MARCH 14, 2015

By Rishabh Singhvi, S Rahul Jain & Sweta Giridar

SECTION 76 of the Finance Act as it exists today, provides for a levy of penalty in event of failure to pay service tax within the prescribed due dates. Section 78 provides for levy of equal penalty in cases involving fraud, collusion etc. The said section provides the benefit of a reduced penalty in cases where amount of tax, interest and penalty is paid within 30 days of the Order.

The provisions of Section 80 ensure that the relief from penalty under section 76 would be available when reasonable cause is established. In the context of penal provisions, the words 'reasonable cause' is understood to mean a cause which is beyond the control of the assessee i.e. a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bonafide. (Jagadish Prasad Chowdary AIR 1996 PATNA 58)

Prior to 06.08.2014, Section 80 provided immunity even in cases where penalty under Section 78, i.e. cases involving fraud, was imposed. However, given the understanding of the term 'reasonable cause', there was an anomaly as to how 'reasonable cause' could be ever established in cases where penalty was confirmed for cases involving fraud, etc. This anomaly was rectified subsequently.

The present Budget has sought to amend the scope of the aforesaid penal provisions on two aspects – (1) the domain of section 76 and Section 78 have clearly been demarcated i.e. Section 76 operates in non-fraud cases and section 78 would operate in other cases, (2) The omission of Section 80 purports to make the provisions relating to Section 76 and Section 78 absolute.

In view of this, can it be said that the adjudicating authorities have been left with no option but to invoke either of the penal provisions and do not have an option of not imposing any penalty?

On a closer perusal of the proposed section 76, it can be seen that the assessee shall be liable to penalty under sub-section (1), for an amount not exceeding ten per cent of the amount of service tax. While on the one hand the provision makes the imposition of penalty mandatory, on the other hand it provides for discretion on the quantum of penalty by prescribing an upper ceiling of 10%. Doubts would arise whether the adjudicating authority has to mandatorily impose penalty in all non-fraud cases.

In our view, since the statute has only provided for an upper ceiling on the quantum of penalty, it would be open to the adjudicating authority to impose a lower penalty or even a NIL penalty on the basis of the merits and bonafides of each case. Thus in effect, the beneficial legislation contained in Section 80 for waiver of penalty on establishing reasonable cause can still be availed of by the assessee through section 76.

The proposed section 78 provides that an assessee shall be liable to pay penalty equal to hundred percent of the amount of service tax. In stark contrast to Section 76, there is no discretion vested under Section 78 on an officer either on the imposition or on the quantum of penalty while adjudicating matters involving fraud cases. In fact the discretion to waive penalty imposed under Section 78 has been taken away from 06-08-2014 itself, when Section 80 was specifically amended to provide that penalty under Section 78 would not be covered under that Section.

In effect, in our view, though Section 80 has been sought to omitted in this budget, there would not be a major impact in so far as penalty levied under Section 76 is concerned. This may not be the case as regards section 78. Once the conditions precedent to section 78 (i.e. case involving fraud, etc) are satisfied, the imposition of penalty under section 78 is attracted automatically.

The other issue that requires attention is whether penalty imposed by an officer can be subsequently modified by the appellate authorities. Section 76 does not grant any specific power for modification of penalty by such authorities in cases where the service tax demand is unaltered. The answer to this issue lies in the provisions of section 85(4) and 86(7). The said provisions grant wide powers to the appellate authorities to modify, annul and confirm the orders of the lower authorities. Such wide powers can be invoked by the appellate authorities to reduce the penalty imposed under section 76.

Since the imposition of penalty under section 78 is automatic, there is no discretion on the quantum of such imposition. Even the appellate authorities would not be empowered to modify the penalty levied under section 78.

(The authors are associated with Lakshmikumaran & Sridharan, Chennai)