SECTION 11 OF CENTRAL EXCISE ACT DOES NOT FOIST ANY LIABILITY ON THE LEGAL HEIRS OF DECEASED ASSESSEE

[Mr. M. GOVINDARAJAN]

In ‘Collector of Central Excise & Customs V. Leelamma George’ – 2003 (6) TMI 26 - HIGH COURT OF KERALA AT ERNAKULAM while interpreting Section 11A, it has been held that the person against whom proceedings are initiated, is the person chargeable with duty.  That is a case of short levy of duty.  The proceedings can be continued against the manufacturer, if he has removed the products paying the duty less than what is liable under the Act. Obviously he has to pay the balance duty as well, if there was a short levy. The demand has to be made, if he remained unpaid, from the legal representatives, even after the death of the predecessor. This is a case where the short levy has been noticed during the life of the predecessor. Therefore the said has no application to the facts of this case. In this case there was no short levy or non levy on the predecessor during his lifetime.  Even otherwise, the High Court found it difficult to accept the interpretation placed on Sec. 11A to include the legal representatives as persons who are chargeable to duty, because if such an interpretation is placed, it amounts to the court re-writing the section. 

In Commissioner of Central Excise, Bangalore V. Press Fab Precision Components Private Limited’ – 2006 (8) TMI 206 - HIGH COURT OF KARNATAKA AT BANGALORE it was held that there is no provision to demand duty from the successor, therefore the successor cannot withstand the test of law.

In ‘Commissioner of Central Excise, Bangalore – III V. Dhiren Gandhi’ – 2012 (6) TMI 556 - KARNATAKA HIGH COURT one Shri Prakash Gandhi was carrying on business in industrial fragrances, flavors, natural essential oils etc., under the name of ‘M/s D&M Naturals & Fragrances’, which was a proprietary concern.  He was availing CENVAT credit on the inputs/capital goods as per Rule 3 of CENVAT Credit Rules.   He dies on 15.9.2003.  His son surrendered the central excise registration.  His son, Dhiren Gandhi took over the business of the basis of no objection given by his family members to carry on the business of the family as sole proprietor.  During the course of audit, it was observed that the assessee was availing CENVAT credit on the inputs/capital goods received into the factory for use in the manufacture of the aforesaid goods.  On the date of surrender of registration, there was a stock of CENVAT credit availed inputs/raw materials valued at Rs.25,24,887/-  The audit party was of the view that by surrendering the registration the assessee opted out the excise act and the rules made there under and therefore the assessee was liable to reverse the credit relating to the inputs/capital goods as on the date of surrendering the registration.  A show cause notice was issued in the name M/s D&M Naturals and Fragrances, the trade name of Shri Prakash Gandhi and served on his son Shri Dhiren Gandhi.

In the reply to the show cause notice the assessee contended that the show cause notice has been issued to a concern which has got nothing to do with the commissions or purported omissions of M/s D & M Naturals & Fragrances. His business is known by the name M/s Dee & Em Naturals and Fragrances.  It cannot be mistaken for the erstwhile proprietorship of by Sri Prakash Gandhi.  There cannot be any demand against him because Sec. 11A does not provide for recovery of duty from a success in business.  The charging provisions under Sec. 3 of the Act are not attracted as he did not manufacture the goods prior to the date of demise of Shri Prakash Gandhi.  The demand was confirmed along with interest also equal amount of penalty and a further penalty of Rs.5000/-

The assessee filed an appeal before the Commissioner of Central Excise (Appeals) which also confirmed the demand. The Tribunal, on the appeal by the assessee, allowed the appeal against which order the Department filed this appeal before the High Court. The Department submitted the following:

• The original assessee was a proprietor concern. After the death of the proprietor his son surrendered the central excise registration but utilized the assets of the business and is carrying on the same business, as its proprietor;
• Once the registration certificate is surrendered the CENVAT credit availed should be reversed and consequently the duty representing the CENVAT credit should be paid to the department.
• Proviso to Section 11 is directly attracted as he is the successor, he is liable to pay the duty demanded;
• Therefore the Tribunal is not justified in setting aside the well considered order passed by the authorities.

The assessee submitted the following:

• Neither in Section 11 nor in Section 11A, there is any indication of insisting any liability under the Act on the legal heirs of the deceased holder of a registration certificate;
• When once the CENVAT credit was availed, but not utilized and the assessee dies and his legal heirs surrender the certificate, they are precluded from having the benefit of CENVAT credit;
• Therefore the question of the legal heirs paying the duty which represents the said CENVAT credit availed, would not arise;
• No proceedings under the Act can be initiated against the legal heirs of an assessee who was chargeable to tax under the Act;
• The entire proceedings initiated are one without jurisdiction and the Tribunal rightly has set aside the orders passed in such proceedings.

The issue taken for consideration by the Court is ‘When the assessee who was registered under the Act as a manufacturer and who was availing the benefit of CENVAT credit dies and registration certificate is surrendered, whether the legal heirs are liable to answer the claims of the department under the Act?’

The High Court analyzed the provisions of Section 11A, Section 3 and Section 2(f).  The Court found it clear, on reading the provisions of Section 11A, that when any duty of excise which has not been levied or paid or has been short levied or short paid or erroneously refunded, the Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with duty to show cause, why he should not pay the amount specified in the notice. The proviso to the said provision only elongates the period of limitation if the case falls under any of those circumstances mentioned therein. Therefore Section 11A can be invoked only to recover duty from a person chargeable with duty. Section 3 of the Act is the charging section. It provides that they shall be levied and collected in such a manner as may be prescribed, a duty of excise on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985.  Therefore this provision makes it clear, a person chargeable with duty is the manufacturer.  Section 2(f) provides that the word ‘manufacturer’ shall include not only a person who employs hired labor in the production or manufacture of excisable goods but also any person who engages any other production or manufacture on his own account.  Therefore, primarily the person who is chargeable with duty under the Act is the manufacturer. 

The court further analyzed then insertion of a proviso to Section 11 with effect from 10.9.2004. According to this proviso the amount due to the Government under Section 11 is recoverable from the person to whom the person chargeable to duty has transferred or otherwise disposed of its business or trade in whole or in part or effect any change in the ownership thereof in consequence of which he succeeded to such business or trade by any other person, i.e., monies can be recovered from the successor in respect of the amounts due from such predecessor at the time of such transfer or otherwise disposal or change.   Therefore the proviso is attracted to cases in which the person chargeable to duty transfers or disposes of the business which he is carrying on during his life time.   If any amount was due from the predecessor in title, the successor in title is liable and it is to be recovered from him.  The Court did not find any provision in the Act which foists any such liability in case of intestate succession.  There is no provision which empowers the authorities to recover due from a deceased assessee by proceeding against the legal heirs.  The way Section 11 and 11A are worded, it is amply clear, the legislature has consciously kept away the legal heirs from answering to liabilities under the Act. 

The Court further held that in the case of an individual, on his death, the manufacturing activity comes to an end. To hold his legal heirs liable for the dues under the Act from the manufacturer who is the person, who is charged with the duty to pay tax, would be unreasonable.   If his family members were to take over the business after his death, continued to carry on the very same business, probably there would comply with the requirements of the statute. If they do not take over the business of comply with the provisions of the Act, they cannot be held liable of the dues of the deceased. 

In this case the manufacturer has availed CENVAT credit by making appropriate entry in the books of account.   But he has not used or utilized the said credit.   Once the legal heir surrendered the certificate of registration, with such surrender, they are also precluded from using and utilizing the said CENVAT credit.   The authorities would not get any right to claim the said CENVAT credit which remained unused or unutilized.   In no way the legal heirs are benefited by the CENVAT credit.   There is not a transfer or disposal during the lifetime of the original assessee.  Therefore they cannot be treated as successors who can be made available for the duty payable by the predecessor in title and therefore proviso to Section 11 is not attracted to the facts of this case.  The appeal was dismissed by the court.