2023 (4) TMI 124 - HC - Central Excise

Clandestine Removal - production by showing lesser production in the ER-1 return - Demand of Central Excise Duty with reference to the installed capacity when the finished goods are not notified under Section 3A of the Central Excise Act, 1944 - no material to show any unrecorded manufacture or clearance of the finished goods - reason for issuing show-cause notice to the assessee was based on the quantity of production difference between the annual installed production capacity statement as declared in the ER-7 statement and the ER-1 return - allegation of clandestine removal is solely based upon the annual installed capacity of the unit of the assessee as mentioned in the ER-7 return compared with the ER-1 statements - suppression of facts or not - extended period of limitation. HELD THAT - The allegation is one of the suppression of the production and clandestine removal of excisable goods without payment of excisable duty. Therefore the burden of proof is on the department to establish that the charge of clandestine removal for which there should be cogent and relevant material to pen down the assessee on a charge of clandestine removal. In the instant case, it is found there was no material which was available with the Commissioner to come to such a conclusion. As pointed out earlier, the genesis of the entire matter is the audit objection. There are two known ways of dealing with an audit objection. Firstly, the respondent department will examine the objection and answer the audit para by giving an explanation. In the event, the same is found to be not acceptable and the findings are reiterated, then the department will have to conduct an enquiry into the aspect and satisfy itself that there are materials to proceed against the assessee and then issue the show cause notice clearly disclosing the case the assessee has to meet. Unfortunately the observation made in the audit objection was taken by the department as gospel truth and without conducting any enquiry or investigation as the authority straight away proceeded to issue the show cause notice. In fact, the reply given by the assessee to the Superintendent, Central Excise department at the first instance was not even taken note of and mechanically the show cause notice was issued. The learned tribunal failed to see that the charge of clandestine removal is very serious charge and to establish the same there should be cogent and relevant materials. Extended period of limitation - suppression of facts - HELD THAT - Admittedly, the audit objection was based upon the information culled out from the return filed by the assessee and therefore there can be no charge of suppression or willful mis-statement and consequently the extended period of limitation could not have been invoked. The learned tribunal did not take enough effort to examine the facts of the case which are very crucial in the case on hand qua the allegations set out in the show cause notice - For invoking extended period of limitation, the revenue ought to have established wilful mis-statement or suppression on the part of the assessee which has not been brought on record. Thus, the extended period of limitation could not have been invoked as well as the penalty could not have been imposed since there is no charge of willful mis-statement or suppression made against the assessee - the department has failed to discharge the onus cast upon him to prove the charge of clandestine removal. The order passed by the tribunal as well as the adjudicating authority are set aside - Appeal allowed.

Issues Involved:
1. Demand of central excise duty based on installed capacity.
2. Allegation of clandestine removal of goods.
3. Validity of invoking extended period of limitation.
4. Imposition of penalty.

Summary:

1. Demand of Central Excise Duty Based on Installed Capacity:
The appeal questioned whether central excise duty can be demanded with reference to installed capacity when the finished goods are not notified under Section 3A of the Central Excise Act, 1944, and there is no material evidence of unrecorded manufacture or clearance. The court noted that the department's demand was based solely on the difference between the annual installed production capacity and the actual production reflected in the ER-1 returns. The court emphasized that duty can only be levied on actual production under Section 3, not on deemed production based on installed capacity unless the goods are notified under Section 3A.

2. Allegation of Clandestine Removal of Goods:
The department alleged that the assessee suppressed production and clandestinely removed goods without paying excise duty. The court referred to precedents, including the case of Oudh Sugar Mills Limited vs. Union of India, highlighting that allegations of clandestine removal must be supported by tangible evidence. The court found that the department failed to provide any concrete evidence of clandestine removal and relied solely on audit objections without conducting a proper investigation.

3. Validity of Invoking Extended Period of Limitation:
The court addressed the issue of whether the extended period of limitation of five years under the proviso to Section 11A(1) could be invoked. The court noted that the facts leading to the issuance of the show-cause notice were within the department's knowledge, derived from the returns filed by the assessee. Therefore, there was no basis for alleging suppression of facts or willful misstatement, making the invocation of the extended period of limitation invalid.

4. Imposition of Penalty:
The court examined the imposition of penalties under Section 11AC of the Act. It concluded that since there was no evidence of suppression, willful misstatement, fraud, or contravention of provisions with intent to evade duty, the penalties imposed were arbitrary and without authority of law.

Conclusion:
The court allowed the appeal, setting aside the orders of the tribunal and the adjudicating authority. It ruled in favor of the appellant, stating that the department failed to establish the charge of clandestine removal with tangible evidence, and the extended period of limitation could not be invoked. The substantial questions of law were answered in favor of the appellant assessee.

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