2021 (2) TMI 388 - HC - Central Excise

Special Audit u/s 14AA - Principles of Natural Justice - primary grievance of the petitioner is that the impugned proceedings have been initiated without giving the petitioner an opportunity of hearing - Special audit in cases where credit of duty availed or utilised is not within the normal limits - Section 14AA of the Central Excise Act - HELD THAT - The legislative intent and object of introducing Section 14AA of the Act was to scrutinize cases of abnormally high availment of MODVAT credit. This section seeks to prevent misuse of MODVAT credit by providing for cost auditing of accounts. Under this section, the Commissioner of Central Excise is the cornerstone on which the whole scheme of cost audit is balanced. If the Commissioner is satisfied that credit has been availed on excisable goods by a manufacturer which is beyond the normal limits or has been availed on account of fraud, collusion or any willful misstatement or suppression of facts he may direct the manufacturer get his accounts audited by a cost accountant. The cost accountant is then required to submit a Report to the Commissioner within the time specified by the Commissioner. This audit is in addition to all other audits which may have been prescribed by any other law in force. The expenses of the audit as determined by the Commissioner are to be borne by the manufacturers which are subject to recovery proceedings as prescribed under the Act. The scheme of the section incorporates the observance of the principles of natural justice before any such material gathered in the audit is used against the assessee in any proceeding. In MOHINDER SINGH GILL ANR. VERSUS THE CHIIEF ELECTION COMMISSIONER, NEW DELHI ORS. 1977 (12) TMI 138 - SUPREME COURT , explaining as to what is meant by civil consequences Krishna Iyer, J. had said Civil consequences undoubtedly cover infraction of not merely property or personal rights but of civil liberties, material deprivations and non-pecuniary damages. In its comprehensive connotation, everything that affects a citizen in his civil life inflicts a civil consequence . In interpreting Section 142 (2A) of the Income Tax Act, 1961, the Supreme Court had held that a special audit is more or less in the nature of an investigation and in some cases may even turn out to be stigmatic. In any event, even if the obligation to pay the auditor s fee is taken over by the Central Government, still civil consequences would ensue on the passing an order for special audit. Ordinarily, a post decisional hearing is no substitute for a pre-decisional hearing. In fact, in a number of decisions whilst interpreting Section 14AA of the Act, the Courts have categorically and repeatedly held that it is important to give an assessee a right of hearing before any order under Section 14AA is passed. The impugned notices and all steps and proceedings taken thereunder are set aside and quashed - Petition allowed.

Summary

Issues:
Challenge to proceedings under Section 14AA of the Central Excise Act without opportunity of hearing.

Analysis:
The petitioner contested the initiation of proceedings under Section 14AA of the Central Excise Act, specifically challenging notices issued under Sections 14A and 14AA along with consequential actions. The petitioner argued that the proceedings lacked adherence to natural justice principles as no opportunity of hearing was granted. Moreover, the petitioner pointed out the absence of a recorded subjective opinion in the notices, emphasizing the retrospective operation of the sections in question and the unauthorized attempt to access records dating back to 1986.

On the other hand, the respondent authorities justified the actions, stating that the purpose of Section 14AA is to safeguard revenue interests. They argued that there is no restriction on reopening previous year records under this section and highlighted the authority of Central Excise Authorities to scrutinize and assess records for under valuation and MODVAT utilization. The respondents contended that Sections 14A and 14AA do not necessitate providing information to the assessee before a special audit and that there is no requirement for disclosure of audit grounds to the assessee.

The judgment delved into the provisions of Section 14AA of the Central Excise Act, emphasizing the objective of scrutinizing cases of abnormally high MODVAT credit availment to prevent misuse. It highlighted the role of the Commissioner of Central Excise in directing cost audits if credit availed is beyond normal limits or due to fraud, collusion, or misstatement. The judgment underscored the requirement for the manufacturer to be given an opportunity of being heard regarding audit findings before utilizing them in any proceeding under the Act or related rules.

Citing legal precedents, the judgment emphasized the importance of granting the assessee a right of hearing before passing any order under Section 14AA. It referenced specific cases where courts have stressed the significance of providing a hearing opportunity to the assessee in matters related to Section 14AA. Consequently, the court found that the respondent authorities failed to adhere to the principles of natural justice in initiating the impugned actions, leading to the setting aside and quashing of notices and related proceedings. The writ petition was allowed, with a directive for the authorities to proceed afresh in compliance with the law.