2014 (1) TMI 1338 - HC - Central Excise

Penalty u/s 11AC - Interest u/s 11AB - Suppression of facts - Contravention of provision of Central Excise Act and Rules - Intention to evade payment of duty - Payment made issuance of SCN - Whether or not the CESTAT was in error in holding that the penalty imposed under Section 11AC and the interest charged under Section 11AB of the Central Excise Act, 1944, are not sustainable if the duty is paid before issuance of show cause notice irrespective of the fact that evasion of duty was detected by the department and the demand was made under the proviso to Section 11A(1) on reason of suppression of facts or wilful misstatement of contravention of the provisions of Central Excise Act and Rules made there under with intent to evade payment of duty - Held that - payment made whether before or after show cause notice, does not alter liability for penalty and the finding of the Tribunal holding that no penalty under Section 11AC of the Act could be imposed, if assessee had deposited short paid amount of excise duty before issuance of show cause notice was held to be a misconceived interpretation by the Tribunal, whereby the Tribunal overlooked the two explanations which qualified the main provision of Section 11A(2-B) and accordingly, set aside the order passed by the Tribunal. In the show cause notice dated 10.10.2001, except for stating that the respondent/assessee has contravened the provisions of the Rules, there is no specific allegation so as to hold the respondent/assessee guilty of having committed fraud, collusion or suppression of facts or made any willful misstatement with an intent to evade payment of duty. In terms of the provision of section 11AC of the Act, the authority is bound to record a prima facie finding that there was an intent to evade payment of duty by suppressing the materials facts or by making willful mis-statement or by committing fraud or collusion. Thus, in the absence of any such specific allegation in the show cause notice, the authorities cannot mechanically impose penalty under Section 11AC of the Act. After the assessee submitted their explanation, the Adjudicating Authority while passing the order dated 24.09.2002, only observed that there is possible manipulation of scrap accounts to show higher production than what would have been normally produced and there is no finding that the first respondent/assessee was guilty of willful mis-statement or suppression of facts or act of fraud with an intention to evade payment of duty - in the absence of any specific findings having been recorded by the authorities, so as to make provisions of Section 11AC of the Act applicable to the case of the assessee, we have no hesitation to hold that the imposition of penalty was totally unjustified and the order of the Tribunal setting aside the penalty, is to be confirmed for reasons other than mentioned by the Tribunal. Tribunal set aside the interest solely on the ground that the duty was paid prior to the show cause notice. The settled legal principle is that interest leviable under Section 11B of the Act is for the money withheld and the levy of interest is automatic and that is why it is termed to be compensatory. However, penalty is for default and therefore punitive and unless reasonable cause is shown, penalty is not imposable. This distinction was not taken into consideration by the Tribunal when admittedly, the Tribunal confirmed the demand of duty, which was paid belatedly by the respondent/assessee. Thus, the duty having been paid belatedly, the interest on such duty is automatic and the assessee is liable to pay the interest - Decided partly in favour of Revenue.

Summary

Issues:
1. Whether payment of duty before issuance of show cause notice absolves the assessee from penalty and interest?
2. Under what circumstances can penalty be imposed under Section 11AC of the Central Excise Act?

Analysis:
1. The appeal involved a dispute where the Revenue challenged the Tribunal's decision to set aside penalty and interest after confirming the duty demand against the respondent/assessee. The primary question was whether payment of duty before the show cause notice exempts the assessee from penalty and interest. The Supreme Court precedent in Union of India vs. Rajasthan Spinning and Weaving Mills clarified that payment timing does not affect penalty liability. The Court held that the Tribunal's interpretation was flawed, emphasizing that penalty under Section 11AC could be imposed even if duty was paid before the notice, as long as there was intent to evade payment.

2. Section 11AC of the Act pertains to penalties for non-payment or short payment of duty due to fraud, collusion, willful misstatement, or suppression of facts with the intent to evade duty. The Court highlighted that the provision requires specific findings of intent to evade duty through fraudulent means. The case lacked such allegations in the show cause notice or subsequent authorities' orders. The Court noted that the absence of explicit accusations of fraud or willful misstatement meant penalty imposition under Section 11AC was unjustified. The Tribunal's decision to set aside penalty based solely on early duty payment was deemed incorrect.

3. Regarding interest, the Tribunal's decision to waive it based on early duty payment was deemed erroneous. The Court differentiated between interest, which is compensatory for money withheld, and penalty, which is punitive for default. As the duty was paid belatedly, the automatic interest levy under Section 11B was upheld. Consequently, the Court partially allowed the appeal, confirming the penalty's dismissal while reinstating the interest payment obligation on the assessee.

In conclusion, the judgment clarified the application of penalty under Section 11AC, emphasizing the need for specific findings of fraudulent intent. It also distinguished between interest and penalty, upholding the automatic nature of interest levies for delayed duty payments.