Penalty cannot be less than the prescribed minimum

The Finance Act, 1994 (Act) levying service tax provides for sanctions for non-compliance also. Section 76 of the Act relates to penalty for failure to pay service tax imposed and provides for levy of penalty at Rs 200 for every day of default or equal to 2 per cent of such tax a month whichever is higher not exceeding the amount of tax due. Similarly, penalties are imposable in respect of defaults mentioned in Sections 77 to 79 also. Section 80 stipulates that despite Sections 76 to 79, no penalty may be imposable on a taxpayer if the taxpayer proves that there was reasonable cause for failure.

The Gujarat High Court in the case of Commissioner of Central Excise & Customs v. Port Officer (2011) 238 CTR (Guj.) 95 has said that considering that there is discretion in Section 80 not to impose the penalty at all, lenient view cannot be taken in implementing Section 76 to levy the penalty below the minimum prescribed. The argument was that the authority imposing the penalty u/s 76 has discretion insofar as the quantum of penalty is concerned. When read with Section 80 of the Act, the said discretion empowers the authority to reduce the penalty to an amount below the limit stipulated in s. 76 of the said Act because once there is a discretion to delete the entire penalty, such discretion can also extend to reducing the penalty partially, if the facts so warrant.

The Commissioner (A) deleted the penalty and the matter was taken to Tribunal- CESTAT - by the Excise Department. The Tribunal decided the issue saying that penalty can be reduced below the minimum prescribed in view of Section 80 of the Act. The issue was then taken to the High Court (HC) contending that the penalty cannot be reduced below the minimum prescribed.

The HC has observed that a plain reading of Section 76 of the Act indicates that a person who is liable to pay service-tax and who has failed to pay such tax is under an obligation to pay, in addition to the tax so payable and interest on such tax, a penalty for such failure. The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits, with a further rider for the maximum limit. So far as Section 76 of the Act is concerned, it is not possible to read any further discretion than the discretion provided by the legislature in regard to minimum and the maximum limits. The discretion vested in the authority is to levy minimum penalty as laid down in the section.

From this discretion, it is not possible to read a further discretion being vested in the authority so as to entitle the authority to levy a penalty below the stipulated limit. The moment one reads such further discretion in the provision it would amount to re-writing the provision which is not permissible. It is not as if the provision is couched in a manner so as to lead to absurdity if it is read in a plain manner. Nor is it possible to state that the provision does not further the object of the statute or violates the legislative intent when read as it stands. Hence no discretion to reduce the penalty below the minimum prescribed is available.

Section 80 overrides provisions of Sections 76, 77, 78 and 79 of the Act and provides that no penalty shall be imposable if the assessee proves that there was reasonable cause for failure stipulated by any of the said provisions. Whether a reasonable cause exists or not is primarily a question of fact. Once reasonable cause is established, the authority has the discretion to hold that no penalty is imposable. The provision does not say that even upon establishment of reasonable cause, a reduced quantum of penalty is imposable.

The court lamented about the way CESTAT has passed the order. It observed that when one goes through the impugned order of Tribunal, it becomes clear that the Tribunal has failed to even consider the provisions of Sections 76 and 80 of the Act before passing the impugned order. The statement by the Tribunal that benefit of Section 80 of the Act has been appropriately extended to the assessee indicates total non-application of mind on the part of the Tribunal. How and in what manner reasonable cause is shown to exist by the assessee in the facts of the case has not even been recorded. .

The Tribunal's order was quashed.

(The author is a former chairman of CBDT.)