MANDATORY PENALTY – LESSER PENALTY NOT IMPOSABLE

[Mr. M. GOVINDARAJAN]

In taxation matters, when the provisions of the Acts and the rules made there under penalty is attracted.   Penalty is of two types viz., mandatory penalty and penalty at discretion of the quasi judicial authorities.  In mandatory penalty, penalty is almost levied equal to the tax payable on the event of issue of demand through show cause notice, if there is a contravention by the assessee with intent to evade the payment of tax. 

For example Section 11AC of the Central Excise Act, 1944 provides that where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded by reasons of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Act or of the rules made there under with intent to evade payment of duty, the person who is liable to pay duty as determined under section 11A(2) of the Act, shall also be liable to pay a penalty equal to the duty so determined.

Section 11AC thus provides for a penalty wherein duty of excise has been levied, paid  or short paid or erroneously refunded by reasons of fraud, collusion of any willful misstatement or suppression of facts, or contravention of any of the provisions of the Act or rules with intent to evade payment of duty.  In such a case person liable to pay duty shall also be liable to pay a penalty equal to the duty so determined.  This type of penalty is mandatory penalty.  Once the allegation that the assessee with the intent to evade payment of tax or duty in contravention of the provisions of the Act or the rules made there under is proved, then the penalty is imposable mandatory equal to the duty so determined.  There is no discretion on the part of the quasi judicial authority to reduce the penalty.

In ‘Commission of Central Excise &Customs V. Nirayu Private Limited’ – 2017 (9) TMI 23 - GUJARAT HIGH COURT the respondent was engaged in manufacturing activity.  The Revenue issued a show cause notice to the respondent and its directors to show cause why duty/CENVAT credit amounting to ₹ 2,02,71,180/- be not reversed for the period between December 1997 to August 2001 in respect of clearance of inputs, semi finished goods and finished goods by the company with interest and penalty under section 11AC of the Act and the show cause notice also proposed for personal penalties.

The Commissioner, Vadodara, after giving reasonable opportunities to the parties of being heard, confirmed the duty demand of ₹ 3,53,268/- already paid and further confirmed duty demand of ₹ 1,17,46,218/- against the company along with interest.   The Authority also imposed penalty against the company of matching amount of ₹ 1,20,99,486/- under section 11AC of the Act.    Personal penalties were also imposed.

Against the order of the Commissioner, the respondent filed an appeal before the Tribunal.  The Tribunal confirmed the order of the Commissioner but allowed the appeal in respect of penalty partially.  The Tribunal was of the view that it will be harsh if the receipt units are not allowed to utilize the credit of duty to be paid.  The Tribunal directed the authorities below shall allow credit of the duty on such inputs to the receipt units subject to the condition that they have been utilized in the duty paid finished goods and also subject to the legal provisions prevailing at that time.    The Tribunal was of the view that the penalty of ₹ 1,20,99,486/- was excessive, though removal of duty paid inputs in contravention of rules and without payment of duty warrants imposition of some penalty.  The Tribunal reduced the penalty to ₹ 5,00,000-.

Against the order of the Tribunal the Revenue filed appeal before the High Court.  The High Court framed the substantial question of law – Whether the penalty under section 11AC is mandatory in nature (as held by Apex Court in case of M/s Sony Limited) can be reduced or waived by the Hon’ble CESTAT?

The High Court found that the adjudicating authority confirmed the demand of duty on the ground of clearance of goods without payment of duty and therefore in breach of the rules.  In fact, the adjudicating authority had held the clearances to be clandestine.  The adjudicating authority also imposed penalty of matching amount under section 11AC of the Act.  The Tribunal, in the impugned judgment did not disturb the findings and in fact, gave its own reasonings for confirming the duty demand.  The Tribunal, without recording any reason for coming to the conclusion that the penalty imposed by the Adjudicating Authority was in excess, reduced the penalty to ₹ 5,00,000/-. 

The High Court analyzed the provision of Section11AC of the Act.  Section 11AC provides that if any of the circumstances referred to in that section are established, the person liable to pay duty would also be liable to pay a penalty equal to the duty so determined.  The High Court also relied on the judgment of the Supreme Court in ‘Union of India V. Dharmendra Textiles Processors – 2008 (9) TMI 52 - SUPREME COURT’ in which the Supreme Court considered such provision and came to the conclusion that the section provides for a mandatory penalty and leaves no scope of discretion for imposing lesser penalty. 

The High Court held that the Tribunal did not come to the conclusion that the conditions for applicability for applying section 11AC of the Act did not arise.   In fact the Tribunal sustained the penalty but reduced the quantum clearly indicating that the grounds for imposition of penalty under section 11AC did exist.  That being the position, it would simply not be open for the Tribunal to exercise discretionary powers to reduce the penalty.   Penalty was mandatory and the Tribunal did not have discretion to reduce the amount.

The High Court allowed the appeal of the High Court and set aside the judgment of the Tribunal to the extent of reduction of penalty against the respondent company and that of the adjudicating authority is restored on the point.