2025 (6) TMI 2036 - HC - GST

Levy of penalty - generation of e-way bill by the petitioner after detention - intent to evade/mens rea present or not - HELD THAT - The penalty imposed by the Sales Tax Authorities is only a civil liability though penal in character but for invoking the proceedings under Section 129 (3) of the Act section 130 thereof is required to be read together where the intent to evade payment of tax is mandatory while issuing notice or while passing the order of detention seizure or demand of penalty or tax as the case may be. Meaning thereby that intention to evade tax for the imposition of penalty is sine qua non before imposing penalty. In other words penalty in such like tax matters would require an element of mens rea . Thus it can be safely concluded that the presence of mens rea for evasion of tax is a sine qua non for imposition of penalty. The Hon ble Supreme Court in CST vs. Satyam Shivam Papers (P) Ltd. 2022 (1) TMI 954 - SC ORDER has upheld the judgment of the Telangana High Court wherein the Court had held in favour of the assessee and underscored that authorities must not presume evasion of tax solely on procedural lapses such as expiry of an e-way bill especially when valid reasons are provided. It was implied by the Hon ble Court that the penalty by the Assessing Officer under Section 129 of Telangana Goods and Services Tax Act cannot be imposed in absence of mens rea. If from the scheme object and words used in the statute it appears that the proceedings for imposition of the penalty are adjudicatory in nature in contradistinction to criminal or quasi-criminal proceedings the determination is of the breach of the civil obligation by the offender. The word penalty by itself will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations are the nature of the functions being discharged by the authority and the determination of the liability of the contravenor and the delinquency - Normally mens rea is not an essential element for imposing a penalty for breach of civil obligations or liabilities. There can be two distinct liabilities civil and criminal under the same Act. In the instant case tax already stands paid therefore there is no question that the petitioner was trying to evade tax. Adverting to the facts of the instant case order passed by respondent No. 3 stands on a foundationless ground since there is no intention to evade tax which could sustain the impugned order(s). There is no reason whatsoever recorded by respondent No. 3 for imposing tax as well as penalty. The requirement of intent to evade tax for the imposition of penalties is a fundamental principle that underpins the fairness and integrity of taxation systems. Recognizing the distinction between technical errors and intentional evasion is essential for maintaining a balanced and equitable approach to tax enforcement. The impugned order set aside - petition allowed.

The core legal questions considered in this judgment revolve around the validity and legality of the penalty and tax demand imposed under Sections 129 and 130 of the Central Goods and Services Tax Act, 2017 ("the Act") and the related Rules, particularly Rule 138 of the Central Goods and Services Tax Rules, 2017 ("the Rules"). Specifically, the issues include:

Whether the imposition of tax and penalty under Section 129 of the Act is justified where the tax on the goods has already been paid prior to their movement.
Whether the failure to generate or produce an e-way bill as required under Rule 138 constitutes a deliberate attempt to evade tax or is merely a technical lapse.
The necessity of mens rea (intent to evade tax) for the imposition of penalty under the Act.
The legal effect and scope of Sections 129 and 130 of the Act and Rule 138 of the Rules concerning detention, seizure, release of goods, and imposition of penalty.
The validity of the orders passed by the authorities in detaining goods, imposing penalty, and dismissing appeals in light of the statutory provisions and judicial precedents.
The entitlement of the petitioner to the release of the bank guarantee furnished as security during the detention proceedings.

Issue-wise Detailed Analysis:

1. Legality of Tax and Penalty Imposed Under Section 129 Where Tax is Already Paid

Legal Framework and Precedents: Section 129 of the Act deals with detention, seizure, and release of goods in transit where transportation contravenes the Act or Rules. It mandates payment of applicable tax and penalty or furnishing security for release. Section 130 provides for confiscation and penalty if goods are transported with intent to evade tax. Rule 138 requires generation of an e-way bill for goods exceeding Rs. 50,000 in value prior to movement.

Judicial precedents, including the Supreme Court judgment in CST vs. Satyam Shivam Papers (2022), emphasize that penalty cannot be imposed merely for procedural lapses without evidence of intent to evade tax. Allahabad High Court decisions in Patanjali Ayurved Ltd. and Hindustan Herbal Cosmetics underscore that mens rea is a sine qua non for penalty under Section 129.

Court's Interpretation and Reasoning: The Court noted that the petitioner had already paid customs duty and IGST amounting to Rs. 4,09,144/- before clearing the goods. Despite this, tax and penalty were imposed for failure to produce an e-way bill. The Court held that since tax was paid, there was no evasion, and non-generation of the e-way bill amounted to a technical error at best.

Key Evidence and Findings: The petitioner's explanation that all material particulars were available through other documents carried by the driver was accepted. The petitioner generated the e-way bill after detention, indicating absence of mala fide intent. The authorities failed to record any reasoned findings to justify penalty or tax demand.

Application of Law to Facts: The Court applied the principle that penalty under Section 129 requires proof of intent to evade tax. Mere procedural lapses without such intent cannot sustain penalty. The presence of tax payment negated any presumption of evasion.

Treatment of Competing Arguments: The respondents argued that failure to produce e-way bill and its generation after detention indicated mala fide intention. The Court rejected this, holding that post-detention generation does not automatically imply intent to evade tax, especially when tax is paid.

Conclusion: The imposition of tax and penalty under Section 129 was held to be without jurisdiction, arbitrary, and unreasonable.

2. Requirement of Mens Rea for Imposition of Penalty Under Sections 129 and 130

Legal Framework and Precedents: The Court extensively discussed the nature of penalty provisions in tax statutes, referencing the Supreme Court and various High Court decisions. It was emphasized that penalty is generally a civil liability, remedial and coercive, not a criminal punishment. However, for penalty under Section 129, mens rea or guilty intent to evade tax is mandatory.

The Allahabad High Court in Patanjali Ayurved Ltd. summarized principles distinguishing civil penalties from criminal offences, noting that mens rea is essential for criminal liability but not necessarily for civil penalties. However, the scheme of the Act and the nature of the penalty provision determine the necessity of mens rea.

Court's Interpretation and Reasoning: The Court held that Sections 129 and 130 require a demonstration of intent to evade tax before penalty can be imposed. The absence of any evidence of such intent in the instant case rendered the penalty unsustainable. The Court also noted that minor or technical errors, such as typographical mistakes in e-way bills, do not constitute evasion.

Key Evidence and Findings: The petitioner's conduct showed no deliberate defiance or dishonesty. The failure to produce e-way bill was not accompanied by any other evidence of tax evasion. The authorities failed to establish mens rea.

Application of Law to Facts: The Court applied the principle that penalty is not to be imposed merely because it is lawful to do so, but only when the statutory conditions including mens rea are fulfilled.

Treatment of Competing Arguments: The respondents' reliance on procedural non-compliance was rejected as insufficient to infer mens rea. The Court underscored that penalty must be proportionate and based on concrete evidence of intentional wrongdoing.

Conclusion: Mens rea is a sine qua non for penalty under the relevant provisions, and its absence invalidates the penalty orders.

3. Validity of Orders Passed by Authorities and Appellate Tribunal

Legal Framework and Precedents: The Court reviewed the statutory requirements for passing orders under Sections 129 and 130, including the necessity of issuing notices, providing opportunity of hearing, and recording reasons. It also considered precedents where penalty orders were quashed due to lack of reasoned findings or absence of intent.

Court's Interpretation and Reasoning: The Court found that the impugned orders lacked sound rationale and did not adequately consider the petitioner's evidence of tax payment and post-detention generation of e-way bill. The appellate authority merely relied on a Supreme Court observation without applying it correctly to the facts, wrongly concluding mala fide intent.

Key Evidence and Findings: The orders failed to specify reasons for penalty or tax demand, did not address the petitioner's submissions, and ignored relevant precedents. The appellate order was upheld on flawed reasoning.

Application of Law to Facts: The Court held that administrative orders imposing penalty must be reasoned and based on evidence. The failure to do so renders such orders liable to be quashed.

Treatment of Competing Arguments: The respondents' reliance on procedural lapses and post-detention e-way bill generation was rejected as insufficient justification for penalty.

Conclusion: The impugned orders were quashed for being arbitrary, unreasonable, and lacking jurisdiction.

4. Release of Bank Guarantee Furnished by the Petitioner

Legal Framework: Under Section 129, goods may be released on furnishing security equivalent to tax and penalty. Upon quashing of penalty and tax demand, the security must be released with applicable interest.

Court's Interpretation and Reasoning: Since the penalty and tax demand were quashed, the bank guarantee furnished as security under protest was ordered to be released with interest.

Conclusion: The petitioner is entitled to release of the bank guarantee within four weeks with applicable interest.

Significant Holdings:

"The presence of mens rea for evasion of tax is a sine qua non for imposition of penalty."

"Penalty would 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 obligations."

"Penalty under Section 129 cannot be imposed merely for procedural lapses such as non-generation or late generation of e-way bill, especially when the tax has already been paid and no intention to evade tax is demonstrated."

"An order imposing penalty must be backed by potent reasoning and evidence of intent; absence thereof renders the order arbitrary and liable to be quashed."

"Technical errors without financial implications or evidence of evasion should not be grounds for penalty."

"The burden lies on tax authorities to establish actual intent to evade tax before imposing penalty."

"Release of security furnished under protest is mandated upon quashing of penalty and tax demand."

The Court finally quashed the impugned orders imposing tax and penalty, directed release of the bank guarantee with interest, and disposed of pending applications, affirming the principles that penalties in tax matters require mens rea, and procedural lapses alone do not justify punitive measures where tax is paid and no evasion is proved.

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