided that while levying penalty under section 37 of the Act the Commissioner must while passing the order of forfeiture and levy of penalty should take into consideration the amount returned back to the purchasers thereby bringing Humanity in the Statute:
“The Commissioner must have regard to all the circumstances of the case, including the fact that amounts illegally collected have been returned to the purchasers to whom they belong before passing the final order. We are clear in our mind that the forfeiture should operate only to the extent and not in excess of, the total collections less what has been returned to the purchasers. We may go a step further to hold that it is fair and reasonable for the Commissioner to consider any undertaking given by the dealer that he will return the amounts collected from purchasers to them. The humanism of a provision may bear upon its constitutionalism.”
It can be observed from the above that forfeiture of amount has been considered in the nature of penalty. Although while deciding that whether entire amount collected was liable to be forfeited as per the provisions of the Act, the Hon’ble Apex Court while providing “humanism of a provision may bear upon its constitutionalism” held that where the assessee has acted in bonafide belief and has returned the amount back to the purchaser or would return the same back as per the undertaking, the amount forfeited which shall in strict compliance of the provisions would be equal to excess amount collected and would be reduced by the amount returned or would be returned to the purchaser. Here also bona fide belief was taken into account while deciding the amount of forfeiture in the nature of penalty.
f) Hon’ble Rajasthan High Court in the matter of Parasnath Granite India Ltd vs State Of Rajasthan And Anr. On 2 June, 2004 144 STC 271 analysed the above decision of Hon’ble Apex Court in the matter of R.S. Joshi v. Ajit Mill’s case 1978 SCR 338 as follows:
“Thus, notwithstanding the fact that breach of provision was completed when collection of any amount as tax was made, but which was not leviable, yet penalty by forfeiture of said was not held to follow automatically in absolute term but was left to be imposed at the discretion of the authority concerned depending upon the enquiry whether the purpose of provision is fulfilled or not. In case the person collecting the amount as tax has at the initial stage acted with bonafide intention to return the amount to customer if the tax is not found leviable or even the defaulting person undertook before the authority to return the amount so collected to customers, the penalty of forfeiture was held to be not imposable in the decision of the Commissioner. This principle was evolved for maintaining the ‘equity and humanism in the Statute was made to bear upon its constitutionality’.
61. It also read the provision in the context of object and restricted the penalty of forfeiture to the extent, it retained its nexus with the object of the provision by clearly pointing out that if in response to show cause notice, it is shown that collection was made only tentatively and were to be returned to customer if ultimately it was found not liable to tax or even if the person gives an undertaking to return the same to customer, it was in the discretion of the Commissioner not to levy penalty.”
g) In another decision in CTO v. Swastik Roadways Appeal No. 9143 of 1996 Judgement Dated 13th February 2004, Hon’ble Supreme Court was faced with an issue directly arising in respect of M.P. Sales Tax Act in somewhat similar circumstances which were before the Hon’ble Apex Court in the matter of D.P Metal and made a distinction between the bona lick mistake and dishonest non compliance:.
“While upholding the constitutionality of the provisions in D.P. Metal’s Case, the Court drew the distinction between honest and dishonest breach of condition. Furnishing of false or forged documents or non furnishing of requisite documents imply dishonest intention. But if by mistake, the documents are not furnished at the checkpoint, the natural justice required to be followed provides an opportunity to produce bona fide genuine and correct documents before the concerned officer within the time allowed. Obviously, in later case, no penalty is envisaged as per view expressed in D.P. Metal’s case. The distinction between a bona lick- mistake and dishonest non compliance is clearly visible in aforesaid statement in D.P. Metals case, which is also the foundation of ratio in Hindustan Steel’s Ltd. referred to above.”
h) Issue with regard to Penalty U/Sec 271(1)(c): Now briefly coming to the issue of penalty under section 271(1)(c). This section was amended by Finance Act 1964 wherein the word “deliberately” was deleted from the statute and an explanation was inserted to clarify what is meant by furnishing of inaccurate particulars and which was further amended w.e.f. 01-04-1976.
i. Relevant extract of the judgment by Hon’ble Karnataka High Court in the matter of The Income Tax Officer Ward-I V/s M/s. Manjunatha Cotton and Ginning Factory Andral Road Bellary (2013) 359 ITR 565 (KARN) which provided as
“Yet, broadly speaking, the effect of the amendment which has to be read along with the Explanation that was inserted by the Finance Act, 1964 has been that it is no longer necessary to establish that the assessee had deliberately concealed the particulars of his income or furnished inaccurate particulars of such income.”
In this backdrop where deliberate intention of the assessee to conceal Income or furnishing of inaccurate particulars is not required to be shown, we analyse the following judgement of Hon’ble Apex Court and High Courts:
ii. The Apex Court in the case of RELIANCE PETRO PRODUCTS reported in 322 ITR 165 held that mere making of a claim which is not allowed by the assessing officer does not mean furnishing of inaccurate particulars and if mere disallowance of claim is the sole basis of levy of penalty then it would create a situation which has not been intended by the legislature.
“There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise.
However, it must be pointed out that in Union of India Vs. Dharamendra Textile Processors no fault was found with the reasoning in the decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra), where the Court explained the meaning of the terms “conceal” and inaccurate”. It was only the ultimate inference in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr. (cited supra) to the effect that mens rea was an essential ingredient for the penalty under Section 271(1)(c) that the decision in Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai & Anr.
Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature.”
iii. It was held by Hon’ble Apex Court in the matter arising out of S.L.P.(C) No.10700 of 2009 Price Waterhouse Coopers Pvt. Ltd. …..Appellant Versus Commissioner of Income Tax, Kolkata-I ….Respondents and Anr.
“20. We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.”
iv. Hon’ble Karnataka High Court in the matter of The Income Tax Officer Ward-I AND: M/s. Manjunatha Cotton and Ginning Factory Andral Road Bellary (2013) 359 ITR 565 (KARN) has held that as an illustrative situation in following situations no penalty should be levied on the assessee on the reason of being bonafide.
“Similarly, in cases, where the legal position is not well settled, when few High Courts and Tribunals have taken a view in favour of the assessee and some High Courts and Tribunals have taken a view in favour of the Revenue and on legal advice if an assessee relies on the said legal position for not disclosing the income and for non-payment of tax, certainly, that is a fact which should weigh in the penalty proceedings after the assessee has paid tax with interest before imposing penalty.”
Conclusion: It can be observed from the above that bonafide belief or good faith or bona fide error have been held to be a valid ground for non levy of penalty. But bona fide belief should be based upon firm facts which the assessee is able to prove when called upon to do so.
The article analyses various issues relating to penalty and nature of liability and presence or absence of mens rea and whether bona fide belief holds a valid ground for dropping of penalty proceedings in civil offences. Although laying down a clear law or conclusion is very hard in the present context but a broad understanding can be made as follows:
a. The nature of offence committed by the defaulter can be civil, criminal or quasi criminal.
b. Mens Rea is always an essential ingredient in criminal offence unless mens rea has been specifically excluded from the statute or by necessary implication it is excluded from the statute as implementation of the statute would be defeated otherwise.
c. Mens rea is not an essential ingredient for levy of penalty under the civil offence unless the language of the statue indicates that need to establish the element of mens rea.
d. That whether mens rea is an essential ingredient under civil offence can be identified from the statute where the statute creates an offence and an ingredient of the offence is attempt to evade tax by fraud, misrepresentation or knowingly or willful misrepresentation, deliberate attempt to evade tax etc.
e. An opportunity of hearing provided in the statute cannot be merely an empty formality and its principle of natural justice which has to be followed unless opportunity of hearing has been specifically excluded by the statute. It is open for the assessee where an opportunity of hearing is provided to contest the accusation against him. The basic understanding of providing opportunity of hearing in a statute is that the law makers intended to provide that levy of penalty is not automatic on default being committed but the person against whom accusation is made should be provided to contest the same.
f. In case wherein discretion has been provided under statute regarding quantum of penalty in matters of civil offence, in such case if the conditions provided in the section are satisfied with reference to committing of offence then while deciding the question of quantum of penalty to be levied, the consideration would have to be given to the gravity of default, relevant factors on which the offenders may rely, nature of breach being technical or venial etc.
g. In a provision for levy of penalty in the case of civil offence wherein no discretion has been provided and quantum of penalty is fixed then in such case once the conditions provided in the section are satisfied, the adjudicating authority has no other option but to levy penalty equal to the amount prescribed in the statute nothing less and nothing more.
h. In the matter of civil offence, where neither mens rea is an essential ingredient nor the statute provides for any discretion of reducing the amount of penalty to the adjudicating authority, penalty proceedings may be dropped in circumstances based upon particular facts of the case wherein
i. There is bonafide belief of existence of a particular circumstances or exemption available to the assessee or his acts in entirety show that there was never an intention to avoid the liability as provided in the statute and it’s the good faith or bonafide belief which has led to the particular act being committed.
ii. The person committing the default is able to show that there were special circumstances not being limited to general excuses which lead the assessee to commit the act.
iii. The levy of penalty in particular circumstances leaves the person in a state which was never intended by the law makers and it would lead to absurdity and creating a catastrophe. It would be appropriate here to quote the relevant extract of the judgement of the Apex Court in the matter of Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore & Ors 1980 SCR (1)1098 as follows:
“the result would be that even if the assessee raises a bonafide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the Court to be not acceptable. That surely could never have been intended by the Legislature.”
Further this view has also been expressed by the Hon’ble Apex Court in the matter of Reliance Petro Products Private Limited 322 ITR 165 that every claim which is rejected by the assessing officer cannot be basis upon which penalty under section 271(1) (c) is levied on the assessee as it would create a situation which has not been intended by the legislature.
The levy of penalty in such cases cannot be an automatic levy only because offence being civil offence and mens rea is not an essential ingredient. The assessee should be given the benefit of bona fide belief of certain claim being made. Every claim denied by the assessing officer or every tax rate on goods levied by the assessee and not accepted by the assessing officer cannot be the sole basis of levy of penalty if the said view of the assessee was based on bonafide opinion.
iv. The circumstances wherein the legal issues are not well settled and there has been a view by Hon’ble Courts both in favour of the assessee and against the assessee and the assessee on the basis of professional opinion takes a particular decision. In the given case the levy of penalty may not be justified.