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Ms J.R. Fabrics (P) Ltd v. Commissioner Of Central Excise
Factual and Procedural Background
This appeal was filed by the revenue under Section 35G of the Central Excise Act, 1944 challenging an order dated 10.1.2008 of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi.
The respondent, M/s J.R. Fabrics (P) Ltd., a manufacturer of fabrics falling under Chapters 54, 55 and 58 of the Central Excise Tariff Act, 1985, was registered and availing CENVAT credit. Central Excise officers detected clearance of chenille fabrics without payment of duty for the period 28.7.2001 to 28.2.2002 during a factory visit on 13.2.2003. The respondent admitted the default and paid excise duty in two instalments (Rs. 6,300 on 15.2.2003 and Rs. 5,04,695 on 18.2.2003, totaling Rs. 5,10,995), and later deposited interest of Rs. 1,11,373 on 27.10.2003. These payments were made prior to the adjudicating authority's order dated 30.4.2004.
The adjudicating authority (order dated 30.4.2004) confirmed the duty of Rs. 5,10,995 (applying extended limitation), appropriated the amounts previously paid, directed payment/appropriation of interest (Rs. 1,11,373) and imposed a penalty of Rs. 5,10,995 under Rule 25 read with Section 11AC and 38A, besides imposing a personal penalty of Rs. 1,00,000 on the Managing Director under Rule 26.
On appeal the Commissioner deleted the personal penalty on the Managing Director but maintained the duty and penalty. The respondent appealed to the Tribunal which reduced the penalty to 25% of the duty (Rs.1,27,000) relying on a Delhi High Court decision (CCE v. Malbro Appliances Pvt. Ltd.). The revenue preferred the present appeal against that Tribunal order.
Legal Issues Presented
- Whether CESTAT was correct in allowing the benefit of penalty up to 25% of the duty amount in a case where the penalty so determined was not paid by the party within the period of thirty days, which is a pre‑requirement to avail such benefit as per the second proviso to Section 11AC of the Central Excise Act?
Arguments of the Parties
Revenue (Mr. Sanjeev Kaushik)
- The decision of the Supreme Court in Union of India v. Dharmendra Textile Processors (2008 (231) ELT 3 (SC)) interprets Section 11AC to require payment of a penalty equal to the duty so determined; consequently, the Tribunal's reduction to 25% is impermissible.
- Plain reading of the second proviso to Section 11AC, according to learned counsel, leads to the conclusion that the equal amount of duty is to be realised as penalty unless conditions of the proviso (including payment within thirty days) are satisfied.
Dealer-respondent (Mr. Jagmohan Bansal)
- The Tribunal correctly reduced the penalty to 25% under the proviso to sub‑section (2) of Section 11AC because the duty and interest were paid before the adjudicating order, and the statutory proviso contemplates a reduced penalty where duty and interest are paid within thirty days from communication of the order determining duty.
- The dealer was deprived of the opportunity to deposit only 25% because the adjudicating authority imposed penalty equal to the amount of duty, contrary to the first proviso to Section 11AC; hence the respondent cannot be faulted for appealing and securing reduction of penalty to 25%.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CCE v. Malbro Appliances Private Ltd., 2007 (208) ELT 503 (Delhi High Court) | Authority relied upon by the Tribunal for reducing penalty to approximately 25% where duty was paid before issue of show‑cause notice. | The Tribunal followed Malbro to reduce the penalty to 25%. The present Court noted that the Tribunal relied on Malbro but observed that the Tribunal's reasoning (that payment before show‑cause made imposition of full penalty illegal) was not strictly in accordance with law. |
| Union of India v. Dharmendra Textile Processors, 2008 (231) ELT 3 (Supreme Court) | Interpretation of Section 11AC indicating mandatory nature of penalty prescribed by that section (as argued by the revenue). | The revenue invoked this Supreme Court decision to contend that penalty equal to duty must be levied. The Court rejected the relevance of Dharmendra Textile to the present facts because the provisos (1st and 2nd) added by Act No. X of 2000 were not considered in Dharmendra Textile's case, and therefore that decision did not override the specific operation of those provisos in the present case. |
| K.P. Pouches (P) Ltd. v. Union of India, 2008 (228) ELT 31 (Division Bench, Delhi High Court) | Division Bench conclusion that, in light of the proviso, only 25% of the duty is payable as penalty where statutory conditions are met. | The present Court respectfully agreed with the Division Bench in K.P. Pouches, finding the facts akin to that case, and adopted its conclusion that the statutory proviso requires that penalty be limited to 25% where the conditions of the proviso are satisfied. |
Court's Reasoning and Analysis
The Court began by closely reading Section 11AC and its provisos as inserted by Act No. X of 2000. The principal clause of Section 11AC makes liable a penalty equal to the duty determined where duty was not paid or short‑paid by reason of fraud, collusion, willful mis‑statement or suppression of facts or contravention with intent to evade duty.
The Court analysed the provisos and highlighted their operative effect:
- The first proviso provides that if the duty (as determined under Section 11A(2)) and interest under Section 11AB are paid within thirty days from the date of communication of the order determining such duty, the penalty shall be 25% of the duty so determined.
- The second proviso states that the benefit of the reduced penalty under the first proviso is available only if the amount of penalty so determined has also been paid within the same thirty‑day period.
- The third proviso addresses adjustments where the duty is reduced or increased on appeal; if increased on appeal, the benefit of reduced penalty is available only if the increased duty, interest and twenty‑five percent of the consequential increase of penalty are paid within thirty days of the appellate order.
Applying these provisions to the facts, the Court noted that the duty of Rs. 5,10,995 was paid on 15.2.2003 and 18.2.2003 and interest of Rs. 1,11,373 was paid on 27.10.2003 and appropriated by the adjudicating authority's order dated 30.4.2004. The Court concluded that the adjudicating authority erred in imposing a penalty equal to the full duty amount without providing the statutory opportunity to avail the reduced penalty under the proviso, as there was no opportunity for the respondent to deposit only 25% (because the authority imposed the full penalty instead).
The Court accepted the Tribunal's outcome (reduction of penalty to 25%) but observed that the Tribunal's reasoning — that payment before issuance of show‑cause notice warranted reduction — was not legally correct. The Court emphasised that the reduction to 25% is not a discretionary leniency granted by a judicial forum but a statu tectonic consequence of the statutory provisos enacted by Parliament effective 12.5.2000.
Addressing the revenue's reliance on the Supreme Court decision in Dharmendra Textile Processors, the Court explained that although Dharmendra interpreted Section 11AC and stressed the mandatory nature of the penalty, that decision did not consider the provisos added by Act No. X of 2000. Consequently, Dharmendra Textile did not govern the operation of the first and second provisos in the present case.
The Court also noted and followed the Division Bench decision in K.P. Pouches (P) Ltd., which had concluded that where the proviso's conditions are met, only 25% of the duty is payable as penalty. The Court found the present facts analogous to K.P. Pouches and respectfully agreed with that view.
Holding and Implications
Final Holding: For the reasons stated, the appeal filed by the revenue fails and is dismissed.
Direct consequences for the parties:
- The dealer‑respondent is to deposit a penalty equal to 25% of the duty of excise determined by the excise officer (i.e., 25% of Rs. 5,10,995) within thirty days from the date of receipt of a copy of this order.
- A copy of the order is to be given to the counsel for the dealer‑respondent after attestation and signed by the bench Secretary, and a copy is to be sent to the Tribunal with a direction that the Tribunal should take into account the correct rationale of law as per statutory provisions rather than following an incorrect judicial approach.
Broader implications: The Court applied and reiterated the statutory operation of the provisos to Section 11AC (as inserted by Act No. X of 2000) and aligned with the Division Bench in K.P. Pouches that, where the proviso's conditions are satisfied, the penalty is limited to 25% as a matter of statute. The opinion does not purport to lay down a new precedent beyond applying the statutory provisos and following existing High Court authority.
This is an appeal by the revenue filed under Section 35 G of the Central Excise Act,1944 (for brevity 'the Act') challenging order dated 10.1.2008 passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (for brevity 'the Tribunal'). The revenue has claimed that the following question of law would emerge from the said order of the Tribunal:
" Whether CESTAT is correct in allowing the benefit of penalty upto 25% of the duty amount in the case when the penalty so determined was not paid by the party within the period of thirty days which is the pre requirement to avail such benefit as per the second proviso to Section 11 AC.?"
Brief facts of the case which are necessary for the disposal of the controversy raised may first be noticed. The dealer- respondent M/s J.R. Fabrics (P) ltd. is engaged in the manufacture of unprocessed woven fabrics, chenille fabrics and pile fabrics falling under Chapter 54, 55 and 58 of the Central Excise Tariff Act,1985.The dealer- respondent was registered with the central excise department and was availing CENVAT credit facility. It is conceded position that dealer- respondent was clearing its fabrics without payment of duty which was detected when the officers of central excise visited their factory on 13.2.2003. The non payment was found on Chenille fabrics in respect of the period from 28.7.2001 to 28.2.2002 which was prior to the date of registration in March, 2002. The dealer- respondent conceded their default and deposited the amount of duty alongwith interesting amount to Rs. 5,10,995/- levied on the chenille fabrics valued at Rs. 31,93,719/-. The aforesaid amount was paid even before the issuance of show cause notice on 15.2.2003 and 18.2.2003.The dealer- respondent also deposited a sum of Rs. 1,11,373/- on 27.10.2003 before issuing of show cause notice. The dealer- respondent admitted their liability vide their reply dated 13.3.2004 and also pointed out that the amount of duty alongwith interest had already been paid which may be appropriated as legally paid. Accordingly the Adjudicating Authority passed an order in original on 30.4.2004 holding as under:
"1. Central Excise duty of Rs. 5,10,995/- (rupees five lacs ten thousand nine hundred ninety five only) leviable on the Chenille fabrics valued at Rs.31,93,719 cleared without payment of duty is confirmed against M/s J.R.Fabrics (P) Ltd., Kundli under Section 11 A of Central Excise Act,1944 by applying extended period of limitation and the aid duty which has already been paid by them vide PLA entry No.50 dated 15.2.2003 for Rs.6300/- and entry no.52 dated 18.2.2003 for Rs.5,04,695/- is appropriated as legally paid.
2. I order for the payment of interest Rs.1,11,373/- as demanded from the party for delayed payment of duty, under section 11 AB of the Central Excise Act,1944. As the said interest has already been paid by the party vides PLA entry No. 8 dated 27.10.2003 is appropriated as legally paid.
3.I impose a penalty of Rs.5,10,995/- on the party under Rule 25 of Erstwhile Central Excise (No.2) rules, 2001 read with Section 11 AC and 38 A of the Act ibid;
4. I also impose a penalty of Rs. 1,00,000/- on Sh. Satish Gupta, Managing Director of the party under Rule 26 of Erstwhile Central Excise (No.2) Rules, 2001."
The aforesaid order was challenged in appeal before the Commissioner who modified the order in original by holding that there was nothing on the record which could prove personal involvement of Shri Satish Kumar, Managing Director of the dealer- respondent company so as to attract the penalty of Rs. 1,00,000/- under Rule 26 of the Central Excise (Part 2) Rules, 2001 or which could prove that he had made some personal gain out of the Chenille fabrics which was the good in question. Thereafter the dealer- respondent further preferred an appeal before the Tribunal. The Tribunal has held that the dealer- respondent was liable to pay only 25 percent of duty amount as penalty by placing reliance on a judgement of the Delhi High Court in the case of CCE v. Malbro Appliances Private Ltd. 2007(208) ELT 503. The view of the Tribunal reads thus:
".......... I find that it is clear case of suppression of fact with intent to evade payment of duty and Section 11 AC would be invoked in this case. The Hon'ble Delhi High Court in the case of Malbro Appliances Pvt. Ltd. (supra) held that the assessee paid duty before issue of show cause notice; the Tribunal rightly worked out penalty amount to close to 25% of the duty determined. Respectfully following the decision of the Hon'ble High Court, penalty is reduced to Rs. 1,27,000/- i.e. 25% of the duty amount as the respondent deposited duty before issue of show cause notice. The appeal is disposed of in the above terms."
Mr. Sanjeev Kaushik, learned counsel for the revenue has vehemently argued that provisions of Section 11 AC of the Act has now been interpreted by Hon'ble the Supreme Court in the case of Union of India v. Dharmendra Textile Processors 2008(231 )ELT 3(SC). According to the learned counsel a plain reading of 2nd proviso to Section 11 AC of the Act would make it clear that equal amount of duty found to be paid to the revenue is to be realised as penalty and therefore the amount of 25% imposed by the Tribunal as penalty is liable to be set aside.
Mr. Jagmohan Bansal, learned counsel for the dealer-
respondent has, however, submitted that the Tribunal has taken the correct view and the judgement of Hon'ble the Supreme Court in Dharmendra Textile's case (supra) would not be applicable to the facts of the present case. Learned counsel has drawn our attention to proviso to sub section 2 of section 11 AC of the Act and argued that where duty is determined and the interest payable thereon under section 11 AB of the Act is paid within 30 days from the date of communication of the order of the officer determining such duty then the amount of penalty has to be 25% of the duty so determined. He has further submitted that dealer- respondent has been deprived of the opportunity to pay 25% of the duty because no benefit of the proviso was extended to the dealer respondent by imposing penalty equivalent to 25% of the duty amount. He has highlighted that once the dealer- respondent has deposited the amount of duty as well as the interest much prior to the date of assessment order drawn under section 11(2) of the Act then there was no question of delay in depositing the amount of penalty equivalent to 25% of the total duty. He has maintained that the adjudicating authority as well as the first appellate authority had illegally insisted on imposition of penalty equivalent to the amount of duty which has been patently contrary to Ist proviso to Section 11 AC of the Act.
After hearing hearing learned counsel for the parties and perusing the record with their able assistance we find that in order to answer the question raised by the revenue it would be first necessary to read Section 11 AC of the Act which is as under:
"11AC. Penalty for short-levy or non-levy etc., in certain cases: Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reasons of fraud, collusion or any willful mis-statement or suppression of facts or contravention of any of the provisions of this Act or of the rules made there under with intent to evade payment of duty, the persons who is liable to pay duty as determined under sub-section (2) of section 11a, shall also be liable to pay a penalty equal to the duty so determined:
[Provided that where such duty as determined under sub section (2) of section 11 A, and the interest payable thereon under section 11 AB , is paid within thirty days from the date of communication of the order of the Central Excise Officer determining such duty, the amount of penalty liable to be paid by such person under this section be twenty five percent of the duty so determined:
Provided further that the benefit of reduced penalty under the first proviso shall be available if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:
Provided also that where the duty determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the duty, as reduced or increased, as the case may be shall be taken into account: Provided also that in case where the duty determined to be payable is increased by the Commissioner (Appeal), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the first proviso shall be available, if the amount of duty so increased the interest payable thereon and twenty-five per cent of the consequential increase of penalty have also been paid within thirty days of the communication of the order by which such increase in the duty takes effect.
Explanation: - For the removal of doubts, it is hereby declared that-
(1) the provisions of this section shall also apply to cases in which the order determining the duty under sub-section (2) of section 11A relates to notices issued prior to the date on which the Finance Act, 2000 receives the assent of the President; (2) any amount paid to the credit of the Central Government prior to the date of communication of the order referred to in the first proviso or the fourth proviso shall be adjusted against the total amount due from such person.
A perusal of Section 11 AC of the Act shows that an amount equal to the amount of duty as determined by the Central Excise Officer under Section 11 A(2) of the Act is required to be paid by the assessee where any duty of excise has not been (a) levied or paid or (b) has been short paid or
(c) erroneously refunded by the reason of fraud collusion or any willful mis- statement or suppression of facts or (d) contravention of any of the provisions of this act or the rules made thereunder with intent to evade payment of duty. The aforesaid principal clause has four provisos. The first two provisos postulate a concessional rate of penalty in case the amount of duty as determined under sub section 11 A (2) of the Act and the interest payable thereon under section 11 AB of the Act stand paid within thirty dates from the date of communication of the order of the officer determining such duty. In such a case the amount of penalty has been stipulated to be 25% of the duty so determined.
The second proviso further imposes an obligation that the benefits contemplated by first proviso are to be available if the amount of penalty so determined has also been paid within a period of thirty days. In other words, if the duty as determined under Section 11 A(2) of the Act by the Central Excise Officer is paid within thirty days then penalty equal to the amount of duty is not required to be paid and the amount contemplated in lieu of the penalty is 25 % of the total amount of excise duty determined the officer concerned.
It would further be necessary to notice that 3rd proviso takes care of a situation where duty determined to be payable is reduced or increased by the Commissioner (appeals), Appellate Tribunal or by this Court then duty as reduced or increased is required to be taken into account. The provision takes care of fluctuation in the assessment of duty at the appellate stage. However, in the present case there is no increase or decrease in the assessment of duty of excise. The alteration has been ordered by the Tribunal in the order of the Commissioner ( Appeals) by reducing the amount of penalty to 25% of the total amount of duty of excise assessed by the Assessing Authority. Therefore, we are of the view that the appeal filed by the Revenue is liable to be rejected.
It is appropriate to notice that the period in question is 28.7.2001 to 28.2.2002 and there is no dispute that the proviso added by Act No. X of 2000 is made applicable w.e.f. 12.5.2000 would apply which provides that an amount equal to 25% of the amount of duty of excise would be liable to be paid as penalty if the amount of duty of excise is paid within thirty days from the date of communication of the order by the Central Excise Officer.
When we examine the facts of the present case in the light of the aforesaid provision, it becomes evident that the total amount of duty amounting to Rs. 6,300/- was paid on 15.2.2003 and amount of Rs. 5,04,695/- was paid on 18.2.2003. Accordingly a total amount of excise duty of Rs. 5,10,995/- stood paid by 18.2.2003 whereas adjudicatory order in original was issued on 30.4.2004. It is further appropriate to mention that the dealer- respondent had also deposited interest of Rs.1,11,373/- on 27.10.2003 which has been appropriated by the order in original passed on 30.4.2004 (A.1).
The order in original also imposes penalty of Rs. 5,10,995/- which is equal to the amount of duty of excise assessed by the Adjudicating Authority. It is thus evident that acting on 2nd proviso the amount of penalty to the extent of 25% could not have been deposited and order was passed by the Adjudicating Authority in derogation of the express provision made by the 2nd proviso and there was no opportunity for the dealer- respondent to deposit 25% of the amount. Accordingly he challenged the order in appeal where again the demand of penalty equivalent to duty of excise was maintained (although some relief was given regarding personal penalty imposed on Shri Satish Kumar, Managing Director). It was thereafter that an appeal was filed and the Tribunal reduced the penalty to 25% of the total amount of duty of excise as assessed by the concerned officer. The Tribunal had primarily placed reliance on a judgement of the Delhi High Court in the case of Malbro Applicances (Private) Ltd. (supra).
The conclusion reached by the Tribunal is correct. However, it seems that the reasoning followed by the Tribunal is not in accordance with the law. The amount of 25% imposed as penalty is not because any discretion is vested in the Court or the Tribunal but because of 1st and 2nd provisos incorporated by the Parliament( by Act No. X of 2000) w.e.f. 12.5.2000. Therefore, the Tribunal should not have committed the same error that merely because the amount of duty has been deposited before the issuance of show cause notice that imposition of penalty becomes illegal or lenient view was required to be taken.
The view taken by the Delhi High Court in Malbro Appliances Private Ltd.'s case (supra) was also examined in detail by a Division Bench of the same Court in the case of K.P.Pouches (P) Ltd v. Union of India 2008 (228) ELT 31. After reading Section 11 AC of the Act, the Division Bench came to the conclusion that according to the proviso only 25% of the duty of excise was payable. The facts of the present case are akin to the facts of the Division Bench judgement in K.P.Pouches (P) Ltd. case (supra). It has been held by the Division Bench that when the statutory authorities are acting illegally and contrary to the 1st proviso to Section 11 AC of the Act and therefore the assessee cannot be faulted to challenge the order passed by the Assistant Commissioner which fault was also repeated by the Commissioner (Appeals). The situation is the same in the present case. We, therefore, respectfully agreeing with the view taken by the Division Bench in K.P. Pouches (P) Ltd.'s case (supra) hold that the conclusion reached by the Tribunal that the dealer- respondent was liable to pay penalty to the extent of 25% of the amount of duty of excise determined by the officer concerned.
The argument of the Revenue that the judgement in Dharmendra Textile Processor's case (supra) would apply and penalty equal to the amount of duty of excise assessed by the Assessing Authority is to be paid. We are afraid that such an argument would not be available because judgement in Dharmendra Textile Processor's case (supra) dealt with Section 11 AC of the Act and has concluded the mandatory nature of the penalty contemplated by the proviso . In para 26, reference has been made to the Union Budget of 1996-97, when Section 11 AC of the Act was introduced. It was then clarified that there was no scope for any discretion and the levy of penalty is of mandatory character. Hon'ble the Supreme Court further placed reliance on the Notes on Clauses concluding that similar indication has been given therein. It appears that provisos 1st and 2nd which were added in the year 2000 were not the subject matter of consideration before their Lordships in Dharmendra Textile Processors' case (supra). Therefore, we find no substance in the contention raised on behalf of the revenue especially in the face of express provision made by the four provisos in the year 2000.
For the reasons afore-mentioned this appeal fails and the same is dismissed. The dealer- respondent shall deposit the penalty equivalent to 25% of the duty of excise determined by the excise officer within 30 days from the date of receipt of a copy of this order. A copy of this order shall be given to the counsel for the dealer- respondent, after due attestation, under the signature of the bench Secretary at the earliest.
Before parting it is necessary to observe that the Tribunal is required to take into account the correct rationale of law as per statutory provisions rather than following the judicially condemned approach. A copy of this order be also sent to the Tribunal.
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