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SC Larger Bench reversing Dilip Shroff penalty concealment ruling
October, 20th 2008


Appeal (civil)  1768 of 2008



M/s Bharjatiya Steel Industries



Commissioner, Sales Tax, U.P.


DATE OF JUDGMENT: 05/03/2008



S.B. Sinha & V.S. Sirpurkar





CIVIL APPEAL NO.     1768         OF 2008

[Arising out of  SLP (Civil) No. 17921 of 2004]





1.         Leave granted.


2.         Appellant manufactures Steel Ingots.  It purchased iron scrap from the

Railways in public auction.  Iron scrap is melted and converted into the

finished products.  Appellant had been accorded recognition under Section

4-B (2) of the U.P. Trade Tax Act (for short "the Act") in terms whereof it

became entitled to purchase raw-materials for manufacturing purpose at a

concessional rate of tax.  In the year 1985-86, it purchased 2532.989 M.T. of

iron scrap.  Allegedly, the lots contained various categories of iron scraps as

it was purchased on "as is where is basis".  Appellant allegedly was not

allowed to sort out the scrap at the time of purchase as the conditions

specified therein were :

"1.        The material will be sold of "AS IS WHERE

IS" basis.

2.         No sorting, picking whatsoever under any

circumstances will be allowed.

3.         The purchaser will be required to take

delivery of the material from the lots.

4.         The purchaser should inspect the lots prior

to the auction"



3.         Appellants stated that about 9.47% of the total amount of scrap

purchased, i.e., 239.966 M.T., could not be utilized by it.  It sold the said

goods to other dealers at a concessional rate of tax. 

Inter alia, on the plea that the appellant for the purpose of obtaining

the tax concession in terms of Section 4-B(2) of the Act had furnished an

undertaking whereby and whereunder it undertook to utilize the entire

material for manufacturing purposes, which was breached by reason of the

said transfer, a proceeding for levy of penalty was initiated against it

whereupon a show-cause notice was issued.  Cause was shown by the

appellant on 5.03.1990 contending that the said quantity of scrap being not

usable, it had no other option but to dispose of the same.

4.         By reason of an order dated 26.03.1990, the assessing officer rejected

the said contention.  It levied penalty of Rs.85,619/- on the appellant.

5.         An appeal preferred thereagainst before the Deputy Commissioner

(Appeals) was dismissed by an order dated 8.02.1991.  An appeal to the

Tribunal preferred by the appellant was, however, allowed by an order dated

29.04.1993, stating:

"6. Having given our deep consideration and

anxious thoughts to the rival submissions and

perused the relevant record, we feel that the ld.

Authorities below have not appreciated the facts of

the case in right perspective.  It is not disputed that

the scrap has been purchased by the Appellant in

lots from the railway, in which there remains

existence of several types of scrap.  During the

course of arguments, the ld. Counsel produced

copy of tender invited by Railway Department. 

We have gone though this document and we find

that in general conditions of the said document,

there is specific mention in condition No. 1 that the

material will be sold on "AS IS WHERE IS" basis

and in condition No. 2, no sorting, picking

whatsoever under any circumstance will be

allowed.  It is worth consideration that no

purchaser can violate the conditions of purchaser.  

The purchases have been made in lots, in which

different types of scrap exists, out of which

maximum usable strap has been consumed by the

Appellant in the manufacture and only that type of

scrap was sold against the Form 3-B which was

not usable in the unit of Appellant in any

condition.  In these circumstances, to our mind,

there appears no malafide on the part of the

Appellant, hence no penalty could be initiated

against the assessee U/s 4-B(6) of the Act"


6.         Respondent preferred a revision petition thereagainst before the High

Court which has been allowed by the impugned judgment dated 1.04.2004.

7.         Mr. Puneet Jain, learned counsel appearing on behalf of the appellant,

in support of the appeal, inter alia would submit :

(1)        On a plain reading of the provisions of Section 4-B of the Act, it is

evident that in terms of Sub-section (a-1) thereof, a dealer is entitled

to sell the goods to another; 

(2)        From a perusal of Sub-section (5) of Section 4-B of the Act, it would

appear that a discretion has been conferred upon the authority to levy

or not to levy penalty and in that view of the matter the High Court

committed a serious error in opining that the principle of mens rea has

no application in the instant case as for technical or venial breaches no

penalty should be levied particularly when the action of the assessee

does not defeat the very object for which the provision has been


(4)        In view of the fact that 90% of the scrap purchased by the appellant

has been utilized for the purpose of manufacture of steel ingots, only

because due to certain unavoidable reasons the rest 10% of it could

not be utilized, the appellant could not be said to have any mens rea in

relation thereto.

8.         Mr. Gaurav Banerjee, learned senior counsel appearing on behalf of

the respondent, on the other hand, would contend:

(1)        In a case of this nature as no duty can be imposed, the minimum

penalty which has been prescribed would amount to the duty payable

to the State. 

(2)        The High Court, in a case of this nature, had ordinarily been ordering

levy of penalty only twice the amount of the duty keeping in view the

fact that the dealer admittedly has not utilized the goods for

manufacturing purposes wherefor it had furnished an undertaking.

(3)        In any event, as the assessing authority and the appellate authority had

assigned sufficient and cogent reasons for imposition of the penalty

having found that:


(i)         it has not been proved that the goods were not suitable for

manufacturing purposes;

(ii)        the goods which were sold to another dealer had been used by

the vendee for manufacturing purposes;

(iii)       the appellant could have given an advance intimation to the

authorities pointing out its genuine difficulty;

(iv)       10% of the total stock cannot be said to be a miniscule portion

which can be ignored by the authorities and, thus, there must be

something more than which meets the eye; and

(v)        In any event such a process of getting away in regard to

payment of duty should not be encouraged.

the impugned judgment should not be interfered with.

9.         Before embarking upon the rival contentions, as noticed hereinbefore,

we may notice the relevant part of Section 4-B of the Act, which reads as


"4-B - Specific relief to certain manufacturers - (1)

Notwithstanding anything contained in Sections 3,

3-A, 3-AAAA and 3-D--

(a) Where any goods liable to tax under sub-

section (1) of Section 3-D are purchased by a

dealer who is liable to tax on the turnover of first

purchases under that sub-section or where any

goods are purchased by any dealer in

circumstances in which such dealer is liable to

trade tax on purchase of such goods under Section

3-AAAA, and the dealer holds a recognition

certificate issued under sub-section (2) in respect

thereof, he shall be liable in respect of those goods

to tax at such concessional rate, or be wholly or

partly exempt from tax, whether unconditionally or

subject to the conditions and restrictions specified

in that behalf, as may be notified in the Gazette by

the State Government in that behalf ;

(a-1) Where any declared goods liable to tax under

sub-section (1) of Section 3-D are sold or supplied

by a dealer, who is the first purchaser thereof, to

another dealer, holding a valid recognition

certificate under sub-section (2), in respect thereof,

the State Government may, subject to such

conditions and restrictions as may be specified by

a notification in that behalf, grant the same relief

as mentioned in clause (a) to such first purchaser:

XXX                            XXX                            XXX


 (2) Where a dealer requires any goods, referred to

in sub-section (1) for use in the manufacture by

him in the State, of any notified goods, or in the

packing of such notified goods manufactured or

processed by him, and such notified goods are

intended to be sold by him in the State or in the

course of inter-State trade or commerce or in the

course of export out of India, he may apply to the

assessing authority in such form and manner and

within such period as may be prescribed, for the

grant of a recognition certificate in respect thereof,

and if the applicant satisfies such requirements

including requirement of depositing late fee, and

conditions as may be prescribed, the assessing

authority shall grant to him in respect of such

goods a recognition certificate in such form and

subject to such conditions, as may be prescribed.


XXX                            XXX                            XXX

 (5) Where a dealer in whose favour a recognition

certificate has been granted under sub-section (2)

has purchased the goods after payment of tax at

concessional rate under this section or, as the case

may be, without payment of tax and has used such

goods for a purpose other than that for which the

recognition certificate was granted or has

otherwise disposed of the said goods, such dealer

shall be liable to pay as penalty such amount as the

assessing authority may fix, which shall not be less

than the difference between the amount of tax on

the sale or purchase of such goods payable under

this section and the amount of tax payable under

any other provisions of this Act but not exceeding

three times the amount of such difference"


10.       It is not in dispute that the appellant was exempted from payment of

the entire amount of tax, subject to the conditions and restrictions specified

in the notification.  For the said purpose, it holds a recognition certificate. 

The assessing authority while opining that the appellant should have taken

all precautions to see that the goods it had purchased were capable of being

utilized or consumed for manufacture of ingots, arrived inter alia at the

following finding of fact:

(i)         "The trader could have very well properly looked

into the fact at the time of purchase of the goods 

as to which of the purchased goods by them would

be fit/ proper for their manufacture, and purchase

of the same should have been carried out through

the assistance of the Form 3-B..."

(ii)        "Now the conclusion arrives is that the trader

has knowingly carried out purchases of such

goods, without utilizing the same in their

manufacture, they have sold away the same with

the assistance of the Form 3-B, because there is no

such evidence available on the records, by which it

may be proved that the goods sold away was not

worth to be utilized in the manufacture.  Because

the purchases of old iron scrap have been made

against the Form 3-B, and the goods sold away

was also old iron scrap and the iron scrap traders

are utilizing the same in their manufacture,

therefore, their such averment is not proved that

the sold away iron was not fit for being utilized in

their manufacture"

(iii)       "Therefore, the conclusion is arrived at that

these goods were worth being utilized in the

manufacture, but the same had been sold away

knowingly with the intention of escaping the tax

against the Form 3-B.  Therefore, the trader was

under the impression that even if each goods is not

in consonance with the conditions of the

provisions of Section 4-B, even then at the time of

purchases, they could have paid the tax against the

same, but the trader had desired to escape from the

payment of the tax to such kind of sale-purchase

till the decision about the final assessment of the

tax, and from the same, the conclusion is arrived at

that the trader has committed violation of the

provisions of Section 4-B of the Act, knowingly

and in planned manner"


            On the said findings, the minimum penalty of Rs. 85,619.00 was


11.       The appellate authority agreed with the said finding of the assessing

authority stating:


"Clearly, the appellants while violating the

provisions of Section 4(B)(2) of the Act had

carried out the sale of the raw material purchased

against Form 3-B.  Therefore, this offence of the

appellant was naturally punishable under the

provisions of Section 4(B)(5) of the Act.  The

appellants have committed this sale knowingly

with a view to escape from the liability of the tax. 

Had this sale would not have been carried out

knowingly to escape from the liability of the tax,

then the appellants, while extending his

cooperation/ bone fides and informed the learned

Tax Assessing Authority and got inspected the

goods which they intended to sale and that that

material could not be utilized in the manufacturing

of the notified articles produced by them.  But the

appellants have not done so.  The appellants have

also not paid any tax against such sales and have

knowingly sold away the aforesaid goods to other

manufacturers and have also obtained the Form 3-

B from them.  In this way, the appellants have also

not paid any tax against such sales"

(Emphasis supplied)


            The Tribunal, however, as noticed hereinbefore, allowed the appeal on

the ground that the appellant did not have any mens rea.

12.       The High Court by reason of its impugned judgment, following some

of its earlier decisions, opined:

"This Court in the case of Sai Electrical (P) Ltd.

(supra) has placed reliance upon three judgments

of the Supreme Court given in the case of

Hindustan Steels Limited Vs. State of Orissa AIR

1970 S.C. 253, R.S. Gujarat S.T.O. Vs. Ajeet Mills

Ltd. 1979 U.P.T.C. 171 and Director of

Enforcement Vs. M.C.T. Municipal Corporation

J.T. 1996 (1) S.C. 79 to hold that classic view that

"no mens rea no crime" is not applicable to the

economic crimes and departmental penalties. 

Plain language of sub-section (5) of Section 4-B

also does not show that mens rea is an essential

ingredient for imposition of penalty.  The

reasoning given by the tribunal in para 6 of its

order that since the goods were purchased in lots

and there appears no mala fide on the part of the

appellant, for deleting penalty under Section 4-

B(5) of the Act cannot be sustained.  It appears

that sub-section (5) to Section 4-B was not brought

to the notice of the tribunal.  The tribunal has

failed to decide the case within the four corners of

Section 4-B(5) of the Act.


            The other reasoning given by the tribunal for

deleting the penalty is that the tax has been paid by

the purchasers to whom the sale of unusable iron

scrap has been made by the appellant.  Substantial

proofs have been produced before it about the

payment of tax.  These factors are hardly germane

for deleting penalty under Section 4-B (5) of the



13.       It is difficult to accede to the contention of the learned counsel that

Sub-section (a-1) of Section 4-B of the Act would be attracted.  Apart from

the fact that no such contention has been raised before the authorities

concerned, the notification purported to have been issued by the Stage

Government has also not been placed on record. 

            It is furthermore difficult to accept that in a case of this nature where a

tax benefit had already been granted to a dealer, a further tax benefit would

be granted even if he violates the condition of certificate. 

14.       Sub-section (5) of Section 4-B of the Act is in two parts.  Penalty is

levied if the goods have been utilized for the purpose other than that for

which the recognition certificate was granted or the dealer otherwise had

disposed of the said goods.  The statutory provision speaks of penalty and

not duty.  It is, therefore, difficult to accept the contention of Mr. Banerjee

that the said provision merely purports to recover the duty which was

otherwise payable by the dealer.  Mr. Banerjee himself submitted that the

stage of realization of the duty was over.  If that be so, only penalty could be

levied.  Levy of penalty, ordinarily, unless there exists any statutory

interdict, requires proof of mens rea. 

            It was so held in Hindustan Steel Ltd. v. State of Orissa [(1969) 2

SCC 627] stating:

"8An 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 be

imposed for failure to perform a statutory

obligation is a 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"


            Mr. Banerjee, however, urged that Hindustan Steel Ltd. (supra) is not

applicable to the facts of the present case.  We do not agree. 

15.       Reliance placed by Mr. Banerjee on R.S. Joshi, S.T.O., Gujarat v. Ajit

Mills Ltd. and another [(1977) 4 SCC 98] has no application in the instant

case.  The question which arose for consideration therein was as to whether

the word 'penalty' would include forfeiture.  The core question therein was

as to whether the enactment by the State legislature providing that sums

collected by dealers by way of sales tax but are not exigible under the State

law  and, indeed, prohibited by it  shall be forfeited to the public

exchequer punitively.  It was held that it is permissible, stating :

"There is a tendency for valiant tax executives

clothed with judicial powers to remember their

former capacity at the expense of the latter.  In a

welfare state and in appreciation of the nature of

the judicial process, such an attitude, motivated by

various reasons cannot be commended.  The

penalty for deviance from these norms is the peril

to the order passed.  The effect of mala fides on

exercise of administrative power is well-



            P.S. Kailasam, J, in his concurrent but separate judgment, stated :


"63. Mr Kaji as well as Mr B. Sen, learned

Counsel for some of the assessees, further brought

to our notice cases in which by the application of

the provisions of the sales tax enactment

considerable hardship and injustice has been

caused to the dealers. It was submitted that where

the assessee innocently collected amounts on the

impression that tax was leviable, the amounts so

collected were forfeited while his obligation to the

purchasers to refund the amounts continued. If the

assessee by a mistake failed to collect tax, from the

purchasers, tax was levied and collected from the

assessee making him suffer in any event. When

after a costly litigation, the assessee succeeded in

establishing that sales tax cannot be collected on

the railway freight on cement bags or inter-State

sales, the Government promptly forfeited such

amounts. We agree these are instances of hardship

to the assessees and deserve Government attention.

But for that reason the Courts cannot say that the

act is beyond the legislative competence. The fact

that in some cases the dealers are prejudiced would

not affect the validity of the legislation which is

the question we are called upon to decide. On a

careful consideration of the points raised, I am

satisfied that the provisions of Section 37(1) are

within the competence of the State Legislature."



            We are not concerned with such a question here.

16.       Reliance has also been placed on Director of Enforcement v. M.C.T.

M. Corporation Pvt. Ltd. & Others [(1996) 2 SCC 471].  This Court was

dealing therein with Foreign Exchange Regulation Act, 1947.  It was opined

that Section 23(1(a) of the Act confers adjudicatory function on the conduct

of the delinquent, stating :

"8. It is thus the breach of a "civil obligation"

which attracts 'penalty' under Section 23(1)( a ),

FERA, 1947 and a finding that the delinquent has

contravened the provisions of Section 10, FERA,

1947 that would immediately attract the levy of

'penalty' under Section 23, irrespective of the fact

whether the contravention was made by the

defaulter with any "guilty intention" or not.

Therefore, unlike in a criminal case, where it is

essential for the 'prosecution' to establish that the

'accused' had the necessary guilty intention or in

other words the requisite "mens rea" to commit the

alleged offence with which he is charged before

recording his conviction, the obligation on the part

of the Directorate of Enforcement, in cases of

contravention of the provisions of Section 10 of

FERA, would be discharged where it is shown that

the "blameworthy conduct" of the delinquent had

been established by wilful contravention by him of

the provisions of Section 10, FERA, 1947. It is the

delinquency of the defaulter itself which

establishes his 'blameworthy' conduct, attracting

the provisions of Section 23(1)( a ) of FERA, 1947

without any further proof of the existence of "mens

rea". Even after an adjudication by the authorities

and levy of penalty under Section 23(1)( a ) of

FERA, 1947, the defaulter can still be tried and

punished for the commission of an offence under

the penal law, where the act of the defaulter also

amounts to an offence under the penal law and the

bar under Article 20(2) of the Constitution of India

in such a case would not be attracted. The failure

to pay the penalty by itself attracts 'prosecution'

under Section 23-F and on conviction by the

'court' for the said offence imprisonment may



17.       The attention of the Court, therein, however, was not drawn to the

earlier binding precedent in Hindustan Steel (supra).  Furthermore, the

question as to whether mens rea is an essential ingredient or not will depend

upon the nature of the right of the parties and the purpose for which penalty

is sought to be imposed.

18.       A distinction must also be borne in mind between a statute where no

discretion is conferred upon the adjudicatory authority and where such a

discretion is conferred.  Whereas in the former case the principle of mens

rea will be held to be imperative, in the latter, having regard to the purport

and object thereof, it may not be held to be so. 


            In Dilip N Shroff v. Joint Commissioner of Income Tax, Mumbai &

Anr. [(2007) 6 SCC 329], it was opined :

"86. It is of some significance that in the standard

pro forma used by the assessing officer in issuing a

notice despite the fact that the same postulates that

inappropriate words and paragraphs were to be

deleted, but the same had not been done. Thus, the

assessing officer himself was not sure as to

whether he had proceeded on the basis that the

assessee had concealed his income or he had

furnished inaccurate particulars. Even before us,

the learned Additional Solicitor General while

placing the order of assessment laid emphasis that

he had dealt with both the situations. The

impugned order, therefore, suffers from non-

application of mind. It was also bound to comply

with the principles of natural justice. (See Malabar

Industrial Co. Ltd. v. CIT)


87. We have, however, noticed hereinbefore that

the Income Tax Officer had merely held that the

assessee is guilty of furnishing of inaccurate

particulars and not of concealment of income;

which finding was arrived at also by the

Commissioner of Income Tax and the Income Tax

Appellate Tribunal."


            In Chairman, SEBI v. Shriram Mutual Fund [(2006) 5 SCC 361], this

Court held:

"35. In our considered opinion, penalty is attracted

as soon as the contravention of the statutory

obligation as contemplated by the Act and the

Regulations is established and hence the intention

of the parties committing such violation becomes

wholly irrelevant. A breach of civil obligation

which attracts penalty in the nature of fine under

the provisions of the Act and the Regulations

would immediately attract the levy of penalty

irrespective of the fact whether contravention must

be made by the defaulter with guilty intention or

not. We also further held that unless the language

of the statute indicates the need to establish the

presence of mens rea , it is wholly unnecessary to

ascertain whether such a violation was intentional

or not. On a careful perusal of Section 15-D( b )

and Section 15-E of the Act, there is nothing which

requires that mens rea must be proved before

penalty can be imposed under these provisions.

Hence once the contravention is established then

the penalty is to follow."


19.       It is, therefore, difficult to accede to the contention of Mr. Banerjee

that under no circumstances absence of mens rea would not be a plea for

levy of penalty.  An assessing authority has been conferred with a

discretionary jurisdiction to levy penalty.  By necessary implication, the

authority may not levy penalty.  If it has the discretion not to levy penalty,

existence of mens rea becomes a relevant factor.  We may notice that in the

show cause notice itself, the authorities stated:

"You have sold away 239.966 tons of iron and

steel without payment of any sales tax with the

assistance of the Form No. 3(B), amounting to Rs.

10,73,850.89, whereas the receipt thereof was also

issued under the provisions of Section 4-B on the

basis of full exemption from the tax, with the

assistance of the Form No. 3(B).  In this way, the

material purchased for the purposes of production

under the provisions of Section 4-B, while utilizing

the same for the same purposes, was sold away in

the same condition, which is a violation of the

provisions of Section 4-B, and is punishable under

the aforesaid sub-section of the Act."


20.       The assessing authority, therefore, understood the said provision to

mean that the appellant was liable to be imposed with a punishment.  The

authority did not say that the duty which was otherwise due from the

appellant would be realized. 

21.       We, however, are of the opinion that in the facts and circumstances of

this case, existence of mens rea on the part of the appellant is evident.

22.       Ordinarily a dealer must abide by the undertaking given by it.  If it is

not in a position to comply with the requirements contained in the statute, it

is expected that it would inform thereabout to the assessing authority.  It

purchased the goods in the assessment year 1985-86.  It did not disclose as

to when it sold out the goods.  What was its consumption during said

assessment year or the next assessment year had not been disclosed. 

As a finding of fact has been arrived at that the dealer had not

furnished any proof in regard to its inability to use it for manufacturing

purposes.  It was obligatory on the part of the appellant as it has special

knowledge in regard thereto to show as to why the entire quantity of goods

could not be utilized. 

A finding of fact has also been arrived at by the assessing authority

that the vendee had utilized the self-same goods for manufacturing.  10% of

the purchased goods, namely, 2532.989 M.T. is not such which could be

ignored by the assessing authority.  Although duty was payable thereon, it

may be that the auction of lots was on "as is where is basis", the same would

not mean that a part of it could not be melted for manufacturing the ingots. 

If that was the position, it could have informed the authorities in that behalf

even prior to affecting the sale to a third party. 

23.       Moreover, the assessing authority as also the appellate authority had

held that the appellant sold the goods knowingly and, it must, therefore, be

inferred that the finding in regard to mens rea had also been arrived at.

24.       In the facts and circumstances of this case, we are of the opinion that

no case has been made out for interfering with the impugned judgment.  The

appeal is dismissed accordingly.  No costs.

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