Must penalty be imposed just because the law permits it?
No. Penalty is discretionary and is not to be imposed merely because it is lawful to do so — and not at all for a technical or venial breach, or where the default flowed from a bona fide belief.
Decided by the Supreme Court (J.C. Shah Ag CJ, V. Ramaswami J and A.N. Grover J) on 1969-08-04, reported as (1972) 83 ITR 26 (SC); (1969) 2 SCC 627; AIR 1970 SC 253; Civil Appeal Nos. 883 to 892 of 1966. It bears on section 271(1)(c), section 273B, section Orissa Sales Tax Act s.12(5), section Orissa Sales Tax Act s.25(1)(a), section Orissa Sales Tax Act s.9(1) of the Income Tax Act 1961, in Penalty matters.
It is the most quoted sentence in Indian penalty practice, across every tax. The part to be careful with is the 'quasi-criminal' framing, which Dharmendra Textile has since displaced for s.271(1)(c).
Binding on every court and authority in India.
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Hindustan Steel, a Government of India undertaking, was registered as a dealer under the Orissa Sales Tax Act 1947 only from the quarter ending March 1959. Between 1954 and 1959 it was erecting factory buildings for a steel plant, housing for employees, roads, water supply and drainage, partly departmentally and partly through contractors, and it supplied the contractors with bricks, coal, cement and steel for consideration, adjusting the value against the tender rates. Bricks bought from its own contractors were supplied at a premium of thirty per cent on second class and twenty-five per cent on first class; cement and steel were supplied at three and a half per cent over cost, described in the tender schedule as storage charges. The Sales Tax Officer held the company a dealer in building material, assessed tax for ten quarters ending 31 December 1958 and imposed penalty for failure to register. The Appellate Assistant Commissioner confirmed; the Tribunal agreed on liability but substantially reduced the penalty. Six questions were referred to the Orissa High Court, which answered five of them against the company.
Three matters arose and the Court decided only two of them. First, the supply of building material to the contractors at agreed rates was a sale: the four elements of a sale were present, and no serious argument to the contrary was advanced. Third, the penalties for failure to register as a dealer were not justified - an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, penalty will not ordinarily be imposed unless the party acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct or acted in conscious disregard of its obligation, and it is not to be imposed merely because it is lawful to do so; those in charge of the company had acted in the honest and genuine belief that it was not a dealer, so even granting that they erred no case for penalty was made out. The second question - whether the company was a dealer, that is whether it carried on the business of selling building material with a profit motive - was not decided. The Court held it could not decide the appeals without further facts and directed the Tribunal to submit a supplementary statement of case, within three months, on whether the company charged any profit apart from storage charges on cement and structural steel, and whether the difference between the price charged to contractors and the price it paid for bricks was in respect of storage and other incidental charges.
On penalty, the liability does not arise merely on proof of default in registering. The proceeding is quasi-criminal, so penalty will not ordinarily be imposed unless the party obliged acted deliberately in defiance of law, or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation; it is not to be imposed merely because it is lawful to do so. Whether to impose it at all is a matter of discretion, to be exercised judicially on all the relevant circumstances, and even where a minimum penalty is prescribed the authority is justified in refusing to impose any where the breach is technical or venial or flows from a bona fide belief that the offender is not liable to act as prescribed. Applying that, the honest belief of those running the company that it was not a dealer answered the penalty. On the dealer question the Court applied Abdul Bakshi: 'business' means an occupation carrying a course of dealing with a profit motive, not sport or pleasure. It then found that both the Tribunal and the High Court had ignored the general rules and conditions annexed to the tender form, and the schedule showing three and a half per cent added to the purchase price of cement and steel expressly as storage charges. If the company was charging a fixed percentage over cost for storage, insurance and rental, it would be difficult to resist the conclusion that it was not carrying on the business of selling those goods; and there was no comparable statement about bricks. That gap in the findings is why the appeals could not be decided.
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.
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Handle my notice → Ask a CA on WhatsAppNo. Penalty is discretionary and is not to be imposed merely because it is lawful to do so — and not at all for a technical or venial breach, or where the default flowed from a bona fide belief. This was decided by the Supreme Court (J.C. Shah Ag CJ, V. Ramaswami J and A.N. Grover J) and bears on section 271(1)(c), section 273B, section Orissa Sales Tax Act s.12(5), section Orissa Sales Tax Act s.25(1)(a), section Orissa Sales Tax Act s.9(1) of the Income Tax Act 1961. It is reported as (1972) 83 ITR 26 (SC); (1969) 2 SCC 627; AIR 1970 SC 253; Civil Appeal Nos. 883 to 892 of 1966. It is the most quoted sentence in Indian penalty practice, across every tax. The part to be careful with is the 'quasi-criminal' framing, which Dharmendra Textile has since displaced for s.271(1)(c). If it applies to you, the first step is this: Use it for the discretion point and the technical-or-venial-breach point, which survive.
Hindustan Steel, a Government of India undertaking, was registered as a dealer under the Orissa Sales Tax Act 1947 only from the quarter ending March 1959. Between 1954 and 1959 it was erecting factory buildings for a steel plant, housing for employees, roads, water supply and drainage, partly departmentally and partly through contractors, and it supplied the contractors with bricks, coal, cement and steel for consideration, adjusting the value against the tender rates. Bricks bought from its own contractors were supplied at a premium of thirty per cent on second class and twenty-five per cent on first class; cement and steel were supplied at three and a half per cent over cost, described in the tender schedule as storage charges. The Sales Tax Officer held the company a dealer in building material, assessed tax for ten quarters ending 31 December 1958 and imposed penalty for failure to register. The Appellate Assistant Commissioner confirmed; the Tribunal agreed on liability but substantially reduced the penalty. Six questions were referred to the Orissa High Court, which answered five of them against the company. The matter was decided on 1969-08-04 by the Supreme Court (J.C. Shah Ag CJ, V. Ramaswami J and A.N. Grover J). On those facts the Supreme Court held as follows. Three matters arose and the Court decided only two of them. First, the supply of building material to the contractors at agreed rates was a sale: the four elements of a sale were present, and no serious argument to the contrary was advanced. Third, the penalties for failure to register as a dealer were not justified - an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, penalty will not ordinarily be imposed unless the party acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct or acted in conscious disregard of its obligation, and it is not to be imposed merely because it is lawful to do so; those in charge of the company had acted in the honest and genuine belief that it was not a dealer, so even granting that they erred no case for penalty was made out. The second question - whether the company was a dealer, that is whether it carried on the business of selling building material with a profit motive - was not decided. The Court held it could not decide the appeals without further facts and directed the Tribunal to submit a supplementary statement of case, within three months, on whether the company charged any profit apart from storage charges on cement and structural steel, and whether the difference between the price charged to contractors and the price it paid for bricks was in respect of storage and other incidental charges.
On penalty, the liability does not arise merely on proof of default in registering. The proceeding is quasi-criminal, so penalty will not ordinarily be imposed unless the party obliged acted deliberately in defiance of law, or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation; it is not to be imposed merely because it is lawful to do so. Whether to impose it at all is a matter of discretion, to be exercised judicially on all the relevant circumstances, and even where a minimum penalty is prescribed the authority is justified in refusing to impose any where the breach is technical or venial or flows from a bona fide belief that the offender is not liable to act as prescribed. Applying that, the honest belief of those running the company that it was not a dealer answered the penalty. On the dealer question the Court applied Abdul Bakshi: 'business' means an occupation carrying a course of dealing with a profit motive, not sport or pleasure. It then found that both the Tribunal and the High Court had ignored the general rules and conditions annexed to the tender form, and the schedule showing three and a half per cent added to the purchase price of cement and steel expressly as storage charges. If the company was charging a fixed percentage over cost for storage, insurance and rental, it would be difficult to resist the conclusion that it was not carrying on the business of selling those goods; and there was no comparable statement about bricks. That gap in the findings is why the appeals could not be decided. In the words reproduced by the source cited on this page: "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."
It was decided by the Supreme Court on 1969-08-04 and is reported as (1972) 83 ITR 26 (SC); (1969) 2 SCC 627; AIR 1970 SC 253; Civil Appeal Nos. 883 to 892 of 1966. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 271(1)(c), section 273B, section Orissa Sales Tax Act s.12(5), section Orissa Sales Tax Act s.25(1)(a), section Orissa Sales Tax Act s.9(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Three matters arose and the Court decided only two of them. First, the supply of building material to the contractors at agreed rates was a sale: the four elements of a sale were present, and no serious argument to the contrary was advanced. Third, the penalties for failure to register as a dealer were not justified - an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, penalty will not ordinarily be imposed unless the party acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct or acted in conscious disregard of its obligation, and it is not to be imposed merely because it is lawful to do so; those in charge of the company had acted in the honest and genuine belief that it was not a dealer, so even granting that they erred no case for penalty was made out. The second question - whether the company was a dealer, that is whether it carried on the business of selling building material with a profit motive - was not decided. The Court held it could not decide the appeals without further facts and directed the Tribunal to submit a supplementary statement of case, within three months, on whether the company charged any profit apart from storage charges on cement and structural steel, and whether the difference between the price charged to contractors and the price it paid for bricks was in respect of storage and other incidental charges. It arises in Penalty matters, on section 271(1)(c), section 273B, section Orissa Sales Tax Act s.12(5), section Orissa Sales Tax Act s.25(1)(a), section Orissa Sales Tax Act s.9(1) of the Income Tax Act 1961, and was decided by J.C. Shah Ag CJ, V. Ramaswami J and A.N. Grover J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not use it for the proposition that mens rea must be proved under s.271(1)(c) — that part is gone. It works particularly well for procedural penalties under ss.271B, 271D and 271E read with s.273B.
Partly overruled — read this first. Not overruled as a whole, but its quasi-criminal characterisation must now be read subject to Dharmendra Textile, where a three-Judge Bench held that penalty under s.271(1)(c) is a civil liability and that wilful concealment is not an essential ingredient, mens rea standing excluded. The passage on technical or venial breach continues to be cited as a live principle. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A sales tax case under the Orissa Sales Tax Act 1947, carried into income-tax practice by citation on s.271(1)(c) and s.273B, neither of which is mentioned in the judgment. Two cautions. The Court did not hold the company to be a dealer; it found the Tribunal and the High Court had ignored the tender schedule showing that three and a half per cent was added to cost expressly as storage charges, and called for a supplementary statement of case on whether any profit was charged. So the case is authority on penalty, not on the dealer question. And the penalty passage was delivered on a finding of honest and genuine belief; it is not a general dispensation from penalty. The citation is 83 ITR 26; 83 ITR 369 given in one commentary is wrong. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Three matters arose and the Court decided only two of them. First, the supply of building material to the contractors at agreed rates was a sale: the four elements of a sale were present, and no serious argument to the contrary was advanced. Third, the penalties for failure to register as a dealer were not justified - an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, penalty will not ordinarily be imposed unless the party acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct or acted in conscious disregard of its obligation, and it is not to be imposed merely because it is lawful to do so; those in charge of the company had acted in the honest and genuine belief that it was not a dealer, so even granting that they erred no case for penalty was made out. The second question - whether the company was a dealer, that is whether it carried on the business of selling building material with a profit motive - was not decided. The Court held it could not decide the appeals without further facts and directed the Tribunal to submit a supplementary statement of case, within three months, on whether the company charged any profit apart from storage charges on cement and structural steel, and whether the difference between the price charged to contractors and the price it paid for bricks was in respect of storage and other incidental charges.
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