Penalty on former CFO quashed for lack of mens rea under Section 112(a)(ii) of Customs Act, 1962

CESTAT New Delhi set aside the penalty imposed on the former CFO under section 112(a)(ii) of the Customs Act, 1962. The Tribunal held that this provision presupposes a conscious and deliberate attempt to evade customs duty. In the absence of evidence showing intentional evasion or deliberate suppression of the final invoices for duty determination, the necessary mens rea was not established. Relying on the Kerala HC decision in O.T. Enasu, the Tribunal concluded that the penalty was unsustainable and allowed the appeal, cancelling the penalty.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether imposition of penalty under section 112(a)(ii) of the Customs Act on the former Chief Financial Officer was legally sustainable in the absence of a conscious attempt to evade customs duty.

1.2 Whether omission to disclose the relevance of final supplier invoices to the customs authorities, in the factual matrix of the case, constituted "seeking to evade" duty so as to attract section 112(a)(ii) of the Customs Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Sustainability of penalty under section 112(a)(ii) of the Customs Act; requirement of conscious attempt to evade duty

Legal framework

2.1 Section 112(a)(ii) of the Customs Act provides that any person who, in relation to any goods, does or omits to do any act which would render such goods liable to confiscation under section 111, or abets such act or omission, shall, in the case of dutiable goods (other than prohibited goods), be liable, subject to section 114A, to a penalty not exceeding 10% of the duty sought to be evaded or Rs. 5,000/-, whichever is higher.

2.2 The Tribunal referred to the interpretation of section 112(a)(ii) by the Kerala High Court in O.T. Enasu v. Union of India, which held that the jurisdictional fact for imposition of penalty under section 112(a)(ii) is that "duty was sought to be evaded", and that being a penal provision, it requires strict construction. "Evade" was construed as involving a conscious exercise and a mental element, such that "seeking to evade" necessarily implies a conscious attempt to avoid duty.

Interpretation and reasoning

2.3 The Principal Commissioner had imposed penalty on the basis that the appellant, as Chief Financial Officer, understood that final invoices were relevant for determination of customs duty and omitted to disclose this fact to the department, thereby attracting section 112(a)(ii).

2.4 The Tribunal emphasized that section 112(a)(ii) presupposes a conscious exercise to evade duty, and thus requires establishment that by omissions or commissions the person led to a situation where duty was "sought to be evaded". Mere omission, without proof of such conscious attempt, is insufficient.

2.5 The Tribunal relied on its own findings in the connected appeal of the importing company, where it was recorded that: (i) dore bars were melted, multiple samples drawn, assayed and reconciled, and final supplier invoices were issued based on final gold/silver content; (ii) the final quantity of precious metal could be more, equal to, or less than that mentioned in the finalized Bills of Entry; (iii) duty short payment arose only where final gold content was more, but in other cases the importer paid excess duty; and (iv) substantial refunds of excess customs duty had been sanctioned by the department in multiple refund orders.

2.6 On these facts, the Tribunal in the connected matter held that no motive could be attributed to the importer in suppressing final invoices, as the importer had in many cases paid more duty than required and had claimed and obtained refunds. It was specifically held that duty was not short paid on account of any wilful statement or suppression of facts, and that the extended period under section 28(4) of the Customs Act could not be invoked.

2.7 Applying the same factual and legal analysis to the present appellant, the Tribunal held that it could not be urged that there was any conscious attempt to evade payment of duty. The essential mental element required for "seeking to evade" duty under section 112(a)(ii) was thus not established.

Conclusions

2.8 The Tribunal concluded that, in view of the requirement of a conscious attempt to evade duty under section 112(a)(ii), as expounded by the Kerala High Court and supported by the factual findings in the connected appeal, mere omission to inform the department about the relevance of final invoices did not amount to "seeking to evade" customs duty.

2.9 The necessary jurisdictional fact that duty was "sought to be evaded" was not established against the appellant; hence the penal provision under section 112(a)(ii) was not attracted.

2.10 The portion of the order imposing a penalty of Rs. 50 lakhs on the appellant under section 112(a)(ii) of the Customs Act was held to be unsustainable and was set aside, and the appeal was allowed.

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