BONAFIDE MISTAKES Vs. PENALTY UNDER SECTION 74. PART-2

[Sadanand Bulbule]

1. The GST regime provides for “audit” under Section 65 to protect the interest of the revenue. There is no second thought about it and it is an integral part of tax administration since ages to ensure that the compliance of law is in its place. There is a bag of penal provisions for the offences committed under the Act. Section 122 deals with the issue of imposition of penalty for certain offences.  It is equally significant to note that, in terms of explanation attached to Section 74, all the penal proceedings under Section 122 & 125 are deemed to be concluded once the penalty is imposed under Section 73 or 74 as part of adjudication proceedings.

2.As already stated in my earlier article dated 29/04/2022, the Audit Officers impose penalty on the ground that the particulars furnished in the monthly returns coupled with the financial statements contain inaccurate details as regards to the actual tax liability. And the presumption is drawn in the matter for violation of law by not furnishing the accurate details in question. The audit officer normally does not consider the factual aspect of the matter before holding that there is violation of law. The records produced by the taxpayer himself at the time of audit do not indicate that any attempt is made to evade tax. In a way it indicates that all the material particulars and information which are required are available in the books of accounts and statements before issuing proposal to levy penalty under Section 74 by the Audit Officer, much before proving the mala fide intention. Under these circumstances, the question is whether penalty can be imposed only on the basis of inference without establishing of mens rea or not for violation of GST law or attempt to evasion of tax?

3. In this regard, the principle laid down by the Hon’ble Apex Court in the case of HINDUSTAN STEEL LIMITED VERSUS STATE OF ORISSA [1969 (8) TMI 31 - SUPREME COURT] may be considered in paragraph 7 of the aforesaid judgment. The Hon’ble Supreme Court of India has held as under:

“…. 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. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should for failure to perform a statutory obligation is matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. 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 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….”

4. In another judgement dated 12/01/2022 of the Hon’ble Supreme Court rendered in the case of ASSISTANT COMMISSIONER (ST) & ORS. VERSUS M/S. SATYAM SHIVAM PAPERS PVT. LIMITED & ANR. [2022 (1) TMI 954 - SC ORDER] as regards to levy of penalty under the GST Act has held as under:

Having said so, the High Court has set aside the levy of tax and penalty of ₹ 69,000/- (Rupees Sixty-nine Thousand) while imposing costs of ₹ 10,000/- (Rupees Ten Thousand), payable by the petitioner No.2 to the writ petitioner within four weeks. The analysis and reasoning of the High Court commends to us, when it is noticed that the High Court has meticulously examined and correctly found that no fault or intent to evade tax could have been inferred against the writ petitioner. However, as commented at the outset, the amount of costs as awarded by the High Court in this matter is rather on the lower side. Considering the overall conduct of the petitioner No.2 and the corresponding harassment faced by the writ petitioner we find it rather necessary to enhance the amount of costs.

Upon our having made these observations, learned counsel for the petitioners has attempted to submit that the questions of law in this case, as regards the operation and effect of Section 129 of Telangana Goods and Services Tax Act, 2017 and violation by the writ petitioner, may be kept open. The submissions sought to be made do not give rise to even a question of fact what to say of a question of law. As noticed herein above, on the facts of this case, it has precisely been found that there was no intent on the part of the writ petitioner to evade tax and rather, the goods in question could not be taken to the destination within time for the reasons beyond the control of the writ petitioner. When the undeniable facts, including the traffic blockage due to agitation, are taken into consideration, the State alone remains responsible for not providing smooth passage of traffic.

Having said so; having found no question of law being involved; and having found this petition itself being rather misconceived, we are constrained to enhance the amount of costs imposed in this matter by the High Court.

The High Court has awarded costs to the writ petitioner in the sum of ₹ 10,000/- (Rupees Ten Thousand) in relation to tax and penalty of ₹ 69,000/- (Rupees Sixty-nine Thousand) that was sought to be imposed by the petitioner No.2. In the given circumstances, a further sum of ₹ 59,000/- (Rupees Fifty-nine Thousand) is imposed on the petitioners toward costs, which shall be payable to the writ petitioner within four weeks from today. This would be over and above the sum of ₹ 10,000/- (Rupees Ten Thousand) already awarded by the High Court.

5. Though the above judgement is delivered in the context of expiry of E-WAY BILL, still the ratio squarely applies to all the offences scheduled under Section 122 of the GST Act. What emerges from the said judgement is, essentially intent to evade tax must exit to initiate penal provisions under Section 74 except administrative minor offences covered under Section 125 of the Act.

6. It is experienced that the contents of the audit proceedings suggest that, there is no question of the taxpayer concealing its tax liability. There is also no question of the taxpayer furnishing any inaccurate particulars deliberately. It appears to me that all that happens in the audit proceedings is that through a bona fide and inadvertent error, the taxpayer while submitting its returns may fail to add few transactions to its total turnover or there may be minor procedural lapses in availing ITC. This can only be described as a “human error” which we are all prone to make. It happens due to absence of due care, which does not mean that the taxpayer is guilty of either furnishing inaccurate particulars or attempting to conceal its tax liability intentionally. The tax payer who furnishes inaccurate details is bound to suffer additional tax along with interest under Section 50. As such penalty under Section 74 shall not be imposed in such cases. Apart from the fact that the taxpayers may do bonafide mistakes, it is possible that even the Audit Officer who frames the audit order is also prone to make mistakes foisting tax liability. That’s why the GST Act has provided enough “ckecks and balances” to protect the interest of all stakeholders.

7. Therefore the facts and circumstances of the each case are to be evaluated in the backdrop of the well settled principles laid down by the Hon’ble Supreme Court (supra) in the matter of imposition of penalty. Despite in many cases, it is found that penalty has been imposed mechanically without any dishonest intention or malice or mens rea having been established or proved. In such cases, the spirit of quasi-judicial freedom of the audit officers is conspicuously detracted by the unseen hands for the reasons unknown to the taxpayers.

8. The primary burden to prove offence committed by the tax payer lies on the audit officer. In the audit proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the taxpayer. But that translates into action only through the statutory notice under Section 74 read with Section 75(4) with an opportunity of hearing. True, the audit proceedings form the basis for penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a repercussion of intentional violation of law, nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from cordial audit proceedings. Therefore, the taxpayer must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice under Section 65 suffers from the vice of vagueness.

9. Payment of penalty under Section 74 of the GST Act means the admission of offence of intention to evade tax, either by way of fraud or through willful misstatement or through suppression of facts. Compelling an honest tax payer to pay penalty under Section 74 of the GST Act is against the spirit of justice delivery system. In this regard, I draw the well settled legal support from the following landmark judicial ruling:

           The judgement dated 20/04/2021 of the Hon’ble Supreme Court rendered in the case of M/S RADHA KRISHAN INDUSTRIES VERSUS STATE OF HIMACHAL PRADESH & ORS. [2021 (4) TMI 837 - SUPREME COURT].

10.Tax payers are also human beings like the tax officers. Human emotions are of paramount importance in public life, be it may in taxation proceedings or otherwise. Emotions have their own self-dignity, delicate and are not to be hurt so easily by the quasi-judicial authorities for silly reasons. Just for the sake of knowing the pains of hurting emotions, let them step in the shoes of taxpayers for a couple of minutes and experience the burning heat. Having served for 35 years in the Commercial Tax Department in all the segments, I am consciously aware of painful truth prevailing on the otherside of the table too.

11. Business is the most trusted institution in the world. On the other hand, business is not easy as it is assumed by the audit officers. Since two years, it is bleeding from all the holes due to predatory competition both domestically and overseas for various reasons. What we read in the newspapers every day is all about the on-going war. Every citizen is suffering the direct impact of war-like situations due to massive disruptions in imports/exports and consequential price hike in essential commodities. So let the audit does not play with human sensitive emotions for the sake of penalty under Section 74 to please unseen bosses. At the same, Section 73 is in ICU suffering from lack of oxygen. It is high time to revive it to render justice to the taxpayers for bonafide mistakes for which alone it is legislated.

12. Administrative directions, though issued for internal consumption, are not appropriate to saddle penalty on the taxpayer against whom there are no allegations of intention to evade tax.  Let the audit officer furnish evidences of the truth of malafide intention to hold that, the taxpayer has actually evaded tax or suppressed the facts. Nothing prevents him from doing so. It’s not a herculean job nor is divine spirit required to do it. It is one of the essential duties of the quasi-judicial authorities. In realty when cogent evidences are placed on record proving the malafide intention, no taxpayer would challenge the credibility of audit proceedings levying penalty under Section 74, much less in the court of law. The moot question is why they are not auditing the way is prescribed? The true answer lies in the heart of the audit officers, but they are made mute. Unfortunately the wings of audit officers are clipped. As the tax officer expects taxpayer to be accurate in all respect, at the same the tax officer is also expected to be accurate to carry forward the legacy of judicious actions. Why it is not happening? They need to answer themselves before questioning the innocent taxpayers.

13. As ex-taxman, I share few tips out of my experience for purposeful/meaningful performance. Let me just start with a couple of examples that I think are the most intuitive. Let the frozen thoughts of tax officer melt to have clarity of mind aiming at what the officer is expected to know first.  Secondly the officer should know with whom he is interacting and thirdly for what purpose. Last but not least, what the intent of law is about? Once this is properly understood, the ambience would be pleasant enough to carry out any toughest assignment without friction. The officer being public servant is supposed to be gentle to take judicious decisions where he/she does not lose or gain anything extra than what is due to the State. This especially matters for someone who is completely accountable in public life. In fact, it increases both quality and productivity of performance. It also helps enhance respect towards tax administration and reduces ridiculous decisions. Mindfulness is essential in decision making process. The overall benefits would sprout much more matured than the sceptical proposals. However at present this is seldom seen in the tax administration due to the distraction of officers’ mind by invisible masters.

14. The size of recovery of additional tax/interest/penalty via audit is not the criteria for the certification of meritorious audit. Sustainability of revenue is as essential as the recovery itself. Many a times the fate of such revenue is finally decided in the court of law in favour of taxpayers and against the department for lack of justifiable evidences. Therefore cordial audit is an issue of judicious resolution and not revenue oriented alone.

15. Hope the innocent tax payers would get the deserving equity and further encouragement the way it has been promised to them for their humongous contribution of revenue in nation building activity despite facing the worst economic disruptions during the recent times due to pandemics. During the last two and a half years the taxpayers have had vast challenges. Despite the country is witnessing progressive GST collections. It is heartening to note that, April 2022 has witnessed the record collection of 1.68L Crore. What made this possible? Is it not substantial improvement in the compliance behaviour? But for the compliance of law by the taxpayers, it would not have been possible. Therefore they do deserve admiration.

16. In terms of Article 141 of the Constitution of India, the judgements of the Hon’ble Supreme Court are binding on all the authorities working under the GST Act. So they must be respected, given due effect without any administrative barricades and should not allow them to be lost in the woods.

17. To put it shortly, judicious attitude is required to be adopted by an audit officer while dealing with an innocent taxpayer. There are several reasons for enhancing the dignity of an innocent taxpayer. Let the audit officers imbibe the quality of being just and impartial towards all taxpayers. However looking at the historical experience of tax audit system which is almost half century old, this is seldom possible. Let us not go back to colonial days.

18. Therefore through this platform, the CBIC is kindly requested to re-visit the administrative directions issued as regards to conducting of audit and place appropriate fresh comprehensive guidelines to the audit officers to remove pre-set prejudicial mind-set as far as invocation of Section 74 is concerned without proving mala fide intention by the taxpayers. If required, the CBIC may also implement “Uniform Audit Code” to infuse energy among the audit officers liberating them from the cages, so that there is no disparity in the audit management. Or else the doors of judicial courts are always open though it causes additional financial burden on already saddled tax payer to seek justice and remedy. Litigation is a bad way to resolve disagreements. Litigation costs precious time and money. All of these things are happening all the time. And they’re happening for a pretty simple reason. I know that weak parties cannot go to courts precisely because it is so costly affair. Again running from pillar to post is like rubbing pinch of salt into the deep wounds.  I wish let it not happen. On the other hand I am confident that, the CBIC would certainly devise innovative attitude to reduce needless litigations and increase the compliance of law by all the tax payers enthusiastically. “ONE NATION, ONE TAX, ONE AUDIT” is the true vision of the GST regime. Let it be reality.