PENALTY:

Penalty has been held by the Courts to be a substantive levy which means that no penalty can be levied for any breach unless the law specifically provides for it. The word “penalty” has not been defined in the model Law but judicial pronouncements and principles of jurisprudence have laid down the nature of a penalty as:

• a temporary punishment or a sum of money imposed by statute, to be paid as punishment for the commission of a certain offence;

• a punishment imposed by law or contract for doing or failing to do something that was the duty of a party to do.

Any law that casts an obligation to carry out a certain act or to refrain from doing something must also provide for penal action in the event of the violation of the statutory obligation otherwise it becomes difficult to administer or enforce the law. But the penal provisions can be invoked only after serving a notice to show cause and affording an opportunity of hearing to the person proceeded against. The levy of penalty is subject to a certain disciplinary regime which is based on jurisprudence, principles of natural justice and principles governing
international trade and agreements. Such general discipline is enshrined in section 68 of the Act. Accordingly—

• no penalty is to be imposed without issuance of a show cause notice and proper hearing in the matter, affording an opportunity to the person proceeded against to rebut the allegations levelled against him,

• the penalty is to depend on the totality of the facts and circumstances of the case

• the penalty imposed is to commensurate to the degree and severity of breach of the provisions of the law or the rules alleged,

• the nature of the breach is to be specified clearly in the order imposing the penalty,

• the provisions of the law under which the penalty has been imposed and the range or quantum of penalty specified in the law for the offence alleged
to have been committed

Section 68 further specifies that, in particular, no substantial penalty is to be imposed for —

• any minor breach (minor breach has been defined as a violation of the provisions in a case where the tax involved is less than Rs.5000), or

• a procedural requirement of the law, or

• an easily rectifiable mistake/omission in documents (explained in the law as an error apparent on record) that has been made without fraudulent intent or gross negligence.

Further, wherever penalty of a fixed amount or a fixed percentage has been provided in the Act, the provisions of this Chapter shall not apply.