PRINCIPLE OF ‘no reformatio in peius’

[Mr. M. GOVINDARAJAN]

The principle of no reformatio in peius (prohibition of reformation in peius means that a person should not be placed in a worse position as a result of filing an appeal) is a Latin phrase expressing the principle of procedure according to which using the remedy at law may not aggravate the situation of the one who exercises it. This rule is justified by the fact that carrying out the inspection of Justice judgments, set up as a guarantee of observance of the law, it would be restricted, if the parties would face a risk to create a situation more difficult as a result of the exercise of uni remedies. This is a principle of procedural law, according to which a decision of the court cannot create a situation more difficult for the party which has declared appeal or a second appeal against the court ruling.

The above principle is well explained in the judgment ‘Servo Packaging Limited V. CESTAT, Chennai’ – 2016 (8) TMI 126 - MADRAS HIGH COURT by the Madras High Court.  The facts of the case run as follows-

The Preventive unit of Puducherry Commissionerate made an inspection in two units of the appellant.  The officers recovered 36 numbers of loose slips and a note book containing the details of raw materials dispatched.  Statements were obtained from the Vice President of the Company, Assistant Security Officer and also from the transporters.  Show cause notices were issued by the Department to the appellant for the inspection carried out in two units.  The appellant requested to return the records and documents seized by them so as to enable the appellant to reconcile the shortage.

In the show cause notices the department alleged that there was shortage of raw materials and CENVAT credit was not reversed.  Clandestine removal of raw materials was also alleged.  The appellant denied the allegations.  The stock was not properly taken.   Half filled bags were not taken.  There was no power supply and therefore there was no production.  The appellants also sought for cross examination of the officials who carried out the stock verification in both the units.  The appellant prayed to drop the show cause case on the basis of the evidence of retraction of the statements given by the persons from whom statements were recorded and for other reasons stated in the reply.

The Adjudicating Authority passed an order in which he held that 36 loose slips alone cannot be sufficient to prove clandestine removal of raw materials and restricted the demand only to the shortage noticed by the Officers.  He demanded a sum of ₹ 7.60 lakhs from the Unit I and a sum of Rws.1.61 lakhs from Unit II.   He also imposed interest and penalty.

The appellant filed appeal against the order of Adjudicating Authority before Commissioner (Appeals).  The Commissioner (Appeals) while confirming the order of adjudicating authority has remanded the matter to the adjudicating authority to reconsider the dropping of demand on the basis of the 36 slips and penalty imposed on the Directors.

The appellant filed appeal before the Tribunal against the order of Commissioner (Appeals).  Before the Tribunal the appellant contested that the Tribunal that when the department did not file any appeal against the order of Adjudicating Authority, on the finding recorded, in favor of the appellant, on the alleged clandestine removal of raw materials and restricted the demand only to the shortage of raw materials, the First Appellate Authority had acted beyond the scope of the appeal and therefore the order of Commissioner (Appeals) required reversal.  The Tribunal remitted the matter with further directions.

Against the order of CESTAT, the appellant filed the present appeal before the High Court, Madras.  The appellant contended the following-

• The stock was not properly verified and the reconciliation statement filed by the appellant was not at all considered;
• The First Appellate Authority and Tribunal have acted beyond the scope of the appeal and exceeded in their jurisdiction, especially, when there was no appeal by the Department against the order of the Adjudicating Authority;
• The appellant cannot be put in a worse position, on their appeal, in the absence of any appeal or cross objection by the Department;
• When the appellant has approached the appellant authority to redress his grievance, on the aspect of shortage of raw materials only, and not on the alleged clandestine removal of raw materials, which allegation has found, as not substantiated by the Original Authority, neither the First Appellate Authority, nor the Tribunal has any jurisdiction or power to enhance the scope of the assessment, adverse to the interest of the appellant, in the absence of any appeal or cross objections, by the department, on the specific finding on the alleged clandestine removal;
• If the department had any grievance against any finding, it ought to have reviewed the said order and filed an appeal before the First Appellate Authority;
• The  Tribunal has failed to appreciate that consequent to the amendment to Section 35A of the Central Excise Act, the First Appellate Authority has no jurisdiction and authority to remand any matter and therefore, the Tribunal ought to have appreciated the said submission and consequently, ought to have held that the order of the First Appellate Authority, remanding the matter, on the aspect of the alleged clandestine removal was not called upon by the department, and hence, without authority of law;

The Revenue contended that the shortage of raw materials was only due to clandestine removal of goods and therefore the said aspect forms part of the subject matter of the remand and therefore there is no illegality in the impugned order warranting interference.

The High Court analyzed the findings of the Adjudicating Authority, First Appellate Authority and the Tribunal.  On the aspect of the alleged clandestine removal of raw materials, the adjudicating authority has categorically held that the documents are not sufficient to prove clandestine removal of raw materials from Unit I and II of the appellant and therefore the adjudicating authority has held that the allegation of clandestine removal fails.

Admitted the department has not filed any appeal against the order of Adjudicating Authority by which the order made by the Adjudicating Authority, in favor of the assessee, has reached finality.  Thus the directions of the First Appellate Authority are certainly beyond the scope of the appeal and exceeded in his jurisdiction, in exercise of his powers under Section 35A of Central Excise Act.

Before the Tribunal the appellant has questioned the very jurisdiction of the first appellate authority.  Without adverting to the said ground of challenge the Tribunal has gone further and elaborated as to how the oral and documentary evidence should be considered in adjudicating the alleged clandestine removal of raw materials.  The Tribunal has directed that the outcome of the loose slips be examined in detail to arrive at the proper duty demand if any, to serve the interest of justice.  The Tribunal has also directed the original authority to examine the contents of the note book and to evaluate the evidence thereof, to arrive at the duty demand, if any.  The Tribunal further directed that, ‘it may so happen that all the materials and evidence may corroborate with each other that aspect may be specifically dealt’.

The High Court held that in the absence of any appeal filed by the Department on the finding related to alleged clandestine removal of raw materials the appellant cannot put in a worse position, in their own appeal, and in such circumstances the principle of ‘no reformatio in peius’ would come into play, which means that a person should not be placed in a worse position, as a result of filing an appeal.   It is a Latin phrase, expressing the principle of procedure, according to which, using the remedy at law, should not aggravate the situation of the one who exercises it.

The High Court further held that if the assessee did not file an appeal, it would not be placed in a situation of inviting an adverse order, on the appeal of clandestine removal.  A party who files an appeal, expects that the appellate authority would only address the grounds of appeal, made against the order impugned and the appellant does not expect the appellate authority to go beyond the scope of appeal and pass an order adverse to his interest, in which event, it certainly creates a worse situation for the appellant, in his own appeal, than the order under challenge.  The High Court made it clear that while adjudicating the aspect of shortage of raw materials, any observation or directions, issued by both the appellate authority and the Tribunal, on the aspect of clandestine removal, requires no adjudication by the original authority and that the adjudication ordered should be confined only to the directions contained in Para 7.1 and 7.2 of the order of the Tribunal.   It is open to the adjudicating authority to deal with the physical inventory and computer record, for passing appropriate speaking orders, in accordance with law, after providing a reasonable opportunity to the appellant.