Earlier posts here have considered the issue of whether the penalty under section 271(1)(c) of the Income Tax Act, 1961 is a criminal, quasi-criminal or civil liability, which in turn has implications on whether mens rea is needed for awarding penalty under the section. The Supreme Court had held in Dilip Shroff that mens rea is needed for the non-disclosure of penalty to result in penalty, but this was subsequently overruled by the Court in Dharmendra Textiles. This was followed by decisions of some High Courts and Tax Tribunals narrowing the applicability of Dharmendra Textile to facts, making it possible that a subsequent consideration of the issue by the Supreme Court may reverse the position again.
However, having been presented with the opportunity in CIT v. Atul Mohan Bindal, the Supreme Court has specifically reaffirmed Dharmendra, holding that the penalty is a civil liability, and hence no mens rea is required under the provision. The Court held-
A close look at Section 271(1) (c) and Explanation (1) appended thereto would show that in the course of any proceedings under the Act, inter alia, if the Assessing Officer is satisfied that a person has concealed the particulars of his income for furnished inaccurate particulars of such income, such person may be directed to pay penalty. The quantum of penalty is prescribed in Clause (iii). Explanation 1, appended tosection 271(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating the same and material to the computation of his total income has been disclosed by him, for the purposes ofSection 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in Section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.
It had been discussed earlier that the issue before the Court in Dharmendra Textiles was section 11AC, Central Excise Act, and not section 271(1)(c), Income Tax Act. On this basis, there was scope for the argument that the finding on section 271(1)(c) was obiter and could be departed from. However, after the decision in Bindal, this line of argument has been unquestionably foreclosed, and the nature of penalty under section 271(1)(c) is now a strict civil liability, with no requirement of mens rea. A summary of the decision is available here.
“Explanation 1, appended to section 271(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating the same and material to the computation of his total income has been disclosed by him, for the purposes of Section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in Section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.”
To my mind, the view taken in Dharmendra’s case, which now stands reaffirmed, needs to be unanimously commended to be a landmark judgment in its profound sense; also, as the most pragmatic and down to earth view, of the few such or similar rulings our courts have handed down in recent times.
The concept of ‘mens rea’, which is a highly nebulous one, may be considered to be, or may continue to be believed to be, of relevance to ‘crimes’ as envisaged under the Indian Penal Code; certainly not for ‘offences’ such as those falling under inter alia the category of – ‘economic offences’ –and covered under any of the other statutory laws – e.g. besides income tax law, the company law, the law on foreign exchange, etc.
A close look at, and an incisive application of mind to, the very crucial words used in the lately appended Explanation (highlighted above), – which in the nature of things are too shallow to be regarded, or believed, to be amenable to a ‘subjective’ scrutiny or a decisive conclusion, – should enable one to readily realize, without any reservation whatsoever, that any such matter should be approached and appreciated having regard to the ‘changed’ or ‘increasingly changing’ times / world we live in today. The point made will be appreciated better, if one is conscious of / keeps in mind the reality that, – in today’s scenario, even the age old legal expressions like – “to the best of my knowledge and belief’” (still being used in any ‘declaration’- for say, income tax purpose), and “I do hereby swear in the name of …and state on oath as …” (used in an ‘affidavit’ or the like) have totally lost their true meaning and legal significance to such an extent that it is high time that a rethinking on the validity of continuing to use them any longer is warranted.
vswaminathan
The last para of the judgment seems to sugges otherwise by its refernce to Dharmendra and Rajasthan Spinning and Weaving Mills.
"On this basis, there was scope for the argument that the finding on section 271(1)(c) was obiter and could be departed from"
Technically true in common law jurisdictions; but the obiter of the Indian Supreme Court is binding on all lower Courts – some SC decision says so; will give citation later is necessary. So merely saying that the observations on 271 were obiter would not be sufficient to deviate from the observations.
But your point is well made – getting around Dharmendra is much harder now.
What about the line of High Court and tribunal decisions reading down Dhrmendra; are they impliedly overruled or anything? (Kanbay, VIP etc)
@ anonymous-
You are right in saying that obiter observations of the Supreme Court are binding on lower Courts (HM Seervai also makes that argument in his book on Constitutional Law). What I meant by pointing out that the line was obiter was not that lower courts could depart from Dharmendra on that ground, but only that subsequent benches of the Supreme Court need not have felt themselves bound. This is why the decision mentioned in the post seems to put the question beyond doubt.
Regarding the decisions which read down Dharmendra, none of the them are cited by the Court, which only briefly discusses the issue. However, the effect on the decisions would depend on the way in which they read down Dharmendra. For instance, the Punjab and Haryana High Court, in CIT v. Sidhartha Enterprises held that Dharmendra had not changed the interpretation of section 271(1)(c), and that deliberate default and not a mere mistake was still needed. This decision would clearly have to be considered as being impliedly overruled. Also, Kanbay suggested that Dharmendra only affected questions of burden of proof, and not the substantive interpretation of section 271(1)(c). This would also have to considered as being impliedly overruled. On the other hand, decisions like VIP Industries, which only held that incorrect deductions, from income which was declared, is not non-disclosure, and does not attract section 271(1)(c). In my view, this would not be overruled, since it pertains not to the mens rea requirement, but to the issue of what is to be considered non-disclosure.