2025 (10) TMI 178 - HC - Central Excise

Appeal dismissed; no willful suppression under s.11A(1), extended limitation not invoked, interest and penalties set aside

Commissioner of Central Excise & Customs, Daman Versus Supertex Industries Limited

HC dismissed the Revenue appeal and upheld the CESTAT, holding there was no willful suppression, fraud or misrepresentation to invoke the proviso to ... Existence of grounds for invoking extended period of limitation available under the proviso to Sub Section (1) of Section 11A of the Central Excise Act, 1944 or not - suppression of material facts with intent to evade payment of duty - time limitation - setting aside of interest and penalty order - HELD THAT:- It appears that the CESTAT after taking into consideration the facts on record has rightly held that both the department and the respondent assessee were having the knowledge of the activities carried out of draw warping and, therefore, there is no question of any willful suppression of facts by the respondent assessee. The Hon’ble Apex Court in case of Baidyanath Ayurved Bhavan Ltd. [1999 (11) TMI 92 - SC ORDER] has held that 'The notice would be in time if the Revenue would invoke the extended period under Section 11A on the ground that the assessee had been guilty of fraud, misrepresentation or willful suppression. It is patent from the facts recorded by the Tribunal that there was no willful suppression, let alone fraud or misrepresentation. That the assessee was not responding to the Revenue’s demand to take out a licence and submit accounts was clear and overt and the Revenue cold have taken action based thereon. The show cause notice, therefore, must be held to be beyond time.' In view of the above dictum of law only because the respondent assessee was under impression that as per Notification No. 84/95-CE it was not liable to pay the excise duty, it cannot be said that there was willful suppression of facts. The CESTAT cannot be said to have committed any error in holding that the appellant Revenue could not have issued the show cause notice invoking the proviso to Section 11A of the Act for extended period of limitation for demanding the duty by issuing the show cause notice in 1998 demanding duty relating period from 04.07.1995 and 22.10.1996. The substantial questions of law are answered in favour of the assessee and against the Revenue and no interference is called for in the impugned order of the CESTAT - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the extended period of limitation under the proviso to Section 11A of the Central Excise Act can be invoked where it is alleged that the assessee suppressed material facts, committed fraud or willful misstatement to evade duty, despite departmental knowledge of the relevant manufacturing activity. 2. Whether demands raised beyond the normal six-month limitation are barred where the Revenue had prior knowledge of the assessee's manufacturing process and had earlier corresponded with or registered the assessee in respect of that process. 3. Whether imposition of penalty under Rule 173Q (now Rule 173Q(1) / Section 11AC context) and interest under Section 11AB can be sustained where the demand itself is held barred by limitation under Section 11A proviso. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invocation of extended limitation under proviso to Section 11A on allegation of suppression, fraud or willful misstatement Legal framework: Proviso to Section 11A permits invocation of an extended period of limitation where duty has been evaded by fraud, misrepresentation or willful suppression of facts; the proviso must be strictly construed. Precedent treatment: Followed - the Court relied on authoritative decisions holding that 'suppression of facts' must be deliberate and willful to evade payment of duty; mere omission, negligence or failure to take out licence where doubt exists does not attract the proviso. The Court applied established tests from higher court rulings (as applied by the Tribunal) that require clear deliberate concealment of correct information to constitute suppression. Interpretation and reasoning: The Court examined contemporaneous communications and registration history showing the Department's knowledge of the draw-warping activity (initial advice in 1994 to obtain registration; registration granted in December 1994; subsequent departmental correspondence and prior show-cause proceedings). The assessee had taken a position (in response to an earlier show-cause) that the relevant notification exempted its process; the Department inspected and approved classification lists at intervals. Given departmental awareness and the assessee's express position, the Court found no deliberate concealment designed to evade duty. Ratio vs. Obiter: Ratio - where the Department was aware of the manufacturing activity and the assessee had communicated its stance (claiming exemption), the element of deliberate suppression required to invoke the proviso to Section 11A is absent; therefore extended limitation cannot be invoked. Conclusion: The extended period under proviso to Section 11A could not be invoked because there was no willful suppression, fraud or misrepresentation by the assessee; the omission or reliance on a contested legal view does not satisfy the proviso. Issue 2 - Effect of departmental knowledge/registration on limitation for demands beyond six months Legal framework: Normal limitation period for recovery is six months; proviso to Section 11A permits extension only on specified grounds (fraud/misrepresentation/suppression). Where both parties knew of facts, omission by the assessee is not 'suppression'. Precedent treatment: Followed - decisions requiring strict construction of 'suppression' and holding that when facts are known to both parties, omission does not amount to suppression, were applied to the facts. Interpretation and reasoning: The Tribunal's factual findings that the Department had been aware of the draw-warping activity pre-dating the notifications and that the assessee had obtained registration and corresponded on the legal position were accepted. The Court emphasized that the Department's prior inspections, approvals of classification lists and communications negate the element of clandestine activity. The Tribunal's conclusion that limitation barred the demand was grounded on these findings, and the Court found no error in that approach. Ratio vs. Obiter: Ratio - departmental knowledge and prior registration/communication demonstrating awareness of the activity negate a finding of deliberate suppression and therefore preclude reliance on the extended limitation proviso; demands beyond the normal period are barred in such circumstances. Conclusion: Demands dated beyond the six-month period could not be sustained where the Department was aware of the activity and the assessee had taken an arguable position; the Tribunal correctly held the demand barred by limitation. Issue 3 - Consequential penalties and interest where limitation bars primary demand Legal framework: Penalties under central excise rules and interest under statutory provisions are consequential to and contingent upon a valid duty demand; if primary demand is barred by limitation, antecedent basis for penalty and interest falls away. Precedent treatment: Applied - because the Tribunal quashed demand on limitation grounds, it did not decide merits; the Court endorsed that where extended limitation cannot be invoked, consequential orders including penalty and interest cannot stand. Interpretation and reasoning: The Tribunal set aside the adjudicating authority's imposition of penalty and interest by quashing the demand on limitation grounds and declined to address substantive liability. The Court accepted that approach because the primary demand was unsustainable in law on limitation grounds. Ratio vs. Obiter: Ratio - where the extended limitation proviso is inapplicable and the primary demand is time-barred, consequential penalty and interest orders cannot be sustained; review of merits is unnecessary once demand is dismissed on limitation. Conclusion: Penalty and interest imposed consequential to the impugned demand were not sustained because the demand itself was barred by limitation; no interference with the Tribunal's decision quashing the demand is warranted. Cross-References and Overall Conclusion Cross-reference: Issues 1 and 2 are interlinked - lack of willful suppression (Issue 1) flows into the limitation conclusion (Issue 2) and dictates the fate of consequential penalties (Issue 3). Final determination: The Tribunal's finding that the proviso to Section 11A could not be invoked was upheld as correct in law and on fact; the extended period could not be applied given departmental knowledge and the assessee's expressed position, rendering the demand time-barred and attendant penalties/interest unsupportable.