Whether penalty U/s. 11AC of Central Excise Act is mandatory

Whether penalty U/s. 11AC of Central Excise Act is mandatory and equal to the duty demanded or the authority has discretion to impose lesser penalty?

We do not find that on all the four counts, demand was raised on the ground of clearance of goods with intent to evade payment of duty. Demand relating to third count and relating to samples was clearly demand on account of legal issues so it cannot be held that there was intention to evade payment of duty. So penalty in respect of these two counts is not sustainable.

IN THE HIGH COURT OF PUNJAB & HARYANA, CHANDIGARH

CEA No. 139 of 2006

Commissioner of Central Excise Commissioner ate, Delhi- V, Rohtak – Appellant

Vs

M/s Jai Shree Agro Industries Ltd., Sonepat – Respondent

 Date of Judgement: May 13, 2010

J U D G M E N T

ASHUTOSH MOHUNTA, J.

The Revenue has filed present Appeal under Section 35G of the Central Excise Act (for brevity ‘the Act’) against the Order dated 19.10.2005 passed by Customs, Excise and Service Tax Appellate Authority, New Delhi. The Revenue has sought to raise the following substantial Question of Law:-

“Whether the penalty under Section 11AC of the Central Excise Act is mandatory and equal to the duty demanded or the authority has discretion to impose lesser penalty”.

Earlier this appeal had come up for hearing before a Division Bench which vide its order dated 25.1.2007 dismissed the appeal and held that the penalty under Section 11AC of the Central Excise Act,1944 is mandatory where the intention to evade tax is established. However, as the counsel for Revenue had failed to point out any specific intention on part of the assessee to evade tax, therefore, it was held that no penalty was leviable.

Against the aforesaid order, the Revenue filed a SLP before the Honourable Supreme Court. The Apex Court while deciding a large number of cases, remanded the case back to the High Court with the following observations:-

“Above being the position (as detailed in the judgement), the plea that the Rules 96ZQ and 96ZO have a concept of discretion inbuilt cannot be sustained. Dilip Shroff’s case (supra) was not correctly decided but Chairman, SEBI’s case (supra) has analysed the legal position in the correct perspectives. The reference is answered. The matter shall now be placed before the Division Bench to deal with the matter in the light of what has been stated above, only so far as the cases where challenge to vires of Rule 967Q(5). In all other cases the orders of the High Court or the Tribunal, as the case may be, are quashed and the matter remitted to it for disposal in the light of present judgments. Appeals except Civil Appeal Nos. 3388 of 2006, 3397 of 2003, 3398-99 of 2003, 4096 of 2004, 4316 of 2007, 4317 of 2007, 5277 of 2006, 675 of 2007, 1420 of 2007 and appeal relating to SLP (C) No. 21751 of 2007 are allowed and the excepted appeals shall now be placed before the Division Bench for disposal.”

Briefly the facts of the case are that that the Appellant/Revenue issued a Show Cause Notice to the Respondent raising the demand amounting to Rs. 44,54,032/-. The demand was raised on following four counts:

i. Rs. 77,294/- on the ground of parallel invoice.

ii. Rs. 28,35,558/- on the ground of Out going Gate Passes (OGP).

iii. Rs. 15,27,773/- as the ground that the value on which duty paid was incorrect inasmuch as the duty was paid on the ex-factory price instead of the depot price.

iv. Rs. 13,407/- on the ground of free samples given to farmers.

The Adjudicating Authority confirmed the whole amount of duty and imposed equal amount of penalty under Section 11 AC of the Central Excise Act. While dealing with the demand raised on the count that goods have been cleared without invoices but under OGP, the Adjudicating Authority found that department has brought on record the factual position which shows that in respect of goods cleared on 40% of the OGP, Central Excise Duty was paid but on the remaining goods no duty was paid and no invoice under Rule 52A was issued.

The Adjudicating Authority turned down contention of the Respondent/ Assessee that on these 40% OGP, they cleared repaired goods on the ground that no intimation was given to the department in respect of the goods brought for repair.

The Respondent- Assessee filed Appeal before the Tribunal assailing the demand as well as penalty. The Tribunal confirmed the demand of Rs. 44,54,032/- but having regard to the facts and circumstances of the case, reduced amount of penalty from equal amount to Rs. 20.00 Lac.

The Revenue has filed present Appeal against the Order of the Tribunal contending that Tribunal has no discretion to reduce the penalty as penalty under Section 11AC is mandatory penalty and it cannot be reduced in any circumstance.

Mr. Sanjeev Kaushik, Counsel for the Revenue, vehemently contended that the Tribunal has no jurisdiction to reduce the quantum of penalty in view of judgement of Honourable Supreme Court in the case of Union of India vs. Dharmendra Textile Processors, 2008 (231) ELT 3 (S.C).

Per Contra, Counsel for the Respondent-Assessee contended that penalty leviable under Section 11AC of the Act is not mechanical. The penalty under Section 11AC can be imposed only if the ingredients are satisfied. Mr. Ranjan further contended that demand of Rs. 15,27,773/- and demand of Rs. 13,407/- purely relates to legal issues. The demand of these counts is purely relating to legal issue and has no bearing with clearance with malafide intention.

The Counsel also contended that as per Ld. Adjudicating Authority also only in case of 60% OGP, there is evidence of clearance without payment of duty. There was procedural lapse in respect of 40% OGP. So demand even though confirmed in respect of those gate passes, penalty cannot be imposed. He relied upon judgement of Honourable Supreme Court in the case of Union of India Vs. Rajasthan Spinning and Weaving Mills, 2009 (238) ELT 3 (S.C).

We have considered arguments of both the learned counsels and perused the record. At the outset, we noticed that the present case is not a case of penalty leviable under Rule 96ZO and Rule 96ZQ and in fact the question involved in the present case is “Whether the penalty under Section 11AC of the Central Excise Act, 1944 is mandatory and equal to the duty demanded or the authority has the discretion to impose penalty?” In view of judgment of Hon’ble Supreme Court in the case of Union of India Vs. Dharmendra Textile Processors (supra), the Tribunal has no discretion to reduce the penalty leviable under Section 11AC of the Act. There is no doubt that penalty under Section 11AC is mandatory penalty but in view of subsequent judgement of Honourable Supreme Court in the case of Rajasthan Spinning and Weaving Mills (supra) penalty is not to be imposed mechanically but Revenue is bound to prove that there was intentional evasion of duty.

In the present case, we do not find that on all the four counts, demand was raised on the ground of clearance of goods with intent to evade payment of duty. Demand relating to third count and relating to samples was clearly demand on account of legal issues so it cannot be held that there was intention to evade payment of duty. We find substance in the contention of the Counsel for the Assessee. So penalty in respect of these two counts is not sustainable.

The Adjudicating Authority, as pointed out by Counsel, has found that Revenue is unable to point out factual position, which shows that in all the cases, goods were cleared without payment of duty. There was procedural lapse even though it may be mandatory. For procedural lapse, penalty cannot be imposed much less penalty under Section 11AC of the Act. The Tribunal has imposed penalty of Rs. 20.00 Lac which if demand raised on account of legal issues and procedural lapse is reduced, comes to more than the duty demanded. As Assessee has not come in Appeal, question of levy of penalty whether excess or not cannot be examined.

In view of the factual matrix, we are of the considered opinion that Revenue has failed to establish the required ingredients of Section 11AC. The Tribunal has rightly reduced the amount of penalty from equal amount of duty to Rs. 20.00 Lacs. The question posed is answered against the Revenue and in favour of the assessee.

Accordingly, the appeal of the Revenue is dismissed.