(1) No officer under this Act shall impose any penalty for minor breaches of tax regulations or procedural requirements and in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence.
Explanation. – For the purpose of this sub-section –
(a) a breach shall be considered a ‘minor breach’ if the amount of tax involved is less than five thousand rupees.
(b) an omission or mistake in documentation shall be considered to be easily rectifiable if the same is an error apparent on the face of record.
(2) The penalty imposed under this act shall depend on the facts and circumstances of each case and shall be commensurate with the degree and severity of the breach.
(3) No penalty shall be imposed on any person without giving him an opportunity of being heard.
(4) The officer under this Act shall while imposing penalty in an order for a breach of any law, regulation or procedural requirement, specify the nature of the breach and the applicable law, regulation or procedure under which the amount of penalty for the breach has been specified.
(5) When a person voluntarily discloses to an officer under this Act the circumstances of a breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the officer under this Act, the proper officer may consider this fact as a mitigating factor when quantifying a penalty for that person.
(6) The provisions of this section shall not apply in such cases where the penalty specified under this Act is either a fixed sum or expressed as a fixed percentage.
Introduction
While penalties are not new in tax laws, this section lays down certain guiding principles to ensure tax administration can be held accountable to the tax paying citizen. It is salutary that such well-reasoned ‘general disciplines’ relating to penalty are provided in the Act.
Analysis
Guideline for imposing penalty is one of the highlights of this progressive tax legislation. Courts have, for long, addresses the presence of circumstances surrounding the instance of – non-payment of tax now admitted – for the imposition of penalty. Now, a section proving guidance on ‘how’ and ‘when’ – to impose or refrain from imposing penalty – is salutary. The following guiding disciplines in certain circumstances apply to substantial penalties:
(a) No penalty can be imposed where the tax involved is less than ` 5,000/- (minor breach) or in case of documentation errors apparent on the face of record which is easily rectifiable and made without fraudulent intent or gross negligence.
(b) When penalty is still liable to be imposed, the next safety as laid down is to inquire into the degree and severity of the breach to proceed with imposition of penalty. In these cases, if the facts do not demand imposition of penalty, restraint is advised. However, no such discretion is provided in the section while providing for amount of penalty.
(c) Person liable to penalty must be given an opportunity of being heard. Further, a speaking order should be passed for imposing such penalty. The officer must provide explanation for levy of penalty and the basis on which penalty is quantified.
(d) Voluntary disclosure by a person to an officer (not merely in his own books and records) about the circumstances of the breach prior to the discovery of the breach by the officer may be considered as a mitigating factor for quantifying of penalty.
(e) Cases involving fixed sum or fixed percentage of penalty are excluded
General notes
The nature of penalty and the principles governing imposition of penalties as held by the Courts would be a guiding factor. There are no infallible tests in law which would guide the provisions relating to levy of penalties. Penalties can or may be levied depending on the facts and circumstances of each case. The guiding principles laid down by Courts can be summarised as follows:
1. Provisions of penalty must be strictly construed and within the term and language of the statute.
2. Penalty provision should be interpreted as it stands and, in case of a doubt it should be in a manner favourable to the taxpayer. If the language of a taxing provision is ambiguous or capable of having more than one meaning, one has to adopt the interpretation favouring the assessee. (CIT Vs Vegetable Products Ltd., (88 ITR 192 (SC)).
3. 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 person either acted deliberately in defiance of law or was guilty of conduct, dishonest or acted in conscious disregard of his obligations. Penalty need not 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 judiciously 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 the belief that the offender is not liable to act in the manner prescribed by the statute. (Hindustan Steel Ltd., vs State of Orissa 25 STC 210).
4. Penalty proceedings are apart and separate from assessment proceedings. A person is entitled to adduce any evidence, which he had adduced or not in the assessment proceedings and such evidence has to be duly considered by the authorities. The assessee is also entitled in the penalty proceedings to take up new pleas, which he had not taken up in the course of assessment proceedings.
Doctrine of mens rea
Non-compliance of law under a genuine belief or without a guilty mind should not generally invoke penalties. This view is by and large accepted by the Courts. For instance, in the case of Modi Spinning and Weaving Mills (16 STC 310 ) the Supreme Court held that “as the assessee bonafide thought that the lift purchased by them would be included in category (b) as well as category (c) of the certificate of registration and as neither the Assessing Officer nor the Appellate Assistant Commissioner had given any finding that the assessee did not or could not have entertained any bonafide doubt and therefore the offence committed, would not attract any penalties.
There is a clear distinction between a representation, which is negligent, and one, which is fraudulent. Normally a section requires that the representation must have been made falsely i.e., without any belief in its truth. A representation, however negligent is not necessarily fraudulent.
Comparative review
Finance Act, 1994 vide section 80, provided for waiver of penalties in cases where the assessee was able to prove that there was a reasonable cause of failure. The same was deleted with effect from 14.05.2015.
Issues and Concerns
The applicability of general disciplines relating to levy of penalties prescribed under this section has limited field of operation since sub-section (6) of section 126 clearly specifies that the general disciplines are not applicable whereever the penalty specified under this Act is either a fixed sum or expressed as a fixed percentage.