In a crucial judgment on the scope of penalty provisions in tax and other civil liability laws, the Supreme Court has significantly broadened their scope (Union of India v. Dharmendra Textile Processors, CA Nos. 10289 – 10303 of 2003, decided on September 29, 2008, per Pasayat J.). The judgment of the three-judge Bench on a reference from a Division Bench overrules the important decision in Dilip Shroff v. JCIT. The following is an argument that it has done so unsatisfactorily.
What is most dubious about the Court’s reasoning is its application of the same principle across enactments. At issue were four provisions – Section 271(1)(c) of the Income Tax Act, 1961, Section 11AC of the Central Excise Act, 1944, Rules 96ZQ and 96ZO of the Central Excise Rules, 1944, and Section 15D(b) of the SEBI Act, 1992. All of these provisions levy penalties for infractions of various kinds, and the question before the Court is usually whether intent to commit the infraction in question is required to impose the penalty, or whether it is automatic. There has been considerable conflict on this question – it has held that there a mens rea requirement is present in s. 271(1)(c) – after much disagreement - and absent in s. 15D(b) of the SEBI Act.
Section 271(1)(c) provides the a penalty may be levied if the AO is satisfied that the assessee has “concealed the particulars of his income” or “furnished inaccurate particulars of such income”. However, before an amendment in 1964, penalty could be levied only if the assessee had deliberately furnished inaccurate particulars. At first sight, the 1964 amendment dispensed with mens rea by omitting the word ‘deliberate’. This had disastrous implications for assesses, because in effect it meant that penalties would be levied for legitimate disagreements with the assessing officer, or where mere inadvertence resulted in inaccuracy. A good example is where the assessee employed a valuer to value property for the purposes of capital gains, and found himself having to pay penalties because the Registered Valuer disagreed with his valuation.
An important recent decision on s. 271(1)(c) – Dilip N Shroff v. JCIT, (2007) 6 SCC 329 thus gave much needed relief to assesses, and held, albeit on dubious reasoning, that the burden of proof was still on the assessee. It is possible to justify this conclusion by resorting to the Explanation to the section which provided, even after the 1964 amendment, that penalties would not be levied if the assessee satisfied the AO that there was a bona fide explanation for the inaccuracy. This meant that mens rea was retained, although the burden of proof was apparently shifted to the assessee, a position supported even by the CBDT (CBDT Instruction No. 1130, dt. 31-3-1978). However, Dilip Shroff relied not on this but that held Section 271(1)(c) is a penal provision, and must therefore include mens rea. This conflicted with several other judgments of the Court, and it is no surprise that in Dharmendra Textile Processors, a Division Bench referred the matter to a larger Bench, which has now overruled Dilip Shroff.
The three judge Bench has now overruled Dilip Shroff, largely because of Dilip Shroff’s conclusion that s. 271(1)(c) is a penal provision. In fact, this was the basis of the referral by the Division Bench, because the Court in SEBI v. Shriram Mutual Funds (AIR 2006 SC 2287) had held that there is no question of mens rea for a provision imposing liability for the breach of a civil, as opposed to a criminal obligation. In that case, it had been held that s. 15D(b) of the SEBI Act requires no mens rea, since it imposes penalties on collective investment scheme companies for failure to comply with the terms of the registration certificate. Thus, the Court in this judgment rightly pointed out that Dilip Shroff had erred on this point.
However, it seems that Dharmendra Textile Processors is not correct either, for two reasons. First, the question before the Court was not s. 271(1)(c) at all, but whether s. 11AC of the Central Excise Act contained a mens rea requirement. Counsel for the assessee relied on Dilip Shroff, and the referring Bench, instead of distinguishing it and considering s. 11AC on its merits, held that “the basic scheme for imposition of penalty under s. 271(1)(c) of the Income Tax Act, Section 11AC and Rule 96ZQ is common”, and referred Dilip Shroff for reconsideration. Section 11AC provides that penalty may be levied if there is fraud, collusion or wilful misstatement or suppression of facts – a clear mens rea requirement. Rule 96ZQ(5) on the other hand provides that penalty is payable if the “amount specified” is not paid by “the date specified” – a clear abrogation of mens rea. This question, therefore, must turn not on the general characterisation of a provision as penal or otherwise, but on its language. Secondly, Dilip Shroff was decided rightly, albeit for the wrong reasons. Without going into detail, the effect of Explanation 1 makes it amply clear that burden of proof is shifted to the assessee only after a prima facie finding of mala fide furnishing of inaccurate particulars.
Unfortunately, the implications of the judgment are not confined to tax law – it is now likely that any provision imposing penalties for the breach of civil obligations will be construed as placing the burden of proof on the person paying it, or will be construed as not having a mens rea requirement at all. This may well be the case, but it depends on the provision in question, and not on whether it is considered penal or not.