2025 (5) TMI 314 - AT - Central Excise

Corporate Tax Penalty Overturned: Rule 26 Inapplicable to Entities Without Proven Intent of Deliberate Tax Evasion

Legal Case Summary:The SC/Tribunal addressed penalty imposition under Central Excise Rules for a limited company. The key holdings were: (1) Rule 26 ... Levy of penalty u/r 26 of the Central Excise Rules, 2002 on appellant company - main assesses has settled the issue under SVLDRS - suppression of facts or not - extended period of limitation - HELD THAT:- It is found that M/s. Super Auto Electricals Pvt. Ltd. who was a Job Worker and the main party against whom the demand of duty along with interest and penalty was confirmed and the said job worker has already settled the issue of demand of duty along with interest and penalty under SVLDRS and this Tribunal vide its order dated 22.01.2021 dismissed the appeal as withdrawn under SVLDRS. CESTAT in various decisions has set aside the penalty on co-assessees when the main assessee has settled the issue under scheme but co-assessees failed to submit the required declaration. Conclusion - The imposition of penalty on co-assessees was set aside, once the main assesses has settled the issue under SVLDRS. The impugned order is set aside - appeal allowed. The core legal questions considered in this appeal include:1. Whether penalty under Rule 26 of the Central Excise Rules, 2002 can be imposed on a limited company (the appellant) as a co-assessee, given the statutory language and judicial precedents.2. Whether the imposition of penalty under Rule 26(1) requires proof of intention to evade tax or any positive act of suppression by the appellant.3. Whether penalty can be imposed on co-assessees when the main assessee (job worker) has settled the demand of excise duty along with interest and penalty under the Sabka Vishwas (Legacy Dispute Resolution) Scheme (SVLDRS).4. The applicability and effect of the area-based exemption notification and Notification No. 214/1986 in relation to the job worker's liability to pay excise duty.Issue 1: Imposition of penalty under Rule 26 of the Central Excise Rules, 2002 on a Limited CompanyLegal Framework and Precedents: Rule 26 of the Central Excise Rules, 2002 provides for imposition of penalty for certain contraventions. The appellant contended that penalty under Rule 26 can only be levied on a living person and not on a corporate entity. The appellant relied on authoritative decisions including Woodmen Industries v. CCE, Patna (affirmed by the Supreme Court), and various recent CESTAT decisions which held that the penalty under Rule 26 is personal and cannot be imposed on a company.Court's Interpretation and Reasoning: The Tribunal acknowledged these precedents and accepted the submission that the statutory language and judicial interpretation restrict the imposition of penalty under Rule 26 to living persons. Since the appellant is a limited company, the penalty imposition under this rule is not sustainable.Application to Facts: The penalty was imposed on the appellant company, which according to the Tribunal, is contrary to the established legal position.Conclusion: The penalty under Rule 26 cannot be legally imposed on the appellant limited company.Issue 2: Requirement of intention or positive act of suppression for penalty imposition under Rule 26(1)Legal Framework and Precedents: The appellant argued that imposition of penalty under Rule 26(1) requires proof of intention to evade tax or a positive act of suppression. The Department failed to demonstrate such intention or suppression by the appellant. The appellant relied on several judicial pronouncements emphasizing the necessity of mens rea for penalty imposition.Court's Interpretation and Reasoning: The Tribunal noted that the Department did not establish any positive act of suppression or intention on the part of the appellant. Mere invocation of extended period and demand of duty against the job worker does not automatically implicate the appellant, especially when the appellant was availing exemption under the area-based notification.Application to Facts: The appellant had provided inputs to the job worker on the strength of job work challans and was entitled to exemption. The Department's case was primarily against the job worker for non-payment of duty, not against the appellant for any deliberate evasion.Conclusion: Absence of proof of intention or suppression negates the basis for penalty under Rule 26(1) against the appellant.Issue 3: Effect of settlement of duty demand by main assessee under SVLDRS on penalty liability of co-assesseesLegal Framework and Precedents: The main job worker had settled the excise duty demand, interest, and penalty under the Sabka Vishwas (Legacy Dispute Resolution) Scheme (SVLDRS). The appellant contended that once the main assessee settles the demand under SVLDRS, penalty cannot be imposed on co-assessees who failed to submit the required declarations. The appellant cited a series of CESTAT decisions where penalties on co-assessees were set aside in similar circumstances.Court's Interpretation and Reasoning: The Tribunal carefully examined the precedents and noted a consistent judicial trend of setting aside penalties on co-assessees once the main assessee has resolved the demand under SVLDRS. The rationale is that the scheme aims to provide finality and relief from legacy disputes, and penalizing co-assessees after the main party's settlement would defeat this purpose.Application to Facts: Since the job worker had settled the demand and the appeal against the job worker was dismissed as withdrawn under SVLDRS, the Tribunal found no justification for continuing the penalty against the appellant co-assessee.Conclusion: Penalty on the appellant co-assessee is not sustainable post settlement by the main assessee under SVLDRS.Issue 4: Applicability of Area-based Exemption Notification and Notification No. 214/1986Legal Framework: The appellant was availing exemption under Notification No. 50/2003-CE (Area-based Exemption Notification). The Department challenged the job worker's eligibility to avail exemption under Notification No. 214/1986, alleging that since the appellant was already exempted, the job worker could not claim exemption on goods cleared to the appellant.Court's Interpretation and Reasoning: The Tribunal did not delve deeply into the substantive merits of the exemption claims but noted that the main dispute regarding duty demand was directed at the job worker, who had been held liable and had settled the demand. The appellant's role was limited to providing inputs and receiving job-worked goods under exemption.Application to Facts: The appellant's entitlement to exemption under the area-based notification was accepted, and no adverse finding was made against the appellant for misuse or wrongful claim of exemption.Conclusion: The exemption notifications were correctly applied to the appellant, and no penalty or duty demand arises against it on this ground.Significant Holdings:'The penalty under Rule 26 of the Central Excise Rules, 2002 can only be levied on living persons and not on a limited company.''Presence of intention to evade tax or positive act of suppression is a pre-requisite for imposition of penalty under Rule 26(1), which was not established against the appellant.''Once the main assessee has settled the issue of demand of duty along with interest and penalty under SVLDRS, penalty cannot be imposed on co-assessees who have failed to submit the required declarations.'The Tribunal set aside the impugned order imposing penalty on the appellant, allowing the appeal with consequential relief as per law.