PRE DEPOSIT OF PENALTY

[Mr. M. GOVINDARAJAN]

Section 35F of the Central Excise Act, 1944 provides for deposit of duty or penalty levied, pending appeal. The said section provides that where in any appeal under this Chapter, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of central excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded or the penalty levied.  The first proviso to this section provides that where in any particular case, the Commissioner (Appeals) or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.

A question arises whether the deposit as well as the penalty is liable to be deposited pending appeal.

In ‘Spandana Spoorthy Financial Limited V. Commissioner of Customs, Central Excise & Service Tax, Hyderabad – 2014 (5) TMI 33 - CESTAT BANGALORE the petitioner filed this writ petition before the High Court challenging the order of the CESTAT, Hyderabad, dated 10.07.2013 by which the Tribunal directed to make pre deposit of the basic tax component as well as 50% of the penalty under Section 78 and discrepancy of ₹ 12 lakhs between the petitioner’s own assessment of tax liability and the adjudicating authority’s determination.

The High Court is of the view when the appeal is admitted for hearing and the order of assessment is under scrutiny, unless the order of assessment reaches its finality, the question of initiation of penalty proceedings does not and cannot arise. The High Court analyzed the first proviso to the Section 35F of the Central Excise Act, 1944.

The High Court held that it is clear that in view of insertion of the word of the Tribunal cannot ask to make pre deposit in both at a time. According to the High Court the pre deposit of the penalty amount will be required when the order of the penalty alone is under challenge. But if there is a composite order namely assessment order, tax component and also penalty order like here, direction of pre deposit of any portion of the penalty amount would result in injustice as well as hardship.  Under these circumstances the High Court was of the view that the direction for pre deposit of penalty component of the order has to be deleted and is decided and the rest portion of the order would remain.

The High Court further directed the Tribunal to decide the appeal as early as possible preferably within a period of  3 weeks from the date of communication of the order.

This principle will also be applicable to the newly proposed substituted Section 35F as per clause 98 of Finance Bill,(No. 2) 2014.   The newly substituted Section 35F reads as follows:

Sec. 35F. The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal-

1. Under sub-section (1) of Section 35, unless the appellant has deposited 7.5% of the duty demanded or penalty imposed or both,  in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise.
2. Against the decision or order referred to in clause (a) of sub section (1) of Section 35B, unless the appellant has deposited 7.5% of the duty demanded or penalty imposed or both, in pursuance of the decision or order appealed against;
3. Against the decision or order referred to in clause (b) of sub-section (1) of Section 35B, unless the appellant has deposited 10% of the duty demanded or penalty imposed or both, in pursuance of the decision or order appealed against:

Provided that the amount required to be deposited under this section shall not exceed ₹ 10 crores.

As per the order of High Court only duty will be payable at the rate prescribed in the above section and not the penalty.  Penalty at the said rate shall be deposited only penalty alone is challenged.  Duty and penalty are not liable to be deposited since as per the High Court’s order the when the appeal is admitted for hearing and the order of assessment is under scrutiny, unless the order of assessment reaches its finality, the question of initiation of penalty proceedings does not and cannot arise.  As such the words ‘or both’ shall be deleted from the new section.

If the said words are not deleted another question will arise who is to order to deposit both duty and penalty since the appellant may be willing to only duty but not penalty. The Appellate Authority only to decide this issue for which an application is to be filed by the appellant before the authority for the waival of penalty.

The views of the experts, in this regard, are solicited.