Dr. Sanjiv Agarwal
Position prior to Finance Act, 2013 (Prior to 10.05.2013)
None of the provisions provided for personal penalty on partners / proprietor of the firm. However, section 77 talks of any person but such expression ‘any person’ does not imply more than one person or ‘firm as well as partner’ for the same offence. If it is meant to be such, it may result in double penalty or even more.
In certain cases, Department sought to impose personal penalty on the partners u/s 77 of the Finance Act, 1994 (as amended) which has not been specifically provided in the statutory provisions. The SCN levied penalty u/s 77 on the firm and separate penalty on partners u/s 77 is over and above the penalties proposed to be levied u/s 76, 77 and 78.
In such cases, the assessee should rely on the following judicial pronouncements to defend levy of personal penalty –
In B. C. Sharma v. Commissioner of Central Excise, Jaipur (2000) 122 ELT 158 (Cestat), where firm was imposed a penalty of ? 2 lakhs, it was held that when penalty has been imposed on the partnership firm, a separate penalty cannot be merited on the partner.
In Kamal deep Marketing Pvt. Ltd. v. Commissioner of Central Excise, Indore (2004) 165 ELT 206 (Cestat, Delhi), where it was held that personal penalty on partners / proprietor in addition to that on the firm was not Imposable.
In Harish Dye. & Ptg. Works v. Commissioner of Central Excise & Customs, Surat-1 (2001) 138 ELT 772 (Cestat, Mumbai), it was held that partnership firm assessee being a partnership firm is not different from its partners and that separate penalty cannot imposed on the partner.
In Commissioner of Central Excise, Mumbai v. Metal Press India (2009) 246 ELT 303 (Cestat, Mumbai), it was held that partnership firm and its partners cannot be penalized simultaneously.
In Vinod Kumar Gupta v. CCE (2013) 287 ELT 54 (Punjab & Haryana), it was held that proprietorship firm or proprietor or partner could not be treated as two different legal entities, hence second penalty on proprietor or partner would amount to imposition of penalty twice over, which could not be sustained in the eye of law.[Case relied upon Tarak Nath Sen v. UOI- AIR 1975 Calcutta 337].
In Ashish Kumar Agarwal v. CCE, Ahmedabad (2012) 284 ELT 529 (Cestat, Ahmedabad), in absence of any duty liability on main company ,it was held that provisions of Section 112 and 117 of Customs Act, 1962 for imposition of penalties on directors was not invocable. However, in Shri Krishna Urja Projects v. CCE (Meerut-I) (2013) 288 ELT 257 (Cestat, Delhi), it was held that personal penalty can be imposed on director who is actively involved in company’s day to day activities.
In CCE & C, BBSRI v. Pentagon Steel Pvt. Ltd. (2013) 288 ELT 271 (Cestat, Calcutta), it was held that no penalty is imposable on the managing director in absence of any evidence of his direct or indirect involvement.
Thus, personal penalty cannot be levied on partners / proprietors in case of service tax defaults.
Position w.e.f. 10.05.2013
Finance Act, 2013 has inserted a new section 78A to provide for penalty for offences by director etc of a company w.e.f. 10.05.2013.
Section 78A reads as under –
“78A. Where a company has committed any of the following contraventions, namely:—
a) evasion of service tax; or
b) issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or
c) availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or
d) failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due, then any director, manager, secretary or other officer of such company, who at the time of such contravention was in charge of, and was responsible to, the company for the conduct of business of such company and was knowingly concerned with such contravention, shall be liable to a penalty which may extend to one lakh rupees.”.
Section 78 A has been inserted so as to impose penalty, which may extend up to one lakh rupees, on director, manager, secretary or other officer of the company for knowingly involved in the contraventions specified therein.
Salient features of Penalty under section 78A
To impose penalty for contraventions / violations by Company
Penalty may extend up to Rs. one lakh per official
Penalty on any director, manager, secretary or officer of Company
Incharge / responsible to Company for conduct of business of Company
If knowingly involved in specified contraventions
Penalty may be levied on more than one person for single contravention / offences
Evasion of Service Tax
Issuance of bill / Invoice / challan without provision of service in violation of rules.
Availment and utilization of credit of taxes /duties without actual receipt of services /goods either fully or partially.
Failure to pay amount collected as service tax to the credit of Central Government beyond 6 months of the due date
Who is Punishable
Any person who is
and who at the time of contravention was in charge of / was responsible to company
Thus, section 78A provides for imposition of penalty on director, manager secretary, or other officer of the company, who is in any manner knowingly concerned with specified contraventions.