Madras High Court
The State Of Tamilnadu Rep. By vs Tvl.Nu Tread Tyres on 27 July, 2006
Author: A.P.Shah
Bench: A.P.Shah
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE: 27.07.2006 CORAM: THE HONOURABLE MR.A.P.SHAH, THE CHIEF JUSTICE THE HONOURABLE MR. JUSTICE D.MURUGESAN and THE HONOURABLE MR. JUSTICE R.SUDHAKAR T.C. (R) Nos.1180 of 1992 and 82 of 1997 T.C. No.1180 of 1992: The State of Tamilnadu rep. by the Deputy Commissioner of Commercial Taxes, Madras (Central) Division, Madras 6. Petitioner Vs. Tvl.Nu Tread Tyres, 45,Whites Road, Madras 14. Respondent For Petitioner :: Mr.Haja Nazirudeen, Spl.G.P. For Respondent :: M/s.Chandran, Karuppiah, Ramani T.C.No.82 of 1997: Tvl.C.S.ParthasarathyChetty Petitioner Vs. The State of Tamil Nadu rep. by Commercial Tax Officer, Vellore(Rural), Vellore. Respondent For Petitioner :: Mr.S.Sridharan For Respondent :: Mr.Haja Nazirudeen, Spl.G.P. COMMON ORDER
(Order of the Court was made by The Hon'ble Chief Justice.) The point that present itself before the Full Bench is whether mens rea is an essential ingredient for the levy of penalty under Section 10(b) of the Central Sales Tax Act, 1956 (hereinafter referred to as 'the Act').
2. The decisions of this Court under Section 10-A of the Act have not been consistent, while in some of the decisions such as State of Tamil Nadu v. Betala Industries (1993)88 STC 328, Sri Lakshmi Machine Works v. State of Madras (1973) 32 STC 407 and in Dharmapuri District Co-operative Sugar Mills Limited v. State of Tamil Nadu (1991) 82 STC 296, it was held that it was necessary to find out whether the act or omission of the assessee resulting in commission of the violations of the Act and dealt with in clauses (b), (c) and (d) of Section 10 of the Act, mens rea was present, in Vijaya Electricials v. State of Tamil Nadu (1991) 82 STC 268, Kumudham Printers (P) Ltd. v. State of Tamil Nadu (1994) 95 STC 453, State of Tamil Nadu v. C.A.Akthar and Co. (1998) 108 STC 510, State of Tamil Nadu v. Srinath Pharma (1998) 110 STC 177, Chennai Textile Chemicals Pvt. Ltd. v. State of Tamil Nadu, 2002 (125) STC 107, Bhuvaneshwari Traders v. State of Tamil Nadu (2006) 143 STC 608 it was held that there was nothing in Section 10-A of the Act which requires that mens rea must be established before penalty can be levied under that provision. Before we deal with this problem in the light of the statutory provisions we will state the material facts which have given raise to this reference.
T.C.No.82 of 19973. The assessee in T.C.No.82 of 1997 is registered under the Act as a dealer. In the registration certificate issued to the assessee he was authorised to purchase by issue of C-Forms for re-sale acids, nitrates, packing cases and other commodities for manufacture of acids, jewellery etc. The assessee purchased empty jars in the assessment year 1989-90 by using the C-Forms. The Assessing Officer noted that empty jars are specific item connected to the assessee's business of manufacture of acids, jewellery, etc. He, however, held that the items which the dealers intended to purchase and use should specifically be noted in the application and liable to be incorporated in the registration certificate, then only they should have inter-State purchases and that empty jars used for the purpose of filling the acids are different from packing cases viz., wooden, corregulated boxes etc. Consequently, the Assessing Officer imposed penalty of Rs.84,123/-. In appeal, the Appellate Assistant Commissioner held that it is an admitted fact that the appellant was permitted to purchase empty jars under the cover of C-Form with effect from 11.1.1991 only. Even prior to that date the appellant purchased empty jars under the cover of C-Form, which is an offence liable to penal action. Mens rea need not be proved under Section 10-A of the Act and therefore, as held in Vijaya Electricals's case, 82 STC 268 levy of penalty is justified. The finding of the Appellate Assistant Commissioner was confirmed by the Tribunal.
T.C.No.1180 of 19924. In this case the assessee who is a registered dealer purchased a boiler, which was required for tyre retreading business, by using C-Form certificate for availing concessional rate of tax, which item is not included in their certificate of registration. The Assessing Officer held that the assessee has purchased the boiler by misusing the C-Form certificate issued to him and therefore, levied a penalty of Rs.10,809/- under Section 10-A of the Act. In Appeal, the Appellate Assistant Commissioner held that the assessee has simply pleaded that they were in bona fide belief and faith while purchasing the goods. The assessee cannot take advantage of bona fide belief and faith and the G.O. issued by the State of Tamil Nadu when they blatantly violated the provisions of the Act. The assessee not only failed to get the commodity included in the certificate of registration but they also misused the commodity by utilising in the works contract for which purpose the C-Form cannot be issued and upheld the levy of penalty. The finding of the Appellate Assistant Commissioner was set aside by the Tribunal. The Tribunal held that the purchase of boiler even without including it in their registration certificate would not be considered as a grave mistake and the purchase of boiler by the assessee is a bona fide one and any motive cannot be attributed on the part of the assessee for such purchase and therefore, set aside the order of the Assessing Officer in respect of levy of penalty of Rs.10,809/-.
5. The Division Bench after noting the conflicting decisions deemed it fit to have these matters referred to the Full Bench.
6. Learned counsel appearing for the assessee submitted before us that mens rea is essential to attract penalty under Section 10-A of the Act. The ingredients of the offence under Section 10(b) is 'false representation' and as long as false representation is not established, penalty under section 10-A is not sustainable. It is submitted that there is nexus between the business activity of the assessee and the items purchased by issue of C-Form and as such penalty is not leviable. Merely because the belief entertained by the assessee turned out to be not proper or correct does not mean that the issue of C-Form was on the basis of a false representation.
7. In reply, learned counsel appearing for the Revenue submitted that there is nothing in Section 10-A of the Act which requires that mens rea must be proved before penalty can be levied under that provision if on facts, it is found that the assessee had made a 'false representation'. Once a finding is recorded by the competent authority that the assessee has made a false representation, that would clearly attract the provisions of section 10(b) of the Act and no further finding is required that the assessee had also mens rea.
8. Before considering the submissions of the learned counsel, it is useful to first examine the scheme of Sections 10 and 10-A of the Act.
9. Section 10 of the Act deals with penalties. It consists of seven categories of violations of the provisions of the Act and it also provides for punishment for such violation which could be simple imprisonment which may extend to six months, or with fine or with both and in case of continuing offence, a daily fine which may extend to fifty rupees for every day during which the offence continues. The violations enumerated in clauses (b), (c) and (d) of Section 10 of the Act are not necessarily to result in prosecution with the possible imposition of sentence of imprisonment or fine or both. An alternative is provided in respect of these violations in Section 10-A of the Act.
10. Section 10-A of the Act provides for imposition of penalty in lieu of prosecution. It provides that if any person purchasing goods is guilty of an offence under clause (b) or clause (c) or clause (d) of Section 10 of the Act, the authority who granted, or is competent to grant to that person a Certificate of Registration under the Act, may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one and a half times of tax which would have been levied under sub-section (2) of Section 8 of the Act in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section. The proviso (1) to section 10-A of the Act bars prosecution for an offence in respect of which a penalty has been imposed under this section. Proviso (2) to Section 10-A of the Act provides that the penalty imposed under Section 10-A(1) has to be collected in the manner provided in sub-section (2) of Section 9 of the Act. That provision provides that procedural provisions in the State Act are to be applied in respect of the Central sales tax as well, unless a different intention is disclosed in the Central Act.
11. The violations specified in clauses (b), (c) and (d) of Section 10 of the Act are the following:
(b) being a registered dealer, falsely represents when purchasing any class of goods that goods of such class are covered by his Certificate of registration; or
(c) not being registered dealer, falsely represents when purchasing goods in the course of interState trade or commerce that he is a registered dealer; or
(d) after purchasing any goods for any of the purposes specified in clause (b) or clause (c) or clause (d) of sub-section (3) or sub-section (6) of Section 8 fails, without reasonable excuse, to make use of the goods for any such purpose.
The violation of law spelt out in clause (a), clause (aa), clause (e) and clause (f) of section 10 of the Act must necessarily be dealt with by prosecuting the offender, and such offender cannot avoid prosecution by paying penalty as these violations are excluded from the purview of section 10-A of the Act.
12. Section 10(b) provides for an offence if any person being a registered dealer falsely represents when purchasing any class of goods that goods of such class are covered by his certificate of registration. Now the expression 'falsely represents' clearly shows that the element of mens rea is a necessary component of the offence. If the registered dealer honestly believed that any particular goods are embraced by the certificate of registration and under this belief makes a representation, he cannot be held guilty of the offence under section 10(b) and no penalty can be imposed under section 10-A. In Cement Marketing Co. of India v. Assistant Commissioner of Sales Tax, (1980)1 SCC 71 similar question fell for consideration under the Madhya Pradesh General Sales Tax Act, 1958. The question was whether the Assistant Commissioner of Sales Tax was right in imposing penalty on the assessee for not showing the amount of freight in the taxable turnover or in the returns. The penalty was imposed under section 43 of the Madhya Pradesh General Sales Tax Act, 1958 and Section 9(2) of the Central Sales Tax Act, 1956 on the ground that the assessee had furnished false returns by not including the amount of freight in the taxable turnover disclosed in the returns. Allowing the appeal the Supreme Court has held as follows:-
"Now it is difficult to see how the assessee could be said to have filed 'false' returns, when what the assessee did, namely, not including the amount of freight in the taxable turnover, was under a bona fide belief that the amount of freight did not form part of the sale price and was not includible in the taxable turnover. The contention of the assessee throughout was that on a proper construction of the definition of 'sale price' in Section 2(o) of the Madhya Pradesh General Sales Tax Act, 1958 and Section 2(h) of the Central Sales Tax Act, 1956, amount of freight did not fall within the definition and was not liable to be included in the taxable turnover. This was the reason why the assessee did not include the amount of freight in the taxable turnover in the returns filed by it. Now, it cannot be said that this was a frivolous contention taken up merely for the purpose of avoiding liability to pay tax. It was a highly arguable contention which required serious consideration by the Court and the belief entertained by the assessee that it was not liable to include the amount of freight in the taxable turnover could not be said to be mala fide or unreasonable. What Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 requires is that the assessee should have filed a 'false' return and a return cannot be said to be 'false' unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the Court, may, in a given case, infer deliberations and the return may be liable to be branded as a false return. But where the assessee does not include a particular item in the taxable turnover under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as a 'false' return inviting imposition of penalty. This view which is being taken by us is supported by the decision of this Court in Hindustan Steel Limited v. State of Orissa, (1969)2 SCC 627, where it has been held that "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 venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.....". It is elementary that Section 43 of the Madhya Pradesh General Sales Tax Act, 1958 providing for imposition of penalty is penal in character and unless the filing of an inaccurate return is accompanied by a guilty mind, the section cannot be invoked for imposing penalty. If the view canvassed on behalf of the Revenue were accepted, the result would be that even if the assessee raises a bona fide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the Court to be not acceptable. That surely could never have been intended by the legislature." (emphasis supplied)
13. In State of Rajasthan v. Jaipur Udyog Limited, (1972)30 STC 565 the question that arose was whether the assessee was guilty of falsely representing that the goods purchased were covered by the registration certificate. The Supreme Court expressed the view that unless it is shown that the assessee had made such a false representation section 10-A would not stand attracted. In that case, the Board of Revenue as well as the High Court had come to the conclusion that the assessee was entitled to the concessional rate which he claimed. The State disputed that decision and went before the Supreme Court. The Supreme Court said, "Assuming, without deciding, that the view taken by them (Board of Revenue and the High Court) is incorrect, even then it is impossible to say under the circumstances of the case that the respondent (assessee) was guilty of making any false representation." The view taken by the Supreme Court in that case was where there is a possibility of two view in the matter as to whether the goods purchased are covered by the registration certificate or not, the mere issue of a C form certificate by the assessee without any further circumstance or material will not lead to the conclusion that the assessee has made false representation.
14. In Hindustan Steel Ltd. v. State of Orissa, (1970) 25 STC 211, the Supreme Court dealt with a penal provision under the Orissa Sales Tax Act, 1947 and held that 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 obligation. The Court also observed that 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 a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.
15. In Sri Lakshmi Machine Works v. The State of Madras, (cited supra) a Division Bench of this Court following the decision of the Supreme Court in State of Rajasthan v. Jaipur Udyog Limited, (cited supra) has held that mere representation based on a bona fide belief will not bring an assessee within the mischief of that provision. The representation, in order to come under that provision, should be a false representation to the knowledge of the assessee. If a belief is entertained by the assessee bona fide that the goods are covered by the certificate of registration, but it ultimately turned out to be not a proper understanding of the certificate of registration or correct understanding of the same, it will not attract the provisions of Section 10(b) of the Act. The use of the word "falsely" itself implies that the person making the representation knew that the certificate of registration does not cover that item, but knowing fully well that it does not, states that it is covered. What is required plainly under section 10(b) is knowledge that the item is not covered by the certificate and the representation that it is covered by the certificate. The decision in Sri Lakshmi Machine Works cited supra was followed in State of Tamil Nadu v. Gemini Studios, (1975) 36 STC 357 and Dharmapuri District Co-operative Sugar Mills v. State of Tamil Nadu, (1991) 82 STC 296 cited supra.
16. In National Aluminium Co. Ltd. v. State of Orissa, (1994) 93 STC 529 a Division Bench of the Orissa High Court held that a penalty proceeding under Section 10A being quasi-criminal in nature, penalty will not ordinarily be imposed unless the dealer acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Thus 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 consideration of all the relevant circumstances. Where, therefore, a breach flows from a bona fide belief that the dealer is not liable to act in the manner prescribed by the statute, the assessing officer would be entitled to refuse to impose any penalty. Similarly, when a dealer is technically guilty of violation but not in conscious disregard of the provisions and acted bona fide and has no motive to escape the liability by using "C" declaration forms, no penalty should be levied. Before a penalty can be imposed, the circumstances established must reasonably point to the conclusion that the assessee concerned has consciously committed the acts or omissions which go to constitute the offence and the burden would be on the department to prove the existence of such circumstances. Thus, in a proceeding for levy of penalty under section 10-A the department must prove the existence of facts and circumstances constituting the offence in question.
17. Similar is the view expressed by the Orissa High Court in Jayshree Chemicals Ltd. v. Addl. Commissioner of Sales Tax, (1992) 87 STC 359, by the Mysore High Court in Manjunatha Tyre Retreading Works v. State of Mysore, (1969) Vol.XXIII STC 428 and by the Madhya Pradesh High Court in Commissioner of Sales Tax v. Bombay Garage, (1984) 57 STC 67.
18. Learned counsel appearing for the Revenue heavily relied upon the decision in Vijaya Electricals case, cited supra where the Bench held that, if a dealer knowing what was contained in the certificate of registration, used the "C" form declarations in respect of goods not mentioned in the certificate, the representation made by the dealer is "false". This decision seems to have been incorporated in a number of other decisions cited supra. We may mention that in Vijaya Electricals case also the Bench clearly held that to the limited extent mens rea has application in tax default cases. It was held that mens rea would stand established, if the conduct of the assessee is found to be blameworthy, within the meaning of the particular provision of the given tax statute. Where a finding is recorded on facts about the existence of the blameworthy conduct, which the Legislature has treated as an offence or a default on the part of the assessee, like the making of a "false representation", it would attract the provisions of section 10(b) of the Act and no further finding would be required to be recorded about the existence of mens rea on the part of the assessee, as it would be inherently included in the earlier finding.
19. Learned counsel for the Revenue next relied on the decision of the Supreme Court in Director of Enforcement v. M/s.MCTM Corpn. Pvt. Ltd., AIR 1996 SC 1100. That case arose out of the provisions of the Foreign Exchange Regulation Act, 1947. The question before the Court was whether existence of mens rea is a necessary ingredient for establishing contravention of Section 10 punishable under Section 23 of FERA, 1947. The High Court, while dealing with that question, opined that Section 23 is a "penal provision" and the proceedings under Section 23(1)(a) are "quasi criminal" in nature and therefore, unless "criminality" is established, the penalty provided under Section 23(1)(a) of the Act cannot be imposed on any person. Reversing the decision of the High Court the Supreme Court held that the proceedings under Section 23(1)(a) are "adjudicatory" in nature and character and are not "criminal proceedings". Mens rea is not an essential ingredient for holding a delinquent liable to pay penalty under Section 23(1)(a) of FERA, 1947 for contravention of the provisions of Section 10 of FERA, 1947 and penalty is attracted under Section 23(1)(a) as soon as the contravention of statutory obligation contemplated by Section 10(1)(a) is established. In the present case, we are concerned with Section 10(b) of the Central Sales Tax Act and what Section 10(b) requires is that the registered dealer should have made false representation and such a representation cannot be said to be false unless there is an element of deliberateness in it. Therefore, the decision of the Supreme Court under FERA has no application.
20. Learned counsel for the Revenue also relied on the decision of the Supreme Court in I.T.Commissioner, Gujarat v. I.M.Patel & Co., AIR 1992 SC 1762 where a two Judge Bench of the Apex Court held that mens rea need not be proved before imposition of penalty under Section 271(1)(a) of the Income-tax Act. The Bench, however, noted the distinction between the levy of penalty under Section 271(1)(a) as opposed to Section 271(1)(c) of the Income-tax Act and held that the former relates to the obligation of the assessee to file a return within the due date, while the latter deals with concealment where statutory obligation has been imposed requiring the assessee to file the return within the due date. Section 271(1)(a) provides that penalty may be imposed if the Income-tax Officer is satisfied that any person has, without reasonable cause, failed to furnish the return of total income and Section 276C provides that if a person wilfully fails to furnish in due time the return of income required under Section 139(1), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine. The Court noted that having regard to the provisions of Section 276(c) which speaks of wilful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established. Thus, this decision is also of no assistance to the learned counsel for the Revenue.
21. Section 10(b) of the Act provides for an offence if any person being registered dealer falsely represents when purchasing any class of goods that goods of such class are covered by his certificate of registration. The expression falsely represents clearly shows that the element of mens rea is the necessary component of the offence. In the absence of mens rea, resort to penal provision would not be proper unless it is established that the conduct of the dealer was contumacious or that there was deliberate violation of the statutory provision or willful disregard thereof. If the registered dealer honestly believes that any particular goods are embraced by the certificate of registration and on that belief makes a representation, he cannot be held guilty of the offence under Section 10(b) of the Act and no penalty can be imposed under Section 10A of the Act. The question whether the assessee acted under the honest belief is a question of fact. Therefore, in our view, mens rea is an essential ingredient for the levy of penalty under Section 10(b) of the Central Sales Tax Act, 1956. The reference is answered accordingly.
The Registry is directed to place the appeals before the appropriate Bench for disposal.
ns/sm.
[PRV/7775]