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Presence of mens rea is Necessary Constituent for Imposing Penalty under Sec 78 of the Finance Act, 1994: Chhattisarh HC

In a recent ruling, the Chhattisgarh High Court held that, presence of mens rea is necessary constituent for imposing penalty under section 78 of the Finance Act, 1994.

The petitioner M/s. Mahadev Logistics has challenged the legality, validity and correctness of the final order dated 3-3-2015 passed by the Customs & Central Excise Settlement Commission whereby a penalty of 4,50,000/- has ₹ been imposed upon the petitioner by the said Commission in exercise of power conferred under Section 78 of the Finance Act, 1994.

The petitioner is a partnership firm which is engaged in activities of supply of vehicles like Hyva, Dumpers, Pay Loader, Tipper etc. on hire basis and also in goods transportation by road but without service tax registration.

These activities are classified under supply of taxable goods service and goods transport services under subclause (zzzzj) of clause 105 and clause 50(f) of Section 65 of the Finance Act, 1994. Investigation was initiated against the petitioner on the basis of intelligence report that the petitioner is engaged in supply of tangible goods on hire basis without obtaining service tax registration and accordingly, summons were issued on 30-5-2014 requiring the petitioner to submit the details / documents related to its activities. Immediately thereafter, on 13-6-2014, the petitioner obtained service tax registration and submitted documents before the concerned competent authority.

While allowing the Writ Petition, Justice Sanjay K Agrawal observed that, “an order imposing a penalty for failure to carry out a statutory obligation is the result of quasi-criminal proceedings and penalty will not ordinarily be imposed unless the party obliged has either acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation”.

“A penalty will not also be imposed merely because it is lawful to do so. In spite of a minimum penalty prescribed, the authority competent to impose the penalty may refuse to impose the penalty if the breach complained of was a technical or venial breach, flew from a bona fide though mistaken belief”.

Agreement between the petitioner and respondent No.3 clearly provides that the petitioner would produce the service tax registration certificate and likewise, reimbursement of service tax was limited to the production of demand regarding payment of service tax. But, it is not in dispute that the petitioner did not produce the service tax registration certificate to respondent No.3, however, immediately after initiation of investigation and upon service of notice of investigation by respondents No.1 and 2, the petitioner had already discharged its tax liability before issuance of show cause notice and paid the service tax liability on 25-7-2014 and discharged interest liability on 26-8-2014.

It is also not in dispute that the petitioner discharged the tax liability even before receiving the said service tax amount from the service recipient – respondent No.3 herein and further, the learned Settlement Commission has already accepted the service tax liability and the interest liability holding that the petitioner has made full and true disclosure of its duty liability.

The Court replied Apex Court decisions in Pepsi Foods Ltd. case and Rajasthan Spinning and Weaving Mills case, presence of mens rea is a necessary constituent for imposing penalty under Section 78 of the Finance Act, 1994, which is absolutely absent in the present case and there is no intention to evade tax by the petitioner, it was a bona fide mistake on its part which it immediately rectified on being noticed particularly, in view of the fact that the Settlement Commission has granted immunity to the petitioner from prosecution under the Finance Act, 1994 and the Rules made thereunder.

Justice Sanjay K Agrawal observed that, “there is no willful suppression of facts to evade tax on the part of the petitioner and it was bona fide on the part of the petitioner, it was not deliberate and in absence of finding relating to mens rea recorded by the Settlement Commission, the penalty imposed upon the petitioner under Section 78 of the Finance Act, 1994 deserves to be quashed”.

Read the full text of the Order below.

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