In penalty matter under the Central Excise Act, 1944 in the case of Union of India & Others v. Dharmendra Textile Processors & Others, (2007) 295 ITR 244 the Bench of two Judges of the Supreme Court doubted the judgment of other two Judges of the Supreme Court in Dilip N. Shroff v. JCIT, (2007) (291 ITR 519); but because one Coordinate Bench (which means the Bench of the same strength of Judges) cannot over-rule the decision of another Coordinate Bench, they recommended the formation of Larger Bench to the Hon’ble Chief Justice of India. Accordingly, the matter was referred to the Larger Bench of three Judges. The decision of the Larger Bench of three Judges is reported as Union of India & Others v. Dharmendra Textile Processors and Others, (2008) 306 ITR 277. In the said decision the Larger Bench held at page 302 that “the object behind the enactment of S. 271(1)(c) read with the Explanations indicates that the said Section has been enacted to provide for a remedy for loss of revenue. The penalty under the provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s.276C of the Income-tax Act.”
Thus, the Larger Bench disapproved the decision in Dilip N. Shroff (supra) and approved of what the Supreme Court held in Chairman SEBI v. Shriram Mutual Fund, (2006) 5 Supreme Court cases 361, which held that “mens rea is not essential for imposing civil penalties under the SEBI Act and regulations”.
Now the limited purpose of this article is to point out that the decision of three Judges in Union of India v. Dharmendra Textile Processors, (2008) 206 ITR 277 is in conflict with the earlier three decisions of three Judges of the Supreme Court and none of the earlier three Judges’ decisions is considered by three Judges’ Bench of the Supreme Court in Dharmendra Textile Processors, and therefore, the decision of Dharmendra Processors is per incuriam. Besides, the Coordinate Bench (of three Judges here) cannot over-rule the decision of another Coordinate Bench (of three Judges). Therefore, for the above two reasons, the decision of Dharmendra is not law under Article 141 of the Constitution of India. Let us see those three decisions.
The earliest decision of these three decisions of three Judges is Hindustan Steel Limited v. State of Orissa, (1972) 83 ITR 27. The Tribunal had referred to the High Court the following question of law u/s.24(1) of the Orissa Sales Tax Act, 1947 (corresponding to S. 256(1) of the Income-tax Act, 1961) :
“Whether the Tribunal is right in holding that penalties u/s.12(5) of the Act had been rightly levied and whether in view of the serious dispute of liability it cannot be said that there was sufficient cause for not applying for registration ?”
S. 12(5) was as follows :
“If upon information which has come to his possession, the Commissioner is satisfied that any dealer has been liable to pay tax under this Act in respect of any period and has nevertheless, without sufficient cause, failed to get himself registered, the Commissioner may, at any time within (five years) from the expiry of the year to which that period relates, call for return U/ss.(1) of S. 11, and after giving the dealer a reasonable opportunity of being heard, assess, to the best of his judgment, the amount of tax, if any, due from the dealer in respect of such period and all subsequent periods and may also direct that the dealer shall pay, by way of penalty, in addition to the amount so assessed, a sum not exceeding one and half times that amount.”
The High Court replied the question in the affirmative against the assessee and the assessee appealed to the Supreme Court by Special Leave. The Supreme Court itself framed the following relevant issue “whether imposition of penalties for failure to register as a dealer was justified ?” Justice J. C. Shah, the Acting Chief Justice, Justice V. Ramaswami and Justice A. N. Grover constituted the Bench. The Court at page 29 of its judgment held as under :
“Under the Act penalty may be imposed for failure to register as a dealer : S. 9(1), read with S. 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.” (Italics to provide emphasis.)
It is worth noting here that this case of Hindustan Steel was not an appeal from the conviction by a Magistrate in prosecution u/s.25 of the Orissa Sales Tax Act. It was an appeal arising from the order of penalty u/s.12(5) of the Orissa Sales Tax Act by the Assessing Officer. It will seem that in spite of the above typographical mistake or shall I say ‘slip of tongue’ of stating S. 25(1)(a) in the above quotation in place of S. 12(5), what the Supreme Court laid down as above was without doubt regarding S. 12(5) and not S. 25, because otherwise it will not describe proceeding to be quasi-criminal proceeding. Proceedings u/s.25 are criminal proceedings before a Magistrate and no Court will commit a mistake of describing them as quasi-criminal proceedings. Looking at the importance of the topic, it is worth emphasising the following from the above quotation from Hindustan Steel; “An order imposing penalty for failure to carry out statutory obligation is the result of a quasi-criminal proceedings 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 defiance or acted in conscious disregard of its obligation.“
Therefore, according to the Bench of three Judges of the Supreme Court in Hindustan Steel, willful contravention is an essential ingredient of attracting liability to penalty. (contra Dharmendra.)
The second decision of three Judges of the Supreme Court in point of time is in the case of D. M. Manasvi v. CIT, (1972) 86 ITR 557, Justice K. S. Hegde, Justice P. Jagmohan Reddy and Justice H. R. Khanna constituted the Bench. This was a matter u/s. 271(1)(c) of the Income-tax Act, 1961. The Court stated at page 565 as follows :
“It cannot therefore, be said that there was no relevant material or evidence before the Tribunal to hold that the assessee had deliberately concealed the particulars of his income or has deliberately furnished inaccurate particulars of income.“
For the assessee, reliance was put on the observation of the Supreme Court in CIT v. Anwar Ali, (1970) 76 ITR 696 and it was argued that from the mere falsity of the explanation, it did not follow that disputed amount represented income and that the assessee had consciously concealed particulars of income or has deliberately furnished inaccurate particulars of income. Disposing of this contention, the Court observed at page 565 :
“In this respect we find that in the present case the inference that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars is based not merely upon the falsity of the explanation given by the assessee. On the contrary, it is made amply clear by the order of the Tribunal that there was positive material to indicate that the business of Kohinoor Mills belonged to the assessee and the whole scheme was to disguise the profits of the assessee as those of a firm of four partners. The present is not a case of inference from mere falsity of explanation given by the assessee, but a case wherein there are definite findings that a device had been deliberately created by the assessee for the purpose of concealing his income. The assessee, as such can derive no assistance from Anwar Ali’s case.” (Italics by the author to provide emphasis.)
Therefore, according to decision of three Judges of the Supreme Court in the case of Manasvi also, deliberate concealment or deliberate furnishing of inaccurate particulars is the essential ingredient for attracting penalty u/s.271(1)(c).
The last decision in point of time of three Judges of the Supreme Court is Anantharam Veerasinghaiah Co. v. CIT (1980) 123 ITR 457. The Bench was constituted by Justice N. L. Untwalia, Justice R. S. Pathak and Justice E. S. Venkataramiah. This too was a case of penalty u/s.271(1)(c). The Court made the following emphatic and clear statement of law at page 461 :
“It is now settled law that an order imposing penalty is the result of quasi-criminal proceedings and that the burden lies on the Revenue to establish that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has deliberately furnished inaccurate particulars : CIT v. Anwar Ali (1970) 76 ITR 696 (SC). It is for the Revenue to prove those ingredients before a penalty can be imposed. Since the burden of proof in a penalty proceeding varies from that involved in an assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted as a finding to that effect in the penalty proceeding. In the penalty proceeding the taxing authority is bound to consider the matter afresh on the material before it and, in the light of the burden to prove resting on the Revenue, to ascertain whether a particular amount is a revenue receipt. No doubt, the fact that the assessment order contains a finding that the disputed amount represents income constitutes good evidence in the penalty proceedings, but the finding in the assessment proceeding can not be regarded as conclusive for the purposes of the penalty proceeding. That is how the law has been understood by this Court in Anwar Ali’s case (1970) 76 ITR 696 (SC), and we believe that to be the law still. It was also laid down that before a penalty can be imposed the entirety of the circumstances must be taken into account and must point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed particulars of his income or deliberately furnished inaccurate particulars. The mere falsity of the explanation given by the assessee, it was observed, was insufficient without there being, in addition, cogent material or evidence from which the necessary conclusion attracting a penalty could be drawn. These principles were reiterated by this Court in CIT v. Khoday Eswarsa and Sons, (1972) 83 ITR 369.” (Italics and underlining by the author to provide emphasis.)
Thus, it is obvious that according to earlier three Benches of three Judges of the Supreme Court (i.e., three Co-ordinate Benches) willful concealment or willful furnishing of inaccurate particulars is an essential ingredient for attracting penalty u/s. 271(1)(c), whereas the latest decision of the three Judges of the Supreme Court in Dharmendra Textile Processors holds to the contrary. In fairness to the Supreme Court it must be pointed out that none of the above three decisions of three Judges was brought to the notice of the Court and the matter proceeded as if only the Bench of two Judges had laid down that willful concealment or willful furnishing of inaccurate particulars is the essential ingredient of S. 271(1)(c) penalty.
Therefore, the bottomline is that the decision of the Supreme Court in Dharmendra Textile Processors & Others, (2008) 306 ITR 277 being of three Judges can-not and has not overruled the law laid down as above by earlier three judgments of three Judges (in other words by Bench of the same strength of Judges) and what came to be laid down by three earlier judgments continues to be the law of the land. Further, it must be pointed out that right from the times of the Bombay High Court decision in CIT, Ahmedabad v. Gokuldas Harivallabhdas, (1958) 34 ITR 98, for last 50 years the law was understood on identical lines as the above three Supreme Court decisions pronounced viz., willful concealment of income or willful furnishing of inaccurate particulars of income is the essential ingredient for attracting penalty.
What the Supreme Court itself pointed out in A.L.A. Firm v. CIT, (1991) 189 ITR 285 at page 307 in regard to the decision of G. R. Ramachari & Co. v. CIT, (1961) 41 ITR 142 (Mad.) is relevant because of the principle of stare decisis.
“The view taken by the High Court has held the field for about thirty years and we see no reason to disagree even if a different view were possible.”
The Supreme Court in a later decision (1995) 6 Supreme Court Cases 84 in the case of Gangeshwar Ltd. v. State of U.P. & Others, stated as follows :
“The understanding of S. 6 of the Ceiling Act by the High Court reflected in these two decisions, when none has been placed before us to the contrary, would require upholding on the principle of stare decisis, for if we go to reinterpret the provision contrarily, it would upset the settled position in the State insofar as this area of laws is concerned. Therefore, necessity of certainty and cold prudence requires us to uphold the orders of the High Court.”
Author/s : J. P. Shah ,Advocate (Ahmedabad)