2016 (5) TMI 273 - HC - Central Excise

Recovery of Modvat Credit together with interest and penalty - Benefit unlawfully claimed by way of depreciation even on the component of duty on which Modvat Credit had been taken - Appellant contended that while restoring the Order in Original, the Tribunal did not take note of that portion of the Order in Original which entitles the appellant to take Modvat Credit from 30.4.2005 - Held that - appellant, though entitled to one of the two benefits, availed both the benefits. After detection by the Preventive Unit, the appellant chose to file an application for rectification under Section 154 of the Act as well as revised returns in respect of the Assessment years 1999-2000 and 2000-2001 which were accepted. In so far as the Assessment year 1998-99 is concerned, the time limit for filing a revised return had already expired and the attempt of the appellant to file application for rectification under Section 154 of the Act failed up to the Supreme Court. The assessee started up with a claim for two benefits and ended up with losing both the benefits. Therefore, the question is as to whether at least after the appellant realised his mistake and had foregone one of the benefits the appellant should still be penalized? The answer to this question would be an emphatic no. It is true that only after detection by the Preventive Unit, the appellant attempted to withdraw one of the two benefits. But the mistake has been explained by the assessee on the ground that their registered office was located in New Delhi and their factory was located in Tamil Nadu. The calculation of depreciation in so far as it relates to the duty component on which Modvat Credit had already been claimed, is certainly a tedious process. It does not mean that the appellant can have the licence to commit a mistake. But once the mistake is detected and he filed revised returns, deprivation of the benefit of Modvat Credit could only be punitive. This cannot be the object of the grant of Modvat Credit. At least in the Order in Original, the Original Authority declared the entitlement of the appellant to Modvat Credit from 30.4.2005. Now while restoring the Order in Original, the CESTAT has modified that portion also, without there being an appeal by the Department to the Appellate Commissioner as against the Order in Original. Therefore, the appellant is entitled to succeed. The Original Authority shall workout the total amount of depreciation given up by the appellant, despite losing the battle in relation to the Assessment Year 1998-99, for the purpose of finding out the extent to which the appellant is entitled to the benefit. - Decided partly in favour of appellant

Summary

Issues:
Challenge to Final Order passed by Customs, Excise and Service Tax Appellate Tribunal under Section 35G of the Central Excise Act, 1944.

Analysis:
The appellant, a company incorporated in 1997, imported goods and filed necessary declarations under the Central Excise Rules. They started commercial production in 1999 and claimed Modvat Credit for imported machinery. However, they erroneously claimed depreciation on the duty component for which Modvat Credit was availed in their Income Tax Returns for certain financial years. The mistake was detected in 2002, leading to rectification attempts under Section 154 of the Income Tax Act, which were partially successful. The Assessing Officer's order refusing rectification was set aside by the Commissioner (Appeals) but reinstated by the Tribunal, upheld by the High Court and Supreme Court.

Subsequently, a show cause notice was issued by the Additional Commissioner of Central Excise to withdraw the Modvat Credit. The Additional Commissioner's order for recovery was partially set aside by the Commissioner (Appeals), leading to an appeal by the Department before the Tribunal. The Tribunal allowed the Department's appeal, restoring the recovery order but failed to acknowledge the appellant's entitlement to Modvat Credit from a specific date. This led to the appellant's appeal before the High Court.

The High Court admitted the appeal based on substantial questions of law, primarily focusing on the appellant's relinquishment of depreciation claims, the alleged willful mis-declaration, and the justification for upholding the demand despite rectification efforts. The court noted that the appellant, though initially entitled to two benefits, ended up losing both due to the detected mistake. Despite the appellant's explanation for the error, the court emphasized that deprivation of Modvat Credit post rectification attempts would be punitive and not aligned with the credit's purpose.

Ultimately, the High Court allowed the appeal, answering the substantial questions of law in favor of the appellant. The court directed the Original Authority to calculate the total amount of depreciation given up by the appellant to determine the extent of benefit entitlement. The court highlighted the appellant's right to Modvat Credit from a specific date and closed the related motions.

This detailed analysis of the judgment highlights the legal proceedings, rectification attempts, appeal process, and the court's considerations regarding the appellant's entitlement to benefits and rectification post-error detection.