Is inadvertent short payment of duty more sinful than intentional evasion?

By Vijay Kumar

A Netizen sent us this:

If anyone takes a look at the interpretation of provisions of Rule 8(3A) of the Central Excise Rules, 2002 by field formations and the clarification issued by CBEC vide Cir 962 dt. 28.03.12, the proceedings initiated by the department against assesses who made short payment of duty of few hundreds of rupees is more severe than for an assessee evading lakhs of rupees of duty. This short-sightedness and wrong interpretation of provisions of Rule 8 (3A) of CE rules has led to initiation of proceedings under Rule 8 (3A).

Let us take an illustration

Situation	Violation committed	How detected	CENVAT	Consequences under law.
Situation 1	Assessee has not paid duty of Rs.1000 in January due to clerical mistake inadvertently	Mistake found during Scrutiny of ER-1in May. Made good the short payment.	Assessee utilized Rs. 50,00,000/- credit for payment of duty till May end.	Proceedings will be initiated under Rule 8 (3A). Assessee will be asked to pay Rs. 50,00,000/- through PLA along with interest till May, and liable for imposition of penalty under Rule 25. If failed, can be realized in terms of Section 11 of CEA as arrears of revenue
Situation 2	Assessee has not paid duty of Rs.1,00,000/- for January by not taking certain clearances into consideration, though such transaction is reflected in books of accounts.	Assessee made good the short payment in May, before service of notice.	Assessee utilized Rs.50,00,000/- credit till May	No bar for assessee availing credit in terms of CBEC circular. And no proceedings could be initiated against him as per the provision of Section 11A(2).
Situation 3	Assessee has not paid duty of Rs.1,00,000/- for January through clandestine clearances (but details available in specified records )	Found out during Anti evasion operation/ Audit in May. Assessee made good the short payment with interest.	Assessee utilized Rs.5000000/- credit till May.	No bar for assessee availing credit in terms of CBEC circular. Assessee is liable to pay penalty @1% per month in terms of Sec. 11A(5)

Situation

Violation committed

How detected

CENVAT

Consequences under law.

Situation 1

Assessee has not paid duty of Rs.1000 in January due to clerical mistake inadvertently

Mistake found during Scrutiny of ER-1in May. Made good the short payment.

Assessee utilized Rs. 50,00,000/- credit for payment of duty till May end.

Proceedings will be initiated under Rule 8 (3A). Assessee will be asked to pay Rs. 50,00,000/- through PLA along with interest till May, and liable for imposition of penalty under Rule 25. If failed, can be realized in terms of Section 11 of CEA as arrears of revenue

Situation 2

Assessee has not paid duty of Rs.1,00,000/- for January by not taking certain clearances into consideration, though such transaction is reflected in books of accounts.

Assessee made good the short payment in May, before service of notice.

Assessee utilized Rs.50,00,000/- credit till May

No bar for assessee availing credit in terms of CBEC circular. And no proceedings could be initiated against him as per the provision of Section 11A(2).

Situation

Assessee has not paid duty of Rs.1,00,000/- for January through clandestine clearances (but details available in specified records )

Found out during Anti evasion operation/ Audit in May. Assessee made good the short payment with interest.

Assessee utilized Rs.5000000/- credit till May.

No bar for assessee availing credit in terms of CBEC circular. Assessee is liable to pay penalty @1% per month in terms of Sec. 11A(5)

The illustration though hypothetical, in reality there are instances where the officers in the field formations have been issuing notices under Rule 8 (3A) rejecting utilization of cenvat and demanding huge amounts in PLA, even in cases where inadvertent short payment of duty is less than hundred rupees, which is found during scrutiny of ER-1. This is because the adjudicating officers failed to appreciate the meaning and intention of Rule 8 (3A) in proper perspective. If Rule 8 is read with Rule 6, it would convey that non-payment/short payment of duty assessed and declared in ER-1 should only be considered as default under Rule 8 and Rule 8 (3A) to attract the consequences mentioned under Rule 8 (3A). Any other short payment noticed due to erroneous assessment of duty pertaining to a month (either due to wrong calculation of duty or irregular utilization of credit) should be dealt in terms of Section 11A of CEA. Otherwise, the Rule 8 (3A) would be like a Damocles sword hanging on the assessees as the department may interpret any underassessment / inadvertent short payment found out during scrutiny of ER-1 as default payment, where the consequences are very harsh and perhaps the assesses may get relief only in CESTAT. The recent draconian circular may add to their woes, as attachment proceedings may be initiated against them, though in fact there was no short payment/non payment of duty in such cases (as the assesses have already paid duty through CENVAT, which the department rejects by invoking Rule 8 (3A). Whereas the assesses who intentionally short paid can escape with 1% penalty and he can happily utilize the credit which is earned subsequent to the period in which non-payment occurred, as per the clarification issued by CBEC in Cir. 962 dt. 28.03.2012. As discussed in the illustration above, the assesses who have short paid duty inadvertently and detected during the scrutiny of ER-1s are in for proceedings under Rule 8 (3A) and would be penalized heavily (by demanding duty in PLA and imposition of penalty under Rule 25).

Certainly, law cannot be so illogical to punish the inadvertency more severely than intent. But litigation arises due to improper drafting of the Rule 8 (3A). Hope the CBEC will have fresh look into the draconian rule to give relief to assessees who made short payment unintentionally due to clerical mistake.