Penalty under Section 11 AC – Revenue wins huge battle in Supreme Court
It is now finally decided – The Larger Bench of the Supreme Court has emphatically ruled that there is no discretion and penalty has to be equal to the duty. Ever since the scheme was introduced in 1996, the matter had been one of intense litigation with the Courts taking differing positions.
A little recap is absolutely necessary.
In DDT 693 - 06.09.2007, we reported to you,
Mandatory penalty – Happy Board commends CESTAT LB decision to the field.
On 26th July 2007, we carried the landmark decision of the Larger Bench of the Tribunal holding that mandatory penalty is not the maximum penalty and if suppression, collusion etc, are proved, there is no option and penalty equal to the duty demanded has to be imposed.(2007-TIOL-(1017-CESTAT-DELHI-LB) .
Obviously the Board is very happy and has communicated our citation to the field, with extracts from the Larger Bench decision. The Board letter says,
The above cited Tribunal's decision is an important authority on the subject and has considered the legal provisions in a very comprehensive, holistic and detailed manner, setting to rest the controversies as created by a host of decisions on the subject matter creating all round confusion in the field.
Board wants the field officers to keep in mind this decision, while deciding the question of imposition of penalty under Section 11AC of the Central Excise Act or Section 114A of the Customs Act as it lays to rest the disparity of practices in the field formations arising out of two diametrically opposite viewpoints as held by various judicial bodies and for the guidance and action of the field officers in similar circumstances.
Board actually has no reason to worry as perhaps not a single officer in the country had imposed a penalty less than the amount of duty, under Section 11AC .
Remember we had carried an article last week by Jai Kumar and Natarajan , where the authors felt that the Tribunals and courts can still impose lesser penalty. Maybe the issue is not finally settled and the issue can still be agitated in the Supreme Court.
In his budget speech of 1996, the Finance Minister said,
I am proposing suitable changes in the Customs and Excise Acts to provide for mandatory penalty, together with interest, for evasion of duties on account of fraud, collusion, mis -statement or suppression of facts. Henceforth, the mandatory penalty for evasion of duty on these counts shall be equal to the amount of duty evaded. Tax evaders would also be required to pay interest starting from the first day of the succeeding month in which the duty evaded ought to have been paid and also face criminal prosecution.
The Board letter explaining the Budget said,
The Finance Bill also contains a proposal regarding mandatory penalty in cases of non-levy, short levy or non-payment or short payment of duty or erroneous refund arising from fraud, collusion or any wilful statement or suppression of facts or contravention of provisions of Act or rules with intent to evade payment of duty. A new Section 11AB has been inserted in the Central Excises and Salt Act. It may be seen that in such cases the adjudicating officer shall have no discretion to determine the amount of penalty and the penalty shall be equal to the amount of duty or refund which is determined as payable under Section 11A (2).
Any idea who the FM was? Our very own Chidambaram
So the original idea appears to have been to impose a mandatory penalty equal to the duty demanded, but somewhere down the line with Machino montell and RINL , it somehow became the law that if duty is paid before issue of notice, there should be no mandatory penalty. This was too good to last, though a perfectly good logic. Even when the assessees came up voluntarily to pay any excise duty which escaped inadvertently, they were stuck with penalty and interest notices.
Anyway it is celebrations time for Revenue and the Board has gladly circulated the case reported by us. Penalty or interest, revenue or assessee, it is good economics to log on to www.taxindiaonline.com for the latest.
In - 11 04 2005 , we reported,
Has the Tribunal any discretion to reduce the amount of penalty under Section 11 AC?
The Department's view is that the penalty equal to the duty under Section 11AC of the Central Excise Act is mandatory and there is no discretion. Though it is nine years since the section came into force, strangely this question is not so far decided by the Supreme Court or any High Court. The famous Escorts JCB case - – was all about valuation, but there was a very interesting decision made by the Tribunal in that case. The Tribunal held that the penalty equal to duty is the maximum and not mandatory. It is not mandatory that in all cases such maximum should be imposed as penalty. Authority is having discretion to impose lesser penalty. And the Tribunal reduced the penalty from Rs 30 Lakhs to Rs 10 Lakhs . The party took the matter in appeal to the Supreme Court on the issue of demand and Revenue also took the matter to Supreme Court challenging the reduction in penalty. The Supreme Court allowed the party's appeal and so there was no demand and consequently no penalty – mandatory or otherwise. Therefore there was no decision on the Revenue appeal. Tribunal continued to hold that mandatory penalty was not all that mandatory. And Revenue is constantly aggrieved. A few reference applications are pending in various High Courts. On the 1st of April 2005, the Supreme Court had another occasion to decide this issue in COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH-I v M/s DABUR INDIA LIMITED. This was also a case where the Tribunal reduced the penalty. The Supreme Court did not find any reason to interfere with the Tribunal's order and dismissed the Revenue appeal with the remarks, We leave open the question whether the Tribunal has power to reduce penalty to be decided in an appropriate case.
Till then Tribunal will give relief.
See full text of Judgement()
In DDT 664 - 25.07.2007, we reported,
Mandatory penalty under Sec 11A is not maximum - No discretion to reduce penalty : CESTAT Larger Bench
Revenue has won a humungous victory. If penalty is imposable under Section 11AC , now nobody has discretion to reduce the penalty. The Larger Bench held that Once it is held that imposition of penalty under Section 11AC of the Act is warranted, the wordings of Section 11AC do not leave any option for imposing a reduced penalty.
Please also refer to our Guest article ERR (O) THO DARRO
In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr . (), the Supreme Court had held that penalty under Section 271(1)(c) of the Income Tax Act is discretionary in nature.
In Chairman, SEBI v. Shriram Mutual Fund and Anr. (2006 (5) SCC 361) = (2006-TIOL-72-SC-SEBI), the Supreme Court held that, “penalty is imposable as soon as violation of the regulations established - statute does not entail establishment of mens rea”
Yet another bench of the Supreme Court in UNION OF INDIA & ORS Vs M/s DHARAMENDRA TEXTILE PROCESSORS & ORS - ()felt that the matter had to be decided by a Larger Bench.
And the Larger Bench has now decided the issue in favour of the Revenue.
Today we bring you the Supreme Court Judgement.
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