2025 (11) TMI 503 - AT - Central Excise

Penalty under Rule 8(3A) cannot be imposed for fractional-month delays; only actual default period penalizable, order quashed

CESTAT (DELHI) - AT set aside an order imposing 1% monthly penalty under Rule 8(3A) of the Central Excise Rules for fractional-month delays, holding that ... Levy of penalty @ of 1% for delay for the entire month by invoking Rule 8(3A) of Central Excise Rules, 2002 - default in payment of duty on time - HELD THAT:- The perusal of Rule 8(3A) of Central Excise Rules, 2002 reveals that the penalty has to be paid @ 1% on such amount of duty not paid for each month or a part thereof. The clear meaning thereby is that if a duty is due by a particular date of the moth, then even it is not paid by the specific time, not only penalty will be calculated @ 1% for every month but it can be calculated even for the friction of a month. Otherwise, also it is opined that the penalty virtually means almost every day of delay even beyond that month. The principle of interpretation it is well accepted that a statute must be construed according to the intention of the Legislature and the Courts should act upon the true intention of the legislation while applying law and while interpreting law. If a statutory provision is open to more than one meaning, the Court has to choose the interpretation which represents the intention of the Legislature. In Kanai Lal Sur Vs. Paramnidhi Sadhukhan [1957 (9) TMI 45 - SUPREME COURT], it was held that if the words used are capable of one construction only then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. Rule 8(3A) of Central Excise Rules has already been interpreted by Hon’ble High Court Madras in the case of State of Tamil Nadu Vs. P.T.C. Sanghvi & Co. [1985 (2) TMI 246 - MADRAS HIGH COURT] wherein the department’s view that the penalty for the whole month will have to be calculated, even if the delay is not of the whole month has already been held to be incorrect view. It has been held that plain reading of Rule 8(3A) does not envisage imposing liability upon an assessee even for one day where there was no default and payment of such duties stood made by the date. The present order is held to be passed in ignorance of the earlier decisions. Hence is hereby set aside. Consequent thereto, the appeal stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Rule 8(3A) of the Central Excise Rules, 2002 is to be imposed at 1% for the entire month where duty payment was delayed only for part of that month. 2. Whether prior insolvency resolution and an approved resolution plan that extinguishes pre-plan tax liabilities relieves the assessee of the penalty demand for periods prior to the plan effective date. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Interpretation of Rule 8(3A): applicability of 'for each month or part thereof' Legal framework: Rule 8(3A) prescribes penalty at 1% per month 'for each month or part thereof' on duty not paid within one month of the due date, calculated from the due date for the period of failure; the Explanation defines 'month' as the period between two consecutive due dates for payment of duty. Precedent Treatment: The departmental view contended that 'part thereof' must be read with the definition of 'month' so that any part of a defined month attracts the full 1% for that entire month. Earlier judicial pronouncements at the High Court level have interpreted 'part thereof' to mean the actual number of days of delay and directed pro rata calculation; other High Court decisions have declared the rule ultra vires on grounds of arbitrariness under equality principles. Interpretation and reasoning: The Court applied standard principles of statutory construction - the legislature's intention must be derived from the words in their ordinary meaning, subject to purposive interpretation where required. The phrase 'for each month or part thereof' unambiguously contemplates liability measured by months or fractions of months; a plain reading supports calculation proportionate to the actual part of the month during which failure continued. Treating any part of a month as a full month would ignore the express language and yield an interpretation inconsistent with the ordinary meaning of 'part thereof' and with established judicial exposition that equates 'part thereof' with the fraction of days delayed. The Court observed that construing the phrase to produce full-month liability for any partial delay would impose a penalty even for days when no default existed, a result inconsistent with the textual scheme. Ratio vs. Obiter: The holding that 'part thereof' requires pro rata (days-based) calculation of 1% is ratio decidendi of the decision. Observations about the illegitimacy of reading 'part thereof' as a full month and the reference to prior decisions striking the rule down as arbitrary are ancillary but directly inform the interpretive ratio. Conclusions: The correct construction of Rule 8(3A) mandates calculation of penalty pro rata for the actual number of days of delay within a month (i.e., part of a month), not automatic imposition of the full monthly 1% for any partial-month default. The departmental computation treating a partial-month default as a full-month liability is incorrect and unsustainable. Issue 2 - Effect of insolvency resolution plan on pre-plan tax liabilities Legal framework: Insolvency resolution proceedings and an approved resolution plan, as upheld by higher adjudicatory authority, can affect the status of contingent or crystallized claims against the corporate debtor to the extent provided in the plan and its judicial sanction. Precedent Treatment: The tribunal considered prior outcomes where an approved plan and its judicial confirmation resulted in extinguishment of pre-plan liabilities as provided by the plan and resulting orders upholding the plan. Interpretation and reasoning: The Court noted the record indicates the appellant underwent insolvency resolution and an approved resolution plan was judicially upheld, with the successful resolution applicant assuming control as of a specified effective date. Where the resolution plan and its judicial sanction expressly operate to extinguish tax liabilities for periods prior to the effective date of the plan, any demand for such liabilities stands discharged to the extent provided by that plan and order. Because the subject penalty demand relates to a period prior to the plan's effective date, and the plan was upheld by the competent authority, the demand cannot be sustained if the plan extinguished such pre-plan liabilities. Ratio vs. Obiter: The conclusion that an approved resolution plan extinguishing pre-plan tax liabilities bars departmental recovery of those liabilities is ratio with respect to the facts before the Court; the observation is grounded in the operative effect of a sanctioned resolution plan rather than a generalized pronouncement beyond those facts. Conclusions: The penalty demand for the period prior to the effective date of the approved resolution plan is extinguished insofar as the plan and its judicial affirmation operate to discharge pre-plan tax liabilities; therefore the penalty demand for January-March 2017 cannot be sustained on that ground. Cross-References and Net Result The two issues are related: even if Rule 8(3A) required pro rata calculation (favouring the assessee on quantum), the Court also found an independent bar to recovery because the relevant liabilities fell within the period extinguished by the approved resolution plan. In view of earlier authoritative judicial interpretations treating 'part thereof' as days-based and the extinguishment under the resolution plan, the impugned order imposing/confirming the penalty was set aside.