Supreme Court Held That Mens Rea Is Not An Essential Element In The Matter Of Imposition Of Penalty Under Section 78(5) Of The Income Tax Act And Sections 45 And 47 Of The Act Make It Clear That Penalties And Interest Are Levied If Certain Eventualities Occur

Case title

State of Gujarat and Anr Vs. M/s Saw Pipes Ltd. (Jindal Saw Ltd.)   

Date of Order

April 17, 2023

Bench

Hon’ble Justice M.R. Shah

Parties

Appellants-State of Gujarat and Anr

Respondent- M/s Saw Pipes Ltd. (known as Jindal Saw Ltd.)   

SUBJECT:

• The State of Gujarat, feeling vindicated and dissatisfied with the impugned judgment and order dated 04.08.2016 issued by the High Court of Gujarat in Ahmedabad in Tax Appeal No. 1283/2006, by which the Division Bench of the High Court set aside the penalty and interest imposed under subsection (6) of Section 45 of the Gujarat Sales Tax Act, 1969 (hereinafter referred to as the Act, 1969), has petitioned the Supreme Court to review the judgment and order.

IMPORTANT PROVISIONS

Subsection (6) of Section 45 of the Gujarat Sales Tax Act, 1969.

Income Tax Act, 1961-

• Section 45 of the Income Tax Act, 1961: This section deals with the capital gains tax on the transfer of a capital asset. It lays down the rules for the calculation of capital gains and specifies the tax rates applicable to different types of capital assets. It also provides for exemptions and deductions from capital gains tax.
• Section 47 of the Income Tax Act, 1961: This section lists out the transactions which are not considered as a transfer and hence, are not liable to capital gains tax. It includes transfers between holding companies and their subsidiaries, transfers due to a merger or amalgamation, and transfers made under a gift or will.
• Section 45(5) of the Income Tax Act, 1961: This sub-section deals with the situation where the consideration for a capital asset is determined in a way other than cash. It lays down the rules for the calculation of capital gains in such cases.
• Section 45(6) of the Income Tax Act, 1961: This sub-section provides for the levy of a penalty in case of non-payment of capital gains tax. The penalty can be up to 50% of the tax payable.
• Section 47(4A) of the Income Tax Act, 1961: This sub-section provides for the levy of interest on the unpaid capital gains tax. The interest is calculated at the rate of 1% per month or part thereof.

OVERVIEW:

• The State of Gujarat has filed an appeal as they are unhappy and dissatisfied with the judgment and order issued by the High Court of Gujarat at Ahmedabad on 04.08.2016 in Tax Appeal No. 1283/2006. 
• The Division Bench of the High Court overturned the penalty and interest imposed under sub-section (6) of Section 45 of the Gujarat Sales Tax Act, 1969 (referred to as the Act, 1969).
• The company being referred to as the respondent and assessee is involved in the business of coating pipes with coal tar and enamel. They have chosen to pay lump-sum tax under Section 55A of the Gujarat Sales Tax Act, 1969. 
• The respondent has paid tax at a rate of 2% on sales related to the coating of pipes by considering it as a civil works contract according to Entry-1 of the notification dated 18.10.1993 issued by the Government of Gujarat. However, the Assessing Officer (AO) disputed this and issued an order on 30.03.2005 for the assessment year (AY) 2002-03 stating that the contract of coating pipes is not a civil works contract. 
• Therefore, the composition amount is not payable at the rate of 2% as paid by the respondent. Instead, it falls under the Residuary Entry of the notification dated 18.10.1993.

ISSUES RAISED:

Whether while imposing/levying penalty and interest leviable under Section 45(6) and Section 47(4A) of the Act, 1969, mens rea on the part of the assessee is required to be considered

ARGUMENTS ADVANCED BY THE APPELLANT:

• The decisions cited by the respondent's counsel are not relevant to the present case when considering Section 45 and Section 47 of the Act, 1969.
•  The language used in the provisions considered in those decisions is distinct from the language used in Section 45 and Section 47 of the Act, 1969. 
• For instance, in Dharamendra Textile Processors case, Section 11AC of the Central Excise Act was considered, which uses words such as "fraud," "collusion," and "wilful misrepresentation," which require mens rea. 
• Therefore, this decision cannot be applied while interpreting Section 45 and Section 47 of the Act, 1969. Similarly, the Pepsi Foods Ltd case decision will also not be helpful to the respondent's case.

ARGUMENTS ADVANCED BY THE RESPONDENT:

• The respondent's lawyer, Shri V. Lakshmikumaran, is strongly opposing the present appeal on behalf of the assessee-dealer. He argues that the penalty and interest are not payable by the assessee as per the facts of the case. 
• The lawyer claims that the penalty clause applies only when the differential tax liability (the difference between tax assessed and tax paid) is greater than 25%, and the assessee claims that the differential tax due on merits is less than 25%. 
• However, for the sake of argument, the 25% criterion is assumed to be met.
• The lawyer further argues that the quantum of tax demand is not correct, even if the same was not pressed before the High Court, and Section 45(5) of the Gujarat Sales Tax Act, 1969 creates a rebuttable presumption. 
• He states that to impose a penalty under Section 45(6) of the Act, mens rea (a guilty mind), blameworthy conduct, deliberate violation, evil doing, fraud, or suppression (either one or more of them) must be proven. 
• He adds out that while Section 45(6) of the Act specifies an upper maximum for imposing a punishment, no minimum penalty is specified, implying that in appropriate circumstances where there is no mens rea, the authority has the option to impose no penalty.
• If the dealer's claim for payment of the 2% composition amount is denied, the lawyer contends that the dealer may be required to pay the tax on the real worth of items included in the execution of a works contract.
• In this scenario, the additional tax payable would be less than 25%, and hence, the provision for penalty will not be attracted. He states that no interest is payable under Section 47(4-A) of the Gujarat Sales Tax Act, 1969.
• The lawyer claims that the imposition of a penalty under Section 45(6) of the Act is conditional on the dealer's obligation to pay tax. Thus, in case there is a dispute regarding the imposition of the penalty under Section 45(6), it becomes necessary to determine if the dealer is liable to pay additional tax. 
• This view would remain unchanged even if the legality of the tax was not challenged in the High Court.
• The lawyer argues that the respondent can, in an appeal filed by the opposite party, recanvass for the reversal of a finding reached against him in the judgment. He cites the court’s decisions in J.K. Cotton Spg. and Wvg. Mills Co. Ltd. Vs. CCE; (1998) 3 SCC 540 and BHEL Vs. Mahendra Prasad Jakhmola; (2019) 13 SCC 82. 
• He also relies on the decision of the Gujarat High Court in the case of Elecon Engineering Vs. State of Gujarat; (1994) 93 STC 397. He claims that advocates cannot give up legal rights or enter into illegal agreements. As a result, any legal concession made by either counsel would not bind the parties.
• Finally, he argues that in the present case, the dealer's advocate did not press the issue of demand on merits since the penalty and interest were proposed to be waived by following the decision in the case of Brooke Bond India Limited (supra). 
• If the judgment of the High Court is proposed to be reversed, the penalty cannot be imposed.

JUDGEMENT ANALYSIS:

• Upon a reasonable interpretation of Section 45 of the Act, it can be observed that according to sub-section (2), a penalty is imposed if the Commissioner believes that a dealer has concealed information about a transaction or provided inaccurate information about a taxable transaction. 
• In this particular case, it cannot be concluded that the dealer has hidden information or given incorrect details about a taxable transaction. However, with regard to the penalty imposed under sub-section (6) of Section 45 of the Act, 1969, it is a statutory penalty, and the Commissioner has no discretion in deciding whether or not to impose it. 
• According to sub-section (5) of Section 45, if the amount of tax assessed or re-assessed exceeds the amount already paid by the dealer for a particular period by more than 25%, the dealer is deemed to have failed to pay the tax to the extent of the difference between the assessed amount and the amount paid. In such a case, a penalty not exceeding one and one-half times the difference mentioned in sub-section (5) will be levied on the dealer. 
• Therefore, in this situation and on the difference of tax as per sub-section (5) of Section 45, the respondent-dealer will be liable to pay the penalty mentioned under sub-section (6) of Section 45
• Section 45 of the Act empowers the imposition of penalty in specific circumstances. The penalty levied under Section 45(1)(a)(b) is distinct from the assessment. 
• However, penalty under Section 45(5) and (6) is directly linked to the order of assessment and tax liability determination. If a dealer is assessed or re-assessed for any period under Section 41, 44, or 50, and the tax assessed or re-assessed exceeds the tax already paid by more than 25%, they will be deemed to have failed to pay the tax to the extent of the difference. 
• According to Section 45(6), if a dealer is deemed to have failed to pay tax under Section 45(5), a penalty not exceeding 1.5 times the difference will be imposed. 
• Therefore, it is clear from a plain reading of Section 45(5) and (6) that the penalty is an integral part of the assessment and shall be levied automatically on the difference between the amount of tax paid and payable as per the assessment or re-assessment order, and the penalty will be imposed when the difference exceeds 25% of the tax paid.
• According to Section 45(6) of the Act, the penalty that can be imposed is a statutory penalty because it uses the phrase "shall be levied." If a dealer is deemed to have failed to pay the tax to the extent mentioned in sub-section (5) of Section 45, a penalty not exceeding one and one-half times the difference referred to in sub-section (5) shall be levied on the dealer.
•  Sub-section (5) states that if the tax assessed or reassessed exceeds the tax already paid by the dealer for a period by more than 25% of the amount of tax paid, the dealer is deemed to have failed to pay the tax to the extent of the difference between the amount assessed or reassessed and the amount paid. 
• Therefore, the penalty is automatic as soon as it is found that a dealer is deemed to have failed to pay the tax to the extent mentioned in sub-section (5).
• Additionally, the assessing officer has no discretion to levy a penalty that is lesser than what is mentioned in Section 45(6) of the Act, and there is no need to consider any mens rea on the part of the dealer/assessee.
• At this point, some rulings of this court and the Gujarat High Court about imposing penalties and interest under the Gujarat Sales Tax Act need to be referenced. In the Dharamendra Textile Processors case, it was noted that when the term "shall be leviable" is used, the adjudicating authority has no discretion. In the Shriram Mutual Fund case, it was held that mens rea is not necessary for contravention of the provisions of a civil Act. 
• The penalty is imposed as soon as the contravention of the statutory obligations is established, and the intention of the parties committing such violation is irrelevant. 
• This Court disagreed with the Tribunal's reliance on the Hindustan Steel Ltd. case, which pertained to criminal/quasi-criminal proceedings and observed that the proceedings under the SEBI Act are not criminal/quasi-criminal. 
• The Court held that the imposition of civil liabilities under the SEBI Act and the Regulations does not require mens rea, and the penalty is attracted as soon as the contravention of the statutory obligation is established. 
• The intention of the parties committing such violation becomes wholly irrelevant, and a breach of civil obligation that attracts a penalty in the form of a fine would immediately attract the levy of penalty, regardless of whether the contravention was intentional or not. 
• The language of the statute does not indicate the need to establish mens rea, and once the contravention is established, the penalty is to follow.
• In the case of Guljag Industries, the court considered the Rajasthan Sales Tax Act, which allowed for penalties for possession or movement of goods in violation of the law, or for submission of false documents. 
• The court observed that the existence of "mens rea" (a guilty mind) is usually required for an offense, but this presumption can be overturned by the wording of the statute or subject matter it deals with. Penalties for tax delinquency are considered civil obligations, and are different from penalties for a crime. 
• The court then referred to the decision in the case of Shriram Mutual Fund, where it was held that mens rea is not essential for contravention of the provisions of a civil act. 
• The breach of a civil obligation that attracts a penalty under the law would immediately attract the levy of the penalty, regardless of whether the contravention was made with any guilty intention. 
• The court further held that, unless the language of the provision intends the need to establish mens rea, it is generally sufficient to prove the default/contravention in complying with the statute. 
• In the present case, the hearing is only to find out whether the assessee has contravened Section 78(2) and not to find out evasion of tax, which is assigned to the assessing officer in assessment proceedings. 
• Therefore, the court concluded that mens rea is not an essential element in the matter of imposition of penalty under Section 78(5) of the Act.
• To begin with, regarding the arguments presented on behalf of the respondent, dealer, and assessee that they should not be liable to pay the tax at the rate of 12%, and that it was a mistake on the authority's part to prove the difference of more than 25%, and the concession was incorrectly given by the Senior Advocate representing the respondent before the High Court - it should be noted that the Senior Advocate consciously decided not to press the issue of the liability to pay the tax at the rate of 12%, before the High Court. 
• The respondent-dealer was represented by a very senior advocate before the High Court, and hence, it cannot be said that the concession was wrongfully given. 
• The High Court recorded the submissions made by the learned Senior Advocate, appearing on behalf of the respondent-dealer, and the same were noted. 
• The High Court noted that the Senior Counsel had conceded that looking at the fact that the respondent has passed the assessment order based on the material available with them, they were required to pay the tax at the rate of 12%, which has been paid by the appellant since the expert's opinion was unfavorable.

CONCLUSION:

• The Competition Commission of India, in the case of a penalty under Section 43A of the Competition Act, 2002, stated in paragraphs 34 to 37 that the market purchases were part of the same transaction and therefore subject to penalty, regardless of subsequent changes in the law. 
• The Commission rejected the argument that there were no mala fides on the part of the respondent and stated that mens rea was not an essential element for levy of penalty under Section 43A. 
• The Commission cited SEBI v. Shriram Mutual Fund and held that a penalty is attracted as soon as the contravention of the statutory obligations is established and that the intention of the parties committing the violation becomes immaterial. 
• The Commission clarified that penalty under Section 43A is for breach of a civil obligation and not a criminal or quasi-criminal proceeding, and that the only discretion in the provision is with respect to the quantum of penalty.
• The Gujarat High Court has consistently held that penalty levied under Section 45(6) of the Act, 1969 is mandatory and statutory, and there is no need to prove mens rea (intent) on the part of the assessee. 
• In the case of Arcelor Mittal Nippon Steel India Limited, the Court held that the language used in Section 45 is precise, plain and unambiguous, and the penalty shall be levied on the occurrence of any eventuality mentioned in Section 45(5). 
• The Court cannot read anything into a statutory provision which is plain and unambiguous. The penalty shall be levied as mentioned in sub-section (6) of Section 45, and the dealer shall be liable to pay the penalty not exceeding one and one-half times of the difference of the tax as mentioned in sub-section (5) of Section 45 of the Act, 1969.
• Given the circumstances and a strict interpretation of Section 45 and Section 47 of the 1969 Act, it can only be concluded that the penalties and interests imposed under these sections are mandatory and have no room for discretion by the Commissioner/Assessing Officer, except as stated in Section 45(6) and Section 47 of the Act. It is important to note that this interpretation is based on the language used in Sections 45 and 47 of the Act.
• Regarding the reliance on the Hindustan Steel Ltd. case by the respondent's counsel, it should be noted that the tribunal found no evidence to support the respondent's belief that they only needed to pay tax at a rate of 2%. 
• Based on a reading of Sections 45 and 47 of the Act, it is clear that penalties and interest are levied if certain eventualities occur. 
• The High Court's judgment that the respondent was under a bonafide belief that they only needed to pay tax at a rate of 2% and had already paid the tax is not valid was upheld by the Supreme Court.
• SC held that “These grounds do not justify the deletion of the penalty and interest that are leviable under the Act. In the case of Shriram Mutual Fund, this Court distinguished the Hindustan Steel Ltd. case and set aside the order passed by the Tribunal that was relying on the Hindustan Steel Ltd. Case”