2023 (8) TMI 182 - AT - Central Excise

Appeal allowed in penalty dispute under Central Excise Act 1944

M/s National Fertilizers Limited Versus Commissioner, Central GST, Excise And Service Tax, Bhopal

The appeal challenged the imposition of penalty under section 11AC of the Central Excise Act, 1944. The appellant, a manufacturer of Ammonia and Urea, ... Imposition of penalty under section 11AC of the Excise Act equivalent to the amount of duty - excise duty with interest had been deposited by the appellant before the issuance of the show cause notice - suppression of facts or not - HELD THAT:- The appellant has given reasons as to why the excess excise duty paid by the appellant was adjusted in the excise duty payable in the month of June 2017. According to the appellant, Goods and Service Tax was introduced with effect from 1 July 2017 and the appellant believed that it was better to adjust the excess excise duty paid. The appellant has also stated that, in the facts and circumstances of the present case, it cannot be alleged that there was any suppression of facts with intent to evade payment of excise duty. The Assistant Commissioner, in the order dated 23.03.2021, has merely observed that since the appellant in reply to the show cause notice had not produced any document/proof affirming the non involvement of any fraud/collusion of tax it has to be concluded that there was involvement of fraud/collusion and so penalty could be imposed. This finding of the Assistant Commissioner is not correct. The penalty could not have been imposed if the amount with interest had been deposited before the issuance of the show cause notice but there was no intention to evade payment of excise duty. In the present case, not only had the department failed to substantiate that the appellant had suppressed facts with intent to evade payment of excise duty, but even otherwise it is not a case where it can be said that the appellant had intention to evade payment of excise duty. In such a situation, penalty could not have been imposed upon the appellant since the excise duty with interest had been deposited by the appellant before the issuance of the show cause notice - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 11AC of the Central Excise Act, 1944 can be imposed where short payment of duty was discovered by departmental audit, the duty and interest were deposited before issuance of the show cause notice, and there is no substantiation of suppression of facts with intent to evade duty. 2. Whether the onus of proving fraud, collusion, wilful misstatement or suppression of facts rests on the Department when invoking Section 11AC, or whether failure by the assessee to produce exculpatory documents in reply to the show cause notice sustains an inference of suppression/intent. 3. Whether the status of the assessee as a Central Public Sector Undertaking or bona fide business practice (adjustment of excess excise dues in anticipation of transition to GST) is relevant to the question of imposition of penalty under Section 11AC. ISSUE-WISE DETAILED ANALYSIS Issue 1: Imposition of penalty under Section 11AC where duty and interest were deposited before show cause notice and shortfall was detected by audit Legal framework: Section 11AC prescribes penalty for fraud, collusion, wilful misstatement or suppression of facts with intent to evade payment of duty; penalty is attracted only when these ingredients are present. Section 11A relates to extended time limit for demand where such ingredients exist. Precedent Treatment: The Commissioner (Appeals) relied on a Tribunal decision holding that mandatory penalty can be imposed on a PSU once the extended time limit is invoked. The present court considered that reliance but did not treat that decision as decisive here. Interpretation and reasoning: The Court examined the chronological facts - (a) short payment discovered in audit; (b) assessee deposited the short-paid duty and interest immediately upon detection (before issuance of show cause notice); (c) the Department thereafter issued a show cause proposing penalty; and (d) Department's adjudicating authority inferred suppression/intent because the assessee did not produce documents affirming non-involvement in fraud/collusion. The Court reasoned that Section 11AC requires a positive finding of suppression with intent to evade and that mere detection by audit and subsequent deposit do not ipso facto establish such intent. The Court emphasized that the Department bore the burden to allege and substantiate intentional suppression or fraud; absence of such substantiation cannot be converted into a presumption of wrongdoing merely because the assessee did not produce particular exculpatory documents in reply. Ratio vs. Obiter: Ratio - Penalty under Section 11AC cannot be sustained where duty and interest have been deposited before issuance of show cause notice and the Department fails to substantiate suppression of facts with intent to evade. Obiter - observations on motives for adjusting excess duty in view of GST transition (bona fide business practice) are persuasive but ancillary. Conclusion: Penalty under Section 11AC was not sustainable on the facts; the order imposing penalty was set aside. Issue 2: Burden of proof and inference from failure to produce documents - whether Department must substantiate allegations of suppression/collusion Legal framework: Adjudicatory charges of fraud/collusion/wilful misstatement/suppression attracting penal consequences require allegation and proof; administrative adjudication cannot rest imposition of penalty on mere absence of documentary proof from the assessee in reply where the Department has not itself put forward evidence of intent or suppression. Precedent Treatment: The adjudicating authority treated absence of exculpatory documents in the assessee's reply as substantive proof of suppression; the appellate authority endorsed that approach. The Court distinguished that approach on the ground of burden allocation. Interpretation and reasoning: The Court held that the Department must not only allege but also substantiate the presence of the ingredients of Section 11AC. It is not permissible to shift the evidentiary burden onto the assessee to disprove fraud merely by failing to produce particular documents in response; doing so reverses the statutory burden and permits imposition of penalty without proof of requisite mens rea. The Court found the Assistant Commissioner's reliance on the absence of documentary affirmation in the reply as legally incorrect and insufficient to infer suppression or intent to evade. Ratio vs. Obiter: Ratio - The Department bears the burden to substantiate allegations of fraud/collusion/wilful misstatement/suppression; failure to produce exculpatory documents by the assessee does not, by itself, constitute proof of suppression/intent sufficient to impose penalty under Section 11AC. Conclusion: The finding of suppression/intent based solely on non-production of documents in the reply was legally untenable; penalty could not be upheld on that basis. Issue 3: Relevance of assessee's status and bona fide explanation (adjustment in view of GST) to penalty imposition Legal framework: Mitigating or exculpatory circumstances (including bona fide explanations and corporate status) are relevant to the question whether requisite culpable intent exists for penal imposition under Section 11AC. Precedent Treatment: The appellate order invoked a Tribunal precedent to support imposition of mandatory penalty on a PSU once extended time limit ingredients are found; the present Court declined to treat PSU status or mandatory-character precedents as overriding the statutory requirement of proof of suppression/intent. Interpretation and reasoning: The Court accepted that the assessee, being a Central Public Sector Undertaking, had provided a plausible business explanation (adjustment of excess excise duty in anticipation of GST) and that there was no reason to doubt its bonafides. The Court regarded such circumstances as material when assessing whether the statutory ingredients for penalty (intentional suppression to evade duty) were met. Where duty and interest were paid promptly and a bona fide commercial rationale existed, these facts undermine any inference of deliberate evasion. Ratio vs. Obiter: Ratio - Bona fide explanation and timely payment before show cause notice are legally relevant and may negate the requisite intent for penalty under Section 11AC. Obiter - The Court's remarks on the reliability of PSU status as a factor are contextual but supportive of the core holding. Conclusion: The assessee's bona fide conduct and status, together with prompt payment before notice, supported the conclusion that there was no intentional suppression to evade duty; penalty could not be imposed. Cross-reference The determinations on Issues 1-3 are interrelated: the absence of departmental substantiation (Issue 2) and the assessee's prompt payment and bona fide explanation (Issue 3) together dispose of the central question (Issue 1) whether the ingredients of Section 11AC were present to sustain a penalty.