2011 (8) TMI 872 - HC - Central Excise

Right to appeal with option to avail compounding of offence - Rule 4(3) of the Central Excise (Compounding of Offences) Rules, 2005 - Petitioner submitted that, question runs counter to the language employed in Section 9A(2) of the Act and also travels beyond the rule making power as enshrined under Section 37(2)(id) of the Act. It is his submission that by incorporating such a provision by way of an amendment in the Rules in 2007, the right to appeal of the petitioner under Section 35G of the Act stands frustrated and once a statutory right of appeal is provided in an enactment, the same cannot be defeated by envisaging such conditions, as has been done in the Rule in question. - The compounding amount has not been defined or prescribed in the Act though it is implicit that to compound an offence, payment of the compounding amount has to be made - when there is a compounding for the purpose admitting a tax evasion, the condition stipulated for entertaining the application cannot be regarded as onerous - The manner, while prescribing, can lay down certain conditions precedent, it does not whittle down the purpose of compounding - Petition is dismissed

Summary

Issues Involved:
1. Whether the second proviso to Rule 4(3) of the Central Excise (Compounding of Offences) Rules, 2005 is ultra vires the Central Excise Act, 1944.
2. Whether the proviso violates Article 14 of the Constitution of India by being unreasonable and creating an anomalous situation.
3. Whether the proviso frustrates the statutory right of appeal under Section 35G of the Central Excise Act, 1944.

Issue-wise Detailed Analysis:

1. Ultra Vires Argument:
The petitioners argued that the second proviso to Rule 4(3) of the 2005 Rules is ultra vires the Central Excise Act, 1944, as it contradicts Section 9A(2) and exceeds the rule-making power under Section 37(2)(id) of the Act. They contended that the compounding amount should not include tax, penalty, and interest. However, the court found that Section 9A permits compounding of criminal offences under the Act and Section 37(2)(id) empowers the Central Government to make rules regarding the amount and manner of compounding. The court held that the compounding amount implicitly includes duty, penalty, and interest, as these are inherently linked to the evasion of duty. Thus, the rule does not exceed the statutory provisions and is not ultra vires.

2. Violation of Article 14:
The petitioners claimed that the proviso offends Article 14 of the Constitution by being unreasonable and creating an anomalous situation. They argued that the table of compounding amounts does not mention tax, penalty, and interest, which leads to inconsistency. The court, however, clarified that the table specifies the rate for the first offence or the percentage for certain offences and does not waive tax, penalty, and interest. The court concluded that the table is consistent with the rule and does not create any anomaly. Therefore, the proviso does not violate Article 14.

3. Frustration of Statutory Right of Appeal:
The petitioners argued that the proviso frustrates their statutory right of appeal under Section 35G of the Act, as they must pay the tax, penalty, and interest for compounding even if they have challenged the demand in a statutory forum. The court noted that compounding is optional and not mandatory. It is a mechanism to avoid criminal prosecution by fulfilling certain conditions, including the payment of tax, penalty, and interest. The court held that the condition for compounding does not infringe the right to appeal, as compounding is a voluntary act and not a statutory mandate. Thus, the proviso does not frustrate the statutory right of appeal.

Conclusion:
The court dismissed the writ petition, holding that the second proviso to Rule 4(3) of the Central Excise (Compounding of Offences) Rules, 2005 is not ultra vires the Central Excise Act, 1944, does not violate Article 14 of the Constitution, and does not frustrate the statutory right of appeal under Section 35G of the Act. The proviso is consistent with the legislative intent and the purpose of compounding, and the conditions stipulated for compounding are not onerous.