2014 (2) TMI 582 - AT - Central Excise

Penalty u/s 11AC - Interest u/s 11A - Shortage in stock - Held that - shortage was detected in the finished product as well as raw material referred supra and then the shortages were admitted by the Director of the company who was present at the time of check. Later on , duty involved on shortages as well as 25% of the duty amount towards penalty was also deposited by them. However, in appeal proceeding before Commissioner (Appeals), imposition of penalty was challenged on the ground of absence of mens rea and lack of departmental evidence pinpointing with intent to evade duty. Activities of evasion are carried out in the darkness of night and the person tried their best to not to leave any evidence and such person cannot be expected faithfully to put the details of such clearances in some register and append their signatures. The clandestine activity can at best be established by the substantial evidence. Evidence forthcoming clearly establish the clandestine nature of activities by the respondents. Such grave irregularities could not be there if persons involved in he controlling of company are not part of such design. Mens rea is clearly imputed. In the strict sense, the provisions of Section 11AC get attracted . However it is observed that duty amount and 25% of duty amount as penalty have already been paid even prior to issue of show cause notice, benefit of payment of 25% of duty as penalty is available. Regarding imposition of penalty under Rule 26 on the Director, I find from facts detailed above that large scale of shortages are detected total valued at Rs.66 lakhs (approx.). Such type of anomalies cannot happen without the involvement of Director. In this case, Mr. Harish Jugran has been overseeing the activities of the company. Without his involvement, such shortages could not be justified. Further Shri Harish Jugran admitted the shortages without any justification. There will be no economic sense left if affairs are allowed to drift in such way. Accordingly I feel , penalty under Rule 26 is imposable on Shri Harish Jugran, director - Revenue s appeal regarding imposition of penalty on the company as well as Director as this is a clear case of invocation of Section 11AC. Order of the Commissioner (Appeals) is modified to that extent - Decided partly in favour of Revenue.

Summary

Issues:
- Imposition of penalty under Section 11AC
- Non-imposition of penalty on Director under Rule 26 of Central Excise Rules, 2002

Imposition of penalty under Section 11AC:
The case involved shortages detected in finished goods and raw materials, leading to a demand of Rs.5,03,171/- along with interest and penalties. The adjudicating authority confirmed the demand and imposed penalties under Rule 25 of the Central Excise Rules, 2002 read with Section 11AC of the Central Excise Act, 1944. However, the Commissioner (Appeals) dropped the penalty against the company director citing absence of mens rea and lack of evidence of intent to evade duty. The Commissioner referred to relevant judgments but concluded that the penalty on the company was not sustainable due to the absence of ingredients of Section 11AC. The Appellate Tribunal noted the substantial shortages detected, valued at Rs.6,10,458/-, and found evidence of clandestine activities, imputing mens rea to the company. The Tribunal observed that the duty amount and 25% penalty had already been paid, but the gravity of irregularities warranted the imposition of penalties under Section 11AC.

Non-imposition of penalty on Director under Rule 26:
The Department argued for the imposition of penalties on the Director under Rule 26 of the Central Excise Rules, 2002. The Tribunal found that the significant shortages detected, totaling around Rs.66 lakhs, could not have occurred without the Director's involvement. The Director admitted the shortages without justification, indicating his oversight of the company's activities. The Tribunal concluded that such anomalies could not be justified without the Director's participation, and the penalties under Rule 26 were deemed imposable on the Director. Therefore, the Tribunal accepted the Revenue's appeal regarding the imposition of penalties on both the company and the Director, modifying the Commissioner (Appeals) order accordingly.

In conclusion, the Appellate Tribunal upheld the imposition of penalties under Section 11AC on the company due to substantial shortages and evidence of clandestine activities. Additionally, penalties under Rule 26 were imposed on the Director for his involvement in the irregularities. The Tribunal found the Revenue's appeal acceptable, modifying the Commissioner (Appeals) order to impose penalties on both the company and the Director.