Excise Duty cannot be demanded Solely on Sales Figure Discrepancy

Pratap Polysacks Ltd. Vs Commissioner of Central Excise (CESTAT Kolkata)

Mere difference in figures in Balance sheet and ER-1 return is not sustainable cause to impose duty

The CESTAT, Kolkata in M/s. Pratap Polysacks Ltd. v. Commissioner of Central Excise, Haldia [Excise Appeal No.175 of 2011 dated August 07, 2023] set aside the demand order passed by the Adjudicating Authority and held that duty cannot be demanded merely based on the difference in sales figures between the balance sheet and the and ER-1 Returns, there has to be some positive evidence brought on record to substantiate the allegation of clandestine clearance.

Facts:

M/s. Pratap Polysacks (“the Appellant”) is engaged in the manufacture of HEPE/PP Sacks, Woven Fabric, woven sacks liner and cut pieces.

The Revenue Department (“the Respondent”) conducted physical verification of stock at the business premises of the Appellant on June 04, 2008 and found 2375 kgs of Master Batch in excess over and above the stock reflected in their RG-23A part-I account.

A statement of the representative of the Appellant was recorded, who accepted the difference, but could not able to justify the reasons for such difference and stated that the difference might have occurred due to excess quantity shown as consumption reported by the Supervisor over a long period of time and it might have been purchased for job work of M/s. Hissar Udyog Pvt. Ltd. for which no Cenvat credit was taken.

Subsequently on June 12, 2008 the Anti evasion unit of the Respondent again visited the Appellant’s business premises and undertook fresh stock counting, wherein 2260 kgs of Master Batch was found excess over of Master Batch and the same was seized. However, the Respondent released the Master Batch provisionally vide order dated November 11, 2008.

The Respondent further investigated the Appellant books of accounts for the financial year 2004-05, 2005-06, 2006-07 and 2007-08 and found that the sales figures in terms of quantities declared in the Schedule of Balance Sheets were not tallying with the quantity of clearance of those products declared in the monthly ER-1 returns filed by the Appellant during the corresponding financial years.

Thereafter, a Show Cause Notice dated May 26, 2009 (“the SCN”) was issued to the Appellant demanding Central Excise duty amounting to INR 50,52,308 under Section 11A(1) of the Central Excise Act, 1944. Later the Adjudicating Authority vide and order December 06, 2010 (“the Impugned Order”) reduced the demand and confiscated the seized Master Batch but allowed the same on payment of redemption fine of INR 15,000 as penalty.

Aggrieved by the Impugned Order the Appellant filed three appeals before the CESTAT, Kolkata.

The Appellant submitted that the alleged differences between the figures appearing in the monthly ER-1 register and reflected in the Schedules to the Balance Sheet for the financial years 2005-06 2006-07 and 2007-08, were certified by the Chartered Accountants after examination of their books of accounts for those financial years.

The Appellant also submitted that so far as the excess of stock of 2260 kgs. of Master Batch found on physical verification of stock of raw materials on June 12, 2008 is concerned, they have not taken Cenvat credit on the excess quantity of Master Batch found. However, since no Cenvat credit was taken on such excess quantity of Master Batch, confiscation of the same does not arise.

Issue:

Whether the duty can be demanded solely based on differences between sales figures in the balance sheet and the ER-1 returns?

Held:

The CESTAT, Kolkata in Excise Appeal No.175 of 2011 held as under:

• Observed that, the demand in the Impugned Order is mainly due to the difference between the sale figures available in the Schedule of the Balance Sheet for financial year 2004-05, 2005-06, 2006-07 and 2007-08 and the quantity of clearance of those products declared in the monthly ER-1 returns filed by the Appellant during the corresponding financial years.
• Noted that, the demand was confirmed based on the difference between the sales figures available in the Balance Sheet and the value declared in the ER-1 returns.
• Opined that, mere allegation of shortage based on the difference in sales figures between the balance sheet and the and ER-1 Returns, cannot be the basis for confirming the central excise duty on the differential quantity.
• Held that, Central Excise duty cannot be demanded merely based on the difference in sales figures found between the balance sheet and the and ER-1 Returns, there must be some positive evidence brought on record to substantiate the allegation of clandestine clearance.
• Set aside the demand confirmed in the Impugned Order.

FULL TEXT OF THE CESTAT KOLKATA ORDER

M/s. Pratap Polysacks Ltd. (The Appellants) are engaged in the manufacture of HEPE/PP Sacks, Woven Fabric (both laminated and un-laminated) woven sacks (both laminated and un-laminated) liner and cut pieces falling under chapter 39 of the First Schedule to CETA, 1985.

2. The Central Excise officers of Haldia Commissioner ate visited the factory of the Appellants on 04.06.2008 and conducted physical verification of stock in their factory. The officer found a quantity of 2375 kgs. of Master Batch in excess over and above the stock reflected in their RG-23A part-I account. A statement was recorded from Shri Arindam Banerjee, Authorized representative of the Appellant company, who accepted the difference, but could not justify the reasons for such difference. Subsequently on 12.06.2008, Officers from Headquarters, Anti Evasion unit again visited the Appellant’s factory and had undertaken fresh stock taking, wherein 2260 kgs. of Master Batch was found to be in excess over the recorded stock.

3. In his statement dated 12.6.2008, Shri Arindam Banerjee, stated that the difference might have occurred due to excess quantity shown as consumption reported by the Supervisor over a long period of time and it might have been purchased for job work of M/s. Hissar Udyog Pvt. Ltd. for which no Cenvat credit was taken. The said quantity of 2260 kgs. of Master Batch valued at Rs.61,585.00 was seized which was subsequently released provisionally vide order dated 11.11.2008.

4. In the course of investigation, the officers checked the Schedule of Balance Sheet for financial years 2004-05, 2005-06, 2006-07 and 2007-08 and found that the said sale figures in terms of quantities declared in the Schedule of Balance Sheets were not tallying with the quantity of clearance of those products declared in the monthly ER-1 returns filed by them during the corresponding financial years.

5. A Show Cause Notice dated 26.05.2009 was issued to the Appellants demanding Central Excise duty amounting to Rs.50,52,308/-including Education Cess under section 11A(1) of the Central Excise Act, 1944. The amount of Rs.4,65,299/- already paid by them was sought to be appropriated against the said demand. The stock of Rs.2260 kgs. of Master Batch valued at Rs.61,585/- was sought to be confiscated under Rule 25 of the Central Excise Rules, 20002. The Notice was adjudicated Vide Order-in-Original dated 06.12.2010, wherein the duty demanded was reduced to 22,19,858/-,including Education Cess. 2260 Kgs of Master Batch seized was confiscated and allowed to be redeemed on payment of redemption fine of Rs 15,000/-. Penalty was imposed on the Director Shri. S. S. Jindal and Authorized Representative B.Kamilla. Aggrieved against the Impugned order, the Appellant Company, its Director and the Authorised Representative have filed the above said three appeals.

6. In their defence, the Appellants submits that there is no merit in the order passed by the Ld. Commissioner. He has not considered the submissions made by them specifically with regard to the alleged differences between the figures appearing in the monthly ER-1 register and those reflected in the Schedules to the balance sheet for the financial years 2005-06 2006-07 and 2007-08. Those have been fully explained by the Appellants and certified by the Chartered Accountants after examination of their books of accounts for those financial years.

7. The Appellants submit that so far as the excess of stock of 2260 kgs. of Master Batch found on physical verification of stock of raw materials on 12.06.2008 is concerned, they have not taken Cenvat credit on the excess quantity of Master Batch found. The plausible explanation for the excess was also given to the effect that difference might have occurred due to excess consumption of Master Batch recorded by the supervisor over a long period time. However, since no Cenvat credit was taken on such excess quantity of Master Batch, confiscation of the same does not arise. This view has been taken by the Tribunals in a number of cases and hence no penalty is imposable on the appellants on this count.

8. The Appellants submits that regarding the alleged shortage of stock of finished goods namely – fabric cut pieces and sacks on comparison with the sales figures declared in the balance sheets during the years 2004-05, 2005-06 and 2006-07 with the quantities of the clearance figures declared in the monthly ER-1 Returns, the figures mentioned in their ER-1 are correct. But while preparing the balance sheets, there were certain apparent mistakes and such mistakes were later corrected by proper Certificates issued by the Chartered Accountants. The Chartered Accountant’s Certificates, all dated 18.06.2008, issued by M/s. V. K. Patwari & Co., reconciling the discrepancies between the figures appeared in the Schedules of Balance Sheets and those appeared in the statutory records were not taken into account by the Ld. Commissioner during the adjudication proceedings.

9. With regard to the allegation of difference in value of Rs.2,72,27,797/-, on the fabrics and laminated fabrics in the monthly ER-1 Returns as compared to the value reflected in the Schedule of the Balance Sheets, they submitted that the figures mentioned in the Schedule of Profit & Loss Account of their Balance Sheet for different financial years has not been properly reflected in the table. There were some apparent errors in the figures of the Schedule of the Balance Sheets. They submitted that in column 5 of the said table, the total assessable value as per ER-1 Returns comes to Rs.12,11,17,885/-. There was a difference of Rs.5,87,779/- only after correcting the errors and not Rs.2,05,71,258/- as alleged in the Notice and confirmed in the impugned order, for the financial year 2005-06. The appellants submits that difference of Rs.5,87,779/- was adjustable with other items in respect of laminated fabrics. A statement in this regard prepared by them for the financial years 2005-06, shows that there were excess values of Rs.5,87,779/- and Rs.1,46,712/-,only in respect of fabrics and laminated fabrics . After reconciling the figures shown in the schedule and balance sheet for the financial years 2005-06, there was no difference.

10. The Appellants submits that for the year 2007-08 there was an alleged difference of Rs.4,06,654/- on the basis of comparison of the figures mentioned in the monthly ER-1 Returns and those reflected in Schedule of the Balance Sheet of 2007-08. The value as per ER-1 Returns actually should be Rs.4,96,66,772/- instead of Rs.4,94,64,089/- leading to a difference of Rs.2,03,968/- and not Rs.4,06,654.00. They examined the figures and there was no value difference when compared with all the items and their value during the financial year 2007-08. A reconciliation statement has been prepared by them from which it can be seen that there was no difference with the items and their values were shown in total. The difference against fabric was neutralized by the minus difference in respect of other items namely – fabric cut pieces, laminated fabrics and sacks. Hence practically there was no difference between the figures mentioned in the schedule of the Balance Sheet and those reflected in the monthly ER-1 returns.

11. The Appellants submit that in respect of their duty demanded on the cash memos, out of those 64 cash memos 50 cash memos had been accepted and already been covered under show cause notice dt.26.05.2009 and the demand in respect of the remaining 14 cash memos had been included in the present proceedings, involving duty of Rs.4,65,299/-. Hence, these value of cash memos had been reflected in the Schedule of Balance Sheets and not in the ER-1 Returns. They have already paid an amount of Rs.4,65,299/- on 29.04.2009 , in respect of the duty pertained to the remaining 14 cash memos.

12. Regarding the 14 cash memos are concerned, they were issued prior to the visit of the DGCEI officials in their factory on 17.05.2006. It was contended that the shortage found by the DGCEI officials was due to the fact that the goods have been removed from the factory without account and without payment of duty under the said 14 cash memos. They submitted that since they paid the duty for the shortages found by the DGCEI officials and admitted such shortages before the Settlement Commission, no further duty was payable by them in respect of 14 cash memos. However, to buy peace and not to precipitate the matter further, they have paid the duty amounting to Rs. 4,65,299/- payable on the 14 cash memos even before issue of the Notice. Hence, no penalty imposable on this alleged clearance through the 14 cash memos. In view of the above submissions, they prayed for dropping of all the Proceedings.

13. The Ld. A.R. reiterated the findings of the adjudicating authority in the impugned order.

14. Heard both sides and perused the appeal records.

15. We observe that the demand in the impugned order is mainly due to the difference between the sale figures available in the Schedule of the Balance Sheet for financial years 2004-05, 2005-06, 2006-07 and 2007-08 and the quantity of clearance of those products declared in the monthly ER-1 returns filed by them during the corresponding financial years. The Appellant stated that the while preparing the balance sheets, there were certain mistakes happened and such mistakes were later corrected by proper Certificates issued by the Chartered Accountants. Copies of the Chartered Accountant’s Certificates all dated 18.06.2008, issued by M/s. V. K. Patwari & Co., reconciling the discrepancies between the figures appeared in the Schedules of Balance Sheets and those appeared in the statutory records were submitted before the adjudicating authority, but the same were not taken into account during the adjudication proceedings, hence the demands were confirmed in the impugned order.

16. We perused the Certificates issued by the Charted Accountant and the reconciliation statements submitted by the Appellant. We observe that it is not the case of the department that even after correction of the mistakes by issuing the certificates by the Charted Accountant, there were shortages. Thus, if the Certificates correcting the mistakes are taken into account, then there was no shortage. So, the main issue to be decided is whether the correction Certificates dated 18.06.2008 issued by the Charted Accountant can be accepted or not.

17. We observe that the Correction Certificates are added as Corrigendum to the Schedule. They are submitted to the Registrar of Companies and accepted by them. Hence, the corrected certificates become part and parcel of the Schedule to the Balance Sheet . The Ld A.R submitted that before correcting the Schedules of the Balance Sheets, it must be approved by the extraordinary General Body Meeting. Also, there is no evidence on record that the Registrar has accepted these changes. Irrespective of acceptance or otherwise of the changes in the Schedules of the Balance Sheet, we find that there is nothing on record to doubt the veracity of the Certificates issued by the Charted Accountant or the reconciliation statements submitted by them. Hence, we agree with the submission of the Appellant that there was no shortage after the correction of the mistakes and hence the duty demanded based on the balance sheet figures is not sustainable.

18. We observe that duty cannot be demanded merely based on the difference in sales figures found between the balance sheet and the and ER-1 Returns. There must be some positive evidence brought on record to substantiate the allegation of clandestine clearance. Mere allegation of shortage based on the difference in sales figures found between the balance sheet and the and ER-1 Returns, cannot be the basis for confirming the central excise duty on the differential quantity. This view has been held by the Tribunal in the following cases.

18.1 In the case of Kutch Steels Pvt Ltd 2014(300) ELT 141(Tri-Ahmd), it has been held that the demand based on difference of sale, income as indicated ER-1 and Balance Sheet, in the absence of any evidence of clandestine manufacture and sale of goods, is not sustainable. In the case of Martin & Harris Laboratories Ltd 2005(185) ELT 421 (Tri-Del), it has been held that the Balance sheet cannot be held as sacrosanct document to prove clandestine removal. The relevant portion of the decision is reproduced below.

“4. We have heard both sides and gone through the record. We find that the allegations of suppression of production and removal of the goods without payment of duty in a clandestine manner had been based solely on the basis of some discrepancies found in the balance sheets of the appellants’ company for the years in dispute regarding the production and in the RT-12 returns filed by them in those years. In the balance sheets, the production shown was more than that was reflected in the RT-12 returns by them. But, we find that the adjudicating authority in the impugned order has observed in these words “that he was of the view that there was genuine mistake in preparing the balance sheets and the same should be overlooked”. He has also observed that the discrepancies in the RT-12 returns vis-a-vis balance sheets regarding the production for the years 1999-2000 and 2000-2001, had been reconciled by the appellants and there existed no discrepancies. He had even dropped the duty demand for these years. For the previous years (1988-99), he has confirmed the duty by not accepting the explanation of the appellants regarding the discrepancies found in the balance sheets and the RT-12 returns. According to the appellants, the discrepancies took place on account of the fact that varieties of tablets were packed in strips of varying quantity, some strips 2-10 while others contained 12-20 or even 30 tablets. Similarly, the liquid bottles had different capacities, such as, 60 ml., 100 ml. or even 200 ml. The mistake occurred while converting or computing the total production by the officers/official who prepared the balance sheets in the Head Office. There is not an iota of evidence on the record to prove the clandestine clearance of the goods by the appellants without payment of duty in the market during these years in dispute. None from the market has come forward to accept the purchase of the goods/medicines, from the appellants’ company without payment of duty during these years. There is also no evidence to prove the excess receipt of inputs by the appellants’ company during these years from outside. No unaccounted goods were also detected and seized from the factory of the appellants. In the absence of such an evidence, in our view, the balance sheet could not be taken as a sacrosanct documents for proving the allegations of clandestine production and removal of the goods by the appellants and thereby evasion of duty by them.”

18.2. Following the above decisions, we hold that the demands made in the impugned order on the basis of the difference in Balance Sheet and ER-1 figures is not sustainable.

19. Regarding the duty demanded in respect of the 14 cash memos, the Appellant stated that out of those 64 cash memos, 50 cash memos had been accepted and covered under show cause notice dt.26.05.2009 and the demand in respect of the remaining 14 cash memos had been included in the present proceedings, involving duty of Rs.4,65,299/-. They submitted that since they paid the duty for the shortages found by the DGCEI officials and admitted such shortages before the Settlement Commission, no further duty was payable by them in respect of 14 cash memos. However, to buy peace and not to precipitate the matter further, they have paid the duty amounting to Rs. 4,65,299/- payable on the 14 cash memos even before issue of the Notice. Hence, no penalty imposable on this alleged clearance through this 14 cash memos.

20. Regarding the excess of stock of 2260 kgs. of Master Batch found on physical verification of stock of raw materials on 12.06.2008 is concerned, we observe that they have not taken Cenvat credit on the excess quantity of Master Batch found. The Appellant has given the explained that the difference might have occurred due to excess consumption of Master Batch recorded by the supervisor over a long period time. However, since no Cenvat credit was taken on such excess quantity of Master Batch, confiscation of the same does not arise. This view has been taken by the Tribunals in a number of cases and hence no penalty is imposable on the appellants on this count. However, we observe that the excess quantity has already been seized and then released provisionally. There is no allegation in the Notice that they have taken any excess credit on account of this excess quantity of master batch found. There is no finding in the impugned order also that the excess quantity has been kept for manufacturing and clearance of the goods clandestinely. The Appellant stated that the excess might have been due to material received for job work of M/s. Hissar Udyog Pvt.Ltd., for which no Cenvat credit was taken.. We observe that the quantity of 2260 Kgs of master batch found excess has been seized and later released on payment of redemption fine. The explanation offered by the Appellant is also not satisfactory. Hence, we uphold the confiscation of the excess quantity of master batch and the redemption fine imposed in the impugned order.

21. Regarding, penalty imposed on the Director Shri. S. S. Jindal and the Authorized Representative Shri. B. Kamilla, we find that there was no role of them in the alleged short payment of duty. The demand has been confirmed based on the difference between the sales figures available in the Balance Sheet and the value declared in the ER-1 returns. The Director and the Authorized Representative has no role in the difference between the figures. The error in the figures, if any, has been committed by the Charted Accountant, which has been admitted by the Firm and rectified. The issue in respect of the alleged clearance without payment of duty by issuing the cash memos has been settled before the settlement commission in respect of 50 cash memos. The duty involved in respect of the remaining 14 cash memos amounting to Rs.4,65,299/- has also been paid. In respect of this also there is no clear finding in the impugned order regarding the role of the Director or the Authorized representative. Just because they admitted and paid duty, it cannot be concluded that there was clandestine clearance. Since, the role of any of the official has not been established in the alleged clearance of goods in respect of the 14 cash memos, we hold that penalty cannot be imposed on them. In view of the above, we hold that the penalty imposed on the Director and Authorized representative, not sustainable.

22. In view of the above discussion, we set aside the demand confirmed in the impugned order, except Rs 4,65,299/- accepted and paid by the Appellant, in respect of the 14 cash memos. We also uphold the confiscation of the excess quantity of master batch found and the redemption fine imposed in the impugned order. We set aside the penalties imposed on all the three Appellants. All the three appeals are disposed on the above terms.

(Order pronounced in the open court on 07.08.2023.)

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