2007 (7) TMI 307 - SC - Central Excise

Supreme Court rules tax evaders can challenge mandatory penalty provision's constitutional validity under section 11AC

UNION OF INDIA Versus DHARAMENDRA TEXTILE PROCESSORS

The SC addressed whether section 11AC of the Central Excise Act requires mens rea for mandatory penalty imposition on tax evaders. The Gujarat HC had read ... Whether section 11AC of the Central Excise Act, inserted by the Finance Act, 1996, with the intention of imposing mandatory penalty on persons who evade payment of tax, should be read to contain mens rea as an essential requirement? Held that:- As in the present cases, the assessee had challenged the vires of rule 96ZQ(5). By the impugned judgment, the Gujarat High Court has read down the said rule incorporating the mens rea requirement. It is made clear that if the larger Bench takes a view to say that the penalty under the said clause is mandatory, then it would still be open to the assessee to challenge the vires of the said rule 96ZQ(5) and, therefore, in that event, the matter has to be kept before the Division Bench for passing appropriate orders. Direct the Registry to place our order in this batch of civil appeals before the hon'ble Chief Justice of India for appropriate directions. See: 3 Member bench Decision [2008 (9) TMI 52 - SUPREME COURT] Issues Involved:1. Interpretation of Section 11AC of the Central Excise Act regarding the requirement of mens rea for imposing penalties.2. Interpretation of Section 3A of the Central Excise Act and Rule 96ZQ(5) of the Central Excise Rules concerning mandatory penalties.3. Conflict between judicial precedents on the interpretation of penalty provisions under tax laws.4. Challenge to the vires of Rule 96ZQ(5) by the assessee.Detailed Analysis:1. Interpretation of Section 11AC of the Central Excise Act:The primary issue in these Civil Appeals is whether Section 11AC of the Central Excise Act, which mandates penalties for tax evasion, requires mens rea (intention) as an essential element. The Department argues that the section should be interpreted as imposing penalties for statutory offenses without discretion for the adjudicating authority. Conversely, the assessee contends that mens rea is crucial, especially since the section mentions 'intent to evade payment of duty.' The assessee draws parallels with Section 271(1)(c) of the Income Tax Act, which is similarly worded, and cites the judgment in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai, to support their argument.2. Interpretation of Section 3A of the Central Excise Act and Rule 96ZQ(5) of the Central Excise Rules:The case also involves the interpretation of Section 3A and Rule 96ZQ(5), which addresses penalties for independent processors failing to pay duty by a specified date. The Department asserts that Rule 96ZQ(5) mandates penalties equal to the outstanding duty, treating it as a statutory offense without discretion for the adjudicating authority. The assessee argues that Rule 96ZQ(5) should incorporate mens rea, particularly since it begins with 'if any independent processor fails to pay the amount of duty.' The assessee again relies on the judgment in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai.3. Conflict between Judicial Precedents:The Court acknowledges a conflict between the judgments in Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai, which suggests the necessity of mens rea for penalties under Section 271(1)(c) of the Income Tax Act, and Chairman, SEBI v. Shriram Mutual Fund & Anr., which supports mandatory penalties for statutory offenses. The Court notes that Section 271(1)(c) aims to remedy revenue loss and imposes civil liability without requiring wilful concealment, unlike prosecution under Section 276C of the Income Tax Act. The Court emphasizes that the judgment in Dilip N. Shroff's case needs reconsideration by a larger Bench due to its implications for both the Income Tax Act and the Central Excise Act.4. Challenge to the Vires of Rule 96ZQ(5):The assessee has challenged the constitutional validity of Rule 96ZQ(5). The Gujarat High Court had read down the rule to include the requirement of mens rea. The Supreme Court clarifies that if the larger Bench determines that the penalty under Rule 96ZQ(5) is mandatory, the assessee can still challenge the rule's vires, necessitating further orders from a Division Bench.Conclusion:The Supreme Court directs the Registry to place the order before the Chief Justice of India for appropriate directions, indicating the need for a larger Bench to resolve the conflicts in judicial interpretations and to address the broader implications for tax law provisions. The Court also notes that the assessee's challenge to the vires of Rule 96ZQ(5) remains open depending on the larger Bench's decision.