Normally all fiscal laws
contain penalty provisions. The intention of such provisions is to have
deterrent effect on the defaulting dealers. However, in what circumstances
penalty can be levied is an issue to be appreciated by authority empowered to
levy the penalty. There are number of judgments where it is held that for levy
of penalty mens rea is a condition precedent. There are also judgments where it
is observed that mens rea may not be necessary to be proved for levy of penalty
under fiscal laws. Normally in relation to fiscal laws reference is made to the
landmark judgment of the Supreme Court in case of Hindustan Steel Ltd. (25 STC
211) (SC) wherein the Supreme Court has observed about nature and incidence of
penalty under fiscal laws. The relevant para is reproduced below:
“Under the Act penalty may
be imposed for failure to register as a dealer : S. 9(1) r/w 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 the 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.”
Recently, the Supreme Court
had an occasion to decide one such penalty matter under the CST Act, 1956 in
case of M/s. Commissioner of Sales Tax, U.P. v. Sanjiv Fabrics, (35 VST 1) (SC).
The facts are that, as per
Registration Certificate under the CST Act, 1956 the dealer was authorised to
purchase cotton/cotton yarn on C Form. However the dealer had purchased cotton
waste, polythene, sutli and tat against C Form. The lower authority considered
the said purchases as unauthorised and levied penalty u/s.10(b) read with S. 10A
of the CST Act, 1956.
The further fact is that
when the issue of penalty came up, the dealer applied for amendment of
registration certificate. Against the penalty order an appeal was filed but the
dealer failed. The Tribunal also upheld the penalty on the ground that cotton
and cotton wastes are two different commodities, hence, there was sufficient
cause for penalty. The argument of the dealer was that he has acted under
bona fide belief that cotton includes cotton waste. The matter was carried
further to the High Court by the dealer. The Allahabad High Court allowed the
appeal by observing as under :
‘Cotton’ and ‘Cotton Waste’
are two different commodities known to Sales Tax Laws. However, there is not
much distinction from the point of view of ordinary people. The applicant is a
registered dealer since the A.Y. 1977-78 and has been making purchases of
‘Cotton waste’ and issuing Form C thereof since then. The department earlier
than October 15, 1985 raised no objection. This as was submitted by the learned
counsel for the applicant is very relevant
circumstance for determination of the question ‘false representation’ occurring
in S. 10(b) of the Act . . . . When Tax Laws are so complex the administration
should proceed specially in the penalty matter from the view of ordinary citizen
who is always willing to comply with the conditions of law. The assessee as soon
as it came to know about its (sic) fault filed application for amendment of
registration certificate. Some fault was on the part of the Department also for
maintaining silence over the period of about eight years.”
The Sales Tax Department
preferred SLP before the Supreme Court contending that mens rea is not an
essential ingredient of the offence u/s.10(b) of the CST Act, 1956 and it is in
the nature of civil liability. It was further argued that if prosecution is
launched, only then mens rea assumes importance.
The argument of the dealer
was that the penalty u/s.10(b) is in lieu of prosecution and mens rea would be
sine qua non for attracting the said penalty.
The Supreme Court referred
to relevant provisions of the CST Act, 1956 i.e., S. 10(b) and S. 10A which are
reproduced below :
“10. Penalties
If any person —
“(b) being a registered
dealer, falsely represents when purchasing any class of goods that goods of
such a class are covered by his certificate of registration, or . . . .”
“10A.
Imposition of penalty in lieu of prosecution
(1) If any person purchasing goods is guilty of an offence under clause (b) or clause (c) or clause
(d) of S. 10, the authority who granted to him or, as the case may be, is competent to grant to him a certificate of registration under this Act may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one and a half times the tax which would have been levied under Ss.(2) of S. 8 in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section. Provided that no prosecution for an offence u/s.10 shall be instituted in respect of the same facts on which a penalty has been imposed under this Section.”
The Supreme Court observed that the real issue is to see what is the significance of using the words ‘falsely represents’. In light of the above, the Supreme Court wanted to find out whether the above term contemplates concept of mens rea. Supreme Court referred to earlier judgment in the case of Nathulal v. State of Madhya Pradesh, (AIR 1966 SC 43) and referred to the following observations:
“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 con-struction 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 ….”
The Supreme Court referred to the judgment in the case of Union of India v. Dharamendra Textile Processors, (2008) 13 SCC 369 and simultaneously also referred to the judgment in the case of Union of India v. Rajasthan Spinning & Weaving Mills, (2009) (13 SCC 448) and observed that “in examining whether mens rea is an essential element of an offence created under a taxing statute, 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.”
On overall appreciation of S. 10(b) and legal position about mens rea, the Supreme Court held as under:
“In view of the above, we are of the considered opinion that the use of the expression ‘falsely represents’ is indicative of the fact that the offence u/s.10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishon-est conduct. Therefore, in proceedings for levy of penalty u/s.10A of the Act, burden would be on the Revenue to prove the existence of circumstances constituting the said offence. Furthermore, it is evident from the heading of S. 10A of the Act that for breach of any provision of the Act, constituting an offence u/s.10 of the Act, ordinary remedy is prosecution which may entail a sentence of imprisonment and the penalty u/s.10A of the Act is only in lieu of prosecution. In light of the language employed in the Section and the nature of penalty con-templated therein, we find it difficult to hold that all types of omissions or commissions in the use of Form ‘C’ will be embraced in the expression ‘false representation’. In our opinion, therefore, a finding of mens rea is a condition precedent for levying penalty u/s.10(b) read with S. 10A of the Act.”
Accordingly the Supreme Court held that mens rea was required to be satisfied before levy of penalty. The Supreme Court remitted the matters back to the adjudicating authority for fresh consideration of the issue, in light of the findings of the mens rea on part of the dealer.
