A Dubious Interpretation of Dharmendra Textile

Three earlier posts have discussed the decision of the Supreme Court in Dharmendra Textile v. Union of India, and how two benches of the ITAT, in Pune and Bombay, have attempted to narrow down the scope of the decision. This reading down has been done in cases where the fact scenarios did not come strictly within the scope of Dharmendra, and involved a stretching of the principles laid down in the case, which these Tribunals declined to do. However, a recent decision of the Punjab and Haryana High Court, in CIT v. Sidhartha Enterprises has gone a step ahead, and if followed would mean that Dharmendra would be restricted to its own particular facts.

The case involved an appeal by the Revenue against a decision of the Tribunal deleting a penalty which had been imposed by the ITO. In filing returns, the assessee had claimed a set-off on account of capital loss against business income. Disallowing this set-off, a penalty was also imposed on the assessee in the assessment proceedings, and it was this penalty that had been deleted by the Tribunal. The basis on which the deletion was made was that there had been no concealment, and that the set-off had been incorrectly claimed on account of a mistake by the assessee’s counsel. This rationale is identical to that adopted by the Bombay ITAT in ACIT v. VIP Industries, discussed earlier, and seems to be in consonance with the decision in Dharmendra Textile.

However, on appeal, the High Court chose to decide the case on a broader interpretation of Dharmendra Textile, rather than the narrower approach adopted by the Tribunal. The Court held, “The judgment of the Hon’ble Supreme Court in Dharmendra Textile cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. What has been laid down is that qualitative difference between criminal liability under section 276C and penalty under section 271(1) ( c) had to be kept in mind and approach adopted to the trial of a criminal case need not be adopted while considering the levy of penalty. Even so, concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default and not a mere mistake”.

This seems to be in conflict with the decision in Dharmendra Textile. In overruling Dilip Shroff, Dharmendra Textile had stated that s. 271(1)(c) is only a civil liability. In Kanbay Software, the Pune ITAT held that the same liability can be both civil and penal in nature, and that 271(1)(c) did not cease to be a penal liability just because of the decision in Dharmendra. However, both Kanbay Software and VIP Industries do not directly conflict with Dharmendra on the requirement of mens rea, and suggest that the burden of proof is on the assessee. By stating that mere mistake is insufficient for s. 271(1)(c), the Court in Sidhartha Enterprises seems to have departed from even these decisions narrowing Dharmendra. While on the facts of Sidhartha Enterprises, the decision is justified since the incorrect set-off meant that there had been no disclosure (in keeping with the decision in VIP Industries), this requirement of mens rea seems to be a departure from Dharmendra Textile.

While the decision as it stands today must be considered to conflict with Dharmendra, the outcome of a possible appeal to the Supreme Court would of great interest to tax practitioners, since it would provide the Apex Court an opportunity to explain precisely the scope of Dharmendra Textile, in light of the numerous lower Court decisions that have diluted it.

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  • It is really difficult to reconcile this decision with Dharmendra Textiles and even Kanbay or VIP Industries. It will be quite interesting to see what is the take of Tribunal benches on this HC decision and how will they reconcile it with Dharmendra Textiles on one hand, and with Kanbay on the other.

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