2025 (5) TMI 1462 - AT - Customs

Imposition a penalty under section 112(a)(ii) on the former Managing Director of the company ( MMTC-Pamp ) - confiscation - evasion of customs duty - improper importation of goods - HELD THAT - Section 112(a)(ii) of the Customs Act stipulates imposition of penalty on the customs duty sought to be evaded and therefore pre-supposes a conscious exercise on the part of the person alleged to have committed evasion. In view of the judgment of the Kerala High Court in O.T. Enasu 2007 (11) TMI 431 - KERALA HIGH COURT the imposition of penalty upon Former MD cannot be sustained. Thus for all the reasons stated penalty under section 112(a)(ii) of the Customs Act could not have been imposed upon Former MD The order dated 31.12.2022 passed by the Principal Commissioner to the extent it imposes penalty upon Former MD under section 112(a)(ii) of the Customs Act therefore deserves to be set aside and is set aside. The appeal is accordingly allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether a penalty under section 112(a)(ii) of the Customs Act, 1962 can be imposed on an individual, specifically the former Managing Director of a company, for alleged improper importation of goods resulting in evasion of customs duty;

(b) Whether the imposition of penalty under section 112(a)(ii) presupposes a conscious or deliberate attempt to evade customs duty by the person charged;

(c) Whether the facts and evidence in the present case establish that the appellant consciously sought to evade customs duty in relation to the importation of gold/silver dore bars;

(d) Whether the extended period of limitation under section 28(4) of the Customs Act is invokable in the circumstances of the case;

(e) Whether the appellant's role as Managing Director entails automatic liability for penalties arising from the company's customs duty payment discrepancies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (e): Liability of Managing Director under Section 112(a)(ii) of the Customs Act

The legal framework under section 112(a)(ii) of the Customs Act provides for imposition of penalty on any person who does or omits to do any act rendering goods liable to confiscation under section 111, or abets such act or omission. The penalty is capped at 10% of the duty sought to be evaded or Rs. 5,000, whichever is higher.

The Principal Commissioner had imposed a penalty on the appellant on the ground that, as Managing Director, he was responsible for the overall management and therefore liable. However, the Tribunal examined whether mere position as Managing Director automatically attracts penalty liability.

Precedent from the Kerala High Court in O.T. Enasu vs. Union of India was relied upon, which emphasized that the penalty under section 112(a)(ii) requires a conscious exercise of evading duty. The Tribunal noted that liability under this provision is not automatic by virtue of office but depends on the mental element of seeking to evade duty.

The Court reasoned that being in charge of management does not ipso facto render the person liable unless it is established that he consciously sought to evade duty. The Tribunal rejected the Principal Commissioner's approach of imposing penalty solely on the basis of the appellant's position.

Issue (b) & (c): Requirement of Conscious Attempt to Evade Duty

The Tribunal referred extensively to the Kerala High Court judgment in O.T. Enasu, which clarified that "evade" means a conscious attempt to avoid payment of duty. The term "sought to be evaded" incorporates a mental element implying deliberate or intentional conduct aimed at evasion.

The Tribunal reiterated that a penal provision like section 112(a)(ii) must be strictly construed and that the imposition of penalty requires proof of a deliberate attempt to evade customs duty.

In the present case, the appellant's company imported dore bars, which were assayed post-import to determine the final gold/silver content. The final assay sometimes showed higher, equal, or lower quantities of gold/silver than declared in the Bills of Entry.

The appellant had also claimed refunds for excess customs duty paid where the final assay showed lower gold content than declared. This fact was critical evidence undermining any inference of deliberate evasion.

The Tribunal noted that since the appellant paid excess duty in many cases and sought refunds, no motive or conscious attempt to suppress facts or evade duty could be attributed to him. The appellant's conduct was consistent with compliance rather than evasion.

Therefore, the Tribunal concluded that the essential ingredient of "seeking to evade" was not established, and penalty under section 112(a)(ii) could not be sustained.

Issue (d): Invocation of Extended Period of Limitation under Section 28(4)

The extended period of limitation under section 28(4) of the Customs Act can be invoked where there is wilful misstatement or suppression of facts. The Tribunal examined whether such extended limitation was applicable.

Given that the appellant had paid excess duty in some cases and sought refunds, the Tribunal found no wilful suppression or misstatement. The appellant's conduct negated any intention to evade duty.

Consequently, the Tribunal held that the extended period of limitation could not be invoked in this matter.

Treatment of Competing Arguments

The Department argued that the appellant, as Managing Director, was responsible for the company's customs duty compliance and liable for penalty. The Tribunal rejected this argument on the basis that liability under section 112(a)(ii) requires proof of conscious evasion, not mere managerial responsibility.

The appellant contended that the discrepancy in gold content was due to post-import assay variations and that excess duty was paid in several instances, negating any intent to evade. The Tribunal accepted this explanation, supported by documentary evidence of refund claims and orders sanctioning refunds.

3. SIGNIFICANT HOLDINGS

"The jurisdictional fact to impose a penalty in terms of Section 112(a)(ii) includes the essential ingredient that 'duty was sought to be evaded'. Being a penal provision, it requires to be strictly construed. 'Evade' means, to escape, slip away, to escape or avoid artfully, to shirk, to baffle, elude... The concept of evading involves a conscious exercise by the person who evades... Therefore, the process of 'seeking to evade' essentially involves a mental element and the concept of the status 'sought to be evaded' is arrived at only by a conscious attempt to evade."

"It cannot, therefore, be urged that the appellant had short paid duty on account of any wilful statement or suppression of facts. The extended period of limitation contemplated under section 28(4) of the Customs Act could not, therefore, have been invoked."

"Being in charge of the overall management of the Company, the appellant cannot be absolved from responsibilities as Managing Director, but penalty under section 112(a)(ii) could not be imposed without establishing conscious attempt to evade duty."

"In view of the absence of any conscious attempt to evade payment of duty, the imposition of penalty upon the appellant cannot be sustained."

The Tribunal set aside the penalty imposed under section 112(a)(ii) of the Customs Act on the appellant, holding that the essential ingredient of conscious evasion was not established and that mere managerial position does not attract penalty liability without such proof.

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