The Hindu Business Line : Discretion is key to levying penalty

If a statute invests a public officer with the authority to do an act in a specified set of circumstances, it is imperative for him to exercise the authority in a manner appropriate to the facts and circumstances of the case.

IT IS well settled that penal provisions have to be strictly construed. Adequate opportunity has to be given to the assessee for meeting the charge of concealment of income or any other offence for which penalty is attracted. Having done so, the Assessing Officer has to form an opinion whether penalty is to be levied or not. Where discretion has to be exercised on the quantum of penalty to be levied, an objective consideration must be brought to bear before the amount of penalty is decided.

Section 271(1)(a) of the Income-Tax Act, 1961, gives the IT officer the discretion to levy penalty or not . This is clear from the phrase "he may direct that such person shall pay by way of penalty... " but only if proper and adequate opportunity is accorded to the assessee. Therefore, before the authority can exercise the discretion vested in it, it is imperative for the authority to grant assessee reasonable opportunity.

So, if the explanation tendered by the assessee is ignored before the order is made, it would definitely violate the principle of natural justice. Also, it would suffer from the vice of non-application of mind.

In C.I.T. v. Scientific Chemicals (278 I.T.R. 199), the Assessing Officer issued a notice under Section 274 read with Section 271 of the Act requiring the assessee to show cause why penalty should not be imposed for late submission of the return. In the order levying the penalty, it was stated that as there was no reply from the assessee, it had no reason to offer in its defence. The Assessing Officer was, therefore, satisfied that the assessee had without reasonable cause failed to file the return in time and thereby committed default and was liable to penalty. Accordingly, penalty was levied under Section 271(1)(a) of the Act.

The assessee went in appeal before the Commissioner of Income-tax (Appeals), who allowed the appeal in part. On behalf of the assessee, two contentions were raised. First, it was urged that the assessee had filed an application seeking extension up to September 30, 1982, but the Assessing Officer failed to deal with the application. Second, it was contended that the Assessing Officer had not cared to consider the explanation tendered by the assessee despite the fact that the assessee had submitted an explanation. The assessee had also given reasons for late filing of the return. The Commissioner of Income-tax (Appeals) followed the decision of the Gujarat High Court in C.I.T. v. Gordhanbhai Jethabhai (142 I.T.R. 84), and held that the assessee had a valid reason for late filing of return as the application for extension was not responded to by the Assessing Officer. However, without dealing with the submission made on behalf of the assessee on non-consideration of the explanation tendered, the Commissioner of Income-tax (Appeals) proceeded to consider the explanation of the assessee on merits and held that the explanation, in his opinion, was not justifiable. He, therefore, confirmed the penalty for the period of default from October 1, 1982, till the date of filing of the return. The assessee went in appeal before the Tribunal, which cancelled the penalty, holding that the plea of the assessee to the effect that the penalty order was bad in law as the same was passed without application of mind, merited acceptance.

On a reference, the Gujarat High Court observed that the Supreme Court had laid down the principle in Tin Box Co. v. C.I.T. (249 I.T.R 216) that once the Tribunal found that the Assessing Officer had not given the assessee adequate opportunity of being heard, whether the assessee could have placed the evidence before the appellate authority or before the Tribunal was really of no consequence because it was the assessment order which had to be considered. The principles of natural justice take within their sweep not only the right of reasonable opportunity, but also the right of being heard.

The Gujarat High Court further held that when an authority vested with discretionary powers omits to take into consideration the explanation tendered, which had been filed in response to a show-cause notice, the order would suffer from the vice of non-application of mind. If a statute invests a public officer with the authority to do an act in a specified set of circumstances, it is imperative for him to exercise the authority in a manner appropriate to the facts and circumstances of the case. The High Court, therefore, concluded that the order of levy of penalty was in violation of principles of natural justice and suffered from the vice of non-application of mind. Thus, the penalty order was held to be bad in law.

In C.I.T. v. Auto Lamps Ltd (278 I.T.R. 32), the Assessing Officer had recorded in his order that penalty proceedings for furnishing inaccurate particulars of the income had been initiated separately. This showed that without mentioning the essential ingredients, which the Assessing Officer is obliged to record for initiation of penalty proceedings, the order was passed to initiate penalty proceedings in a routine manner, in apparent violation of the relevant provisions. The Assessing Officer failed to record the requisite satisfaction in consonance with the settled principles of law. Therefore, the order suffered from the infirmity of non-application of mind. The Commissioner (Appeals) and the Tribunal had rightly deleted the penalty.

The Delhi High Court concluded that before initiating penalty proceedings under Section 271(1)(c), the Assessing Officer has to form his opinion and record his satisfaction. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at.

In Bharat Rice Mill v. C.I.T. (278 I.T.R. 599), the Allahabad High Court held that the word "concealment" inherently carries with it the element of mens rea. Therefore, where the assessee has voluntarily disclosed the value of stock of goods in his revised return, no penalty can be imposed though such value had not been disclosed in the original return. Before concluding, it would be interesting to take note of a recent decision of the Bombay High Court in C.I.T. v. Schell International (278 I.T.R. 630). In this case penalty was sought to be levied under Section 272-A for not filing a statement under Section 285-B by a producer of cinema films. The assessee claimed that the production of film was his first and last venture. He, therefore, did not file the statement being unaware of the legal formalities. As soon as the producer got the show-cause notice, he submitted the statement.

The High Court held that though ignorance of law is no excuse, there is no presumption that every one knows the law. The High Court drew support from the observations of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh (118 I.T.R. 326) where the Court ruled: "Moreover, it must be remembered that there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law. Over a hundred and thirty years ago, Maula J. pointed out in Martindale v. Falkner ([1846] 2 CB 706): `There is no presumption in this country that every person knows the law; it would be contrary to common sense and reason if it were so... '." Relying on this passage, the Bombay High Court upheld the cancellation of the penalty order. Undoubtedly, most assessees would be delighted to take advantage of the High Court judgment, and the observations of the Supreme Court in this regard.

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