CIVIL APPEAL 34/04 on 2 July 1999

J U D G M E N T

C.C.E. Jaipur vs.M/s Banswara Syntex Ltd (D.B.CIVIL EXCISE APPEAL NO.02/05)

Union of India VS. SPBL Ltd. & Ors.(D.B.CENTRAL EXCISE APPEAL NO.52/06)

Union of India VS. Rajasthan Spinning & Weaving Mills Ltd. & Anr.

(D.B.CENTRAL EXCISE APPEAL NO.61/06)

Union of India VS. M/s Hindustran Processors Ltd. & Anr.

(D.B.CENTRAL EXCISE APPEAL NO.13/05)

C.C.E. VS. M/s S.B.Marbles (P) Ltd.

(D.B.O.T.R.CASE NO.34/04)

Union of India

VS. M/s Vimal Textile Mills.

(D.B.CENTRAL EXCISE APPEAL NO.31/06)

DATE OF JUDGMENT

:

2[nd] March, 2007

P R E S E N T

HON'BLE MR.JUSTICE RAJESH BALIA

HON'BLE MR.JUSTICE GOPAL KRISHAN VYAS

Mr.V.K.Mathur ], for the appellantsMr.K.K.Bissa ]

Mr.Rajendra Mehta,] for the respondents.Mr.Dinesh Mehta, ]Mr.Sanjeev Johari, ]

BY THE COURT: (PER HON'BLE JUSTICE RAJESH BALIA)

D.B.CENTRL EXCISE APPEAL NO.61/06:

“Whether in the facts and circumstances

of the case,the Tribunal has discretion to reduce thepenalty leviable under Section 11AC of the Act?”

In this case penalty equal to short levied duty was imposedwith reference to Section 11AC though the notice was given only underSection 173 Q for alleged breach of the Rules but the penalty equal toduty was decided to be levied with reference to Section 11AC and not tobe levied with reference to Rule 173Q.

D.B.CENTRAL EXCISE APPEAL NO.13/2005

“Whether the learned Tribunal is right in lawin reducing the mandatory penalty imposable as equal tothe amount of duty imposable under Sec.11AC of theCentral Excise Act, 1944?”

A show cause notice was issued for alleged short levy onexcess stock found on verification with the one shown in the registermaintained for that purpose. Apart from issuing show cause notice forlevy of duty, notice for levy of penalty under Section 173Q as well as11AC was issued for alleged breach of Rules and ultimately adjudicatingauthority decided to levy penalty under Section 11AC for the allegedbreach of Rules.

D.B.O.T.R.NO:2/2005:

Following substantial question of law has been referred forfor opinion in this appeal:- “Is Tribunal empowered to reduce the mandatorypenalty imposed under Section 11AC of the Central Excise Act, 1944, while upholding the demand ofduty ?”

A show cause notice was issued to the respondent assesseethat the assessee has wrongly availed benefit of exemption undernotification dated 2/6/1998. Along with show cause notice for thealleged short levy of duty, notice to levy penalty for the same wasissued under Section 11AC read with Rule 173Q. The adjudicatingauthority had raised a demand of short levy of duty on account oferroneous availment of the exemption notification and imposed apenalty equal to the amount of duty short levied under Section 11 ACread with Rule 173Q of Central Excise Rules.

D.B.O.T.R.NO.34/2004:

“Is Tribunal empowered to reduce the mandatorypenalty imposed under Section 11AC of the Central ExciseAct, 1944, while upholding the demand of duty ?”

In this case the assessee was issued a show cause notice for the purpose of alleged short fall in the stock as per the register andlevy of penalty under Section 173Q read with Section 11AC of theCentral Excise Act, 1944. The adjudicating authority after rejecting theexplanation submitted by the assessee imposed short levied duty andimposed penalty equal to the short levied duty under Section 173Q readwith Section 11AC of the Act, 1944.

D.B.CENTRAL EXCISE APPEAL NO.31/06:

Issues

In this case respondent is engaged in processing of textileat Pali. A show cause notice was issued on 2/7/1999 calling upon theexplanation of the Mills for short levy of duty on the cleared processedfabric from the Mills and also to show cause against the levy of penaltyunder Section 11AC & Rules 173Q & 226 of the Central Excise Rules, 1944as they existed at that time. While confirming the demand under theshow cause notice, the adjudicating officer also levied penalty equal tothe amount of short levy under Rule 173Q and under Section 11AC fordifferent period.

The order of the adjudicating authority dated1.12.2003/5.12.2003 was appealed against before the CESTAT. TheTribunal while confirming the demand reduced the penalty to Rs.25lacs.

Hence, in appeal, the following question of law has been framed:- “Whether the learned Tribunal is right in law inreducing the mandatory penalty imposable as equalto the amount of Duty under Section 11AC of theCentral Excise Act, 1944.”

D.B.CENTRAL EXCISE APPEAL NO:52/2006

“Whether penalty leviable under Section11AC of the Central Excise Act, 1944 is fixed penalty andcannot be reduced or waived by the Tribunal, once thefinding that the penalty is leviable, has been reached ?”

A show cause notice was issued against excess availment ofModvat/Cenvat credit by the manufacturer and calling upon theassessee to recall the excess availed Modvat credit in contravention ofRule 9(1), 57AB, 57AC & 57AE of the Central Excise Rules. Rejecting the assessee's explanation, the adjudicating authority disallowed the Cenvatcredit availed in excess of the permissible limit and imposed a penaltyequal to excess availment of modvat credit by resorting to Section 11AC.It may be stated that in the show cause notice no allegation ofsuppression, fraud or collusion was made. The show cause notice forlevy of penalty under Section 11AC and Rule 173Q for allegedcontravention of Rule 9(1), 57AB, 57AC & 57AE of Central Excise Rules,1944 and Rule 13 of the Cenvat Credit Rules, 2001 and for the samereason show cause notice under Section 11 AC was also issued. However,after adjudicating against the manufacturer about the wrong availmentof excess Cenvat credit, adjudicating authority raised a demand forexcess availed Cenvat Credit and imposed a penalty equal to amount oftax under Section 11AC. While considering the levy of penalty referencewas not made to Rule 173Q.

In all these cases the Tribunal upheld the levy of dutyagainst various show cause notices but in the facts and circumstances ofthe case held that penalty is leviable but reduced it to different sums. Itis in the aforesaid circumstances, the substantial question has beenreferred/framed in each case as noticed above.

Learned counsel for the Revenue in all the cases has reliedon the phrase “equal to” used under Section 11AC and has contended

Arguments

that literally speaking expression “equal to” denotes a comparablemeasure. Since measure of duty has been provided compared to dutylevied, the Tribunal had no jurisdiction to reduce or waive the penaltyin case penalty is found leviable. Since in all these cases the penalty hasbeen found leviable, which is apparent from the fact that levy ofpenalty has been sustained in all these cases though amount of penaltyhas been reduced, it is submitted that such discretion in view oflanguage used in Section 11AC is not vested in the adjudicating authorityor the appellate authority.

Learned counsel for the manufacturer, on the other hand,contends that matter received attention of the Supreme Court in Stateof Madhya Pradesh reported in 1998 (99) ELT 33. It was a case arisingfrom Madhya Pradesh State Entry Tax Act, 1976. Validity of theprovisions relating to levy of penalty equal to ten times the duty wasalso under challenge apart from the substantive provision. It has beencontended that since the use of phrase “equal to” does not leave anydiscretion upon the assessing authority to levy more or less penaltytaking into consideration the relevant facts and circumstances includingthe mitigating circumstances, if any, & the levy of penalty isconfiscatory and ultra vires.

Of course, it was conceded by the counsel appearing forthe State that it may be treated that the provisions provide it as themaximum limit and not fixed amount of penalty leaving no discretion forimposition of lesser penalty, while the Court said that “It is notnecessary for us to decide whether the provision for levy of penaltyequal to ten times the amount of entry tax would be confiscatory and,therfore, ultra vires since Mr.Sanghi, in fairness, submitted that theState treats it as the maximum limit and not fixed amount of penaltyleaving no discretion for imposition of lesser penalty.”

However, it is only construing the phrase “equal to”,“equivalent to”, “upto” to treat the measure of penalty provided underthe provision to be maximum limit and the assessing authority has thediscretion to levy lesser amount of penalty. The Court held that:

“From the aforesaid it follows that Section 7(5) has to beconstrued to mean that the presumption contained therein is rebuttableand secondly the penalty of ten times the amount of entry taxstipulated therein is only the maximum amount which could be leviedand the assessing authority has the discretion to levy lesser amount,depending upon the facts and circumstances of each case. ConstruingSection 7(5) in this manner the decision of the High Court that Section 7(5) is ultra vires cannot be sustained.

On this premise, it is further submitted by the learnedcounsel that following the aforesaid decision, the Gujarat High Court inAmbuja Synthetics Mills vs. Union of India [2004 (175) E.L.T. 85 (Guj.)],& Madras High Court in Commissioner of Central Excise, Tiruchirapalli-1vs. CEGAT, Chennai [2001 (133) E.L.T. 536 (Mad.)] & in Beauty Dyers vs.Union of India [ 2004 (163) E.L.T.28 (Mad.)] has construed the provisionof 11AC of Central Excise Act as laying down the maximum limit ofpenalty to be levied and not the fixed amount of penalty and held thatdiscretion to levy lesser penalty than the amount equal to the amount ofduty vests with the assessing officer.

It was also urged that Full Bench of the Tribunal has alsoheld that limit prescribed under Section 11AC is the maximum limit anddiscretion vests with the assessing officer to levy the lesser amount ofpenalty. It was also pointed out in Sony India Ltd. vs. Commissioner ofCentral Excise, Delhi [2004 (167) E.L.T. 385 (S.C.)] on which reliancewas placed by the learned counsel for the Revenue that question aboutthe quantum of penalty to be levied under Section 11AC had not beenraised and decided but having found that the duty was leviable and hasbeen short levied, in the facts and circumstances of the case levy ofpenalty equal to the amount of duty was upheld. Therefore, Soni Indiacase (supra) does not lay down the proposition throwing any light on the controversy raised before us.

We are of the opinion that so far as the ratio emergingfrom Bharat Heavy Electricals case (supra) in terms cannot be invokedwhile interpreting Section 11AC of the Central Excise Act, 1944 standingalone. The quantum of penalty prescribed under the M.P.State Entry Taxis amount equal to ten times of the duty and it is that quantum ofpenalty which was under challenge being confiscatory in nature &statutorily a detriment sum. In order to save the said provision beingheld ultra vires being confiscatory in nature, State has conceded thatmeasure provided under the Act is the maximum limit upto which theduty can be levied leaving it in the discretion of the assessing officer tolevy lesser amount of penalty. Accepting such contention the Court heldthat reading in this manner saves the provision being ultra vires. It waswith reference to the quantum of penalty imposable under MadhyaPradesh Entry Tax Act to be the maximum limit, the Court led it down tosave it from being ultra vires but Court really did not interpret themeaning of phrase “equal to” to mean “upto” in all circumstances. Butit do suggest that if the context warrants in a given case “equal to” inconjunction with discretion vesting in authority to levy penalty,it canalso be read as “upto”

In the present case, as we have noticed above that show cause notice in all the cases have been given for levy of penalty underSection 173Q and 11AC. In some of the cases penalty has been leviedequal to duty of amount of tax by considering it to be under Section173Q read with Section 11AC and in some cases while adjudicatingauthority levied penalty by referring to Section 11AC and has abandonedthe reference to Rule 173Q.

These facts deserve consideration. Rule 173Q envisagesthat for contravention of Rule by the manufacturer in variouscircumstances and on various grounds invoke levy of penalty. Rule 173Qof the Rules, 1944 reads as under:- “Rule 173Q. Confiscation and penalty.-(1)Subject to the provisions contained in Section 11AC ofthe Act and Rule 57AH, if any manufacturer, producer,registered person of a warehouse or a registered dealer- (a)removes any excisable goods in contravention ofany of the provisions of these rules; or (b)does not account for any excisable goodsmanufactured, produced or stored by him; or (bb)takes credit of duty in respect of inputs or capitalgoods for being sued in the manufacture of finalproducts or capital goods for use in the factory of themanufacturer of final product, as the case may be

wrongly or without taking reasonable steps to ensurethat appropriate duty on the said inputs or capital goodshas been paid as indicated in the invoice or any otherdocument approved under these rules evidencing thepayment of excise duty or the countervailing duty, asthe case may, accompanying thereof, or takes credit ofduty which he knows or which he has reason to believe,is not permissible under these rules, or does not utilisethe inputs or capital goods in the manner provided for inthese rules, or utilises credit of duty in respect of inputsor capital goods in contravention of any of the provisionsof these rules, or does not render proper and trueaccount of the receipt and disposal of the said inputs orcapital goods and the credit of duty taken thereon asrequired under these rules, or contravenes any of theprovisions contained in Section AA or AAA of Chapter Vof these rules; or (bbb) enters wilfully any wrong or incorrect particularsin the invoice issued for the excisable goods dealt byhim with intent to facilitate the buyer to avail of creditof the duty of excise or the additional duty underSection 3 of the Customs Tariff Act, 1975 (51 of 1975) inrespect of such goods which is not permissible underthese rules; or

(c) engages in the manufacture, production orstorage of any excisable goods without having appliedfor the registration certificate required under Section 6of the Act; or (d)contravenes any of the provisions of these ruleswith intent to evade payment of duty, then, all such goods shall be liable to confiscationand the manufacturer, producer, registered person of awarehouse or a registered dealer, as the case may be,shall be liable to a penalty not exceeding the duty onthe excisable goods in respect of which anycontravention of the nature referred to in Clause (a)or clause (b) or clause (bb) or Clause (bbb) or Clause (c)or Clause (d) has been committed, or ten thousandrupees, whichever is greater.

Provided that where the identity andaddress of the manufacturer or the supplier is satisfiedon the strength of a certificate, the person availing ofcredit of duty shall retain such certificate for productionbefore the proper officer on demand.”

It would be pertinent to notice that Section 11AC clearlyprovides that penalty under Section 11AC could be levied only wherethere is short levy or non-levy of duty or wrong availment of any benefitunder various notifications is intended action on the part of the assesseeto evade payment of duty is an essential ingredient. In other words untilshort levy or non-levy or excess availing of tax concessions is a result ofwilful action on the part of the assessee then only penalty under Section11AC is leviable and not otherwise, but it uses different circumstances for levy of penalty; (i) by reason of fraud (ii) by reason of collusion orby reason of any wilful mis-statement or (iii) suppression of facts or(iv) contravention of any of the provisions of this Act or the Rules madethereunder with intent to evade payment of duty.

Of course, all the circumstances are grave enough but

amongst them gravity of wilful act or intention differs in degrees.However, under Rule 173Q, under which show cause notices have beenissued and with which we are concerned, provides levy of penalty forthe same defaults as under Section 11AC, under sub-rule (d) in generalterms viz. with intent to evade payment of duty. Bad intention or lackof bonafide is part of Section 11Ac read with Rule 173Q (d). The twohad to be read together.

As it is noticed from the provisions of Rule 173Q

reproduced hereinabove, the penalty provided is `not exceeding theduty on the excisable goods or Rs.10,000/-, whichever is greater'.Significantly, Rule 173Q envisages not only simple contravention ofprovisions without intention to evade payment of duty for levy ofpenalty but also includes levy of penalty for contravention of theprovisions of the Rules with intention to evade payment of duty andw.e.f. 4/7/1994 it also includes penalty for entering wilfully any wrongor incorrect particulars in the invoice issued for the excisable goods dealt by him with intent to facilitate the buyer to avail the credit of theduty of excise or the additional duty in respect of such cases. Thus, foreven wilful contravention of the provisions to evade payment of dutyminimum penalty is leviable upto the sum prescribed but the maximumlimit is upto the duty of such excisable goods.

Apparently, Rule 173Q leaves it to the discretion of theassessing officer the quantum of penalty to be levied subject tominimum amount even in cases where the contravention of anyprovision of the Rules is intended to evade payment of duty or there hasbeen wilful entry of any wrong or incorrect particulars in the invoice forthe purpose of facilitating the buyer to avail credit thereof.

Section 11AC read with Rule 173Q in connection with levyof penalty provides the true scope of scheme about levy of penalty indifferent circumstances and gives clue to the question raised before us.If the two provisions are read, it becomes clear that where the case isgoverned by Rule 173Q, the penalty which could be levied under Section11AC is the maximum limit upto which penalty can be levied butdiscretion vests with the assessing authority to levy lesser amount ofpenalty subject to minimum amount of penalty mentioned in Rule 173Q.Where the adjudicating authority himself has issued show cause noticeunder the two provisions and it is within its discretion to levy penalty with reference to any of the provisions, it cannot be construed as givinghim a discretion not to apply his mind to the attending circumstances &the explanation submitted by the assessee where the penalty upto themaximum limit or the lesser amount of penalty could meet the ends ofjustice. The assessee has paid the amount of duty voluntarily thatmitigates the default made by him.

It is also clear from the amendment brought in Section11AC by way of inserting second proviso that where the duty determinedunder sub-section (2) of Section 11A along with interest thereon is paidwithin thirty days from the date of notice of demand, the amount ofpenalty has to be reduced to 25% of the duty levied. Thus, prescribingminimum leviable penalty, since amendment under Section 11AC, to 25%of the duty on deposit of the amount for which demand has beencreated along with interest within prescribed time and waived amountover and above it. Therefore, keeping in view this provision, we arepersuaded to hold that where show cause notice under Section 11AC aswell as 173Q has been issued for the same defaults, the assessing officercannot overlook the provisions of Rule 173Q for the purpose of levyingmaximum penalty only using his discretion to levy penalty under Section11AC without considering the provision of Rule 173Q. If he has discretionto use, and case is made out for imposing lesser penalty, he cannot usehis discretion not to invoke the provisions of Rule 173Q at all and insist on levying maximum penalty only.

The two provisions read together make it fairly clear thatthe limit of penalty provided under Section 11AC serves as a maximumlimit upto which penalty could be levied but the assessing officer in hisdiscretion may levy lesser penalty.

Since all the cases, as noticed by us, fall under Section11AC & 173Q, therefore, no interference is called for in the orderspassed by the Tribunal in reducing the penalty. Since reduction ofpenalty is sought to be challenged only on the basis of interpretation ofSection 11AC and not on merits, we are not further examining thequestion whether levy of penalty itself in each case was justified or not.

The appeals are, therefore, dismissed. The questionsreferred are answered in affirmative in favour of assessee and againstthe Revenue by holding that Tribunal has power to reduce the penaltyimposable under Rule 173Q as well as Section 11AC and it being not thecase of Revenue that penalty was imposable under both the provisionsseparately and independently, the harmonious consideration of twoprovisions lead to a conclusion that limit of penalty provided underSection 11AC is the maximum limit upto which penalty can be levied.Now such minimum penalty in the case of intentional breach, Section 11AC itself has been reducible to 25% by dint of provisoreferred to hereinabove. Therefore, there was no error on the part of the Tribunal in reducing the penalty when it found that levy ofmaximum penalty was not justified.

No costs.

(GOPAL KRISHAN VYAS), J. (RAJESH BALIA), J.

Pankaj Baweja