Cost Audit Shortages Alone Cannot Sustain Time-Barred Excise Demand: Calcutta HC

Hindalco Industries Limited Vs Commissioner of Central Excise (Calcutta High Court)

Statutory Cost Audit Disclosure Defeats Extended Excise Limitation; Department’s Presence at Stock Verification Negates Alleged Suppression; Excise Demand Time-Barred Where Notices Failed to Establish Suppression; Absence of Intent to Evade Defeats Extended Limitation and Penalty: Calcutta High Court

Summary: Calcutta High Court allowed Hindalco Industries Limited’s appeal challenging the CESTAT Kolkata order dated 22.12.2010, which had restored four Orders-in-Original confirming a Central Excise demand of Rs.6,29,920/- with interest and penalty. The dispute concerned Financial Years 2001-02 and 2002-03 and principally involved whether the extended limitation period under the proviso to Section 11A(1) of the Central Excise Act, 1944 could be invoked when the demand was founded on shortages reflected in the assessee’s statutory Cost Audit Report and the Department had contemporaneous knowledge of the relevant facts. The Court also considered whether penalty under Section 11AC could survive when the requirements for invoking extended limitation were absent.

Hindalco manufactured aluminium and availed CENVAT credit on inputs. It had invited departmental officers to its annual stock verification, and officers attended stock-taking on 09.02.2002 and 08.03.2003. The physical inventory reports recorded excesses and shortages at different stages of manufacture. The Cost Audit Report dated 26.09.2003, prepared from those stock-taking records under the Cost Audit (Report) Rules, 2001, similarly disclosed excesses and shortages of raw materials, work-in-progress, finished goods, scrap and wastage. The excesses and shortages offset one another and there was no net shortage. On 16.12.2004, departmental officers audited Hindalco’s premises and were supplied the financial and statutory records, including the Cost Audit Report. Nevertheless, four Show Cause Notices invoking extended limitation were issued only on 03.04.2006.