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Judgment
Rajive Bhalla, J.—By way of this order, we shall dispose of four appeals namely CEA Nos. 22, 10, 71 and 72 of 2013. For the sake of convenience, facts are being taken from Central Excise Appeal No. 22 of 2013. Counsel for the appellant submits on instructions that he confines challenge in these appeals to the levy of penalty. Counsel for the appellant has filed three amended questions of law, in Court today, which are taken on record.
Counsel for the appellant submits that finding recorded by the Additional Commissioner, Central Excise, Ludhiana, that penalty, can be levied irrespective of mens rea, is illegal. A bare perusal of Section 11AC(1)(a) of the Central Excise Act, 1944 (hereinafter to be referred as "the Act"), reveals that penalty can only be levied, if duty has not been levied, paid, has been short levied, paid or erroneously refunded, by reason of fraud, collusion or any willful misstatement or suppression of facts or contravention of any of the provisions of the Act or Rules. The exercise of power to impose penalty must, therefore, be preceded by a finding, in terms provided by Section 11AC(1)(a) of the Act. A perusal of the order passed by the Additional Commissioner, Central Excise, Ludhiana, reveals that penalty has been imposed without recording a finding in terms of Section 11AC(1)(a) of the Act. It is further submitted that the order passed by the Assessing Authority was set aside by the Appellate Authority. The Tribunal has restored the order passed by the Assessing Authority without considering the appellant''s plea that penalty has been imposed in violation of Section 11AC(1)(a) of the Act.
Counsel for the respondent submits that as violation of provisions of the Act and the Rules, has been proved, mens rea is inherent in such a violation. The finding recorded by the Assessing Authority that mens rea is not required, has to be read in the above context. The failure of the appellant to deposit requisite duty is an attempt to evade duty by misstating relevant facts and therefore, attracts penalty.
We have heard learned counsel for the parties and perused the impugned orders.
The appellant manufactures rice bran oil. The manufacturing process produces gum, wax and fatty acids as waste products. The appellant claimed that as gum, wax and fatty acids are waste products, they are not exigible to Excise Duty. The Assessing Authority took a contrary view and held that gum, wax and fatty acids are dutiable products and while levying duty, imposed interest and penalty, by holding that for imposing penalty there is no need to prove mens rea.
Aggrieved by this order, the appellant filed an appeal before the Commissioner (Appeals), Customs and Central Excise, Chandigarh. The appeal was allowed, vide order dated 11-7-2008, by holding that as gum, wax and fatty acids are waste products they are exempted, and therefore, not exigible to Excise duty. As a consequence, duty, penalty and interest were set aside.
The respondents filed an appeal before CESTAT which was allowed vide order dated 25-7-2011, by reversing order passed by the Appellate Authority and restoring the order passed by the Assessing Authority, including the penalty.
Counsel for the appellant having confined challenge to the imposition of penalty, has framed the following questions of law:-
"(i) Whether penalty can be imposed without recording finding with respect to levy of penalty?
(ii) Whether penalty under Section 11AC of the Central Excise Act read with Rule 25 of the Central Excise Rules can be imposed when there is no finding of mens rea?
(iii) Whether upholding of penalty without considering the question of levy of penalty is apparent mistake on record?"
An answer to these questions, which essentially relate to the exercise of power to impose penalty, would require appraisal of Section 11AC(1)(a) of the Act, which reads as follows:-
Section 11AC. Penalty for short-levy or non-levy of duty in certain cases. - (1) The amount of penalty for non-levy or short-levy or non-payment or short payment or erroneous refund shall be as follows:-
(a) where any duty of Excise has not been levied or paid or short-levied or short-paid or erroneously refunded, by reason of fraud or collusion or any willful misstatement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (10) of Section 11A shall also be liable to pay a penalty equal to the duty so determined;"
Section 11AC(1)(a) of the Act empowers the Assessing Authority to impose penalty if the assessee has not paid or short-paid duty or duty has not been levied or has been short-levied by reason of (a) fraud or collusion, willful misstatement or suppression of facts, or (b) contravention of any provisions of the Act/Rules, with intent to evade duty. A plain reading of Section 11AC(1)(a) of the Act, particularly the words and expressions used therein unequivocally postulate that penalty, under Section 11AC(1)(a) of the Act, can only be levied, if fraud, collusion, willful misstatement or suppression of facts or contravention of the provisions of the Act and Rule with intent to evade duty, is proved.
Section 11AC(1)(a) of the Act came up for consideration before the Hon''ble Supreme Court of Union of India (UOI) Vs. Rajasthan Spinning and Weaving Mills, . After considering Section 11AC(1)(a) of the Act and the judgment in Dharamendra Textile, the Hon''ble Supreme Court held as follows:-
"19. From the aforesaid discussion it is clear that penalty under Section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section.
At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam, J.) was a party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner. In Dharamendra Textile the court framed the issues before it, in Paragraph 2 of the decision, as follows:
"2. A Division Bench of this Court has referred the controversy involved in these appeals to a Larger Bench doubting the correctness of the view expressed in Dilip N. Shroff Karta of N.D. Shroff Vs. Joint Commissioner of Income Tax, Special Range Mumbai and Another, . The question which arises for determination in all these appeals is whether Section 11AC of the Central Excise Act, 1944 (in short the ''Act'') inserted by Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient and whether there is a scope for levying penalty below the prescribed minimum. Before the Division Bench, stand of the Revenue was that said section should be read as penalty for statutory offence and the authority imposing penalty has no discretion in the matter of imposition of penalty and the adjudicating authority in such cases was duty bound to impose penalty equal to the duties so determined. The assessee on the other hand referred to Section 271(1)(c) of the Income-tax Act, 1961 (in short the ''IT Act'') taking the stand that Section 11AC of the Act is identically worded and in a given case it was open to the assessing officer not to impose any penalty. The Division Bench made reference to Rule 96ZQ and Rule 96ZO of the Central Excise Rules, 1944 (in short the ''Rules'') and a decision of this Court in The Chairman, SEBI Vs. Shriram Mutual Fund and Another, and was of the view that the basic scheme for imposition of penalty under Section 271(1)(c) of IT Act, Section 11AC of the Act and Rule 96ZQ(5) of the Rules is common. According to the Division Bench the correct position in law was laid down in Chairman, SEBI''s case (supra) and not in Dilip Shroffs case (supra). Therefore, the matter was referred to a Larger Bench."
After referring to a number of decisions on interpretation and construction of statutory provisions, in Paragraphs 26 and 27 of the decision, the court observed and held as follows:
"26. In Union Budget of 1996-97, Section 11AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In Para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given.
Above being the position, the plea that the Rules 96ZQ and 96ZO have a concept of discretion inbuilt cannot be sustained. Dilip Shroff''s case (supra) was not correctly decided but Chairman, SEBI''s case (supra) has analysed the legal position in the correct perspectives. The reference is answered...........".
From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that Section 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.
There is another very strong reason for holding that Dharamendra Textile could not have interpreted Section 11AC in the manner as suggested because in that case that was not even the stand of the Revenue. In Paragraph 5 of the decision the court noted the submission made on behalf of the Revenue as follows:
"5. Mr. Chandrashekharan, Additional Solicitor General submitted that in Rules 96ZQ and 96ZO there is no reference to any mens rea as in Section 11AC where mens rea is prescribed statutorily. This is clear from the extended period of limitation permissible under Section 11A of the Act. It is in essence submitted that the penalty is for statutory offence. It is pointed out that the proviso to Section 11A deals with the time for initiation of action. Section 11AC is only a mechanism for computation and the quantum of penalty. It is stated that the consequences of fraud, etc., relate to the extended period of limitation and the onus is on the Revenue to establish that the extended period of limitation is applicable. Once that hurdle is crossed by the Revenue, the assessee is exposed to penalty and the quantum of penalty is fixed. It is pointed out that even if in some statutes mens rea is specifically provided for, so is the limit or imposition of penalty, that is the maximum fixed or the quantum has to be between two limits fixed. In the cases at hand, there is no variable and, therefore, no discretion. It is pointed out that prior to insertion of Section 11AC, Rule 173Q was in vogue in which no mens rea was provided for. It only stated "which he knows or has reason to believe". The said clause referred to willful action. According to learned counsel what was inferentially provided in some respects in Rule 173Q, now stands explicitly provided in Section 11AC. Where the outer limit of penalty is fixed and the statute provides that it should not exceed a particular limit, that itself indicates scope for discretion but that is not the case here."
The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of Section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of Section 11A. That is what Dharamendra Textile decides."
The above extract leaves no ambiguity that penalty may only be imposed, if failure to deposit duty is occasioned by willful misstatement, fraud and collusion, etc., i.e. mens rea. Thus, before an adjudicating authority proceeds to levy penalty it is required to record a finding, in terms of Section 11AC(1)(a) of the Act.
A perusal of the order passed by the Assessing Authority reveals that it has treated levy of penalty as an automatic consequence of failure to pay duty, thereby rendering its order illegal, insofar as it relates to imposition of penalty. The Appellate Authority and the Tribunal failed to discern this error.
The appeal is, consequently, partly allowed, order passed by the Tribunal, affirming the order of penalty is set aside and the appeal is restored to the CESTAT on the limited question of the legality of penalty, imposed by the Assessing Authority. Parties through their counsel are directed to appear before the CESTAT, on 22-12-2014.