Penalties, Prosecution, Power to Arrest – Recent Amendments

Significant amendments have been made by the Finance Act, 2013 through introduction of provisions for imposing penalties on directors/ managers/etc. of a company and making certain offences cognisable thereby empowering tax authorities to arrest a person without warrant. These amendments which have far reaching implications, are discussed hereafter.

Penalty for failure to register:

Presently, u/s. 77 of the Finance Act, 1994 (‘Act’), penalty for failure to register within the due date, is the higher of the following:

? Rs. 10,000/- or

? Rs. 200/- per day during which the default continues.

Section 77 of the Act is amended with effect from 10-05-2013, to restrict the maximum amount of penalty for failure to register to Rs. 10,000/-. Though the penalty is still on the higher side, the amendment is a welcome one.

Penalty on directors, managers, secretary or other officers for certain contraventions by a company:

The Finance Act, 2011, with effect from 08-04-2011, made section 9AA of the Central Excise Act 1944 (‘CEA’) applicable to service tax. This section provides that if an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

• the company;

• every person, who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and

• any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed.

In addition to the above, a new section 78A is introduced with effect from 10-05-2013, for imposing a financial penalty upto Rs. 1,00,000/- on directors, managers, secretary or other officers in charge of the company for specified contraventions committed by a company namely :

• evasion of service tax; or

• issuance of invoice, bill or challan without provision of taxable services contravening the provisions of the Rules prescribed under the Act;

• availment and utilisation of credit of taxes/ duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the Credit Rules;

• failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due.

The aforesaid persons would be liable to penalty only if:

• at the time of such contravention they were in charge of and responsible to the company for the conduct of business; and

• they were knowingly concerned with such contravention.

The terminology “in charge of and responsible to the company for the conduct of the business of the company” has been a subject of interpretation by the Supreme Court as well as High Courts from time to time. Some judicial considerations are given hereafter:

In Girdhari Lal Gupta vs. D N Menta, Collector of Customs (1971) 3 SCR 748, it was held that, the words “in charge of” must mean in overall control of the day to day business of the company or the firm;

In State of Karnataka vs. Pratap Chand 1981 (1) FAC 374, it was observed that, a partner who was not in overall control of the day to day business of the firm could not be proceeded against merely because he had a right to participate in the business of the partnership firm under the terms of the partnership deed.

In light of the foregoing, it would appear that, whether or not a director/manager/etc. of a company was “in charge/responsible”, would depend upon the facts and circumstances of a given case. Hence, it would be very difficult to lay down specific parameters as to the precise situations under which penalty would be imposable.

In this regard, it may be noted that for the contraventions mentioned in case of evasion, issuance of bogus invoices and non-payment amount collected as service tax, such persons may also be liable to be prosecuted in terms of section 89 of the Act read with section 9AA of CEA in addition to suffering a financial penalty u/s. 78A of the Act.

Further, in the absence of a corresponding amendment in section 80 of the Act, the defense of “reasonable cause” available under the said section would not be available against imposition of penalty u/s. 78A of the Act.

Failure to pay tax collected beyond 6 months – maximum imprisonment increased from 3 years to 7 years:

Presently, failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due is a punishable offence. The quantum of punishment for this offence is increased with effect from 10-05-2013. Section 89 of the Act, as amended, prescribes the quantum of punishment separately in respect of first offence and second offence and also in cases where amount exceeds Rs. 50 lakh and other cases. The quantum of punishment for various offences as applicable from 10-05-2013 is summarised in the Table at the end:

Cognizance of offences and power to arrest:

 Amendments in brief:

Significant amendments are made with effect from 10-05-2013 by introducing provisions relating to arrest of persons for offences under the Act. These provisions are summarised hereafter :

Offences are divided into two categories viz:

• Cognisable offences i.e. where the person can be arrested without ‘warrant’; and

• Non-cognisable offences [i.e. offences other than the above].

Failure to pay tax collected beyond 6 months from the due date where the ‘amount’ exceeds Rs. 50 lakh is the only cognisable offence. All other punishable offences (viz. knowingly evading service tax, availing bogus credits, supplying false information, etc.) are non-cognisable offences.

If the Commissioner of Central Excise (‘CCE’) has reason to believe that any person has committed an offence u/s. 89 of the Act where the ‘amount’ exceeds Rs. 50 lakh he may by general or special order authorise any officer of Central Excise not below the rank of Superintendent of Central Excise to arrest such person.

Where a person is arrested for any cognisable offence, every officer authorised to arrest a person shall inform such person of the grounds of arrest and produce him before a magistrate within 24 hours.

• In the case of a non-cognisable and bailable offence, the Assistant/Deputy Commissioner, shall for the purpose of releasing an arrested person on bail or otherwise have the same powers and be subject to the same provisions as an officer in charge of a police station has, and is subject to u/s. 436 of the Code of Criminal Procedure Code, 1973 (‘CrPC”).

• All arrests shall be carried out in accordance with the provisions of the CrPC.

Some considerations under Central Excise:

Provisions relating to power to arrest have been existing under Central Excise/Customs laws. Some considerations under the said laws are set out hereafter. The same could serve as a useful guide for the purpose of the service tax.

Powers to arrest:

U/s. 13 of CEA, an Excise Officer (EO) not below the rank of Inspector, is empowered to arrest a person whom they have “reason to believe” to be liable to be punished under provisions of CEA. Such arrest can be only with prior approval of the Commissioner.

EO can arrest and inform the concerned person as to the ground of arrest. The person arrested has to be forwarded to the Magistrate and must be produced before a Magistrate within 24 hours. The Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of Court.

As per Section 50 of CrPC, a person arrested should be informed full particulars of the offence and his rights about the bail.

In Sunil Gupta vs. UOI (2000) 118 ELT8 (P&H), it was held that, even if offences under Central Excise are not cognisable, EO duly empowered u/s. 13 of CEA can arrest a person without a warrant.

However, these restrictions are only to police officers. Section 13 of CEA confers substantive powers of arrest. These powers can be exercised by a duly authorised EO without a warrant of arrest. [Refer Sunil Gupta vs. UOI (2000) 118 ELT 8 (P&H)].

Arrest can be made only as per the provisions of section 46 of CrPC. Under this section, the person making arrest shall actually touch or confine the body of person to be arrested, unless the persons submit to the custody. If he resists the arrest, all necessary means may be applied to effect the arrest. However, this does not give right to cause death of a person, unless the accused of the offence is punishable to death or with imprisonment for life.

Arresting authority should make all efforts to keep a lady constable present. But in circumstances if a lady constable is not available or delay in ar-rest would impede the course of investigation, arresting officer, for reasons to be recorded in writing, can arrest a lady for lawful reasons at any time of day or night, even in absence of a lady constable [State of Maharashtra vs. Christian Community Welfare Council 2003 AIR SCW 5524.]

EO can make enquiry even after the arrest. In Badaku Joti Savani vs. State of Mysore – AIR 1966 SC 1746, it has been held by the Supreme Court that, though EO has the powers of a police officer, he is not a “police officer” unless he has powers to lodge a report u/s. 173 of CrPC. Statements made before EO even after arrest are not hit by section 25 of the Indian Evidence Act and these statements can be used as evidence against the accused.

Procedure after arrest:

The person arrested has to be forwarded to the EO who is empowered to send the arrested per-son to a Magistrate. If such empowered EO is not available within reasonable distance, the person may be sent to officer-in-charge of the nearest police station. Superintendent of CE has been empowered for this purpose. [Section 19 of CEA].

EO of the rank of Superintendent or above will make enquiry into the charges against the person arrested. While making enquiry, he has the same powers as an officer–in–charge of a police station [Section 21(1)(b) of CEA]. If he is of the opinion that there is sufficient evidence or reasonable ground of suspicion against the accused person, he can forward the person to Magistrate for bail or custody, [Proviso (a) to Section 21(2) of CEA].

EO making arrest has powers to release a person on executing a bond with or without sureties, and make a report to his superior officer. He can do so if it appears to him that there is no sufficient evidence or reasonable ground of sus-picion against the accused person [Proviso (b) to section 21(2) of CEA]. Superintendent of CE and officers above him have been empowered for this purpose vide Notification No. 9/99-CE(NT) dated 10-02- 1999. However, if he is of the opinion that there is sufficient evidence or reasonable ground of suspicion, he shall either admit him to bail to appear before a Magistrate having jurisdiction in the case or forward him in the custody of such Magistrate [Proviso (a) to section 21(2) of CEA].

Section 20 of CEA prescribes that the police officer shall either admit him to bail to appear before a Magistrate having jurisdiction, or in default of bail, forward him in the custody of such Magistrate. The arrested person must be produced before a Magistrate within 24 hours of the arrest.

Granting ‘Bail’:

‘Bail’ means a “security for prisoner’s appearance, on giving which he is released pending trial”. If offence is ‘bailable’, grant of bail is automatic and can be given by a police officer in charge of a police station or by a Court, on bond or with-out bond. Court has no discretion in the matter. In case of non–bailable offence, accused can be released on bail, unless the offence is punishable with death or imprisonment for life, Court has discretion whether to release on bail or not in respect of non–bailable offences.

The considerations which normally weigh with the Court in granting bail in non–bailable offences are basically – (a) nature and seriousness of offence (b) character of the evidence (c) circumstances which are peculiar to the accused (d) a reasonable possibility of the presence of the accused not being secured in the trial (e) reasonable apprehension of witnesses being tampered with (f) larger interest of public or State and (g) other similar factors which may be relevant in the facts and circumstances of the case [Jayendra Saraswathi Swamigal vs. State of Tamil Nadu AIR 2005 SC 716 (SC 3 Member Bench)].

The basic rule is in favour of granting a bail ex-cept where the course of justice being affected, gravity or heinous nature of the crime, risk of non appearance at the trial, influencing or intimidation of witnesses and similar other possibilities exist [State of Rajasthan vs. Balchand AIR 1977 SC 2447].

In Chaman Lal vs. State of UP 2004 AIR SCW 4705, it was considered that Court dealing with the bail application should be satisfied as to whether there is a prima facie case, but exhaustive exploration of the merits of case is not necessary. It is necessary for the Court dealing with application for bail to consider among other circumstances, the following factors before granting bail – (a) Nature of accusation and severity of punishment in case of conviction and nature of supporting evidence (b) Reasonable apprehension of tampering the witness or apprehension of threat to the complainant (c) Prima facie satisfaction of the Court in support of the charge.

Since the words used in section 20 of CEA are “shall admit the arrested person to bail”, it was argued that the Magistrate must release the person on bail. He has no power to keep the person in judicial custody, if he gives necessary bail bond. There were divergent opinions about whether Magistrate can detain him or he must release the arrested person on bail. Finally, in Director of Enforcement vs. Deepak Mahajan (1994) 70 ELT 12 (SC) Supreme Court has held that the Magistrate has jurisdiction u/s. 167(2) of CrPC to authorise detention of a person arrested under Customs Act etc. as provisions are identical. Thus the Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of the Court.

In Sankarlal Saraf vs. State of West Bengal (1993) 67 ELT 477 (Cal), a division bench has held that power to grant bail, by necessary implication, includes power to refuse bail, Thus, Magistrate can refuse bail and order custody, police, jail or otherwise.

As per section 167 (2) of CrPC, a person can be kept in judicial custody for 60 days. If investigations are not completed within 60 days, the person arrested should be released on bail. The period is 90 days when offence is punishable with death, imprisonment for life or imprisonment of 10 years or more.

Section 438 of CrPC makes provision for “anticipatory bail”. Court should grant or refuse bail after exercising its judicial discretion wisely [Director of Enforcement vs. PV Prabhakar Rao (1997) AIR 1997 SC 3868 (3 Member Bench) – quoting Gurbaksh Singh vs. State of Punjab (1980) AIR 1980 SC 1632 (SC Constitution Bench).]

Conclusion

The amendments relating to penalties, prosecution & powers of arrest discussed above have been a subject of widespread expression of concerns by the trade & industry and the tax paying fraternity inasmuch as the provisions could be misused to cause undue harassment by the tax authorities.

In para 3 of TRU Circular No DOF No. 334/3/2013 TRU dated 28 -02-2013, it is clarified that policy wing of CBEC will issue detailed instructions in due course of time. It is felt that CBEC should issue a draft circular and seek views of trade & industry and all affected persons before finalising such instructions.
 

Table —Summary of Punishment for various offences