2025 (10) TMI 328 - AT - Central Excise

Audit notice invoking extended five-year limitation held time-barred; Cenvat credit demand, interest and penalty set aside

M/s. Vasu Paints Pvt. Ltd. Versus Commissioner of Central Excise & CGST – Indore

CESTAT held the show-cause notice issued after an audit in 2020, which invoked the extended five-year limitation to deny Cenvat credit, was time-barred. ... Demand on account of denial of Cenvat credit was confirmed along with the interest and equivalent amount of penalty - SCN has been issued on the basis of audit conducted in the Year 2020 - applicability of time limitation of 5 years - HELD THAT:- It is a fact on record that appellant is registered with the Central Excise Department and filing their ER-3 returns regularly showing availment of Cenvat credit in their returns and the audit and scrutiny of ER-1 return was done in the Year 2020 and on that basis, a show cause notice has been issued to the appellant by invoking extended period of limitation. The said show cause notice is barred by limitation as held by this Tribunal in the case of MD Industries Limited [2025 (2) TMI 371 - CESTAT NEW DELHI], wherein this Tribunal observed that 'For the period April 2017 to June 2017 appellant did not file their ER-1 returns, therefore, for the said period extended period of limitation is rightly invoked by the adjudicating authority.' The show cause notice issued to the appellant is barred by limitation. Accordingly, the impugned demand is set aside and resultantly, the appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a show cause notice issued on the basis of an audit/ scrutiny carried out after regular filing of ER-3 returns can invoke the extended period of limitation for recovery of Cenvat credit? 2. Whether ineligibility of Cenvat credit reflected in statutory ER-3 returns and discovered by departmental audit constitutes suppression, fraud or wilful mis-statement sufficient to sustain demand beyond the normal limitation period? 3. Scope of relief when part of the disputed period is sought to be taxed under extended limitation and the rest falls within normal limitation; incidental consequences as to interest and penalty. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of extended period of limitation where credits were declared in ER-3 returns and subsequently questioned on audit Legal framework: Central excise limitation regime distinguishes normal limitation and extended period (for cases of suppression, fraud or wilful mis-statement). Regular statutory returns (ER-3/ER-1) are prima facie relevant to the question whether the extended period can be invoked. Precedent Treatment: The Tribunal relied on its prior decisions, notably the decision referred to as MD Industries (supra) and M/s Nalwa Steel and Power Ltd. (supra), which held that when credits are recorded in statutory returns and subsequently detected on audit, mere detection by routine audit without material showing suppression/fraud does not justify invoking extended limitation. Interpretation and reasoning: The Tribunal emphasised that the appellant had been regularly filing ER-3 returns showing availment of Cenvat credit. The show cause notice was issued following an audit conducted in 2020 raising ineligibility. In the absence of any pleaded or demonstrated positive act of suppression, fraud or a wilful attempt to evade duty, extended limitation cannot be invoked merely because audit later disagrees with the assessee's view. The Tribunal adopted the reasoning in Nalwa Steel that allegations of fraud/suppression must be supported by particulars and evidence and cannot be founded on general assertions where the contested credits were declared in the returns. Ratio vs. Obiter: Ratio - Where credits are reflected in statutory returns and the record shows routine disclosure, extended period cannot be invoked without specific evidence of suppression/fraud. Obiter - Any general observations about the policy behind limitation provisions or hypothetical fact patterns not present in the record. Conclusions: The Tribunal held that the show cause notice insofar as it relied on extended period of limitation was barred by time, except as contested separately for a specified quarter (see cross-reference under Issue 3). Ultimately the Tribunal found the extended period invocation unsustainable on the facts. Issue 2: Whether detection by audit of credit entries in ER-3 returns amounts to suppression/fraud to attract extended limitation Legal framework: The threshold for invoking extended limitation requires an affirmative finding of suppression of facts, fraud or wilful mis-statement. The presence of entries in statutory returns and routine maintenance of records weighs against any finding of suppression. Precedent Treatment: The Tribunal applied the principles from Nalwa Steel and related authorities (including Pushp Enterprises as cited in Nalwa Steel) which hold that detection of ineligibility by audit, where the credit was bonafidely taken and disclosed in statutory returns, does not ipso facto amount to suppression or fraud. Interpretation and reasoning: The Tribunal examined whether the show cause notice contained particularised allegations or evidence of active concealment. It found no elaboration of evidence or positive acts of concealment; the credits were reflected in returns and audited records. Consequently, allegations in the notice were insufficient to justify extended limitation. The Tribunal treated the departmental contention (that audit in 2020 justified a five-year extended reach) as unsupported by particulars of suppression. Ratio vs. Obiter: Ratio - Mere detection by audit of credits declared in statutory returns is insufficient to establish suppression/fraud; extended limitation cannot be invoked without particularised evidence. Obiter - Remarks concerning what particularised evidence would suffice in different factual matrices. Conclusions: The Tribunal concluded that there was no material establishing suppression/fraud; therefore extended limitation could not be invoked for the periods covered by routine declaration, and the related demand could not be sustained on that basis. Issue 3: Temporal scope of allowable demand, interest and penalty where part of the period may fall within extended limitation Legal framework: When demands are assessed across multiple periods, each period must be considered against the applicable limitation rule and the evidence of suppression/fraud (if any). Interest and penalty consequences flow from confirmed demands and the legal validity of the show cause notice. Precedent Treatment: The Tribunal applied the approach in its precedents that separate determination must be made for each relevant period; if extended limitation is not attracted for earlier periods but is applicable for a specific recent quarter, only the latter may sustain recovery subject to proof. Interpretation and reasoning: The record showed that the appellant exercised SSI exemption up to Feb 2017 and thereafter availed Cenvat credit and used it from March 2017. The audit led to a show cause notice invoking extended limitation. The Tribunal, relying on precedent, held that the demand based on extended period was not sustainable except (as noted in the order) potentially in respect of the quarter April 2017 to June 2017. The Tribunal nonetheless proceeded to conclude that the show cause notice was barred by limitation and set aside the impugned demand, granting consequential relief. There is an internal observation in the order distinguishing the extended-period demand and indicating liability to reverse ineligible credit for certain months along with interest; however the operative disposal sets aside the impugned demand as time-barred and allows the appeal. Ratio vs. Obiter: Ratio - Each disputed period must be judged on its own facts against limitation rules; routine declaration in returns defeats invocation of extended limitation for earlier periods absent particularised proof of concealment. Obiter - Any inconsistent or ancillary comments about reversing credit for specific earlier half-years not determinative of the final disposal. Conclusions: The Tribunal concluded that the show cause notice relying on extended limitation was barred by time and the impugned demand (including interest and penalty founded on that extended-period demand) was set aside; the appeal was allowed with consequential relief. The order clarifies that, save for the narrow temporal contention relating to April-June 2017, extended-period reliance was unsustainable on the facts and precedents applied.