2025 (10) TMI 388 - AT - Central Excise

Duty demand, interest and penalty set aside as show-cause notice held time-barred due to department delay

M/s. Pallipalayam Spinners Private Ltd. Versus Commissioner of GST and Central Excise, Salem

CESTAT held the duty demand, interest and penalty set aside as the show-cause notice was barred by limitation. The shortage basis arose from the ... Invocation of extended period of limitation - audit of the appellants unit took place in September 2011 and Show cause has been issued on 17.04.2014 - stock on which credit has been taken and which are meant for purpose of export have been diverted to domestic market under N/N. 30/2004 dt.09.07.2004 - HELD THAT:- On the issue of invoking extended period, it is not disputed that the shortage was quantified on the basis of stock challenge and based on the stock registers maintained by the Appellant during the Audit. It is observed that duty demand was quantified on the basis of alleged shortages and investigation has not unearthed evidence of clearance of the dutiable goods. Further, it is a settled proposition of law that when facts are culled out from the assessee's own statutory records and returns, which were duly maintained and produced before the Department, there can be no allegation of suppression or intent to evade duty. Here, the entire basis of the demand emanates from the records and returns filed by the Appellant. It is not the Department's case that the Appellant failed to file returns. In the present case, the Appellant has regularly filed its returns with the department. The fact that the Department could not detect the alleged short payment until audit only reflects an omission on the part of the Department in timely scrutinizing returns and not suppression by the assessee. Furthermore, there are other catena of judgments wherein various High Courts as well as this Tribunal has consistently held that when the assessee is registered and filing returns regularly, the range officer has a duty to scrutinize returns, detect irregularity, and to raise pertinent queries in this regard and that in light of any negligence or failure to do so, the allegation of suppression by the assessee cannot be sustained - since audit was conducted in August, 2011 and the Appellant has replied to the same on 07.11.2011, itself, it is clear the facts of the same were within the knowledge of the Department. This being the case, there is no reason as to why the show cause notice issued for the period from April, 2010 to August, 2011 was issued only in the year 2014 (17.04.2014) i.e., beyond the normal period of limitation, thereby the Show Cause Notice issued is barred by limitation. Following the decision this Tribunal in the case of M/s. AAM India Manufacturing Corporation Pvt. Ltd. V. Commissioner of GST & Central Excise [2025 (8) TMI 1655 - CESTAT CHENNAI], held that the demand was wholly barred by limitation and accordingly, it is refrained from delving into the merits of the issue in detail. Following the same principle in the instant case, it is held that the demand is barred by limitation and therefore it is refrained from going into the merits of the matter. The entire demand, interest and penalty is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the extended period of limitation can be invoked where the alleged shortfall was quantified from the assessee's own statutory records and the Department had knowledge of audit observations prior to issuance of the show cause notice. 2. Whether stock on which CENVAT credit was taken or which was procured under Annexure procedure for export was diverted to the domestic market attracting duty, interest and penal consequences (considered only to the extent necessary for limitation issue). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invocation of extended period of limitation Legal framework: Extended period under the proviso to the relevant limitation provision requires proof of fraud, collusion, willful misstatement or suppression of facts with intent to evade duty; normal period applies otherwise. The proper officer has a statutory duty to scrutinize returns and records filed by the assessee. Precedent treatment: The Tribunal followed Supreme Court and High Court authorities holding (i) suppression means deliberate nondisclosure to evade duty and cannot be inferred from omissions alone; (ii) where primary facts are disclosed in statutory records/returns, the assessee's duty is limited to true disclosure and it is for the department to draw inferences; and (iii) where returns are regularly filed and audit observations were in the Department's possession, extended period cannot be invoked. The Tribunal expressly relied on earlier Tribunal and higher court decisions applying these principles (treating them as followed). Interpretation and reasoning: The demand was quantified solely on the basis of stock registers and returns maintained and produced by the assessee during audit. The assessee responded to audit observations on 07.11.2011, establishing that the material facts were within the knowledge of the Department well before the show cause notice (issued 17.04.2014). There was no allegation that returns were not filed. The Tribunal reasoned that the Department's delay in detection and failure to scrutinize returns cannot be converted into suppression by the assessee. The Tribunal emphasized that extended period requires deliberate suppression or mala fide on the part of the assessee and that mere discrepancies discovered in audit do not ipso facto constitute suppression. The duty to draw inferences from disclosed primary facts rests with the Department; omission to do so does not render the assessee culpable of suppression. Ratio vs. Obiter: Ratio - Where a demand is founded exclusively on discrepancies culled from the assessee's statutory records/returns that were produced and available to the Department, and where the assessee had replied to audit observations prior to the show cause notice, the extended period cannot be invoked because suppression with intent to evade duty is not established. Obiter - General observations on the Department's duty to scrutinize returns and citations of additional authorities in similar contexts (supportive but not necessary to disposition). Conclusion: The allegation of suppression with intent to evade duty is unsustainable; invocation of the extended period is barred and the show cause notice is time-barred. Consequently the demand, interest and penalty founded on that demand are set aside. Cross-reference - This conclusion is dispositive: having held the demand time-barred, the Tribunal refrained from detailed adjudication of substantive diversion allegations (Issue 2) and determined the appeal on limitation grounds. Issue 2 - Alleged diversion of export/raw-material stocks to domestic clearances (limited consideration) Legal framework: Liability for duty and penal consequences may arise where materials procured under concessional/annexure procedures or benefiting from notification exemptions are diverted to assessable domestic clearances; proof requires evidence of actual clearance of dutiable goods or deliberate suppression. Precedent treatment: Authorities were cited by both sides regarding standards for proving diversion, treatment of usable waste/work-in-process adjustments, and requirement of corroborative evidence for imposition of penalties. The Tribunal referred to authorities requiring positive proof of deliberate suppression to invoke extended limitation and penalties (followed to the extent relevant). Interpretation and reasoning: The Department quantified shortages by stock reconciliation but did not produce independent evidence of actual clearance of dutiable goods outside returns; shortages were calculated from the assessee's own records. The assessee explained usable waste, work-in-process and industry practice for utilizing waste for domestic yarn, and produced a reply to audit observations. The Tribunal noted that the audit-derived quantification, without evidence of deliberate diversion or concealment, cannot sustain penal consequences when returns were regularly filed and audit replies were on record prior to issuance of show cause notice. Ratio vs. Obiter: Obiter - Findings on adequacy of departmental evidence on diversion, applicability of work-in-process and usable waste explanations, and industry practice are addressed only insofar as they support the limitation conclusion; the Tribunal expressly refrained from a final merits adjudication because the demand was time-barred. The definitive ratio is that absence of deliberate suppression (see Issue 1) precludes invocation of extended limitation even if stock discrepancies exist. Conclusion: The Tribunal did not finally adjudicate the substantive allegation of diversion because the show cause notice is barred by limitation; therefore, demands and penal consequences premised on the alleged diversion could not be sustained and were set aside on limitation grounds. Relief and disposition Because the extended period was improperly invoked and the show cause notice was issued beyond the normal period despite the Department having audit knowledge and the assessee having replied, the Tribunal allowed the appeal and set aside the demand, interest and penalties, with consequential relief as per law.