INVOKING EXTENDED PERIOD OF LIMITATION FOR SUPPRESSION OF FACTS

[Mr. M. GOVINDARAJAN]

Invoking extended period of limitation

Section 11A of Central Excise Act, 1944 provides that where any duty of excise has not been levied or paid or has been short-levied or short-pain or erroneously refunded, by the reason of-

•  fraud; or
• collusion; or
• any willful misstatement; or
• suppression of facts; or
•  contravention of any of the provisions of this Act of the rules made thereunder with intent to evade payment of duty

by any person chargeable with the duty, the Central Excise Officer shall, within five years from the relevant date, serve notice on such person requiring him to show cause why he should not pay the amount specified in the notice along with interest payable thereon under Section 11AA and a penalty equivalent to the duty specified in the notice.

Section 73(1)  of Chapter V of Finance Act 1994 provides that where any service tax 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 the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:

PROVIDED that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of-

•  fraud; or
• collusion; or
• willful mis-statement; or
• suppression of facts; or
• contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax

by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words “one year”, the words “five years” had been substituted.

Meaning of Suppression of fact

The Supreme Court in ‘Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise’ -  2005 (9) TMI 331 - SUPREME COURT held that the term ‘suppression’ must be construed strictly. It does not mean any omission and the act must be deliberate and willful to evade payment of duty. In taxation, it (“suppression of facts”) can have only one meaning that the correct information was not disclosed deliberately to escape payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.  When facts were known to both the parties, the omission by one to do what he might have done not that he must have done would not render it suppression. It is settled law that mere failure to declare does not amount to willful suppression. There must be some positive act from the side of the assessee to find willful suppression. 

In ‘Pushpam Pharmaceuticals Company v. Collector of Central Excise, Bombay’ - 1995 (3) TMI 100 - SUPREME COURT, the Supreme Court examined whether the Department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Excise Act. The proviso to section 11A of the Act carved out an exception to the provisions that permitted the Department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of it was suppression of facts. It is in this context that Supreme Court observed that since ‘suppression of fact’ had been used in the company of strong words such as fraud, collusion, or willful default, suppression of facts must be deliberate and with an intent to escape payment of duty.    The Supreme Court held that a perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or willful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.

In ‘Continental Foundation Joint Venture Holding vs. Commissioner of Central Excise, Chandigarh-I’ -  2007 (8) TMI 11 - SUPREME COURT, the Supreme Court held that the expression 'suppression" has been used in the proviso to Section 11A of the Act accompanied by very strong words as 'fraud' or "collusion" and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11A the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a willful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct.

In ‘Bharat Hotels Limited v. Commissioner, Central Excise (Adjudication) – 2018 (2) TMI 23 - DELHI HIGH COURT, the High Court held also examined at length the issue relating to the extended period of limitation under the proviso to Section 73 (1) of the Act.  The High Court held that it is evident that failure to pay tax is not a justification for imposition of penalty. Also, the word ‘suppression’ in the proviso to Section 11A(1) of the Excise Act has to be read in the context of other words in the proviso, i.e. “fraud, collusion, willful misstatement”. The expression “misstatement or suppression of facts” does not mean any omission. It must be deliberate. There must be deliberate suppression of information for the purpose of evading of payment of duty. It connotes a positive act of the assessee to avoid excise duty.  Invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty or take out a license without the presence of such intention.  The Revenue has not been able to prove an intention on the part of the Appellant to avoid tax by suppression of mention facts. In fact it is clear that the Appellant did not have any such intention and was acting under a bona fide belief.

In  ‘ Pappu Construction v. Commissioner, Central Excise, Customs & Service Tax, Indore’ - 2020 (4) TMI 382 - CESTAT NEW DELHI, the Appellant executed a contract dated 05 July, 2005 with MP State Mining Corporation Limited State Corporation for mining of rock phosphate from Government Guwali Meghnagar Mines  for a period of 3 years up to 04.07.2008. This contract was extended initially up to 30.07.2009 and thereafter up to March, 2011 on the same terms.

 A Show Cause Notice dated 03 October, 2012 was issued to the Appellant alleging that the Appellant had not paid service tax on receipts from taxable service provided by it at Meghnagar mines during the period 01.06.2007  to 31.03.2011. It was stated that the Appellant should have got itself registered with the Department in June, 2007 (from when any service provided or to be provided to any person, by any other person in relation to mining or mineral oil or gas was made a taxable service under Section 65 (105)(zzzy) of the Act) and should have paid the service tax on the receipts from the State Corporation, but it did not.  The appellant got registered itself only in the month of January 2011.  The Appellant also paid service tax for the new contract executed for Meghnagar mines from March, 2011 under the agreement dated 22 March, 2011. In regard to the invocation of the extended period of limitation, as provided for under the proviso to Section 73 (1) of the Act, the Show Cause Notice mentions that by not getting itself registered with the Department and failing to declare the receipts of the taxable services rendered to the State Corporation, the Appellant appeared to have done so with an intention to suppress the value of taxable service so as to avoid detection by the Department that it was not paying service tax.

The appellant contended that it was not aware that mining had became a taxable service till January, 2011, when it entered into another contract with the State Corporation for mining at Hirapur mines in District Sagar.  The Commissioner confirmed the demand of ₹ 61,85,787/- as there was deliberate attempt of tax avoidance on their part as they were registered for mining services at Sagar (MP) since January, 2011.

The appellant filed appeal against the order of Commissioner before CESTAT.  The appellant put forth the following submissions before the Tribunal-

• The mining had become a taxable service with effect from 01.06.2007.
• The extended period of limitation, in facts and circumstances of the case, could not have been invoked.
• the Appellant became aware that mining had became a taxable service with effect from 01.06.2007 only in January, 2011 when another contract was executed with the State Corporation for mining at Hirapur, and therefore, the Department cannot urge that the Appellant had not paid service tax by reason of willful suppression of facts with an intent to evade payment of service tax. 

The Department put forth the following submissions before the Tribunal-

• The extended period of limitation was correctly invoked in the present case as there was willful suppression of facts with intent to evade payment of service tax.
• The statement made by Rajkumar Vijay Pal Singh, proprietor of the Appellant on 18 August, 2011 indicated that the Appellant had provided taxable service but had not paid service tax. 
•  If the appellant, after coming to know in January, 2011 that mining was a taxable service, it had immediately got itself registered with the Department, but it was only when a fresh contract was entered for the Meghnagar mines with the State Corporation that the Appellant ultimately got itself registered after the investigation in the present proceedings had started.

The Tribunal considered the submissions put forth by both the parties.   The issue that arises for consideration in this appeal is as to whether the Department was justified in invoking the extended period of limitation of five years, because admittedly the Show Cause Notice was issued on 03.10.2012 for the period 01.06.2007 to 31.03.2011

The Tribunal analyzed the provisions of section 11A of the Central Excise Act, 1944 and Section 73(1) of Chapter V of Finance Act, 1994.  The Tribunal observed that in the present case, the Department has invoked the extended period of limitation of five years for the reason that the Appellant “by not getting themselves registered with the Department and failing to declare the receipts from taxable services rendered to MPSMC appears to have done so with intention of suppressing their value of taxable services rendered and to avoid detection by the Department that they were not paying appropriate service tax”. There is no charge in the Show Cause Notice that “suppression” by the Appellant was “willful”, nor does the Show Cause Notice mention that suppression was with intent to evade payment of service tax.

The Supreme Court also analyzed the decisions of Supreme Court as well as High Courts.  What was necessary for the Department was to establish that the Appellant had suppressed facts with intention to evade payment of service tax. It was not a charge in the Show Cause Notice that the Appellant had suppressed facts with intention to evade the payment of tax nor has any finding to this effect been recorded by the Commissioner. The extended period of limitation, therefore, could not have been invoked.  The Tribunal held that the demand made for period within one year from the relevant date is justified but taking recourse to the extended period of limitation provided for in the proviso to Section 73 (1) of the Act is not justified. The demand made for the period within the normal period of one year is confirmed but this would have to be determined by the Commissioner afresh within a period of three months after providing an opportunity to the Appellant. The Commissioner shall also determine whether interest or penalty has to be imposed for this period.  The Tribunal set aside to the extent indicated above and the appeal also stands allowed to that extent.

Applicable to GST?

Section 74(1) of Central Goods and Services Tax Act, 2017 provides that where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

Whether the above decision is applicable to the show cause notices issued under the provisions of Section 74(1)?  In my view it is equally applicable to GST provisions also.  The proper officer while invoking the extended period of limitation in issuing of show cause notice the proper officer is to prove that the registered person suppressed the fact with willful intention to evade payment.  The case laws discussed in this article will be used in dealing such cases.