The Hindu Business Line : Softening of penal provisions

A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws.

H. P. Ranina

In the Income-tax Act, 1961, there are several provisions for levy of penalty. Provisions dealing with penalty must be strictly construed. 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 either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest or acted in conscious disregard of his obligation. Penalty wil l also not be imposed merely because it is lawful to do so.

Even if a minimum penalty is prescribed, the authority competent to impose 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.

Section 269-SS lays down the mode of taking and accepting certain loans and deposits. After the insertion of the section, no person should take or accept from any other person any loan or deposits otherwise than by an account payee cheque or account payee bank draft if the amount is Rs 20,000 or more. Section 271-D deals with imposition of penalty for failure to comply with the provisions of section 269-SS.

‘Reasonable clause’

Section 273-B provides that no penalty shall be imposed if the assessee proves that there was reasonable cause for the failure.

The words ‘reasonable cause’ have not been defined under the Act but they could receive the same interpretation that is given to the expression ‘sufficient cause.’ Therefore, in the context of the penalty provisions, the words ‘reasonable cause’ would mean a cause that is beyond the control of the assessee.

This section starts with a non obstante clause and provides that notwithstanding anything contained in the several provisions enumerated therein, no penalty is imposable for any failure referred to in these provisions, if the assessee proves that there was ‘reasonable cause’ for the failure (I.T.O. v. Nanak Singh (257 I.T.R. 677); C.I.T. v. Manoj (260 I.T.R. 590)).

Initial burden on assessee

The effect of this section is to cast the initial burden on the assessee to prove that he had a reasonable cause for the failure referred to in the various sections. Thereafter, the officer has to consider whether the explanation offered by the assessee or other person as regards the reason for failure was on account of a reasonable cause, and non-consideration of assessee’s explanation would vitiate the order (C.I.T. v. Capital Electronics (261 I.T.R. 4)).

In Woodward Governor India P. Ltd. v. C.I.T. (253 I.T.R. 745), the Court considered the meaning of ‘reasonable cause’ and held: ‘“Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as probable cause. It means an honest belief founded upon reasonable grounds…..”’. (Azadi Bachao Andolan v. Union of India (263 I.T.R. 706).

The ‘reasonable cause’ must necessarily have a relation to the failure on the part of the assessee to comply with the requirement of the law; thus, in cases where the cause shown explains a part of the delay, or only mitigates the gravity of the non-compliance, such a clause cannot be treated as being good cause for the whole of the period of the delay (Kalakrithi v. I.T.O. (253 I.T.R. 706)).

“Reasonable cause” obviously means a cause that prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides. Before imposition of penalty under section 271-D, the Assessing Officer must be satisfied, not arbitrarily but judiciously, that the assessee has, without reasonable cause, failed to comply with the provisions.

Court finding

The point was considered by the Jharkhand High Court in OMEC Engineers v. C.I.T. (294 I.T.R. 599). The facts in this case were that the assessee was a firm carrying on contract business. The assessee received Rs 2,000 or more in cash from 11 persons between February 14, 1993 and November 10, 1993, amounting to Rs 5 lakh.

The return filed by the assessee was accepted under section 143(3) of the Income-tax Act. After the assessment was made, a penalty proceeding under section 271-D of the Act was initiated by the assessing authority for receiving and accepting those deposits in violation of the provisions of section 269-SS of the Act. In compliance with the notice issued by the assessing authority, the assessee submitted its explanation stating, inter alia, that the assessee was in urgent need of money for payment to the labourers and sufficient cash was not available; therefore, it received deposits from different persons in cash. The assessee further stated that its return was finally accepted under section 143(3) of the Act and no loss of revenue was found. The Deputy Commissioner of Income-tax imposed penalty and this was upheld by the Tribunal.

On a reference, the Jharkhand High Court held that there was no finding of the assessing authority, the appellate authority or the Tribunal that the transaction entered into by the assessee in breach of the provisions of section 269-SS was not a genuine transaction. On the contrary, the return filed by the assessee was accepted after scrutiny under section 143(3) of the Act.

Further, there was no finding of the appellate authority that the transaction in breach of the aforesaid provisions made by the assessee was mala fide and with the sole object to conceal money. Consequently, penalty imposed under section 271-D merely on technical mistake committed by the assessee, which had not resulted in any loss of revenue, was harsh and could not be sustained in law.

Relying on cardinal principle

In coming to this conclusion, the High Court relied on one of the cardinal principles of the English criminal law, which is expressed in the maxim actus non facit reum, nisi mens sit rea, that is, a person cannot be convicted and punished in a proceeding of a criminal nature unless it can be shown that he had a guilty mind.

In C.I.T. v. Bengal Iron Galvanising Works (165 I.T.R. 249), a Bench of the Calcutta High Court while considering the provisions of section 271(1)(c) following the decision of the Supreme Court in case of Hindustan Steel Ltd‘s case (83 I.T.R. 26), observed that it is not mandatory under section 271 that a penalty must be imposed in every case.

The aforesaid judgments throw considerable light on the circumstances in which penal provisions can be invoked.

The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in