VIP Road Chartered Accountants Association

Every fiscal statute imposing tax, out of necessity will have to provide for sanctions for not complying with the obligation imposed under that statute. For the purpose of the compliance of the provisions of the fiscal statute, the sanction provides to deal with non compliance. These sanctions fall generally in three categories – Interest, Penalty and Prosecution.

The object of imposing interest in respect of non compliance with the provisions of the statute is based on the concept of depriving the Government of its legitimate dues by way of tax and during the period during which the State is deprived of its legitimate dues, that is, for the period during which payment of taxes is delayed.

It is simply compensatory in nature and as it is compensatory and not penal, levy of such interest is mandatory and not discretionary. As against that, to deter the person from not complying with the obligations imposed by the statute, penal provisions are provided whereunder penalty is imposed for various kinds of non compliance, particularly in respect of concealment of income. Penal provision is to deter a person against non compliance of the statutory obligations imposed. As against penal provision, provision for prosecution for dealing with major defaults are with the object to deter others from committing similar defaults and generally in a fiscal statute all these three kinds of sanctions are provided with an object of enforcing due compliance with the obligations imposed under the statute.

Penalty is not additional tax. As such penalty proceedings are different from assessment proceedings and it cannot be considered that penalty proceedings are continuation of assessment proceedings. Tax becomes payable by an assessee when it is by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute or as against that interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by it thus depriving the State of the legitimate dues. The Hon‘ble Supreme Court has clearly laid down that penalty is not additional tax, though broadly, assessment proceedings may include penalty proceedings.

Though penalty proceedings have certain characteristics of criminal proceedings, penalty proceedings in essence are not criminal proceedings. Though penalty proceedings can be called quasi criminal proceedings, the character and nature of penalty proceedings are different from those of criminal proceedings.

In the nature of things, penalty proceedings are penal in nature. Though penalty proceedings are not strictly criminal in nature, it is certainly clear that it is intended to punish. The question of whether the given provision in the statute is a penal one or not, it is sometimes not easy to comprehend. In ordinary parlance, the word "penal "may embrace penalties for avoidance of civil liabilities which do not constitute offences against the State. There is a marked distinction, as penalty proceedings are basically penal in nature and, therefore, the elementary principles of criminal jurisprudence should normally apply to these proceedings, unless there is something contrary provided in the statute by itself. Basically, the concept of presumption of innocence and the proof of burden and proving beyond reasonable doubt are normal provisions are characteristics of criminal proceedings, normally apply to penal provisions.

Just like in case of criminal proceedings, in penal proceedings also, burden of proof lies on the Department to prove that all the requisite conditions of penal provisions are fulfilled before penalty could be imposed. The burden is heavily on the Department and there is of course the presumption of innocence as penalty proceedings are quasi criminal proceedings. Only because an addition is made to income in the assessment proceedings it does not necessarily attract the liability on account of penalty.

However, penalty proceedings are not criminal proceeding in the strict sense of the term. Therefore, articles dealing with criminal proceedings are just like doctrine of double jeopardy and absence of retrospective operation of criminal offence etc. would not be applicable to penal provisions. Though they are quasi criminal in nature, penalty prosecution has serious consequences and though they are revenue in nature they cannot be equated to criminal proceedings, so as to attract provisions of Article 20 of the Constitution of India. As such, the Hon‘ble Supreme Court has held that for the same kind of default there could be penalty as well as prosecution. The same view of violating the doctrine of double jeopardy is incorporated under Article 20 of the Constitution of India. Similarly, for the same kind of default there could be different kinds of penalty. The said principle that for the same offence an assessee cannot be penalized twice, the essential principle of double jeopardy is not applicable to criminal proceedings. As such, the same act may lead to different kinds of penalties not under the same enactment but may also attract penalty under different statutes also for the same act which may lead to criminal liability under the Income-tax Act, Wealth-tax Act and Excise Act etc. Similarly, for the same default there could be interest, penalty and also prosecution. The levy of interest, penalty and prosecution for the same default may not be covered by the doctrine of double jeopardy

Criminal proceedings are normally mandatory and unless a specific provision is provided, the Officer can impose or not impose penalty. Normally, penalty proceedings are mandatory in nature

Penalty provisions impose a heavy liability on the assessee and they not being discretionary provisions, they must be strictly construed. The Court must see that the person to be penalised comes fairly and squarely as per the provisions of the statute which makes it act as a penal one, unless it falls strictly within the actual words and terms used. Penalty cannot be imposed on the alleged ground of substantially falling within the misleading, because all statutes are not pari materia. The popular and literary notion about penalty and the concepts associated with it will have to subordinate themselves to the actual words and terms used in the statute creating the penalty and laying down the procedure for its imposition. As such, both should be literally complied with, and both, substantial procedural provision with penal provisions are to be complied with before valid penalty could be imposed.

In tax there is no equity, more so in case of penalty. The principle of natural justice which normally applies to taxing provision will apply more strictly to penal provisions. Therefore, it is a fundamental requirement of law that, before the authority to impose penalty decides to do so, it must give the assessee affected a reasonable opportunity of being heard.

Proper notice as per law must be given before penalty proceedings can be initiated or continued. As such, any invalid notice or defective notice or not properly served notice could be fateful and in such cases imposition of penalty cannot be sustained as penalty proceedings imposed are quasi criminal liabilities. Normally, these provisions cannot have retrospective operation unless strictly provided by the statute.

The law which is applicable to penalty would be the normal law which was prevailing at the time of doing or not doing a particular act which leads to penal liability. The law prevailing on the date of the commission of default would be the law governing the imposition of liability which is penal liability for commission of such default. It is the basic concept of law that the act of omission or commission becomes an offence.. Only if on the date when it was committed the law in force declares that it is an offence and penalty imposable under the provisions of law ordinarily can be imposed only in accordance with law as it stood on the date of the Act giving rise to the penalty is committed.

As such, penalty like concealment would be governed by the law prevailing on the date on which the return was filed in which the true income is not disclosed. However, there are a few exceptions provided in the statute which are not governed by the above principle.

Penalty can be imposed only after completion of assessment proceedings though penalty proceedings could be initiated before completion of assessment proceedings. The actual levy of penalty should follow the assessment proceedings. The Hon‘ble Bombay High Court laid down following four propositions:

Penalty proceedings being quasi-criminal proceedings, the department must establish that the receipt in question constituted income of the assessee.
Merely because explanation given by the assessee is found to be false, it does not necessarily attract penalty.
A decision given in assessment proceedings is not binding on the authorities that try the assessee for an offence.
It is open to the Income-tax Officer in penalty proceedings to consider his own finding that the receipt constituted an income for the assessment year, but he is not bound by that finding and if, for instance, any other evidence is produced in the penalty proceedings, it would be open to him to come to a different finding.

The decision of Gokuldas’s case was followed by the Gujarat High Court in CIT vs. L.H. Vora – 56 ITR 126 (Guj). Before the Hon‘ble Supreme Court decided the issue in a series of cases starting with Anwar Ali’s case there was a difference of opinion as regards the nature of penalty proceedings as well as on the issue of burden of proof required and the relevancy and extent of relevancy of finding in the course of assessment proceedings between the various High Courts.

Imposition of penalty would be normally governed by the following principles:

Provisions dealing with penalty must be strictly construed. Penalties are to be construed within the term and language of the particular statute.
Penalty provision should be interpreted as it stands and, in case of doubt, in a manner favourable to the tax-payer. If the court finds that the language of a taxing provision is ambiguous or capable of more meaning than one, then the court has to adopt the interpretation which favours the assessee, more particularly so where the provision relates to the imposition of penalty [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192, 195 (SC) and C.A. Abraham vs. ITO ( 1961) 41 ITR 425(SC).
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 obliged, either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest or acted in conscious disregard of its obligations. Penalty will not also 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 judicially 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 (1972) 83 ITR 26(SC).
Penalty proceedings are apart and separate from assessment proceedings. An assessee 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 the assessment proceedings.
The consideration that arises in penalty proceedings are different from those in assessment proceedings. As such, the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings cannot operate as res judicata.

Penalty provisions being quasi criminal in nature, particularly in case of concealment penalty, the onus is on the Department to prove that not only all the conditions of penalty provisions are fulfilled, but also the proof that mens rea is present; i.e., conscious and deliberate violation of the provisions. It must be established by the Department that there is presence of mens rea and the onus lies on the Department to prove it. Therefore, it is for the Department to prove that a particular amount is not only income of the assessee and that the assessee has deliberately and consciously concealed the same. The burden is on the Department to prove that a particular amount is a revenue receipt. It would be perfectly legitimate to say there the mere fact that the explanation of the assessee is false, it is not necessary to give rise to the inference that the disputed amount represents concealment of income.

Though penalty proceedings are different from assessment proceedings, whatever finding is given in the assessment proceedings, it is not binding for penalty proceedings and, as such, it is quite possible for the assessee to argue that a particular amount which is treated as income in assessment proceedings is not really income; i.e., finding in the assessment proceedings regarding the taxability of a particular receipt is not binding in penalty proceedings.

The penalty proceedings being penal in nature, the assessee agreeing to offer a particular amount as income is not sufficient to penalise him on the ground of concealment. There cannot be penalty on mere agreement.

Undoubtedly there are substantial change in the statutory law imposing penalty whereby under the principles dealing with mens rea and the burden of proof, have undergone substantial changes. The amendments are quite significant whereunder the tendency is to treat penalty proceedings almost on par with assessment proceedings. However, in spite of these amendments unless there is specific statutory provisions on the contrary, the basic principles underlying penal proceedings would be applicable, even today for interpreting penal provisions under the statute.