R E P O R T A B L E

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3527  OF 2009                        (Arising out of S.L.P. (Civil) No. 15927 of 2007)

Union of India ..Appellant

Versus

M/s Rajasthan Spinning & Weaving Mills ..Respondent

AND

CIVIL APPEAL NO.  3525   OF 2009 (Arising out of S.L.P. (Civil) No. 4078 of 2008)

Commissioner of Customs and Central Excise … Appellant

Versus

M/s. Lanco Industries Ltd. …Respondent

         J U D G M E N T

AFTAB ALAM,J.

1. Leave granted in both the SLPs.

2. What are the conditions and the circumstances that would attract the  

imposition of penalty under section 11AC of the Central Excise Act (‘The  

Act’, hereinafter)?  In the two cases before us the Tribunal has taken the view  

that there was no warrant for levy of penalty since the assessees had deposited  

the balance amount of excise duty (that was short paid at the first instance)  

even before the show cause notice was issued. On the other hand, on behalf of  

the Revenue, the appellants in the two appeals, it was contended, relying upon  

a recent decision of this Court in  Union of India  Vs.  Dharamendra Textile   

Processors, 2008 (231) ELT 3 that mere non payment or short payment of  

duty (without anything else!) would inevitably lead to imposition of penalty  

equal to the amount by which duty was short paid. In our view the reason  

assigned  by  the  Tribunal  to  strike  down  the  levy  of  penalty  against  the  

assessees is as misconceived as the interpretation of  Dharamendra Textile  is  

misconstrued by the Revenue. We completely fail to see how payment of the  

differential duty, whether before or after the show cause notice is issued, can  

alter the liability for penalty, the conditions for which are clearly spelled out  

in section 11AC of the Act.  

3. Though  both  the  appeals  turn  on  a  question  of  law,  it  would  be  

nevertheless useful to take a brief look at the facts of the two cases.

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4. In  the  appeal  arising  from SLP (C)  No.15927/2007  the  respondent-  

assessee is a manufacturer of P/V yarn. On July 12, 2000 the Preventive Party  

of Central  Excise Division, Udaipur visited the assessee’s factory premises  

and on scrutiny of its internal  records took the view that in  clearances of  

goods on ex-mill sales there was short payment of duty by Rs.1,09,682.00 and  

by Rs.69,900.00 on sales made from the assessee’s depot. The short payment  

of duty, according to the Revenue, took place in the following circumstances.  

The assessee was collecting handling and forwarding charges at the rate of  

Rs.6.00 per bag/ carton up to October, 1996 and after that at the rate of Rs.8/-.  

The amount of handling and forwarding charges was shown in the invoices  

separately from the assessable value of the goods. During the material time  

the  assessee  had  collected  a  sum  of  Rs.7,46,219.00  as  handling  and  

forwarding charges on its sales from the mill. The assessee paid duty only on  

the difference between the amount collected by it and the actual expenditure  

incurred on loading and handling of goods within the factory. In this way a  

sum of Rs.5, 59,603.00 was left out of reckoning for levy of excise duty. The  

excise duty on the aforesaid sum came to Rs.1, 09,682.00. In the same manner  

there was short payment of duty amounting to Rs.69, 900.00 on sales made  

from the assessee’s depot.  

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5. On the aforesaid  facts  the Additional  Commissioner,  Central  Excise,  

Jaipur issued a show cause notice to the assessee on March 27, 2001. In the  

notice it was expressly acknowledged that on being pointed out the assessee  

deposited the full amount of duty (that is, Rs.1,09,682.00 + Rs.69,900.00) on  

August 26, 2000. Nevertheless, the notice went on to say that with effect from  

October 1, 1996 the requirement to submit the invoices to the Central Excise  

department was dispensed with and the assessee had discontinued submitting  

its  invoices  to  the  concerned  authorities.  This  resulted  into  suppression of  

material facts on its part that the handling and forwarding charges were not  

being  added  on  to  the  assessable  value  of  the  goods.  The  Additional  

Commissioner,  therefore,  invoked  the  provision  of  penalty  as  well.  The  

assessee  filed  its  show  cause  against  imposition  of  penalty  but  the  Joint  

Commissioner by his order dated September 26, 2001 not only confirmed the  

demand of duty (that was already deposited by the assessee) but also imposed  

penalty amounting to Rs.1,79,522/- under section 11AC of the Act. On appeal,  

however, the Tribunal set aside the imposition of penalty on the sole ground  

that the assessee had made payment of the full duty amount even before the  

issuance of notice.  

6. M/s  Lanco Industries  Limited,  the  respondent-assessee  in  the  appeal  

arising  from  SLP  (C)  No.  4078/2008  is  a  company  engaged  in  the  

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manufacture  of  pig  iron.  The  assessee  sold  pig  iron  and  molten  metal  to  

another  company  called  M/s.  Lanco  Kalahasthi  Castings  Limited  (LKCL)  

which was in existence at the material time before its amalgamation with the  

respondent company, with effect from, April 8, 2004 as per the order of the  

Andhra Pradesh High Court, dated February 20, 2004 in Company Petition no.  

182-83/ 2003. LKCL had its factory at a distance of about 150 metres from  

the assessee’s  factory  where  the  pig  iron and molten  metal,  on sale,  were  

transferred for manufacture of ductile iron pipes by the transferee company.  

The sold goods were cleared from the factory of the assessee on payment of  

central excise duty on transaction value, that is, the price actually charged by  

it from LKCL. LKCL would get full CENVAT credit for the duty paid by the  

respondent company and would reimburse to the assessee the amount of duty  

at actuals.  

7. The  Central  Excise  officers  on  scrutiny  of  the  annual  record  of  the  

respondent for the period July 1, 2000 to March 31, 2004 took the view that  

the assessee had been clearing molten iron and pig iron to M/s. LKCL on an  

improper assessable value. In the annual reports of the respondent company  

for the years 2000-01 and 2001-02 LKCL was listed as one of its associate  

companies. The annual reports further revealed that the two companies had a  

number of common directors on their respective boards, as key managerial  

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personnel.  The common directors were also related to each other. The two  

companies were having related party transactions in the form of sale of goods  

etc. In light of the facts disclosed in the respondent company’s annual reports  

the  Central  Excise  authorities  took  the  view  that  after  the  amendment  of  

Section  4  with  effect  from  July  1,  2000,  in  relation  to  the  respondent  

company, LKCL was ‘related person’ within the meaning of section 4(3) (b)  

(ii) of the Central Excise Act. That being the position the  value of molten iron  

and  pig  iron  cleared  by  the  assessee  to  LKCL,  for  payment  of  duty  was  

required to be determined in terms of  Rule  8 of  Central  Excise  Valuation  

(Determination of Price of Excisable goods) Rules 2000, i.e., @ 115% of the  

cost of production upto August 4, 2003 and after that date @ 110% in terms of  

the amendment introduced in the rule by notification No. 60/2003-CE (NT),  

dated August 5, 2003. The authorities calculated the amount of duty short-

paid  by  the  assessee  for  the  period  July  1,  2000  to  March  31,  2004  at  

Rs. 56,04,274.00 for pig iron and Rs. 70,05,163.00 for molten metal, totalling  

to Rs. 1,26,09,437.00. Accordingly, the Commissioner, Central Excise, issued  

notice to the assessee on July 27, 2005 raising the demand of differential duty,  

besides  interest  and  penalty, alleging  that  the  assessee  had  willfully  

suppressed the relevant  facts  from the department  with intent to evade the  

proper payment of duty.

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8. The  assessee  in  his  reply  explained  that  it  had  deposited  the  entire  

amount of the demand on the same day (July 27, 2005). Moreover, the whole  

exercise was revenue neutral and, therefore, there was no reason to impose  

interest,  much  less  any  penalty.  The  Commissioner,  however,  not  only  

confirmed the demand of duty but by his order dated January 25, 2006 also  

levied interest under section 11AB and 100% penalty under section 11AC of  

the Act observing whether or not the demand was revenue neutral was not  

relevant to the issue before him. Against the order of the commissioner the  

assessee filed an appeal before the Customs Excise and Service Tax Appellate  

Tribunal.  The Tribunal allowed the appeal by its order dated September 5,  

2006 as noted above.

9. On behalf of the assessees in both the cases it was submitted the stand  

of the Revenue that there was any short payment of duty and the consequent  

demand  for  recovery  of  the  differential  duty  was  quite  untenable  but  the  

assessees had made payment of the demands simply in order to buy peace and  

to avoid any litigation. In those circumstances the imposition of penalty was  

wholly unjust, unwarranted and unauthorised in law.  

10. Mr. Ashok Desai, learned Senior Advocate appearing for the assessee  

in the appeal arising from SLP (C) No. 4078/2008 submitted that the view  

taken by the Revenue that the assessee and LKCL, with respect to each other,  

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were ‘related person’ was quite unsound. Nevertheless, the assessee paid the  

entire  demand  of  Rs.1,26,09,437.00  first,  in  order  to  avoid  litigation  and  

secondly because the payment did not result in any actual monetary outflow  

for the assessee; whatever payment was made by the assessee, LKCL took  

CENVAT credit for it and reimbursed the full amount of duty to the assessee.  

He further submitted there was no question of suppression of any material fact  

by the assessee since all the information on which the show cause notice and  

the adjudication order were based were admittedly taken from the assessee’s  

annual report which was a material in public domain. He also submitted that  

there could not be possibly any intent to evade any excise duty as the whole  

exercise  was revenue neutral in as much as whatever sum the assessee paid as  

excise duty on transaction with LKCL it got back as reimbursement from the  

transferee. There being no element of fraud or suppression of facts etc. with  

intent to evade payment of duty any imposition of penalty was illegal  and  

unauthorised.  

11. In a case of non-payment, short-payment or erroneous refund of duty  

normally three issues are likely to arise relating to (i)  recovery, (ii)  interest  

and (iii) penalty. The three issues are dealt with under section 11A (Recovery  

of duties), section 11AA (Interest for the period from three months after the  

determination of duty payable till the date of payment of duty), section 11AB  

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(Interest for the period from the first day of the month succeeding the month  

in  which  duty  was  payable  till  the  payment  of  duty)  and  section  11AC  

(Penalty for short levy or non levy of duty).  

Section 11A reads as follows:  

“11A.  Recovery  of  duties  not  levied  or  not  paid  or  short- levied or short-paid or erroneously refunded.-(1)  When any  duty of  excise has not been levied or paid or has been short- levied or short-paid or [ erroneously refunded, whether or not  such non-levy or  non-payment,  short-levy or  short  payment or  erroneous refund, as the case may be, was on the basis of any  approval, acceptance or assessment relating to the rate of duty on  or valuation of excisable goods under any other provisions of this  Act or the rules made thereunder], a Central Excise Officer may,   within  [one year]  from the  relevant  date,  serve  notice  on  the   person chargeable with the duty  which has not been levied or  paid or which has been short-levied or short-paid or to whom the  refund has erroneously been made, requiring him to show cause  why he should not pay the amount specified in the notice;  

Provided that where any duty of excise has not been levied  or  paid  or  has  been  short-levied  or  short-paid  or  erroneously  refunded  by  reason  of  fraud,  collusion  or  any  wilful  mis- statement or suppression of facts,  or contravention of any of   the provisions of this Act or of the rules made thereunder with  intent to evade payment of duty, by such person or his agent, the  provisions of this sub-section shall have effect, [as if ]  for the  words [“one year”], the words “five years” were substituted:

Explanation. - Where the service of the notice is stayed by an  order  of  a  court,  the  period of  such stay shall  be excluded in  computing the aforesaid period of [one year] or five years, as the  case may be.

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[(1A) When any duty of excise has not been levied or paid or has  been  short-levied  or  short  paid  or  erroneously  refunded,  by  reason  of  fraud,  collusion  or  any  wilful  misstatement  or  suppression of facts, or contravention of any of the provisions of  this  Act  or  the  rules  made  thereunder  with  intent  to  evade  payment of duty, by such person or his agent, to whom a notice is  served under the proviso to sub-section (1) by the Central Excise  Officer, may pay duty in full or in part as may be accepted by  him, and the interest payable thereon under Section 11AB and  penalty equal to twenty-five per cent of the duty specified in the  notice or the duty so accepted by such person within thirty days  of the receipt of the notice.]  

(2)  The  [Central  Excise  Officer]  shall,  after  considering  the  representation,  if  any,  made by the person on whom notice  is  served under sub-section (1),  determine the amount of duty of  excise due from such person (not being in excess of the amount  specified in the notice) and thereupon such person shall pay the  amount so determined.  

Provided  that  if  such  person  has  paid  the  duty  in  full  together  with,  interest  and penalty under sub-section (1A),  the  proceedings in respect of such person and other persons to whom  notice are served under sub-section (1) shall, without prejudice to  the  provisions  of  section  9,  9A  and  9AA,  be  deemed  to  be  conclusive as to the matters stated therein:

Provided further that, if such person has paid duty in part,  interest and penalty under sub-section (1A), the Central Excise  Officers, shall determine the amount of duty or interest not being  in excess of the amount partly due from such person.]

[(2A) Where any notice has been served on a person under sub- section (1), the Central Excise Officer,- (a) in  case  any  duty  of  excise  has  not  been  

levied  or  paid  or  has  been  short-levied  or  short-paid  or  erroneously  refunded,  by  

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reason of fraud, collusion or any wilful mis- statement  or  suppression  of  facts,  or  contravention  of  any  of  the  provisions  of  this Act or the rules made thereunder with  intent to evade payment of duty, where it is  possible  to  do  so,  shall  determine  the  amount of such duty, within a period of one  year; and   

(b) in any other case, where it is possible to do  so,  shall  determine  the  amount  of  duty  of  excise which has not been levied or paid or  has  been  short-levied  or  short-paid  or  erroneously refunded, within a period of six  months,   from  the  date  of  service  of  the  notice on the person under sub-section (1)  

(2B) Where any duty of excise has not been levied or paid or has  been  short-levied  or  short-paid  or  erroneously  refunded,  the  person, chargeable with the duty, may pay the amount of duty [on  the basis of his own ascertainment of such duty or on the basis of  duty ascertained by a Central Excise Officer] before service of  notice on him under sub-section (1) in respect of the duty, and  inform the Central  Excise Officer of such payment in writing,  who, on receipt of such information shall not serve any notice  under sub-section (1) in respect of the duty so paid:

        Provided that the Central Excise Officer may determine the  amount of short payment of duty, if any, which in his opinion has  not  been  paid  by  such  person  and,  then,  the  Central  Excise  Officer  shall  proceed  to  recover  such  amount  in  the  manner  specified in this section, and the period of “one year” referred to  in sub-section (1) shall  be counted from the date of receipt  of  such information of payment.  

Explanation 1. - Nothing contained in this sub-section shall apply  in a case where the duty was not levied or was not paid or was  short-levied or  was short-paid or was erroneously refunded by  reason  of  fraud,  collusion  or  any  wilful  mis-statement  or  

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suppression of facts, or contravention of any of the provisions of  this  Act  or  of  the  rules  made  thereunder  with  intent  to  evade  payment of duty.  

Explanation 2.- For the removal of doubts, it is hereby declared  that  the  interest  under  section  11AB  shall  be  payable  on  the  amount paid by the person under this sub-section and also on the  amount of short-payment of duty, if any,  as  may  be  determined  by  the  Central  Excise  Officer,  but  for  this  sub- section.  

(2C) The provisions of sub-section (2B) shall not apply to any  case where the duty had become payable or ought to have been  paid before the date on which the Finance Bill, 2001 receives the  assent of the President.]  

(3) For the purposes of this section-  

(i) “refund” includes rebate of duty of excise on excisable  goods  exported  out  of  India  or  on  excisable  materials  used in the manufacture of goods which are exported out  of India;  

(ii) “relevant date” means,-  

[(a) in the case of excisable goods on which duty of excise has         not been levied or paid or has been short-levied or short-             paid-  

(A) where under the rules made under this Act a  periodical  return,  showing  particulars  of  the  duty  paid  on  the  excisable  goods  removed  during  the  period  to  which  the  said  return  relates, is to be filed by a manufacturer or a  producer or a licensee of a warehouse, as the  case may be, the date on which such return is  so filed;  

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(B) where  no  periodical  return  as  aforesaid  is  filed, the last date on which such return is to  be filed under the said rules;  

(C) in any other case, the date on which the duty  is to be paid under this Act or the rules made  thereunder;]

(b) in a case where duty of excise is provisionally assessed                                   under this Act or the rules made thereunder, the date of                                 adjustment of duty after the final assessment thereof;  

( c )   in the case of excisable goods on which duty of excise has           been erroneously refunded, the date of such refund.]”  

From sub-section  1  read with  its  proviso  it  is  clear  that  in  case  the  short  

payment,  non  payment,  erroneous  refund  of  duty  is  unintended  and  not  

attributable to fraud, collusion or any wilful mis-statement or suppression of  

facts, or contravention of any of the provisions of the Act or of the rules made  

under  it  with  intent  to  evade payment  of  duty  then  the  Revenue can give  

notice for recovery of the duty to the person in default within one year from  

the relevant date (defined in sub section 3). In other words, in the absence of  

any element of deception or malpractice the recovery of duty can only be for a  

period not exceeding one year. But in case the non-payment etc. of duty is  

intentional and by adopting any means as indicated in the proviso then the  

period of notice and a priory the period for which duty can be demanded gets  

extended to five years.

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12. In  Cosmic Dye Chemical V  Collector  of  Central  Excise,  (1995) 75  

ELT 721 a three Judges Bench of this Court observed as follows:

“5.The  main  limb  of  Section  11A  provides  limitation  of  six  months. In cases, where duty is not levied or paid or short-levied  or short-paid or erroneously refunded, it can be recovered by the  appropriate officer within six months from the relevant date. (The  expression ‘relevant date’ is defined in the Section itself). But the  said period of six months (substituted by one year  with effect  from May 12, 2000) gets extended to five years where such non- levy,  short  levy,  etc.,  is  “by reason of  fraud,  collusion or  any  wilful mis-statement or suppression of facts or contravention of  any of the provisions of this Act or of the rules with intent to  evade payment of duty….

“6. Now so far as fraud and collusion are concerned, it is evident  that  the  requisite  intent,  i.e.,  intent  to  evade  duty  is  built  into  these very words.  So far as mis-statement or suppression of facts  are  concerned,  they are  clearly  qualified  by the  word “wilful”  preceding  the  words  “mis-statement  or  suppression  of  facts”  which means with intent to evade duty.  The next set of words  “contravention of any of the provisions of this Act or Rules” are  again qualified by the immediately following words “with intent  to evade payment of duty”. It is, therefore, not correct to say that   there can be a suppression or mis-statement of fact, which is not   wilful and yet constitutes a permissible ground for the purpose of   the proviso to Section 11A. Mis-statement or suppression of fact   must be wilful.”          

                                         (emphasis added)

13. The same position was reiterated in Continental Foundation Jt. Venture  

vs   Commissioner of Central Excise, (2007) 216 ELT 177 to which one of us  

(Kapadia J.) was a party. In Paragraphs 10 and 12 of the judgment it  was  

observed as follows:

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“10. The expression “suppression” has been used in the proviso  to Section 11A of the Act accompanied by very strong words as  ‘fraud’  or  “collusion”  and,  therefore,  has  to  be  construed  strictly.   Mere  omission  to  give  correct  information  is  not  suppression of facts unless it was deliberate to stop the payment  of duty.  Suppression means failure to disclose full information  with the intent to evade payment of duty.  When the facts are  known to both the parties, omission by one party to do what he  might  have done  would not  render  it  suppression.  When the  Revenue  invokes  the  extended  period  of  limitation  under  Section 11A the burden is cast upon it to prove suppression of  fact.   An incorrect statement cannot be equated with a wilful  misstatement.  The  latter  implies  making  of  an  incorrect  statement  with  the  knowledge  that  the  statement  was  not  correct.  

“12.  As far as fraud and collusion are concerned, it is evident  that the intent to evade duty is built into these very words.  So  far as mis-statement or suppression of facts are concerned, they  are clearly qualified by the word ‘wilful’, preceding the words  “mis-statement  or  suppression  of  facts”  which  means  with  intent to evade duty.  The next set of words ‘contravention of  any of the provisions of this Act or Rules’ are again qualified  by  the  immediately  following  words  ‘with  intent  to  evade  payment of duty.’   Therefore, there cannot be suppression or  mis-statement of fact, which is not wilful and yet constitute a  permissible ground for the purpose of the proviso to Section  11A.  Mis-statement of fact must be wilful.”

(emphasis supplied)

14. Sub-section  1A of  section  11A provides  that  in  case  the  person  in  

default to whom the notice is given under the proviso to sub section 1 makes  

payment of duty in full or in part as may be accepted by him, together with  

interest under section 11AB and penalty equal to 25% of the accepted  

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amount of duty within thirty days of the date of receipt of notice then the  

proceeding  against  him  would  be  deemed  to  be  conclusive (without  

prejudice to the provisions of sections 9, 9A and 9AA) as provided in the  

proviso to sub-section 2 of section 11A. Sub section 1A and the proviso to sub  

section 2 were inserted with effect from July 13, 2006 and, therefore, have no  

application to the periods relevant to the two appeals.  

15. Sub-section  2B  of  section  11A  provides  that  in  case  the  person  in  

default makes payment of the escaped amount of duty before the service of  

notice then the Revenue will not give him the notice under sub section 1. This,  

perhaps, is the basis of the common though erroneous view that no penalty  

would be leviable if the escaped amount of duty is paid before the service of  

notice.  It,  however,  overlooks  the  two  explanations  qualifying  the  main  

provision. Explanation 1 makes it clear that the payment would, nevertheless,  

be subject to imposition of interest under section 11AB. Explanation 2 makes  

it further clear that in case the escape of duty is intentional and by reason of  

deception the main provision of sub section 2B will have no application.     

16. The other provision with which we are concerned in this case is section  

11AC relating to penalty. It is as follows:

[11AC. Penalty for short-levy or non-levy of duty in  certain  cases.- where any duty of excise has not been levied or paid or  has been short-levied or short-paid or erroneously refunded by  

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reasons of fraud, collusion or any wilful mis-statement or  suppression  of  facts,  or  contravention  of  any  of  the  provisions of this Act or of the rules made thereunder with  intent to evade payment of duty,  the person who is liable to  pay duty as determined under sub-section (2) of section 11A,  shall  also  be  liable  to  pay  a  penalty  equal  to  the  duty  so  determined:  

[Provided that where such duty as determined under sub- section  (2)  of  section  11A,  and  the  interest  payable  thereon  under section 11AB, is paid within thirty days from the date of  communication  of  the  order  of  the  Central  Excise  Officer  determining such duty, the amount of penalty liable to be paid  by such person under this section shall be twenty-five per cent  of the duty so determined:  

Provided further that the benefit of reduced penalty under  the first proviso shall be available if the amount of penalty so  determined has also been paid within the period of thirty days  referred to in that proviso:  

Provided  also  that  where  the  duty  determined  to  be  payable  is  reduced  or  increased  by  the  Commissioner  (Appeals), the Appellate Tribunal or, as the case may be, the  court, then, for the purpose of this section, the duty as reduced  or increased, as the case may be, shall be taken into account:  

Provided also that in case where the duty determined to  be  payable  is  increased  by  the  Commissioner  (Appeals),  the  Appellate Tribunal or, as the case may be, the court , then, the  benefit  of  reduced  penalty  under  the  first  proviso  shall  be  available,  if  the  amount  of  duty  so  increased,  the  interest  payable thereon and twenty-five per cent of the consequential  increase of penalty have also been paid within thirty days of the  communication of the order by which such increase in the duty  takes effect.

Explanation. - For the removal of doubts, it is hereby declared that-  

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(1) the provisions of this section shall also apply to cases in             which the order determining the duty under sub-section              (2) of section 11A relates to notices issued prior to   the              date on  which  the  Finance  Act,  2000   receives    the              assent of  the President;  

(1) any amount paid to the credit of the Central Government  prior to the date of communication of the order  referred  to  in  the   first   proviso  or  the  fourth proviso shall be  adjusted against the total amount due from such person.]

17. The  main  body  of  sub-section  1  lays  down  the  conditions  and  

circumstances that would attract penalty and the various provisos enumerate  

the conditions, subject to which and the extent to which the penalty may be  

reduced.

18. One can not  fail  to  notice  that  both the  proviso to  sub section 1 of  

section 11A and section 11AC use the same expressions: “….by reasons of  

fraud, collusion or any wilful mis-statement or suppression of facts,  or  

contravention of any of the provisions of this Act or of the rules made  

thereunder with intent to evade payment of duty,…”.  In other words the  

conditions  that  would  extend the  normal  period  of  one  year  to  five  years  

would also attract the imposition of penalty. It, therefore, follows that if the  

notice under section 11A (1) states that the escaped duty was the result of any  

conscious and deliberate wrong doing and in the order passed under section  

11A (2) there is a legally tenable finding to that effect then the provision of  

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section 11AC would also get attracted. The converse of this, equally true, is  

that in the absence of such an allegation in the notice the period for which the  

escaped duty may be reclaimed would be confined to one year and in the  

absence of such a finding in the order passed under section 11A (2) there  

would be no application of the penalty provision in section 11AC of the Act.  

On behalf of the assessees it was also submitted that sections 11A and 11AC  

not only operate in different fields but the two provisions are also separated by  

time. The penalty provision of section 11AC would come into play only after  

an order is passed under section 11A(2) with the finding that the escaped duty  

was the result of deception  by the assessee by adopting a means as indicated  

in section 11AC.

19. From  the  aforesaid  discussion  it  is  clear  that  penalty  under  section  

11AC, as the word suggests, is punishment for an act of deliberate deception  

by the assessee with the intent to evade duty by adopting any of the means  

mentioned in the section.

20. At this stage, we need to examine the recent decision of this Court in  

Dharamendra Textile (supra).  In almost  every case relating to penalty,  the  

decision is referred to on behalf of the Revenue as if it laid down that in every  

case  of  non-payment  or  short  payment  of  duty  the  penalty  clause  would  

automatically get attracted and the authority had no discretion in the matter.  

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One of us (Aftab Alam,J.) was a party to the decision in Dharamendra Textile  

and we see no reason  to understand or read that decision in that manner. In  

Dharamendra Textile the court framed the issues before it, in paragraph 2 of  

the decision, as follows:

“2.  A  Division  Bench  of  this  Court  has  referred  the  controversy  involved in  these  appeals  to  a  larger  Bench  doubting the correctness of the view expressed in Dilip N.  Shroff vs. Joint Commissioner of Income Tax, Mumbai &  Anr. [2007 (8) SCALE 304].  The question which arises  for determination in all these appeals is whether Section  11AC of the Central Excise Act, 1944 (in short the ‘Act’)  inserted  by  Finance  Act,  1996  with  the  intention  of  imposing  mandatory  penalty  on  persons  who  evaded  payment of tax should be read to contain mens rea as an  essential  ingredient  and  whether  there  is  a  scope  for  levying penalty  below the prescribed  minimum.   Before  the  Division  Bench,  stand  of  the  revenue  was  that  said  section should be read as penalty for statutory offence and  the  authority  imposing  penalty  has  no  discretion  in  the  matter  of  imposition  of  penalty  and  the  adjudicating  authority in such cases was duty bound to impose penalty  equal  to  the  duties  so  determined.  The  assessee  on  the  other hand referred to Section 271(1)(c) of the Income Tax  Act,  1961  (in  short  the  ‘IT  Act’)  taking  the  stand  that  Section 11AC of the Act is  identically  worded and in a  given  case  it  was  open  to  the  assessing  officer  not  to  impose any penalty. The Division Bench made reference to  Rule 96ZQ and Rule 96ZO of the Central Excise Rules,  1944 (in short the ‘Rules’) and a decision of this Court in  Chairman, SEBI vs. Shriram Mutual Fund & Anr.[2006(5)  SCC 361] and was of the view that the basic scheme for  imposition of penalty under section 271(1)(c) of IT Act,  Section 11AC of the Act and Rule 96ZQ(5) of the Rules is  

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common.  According  to  the  Division  Bench  the  correct  position in law was laid down in Chairman, SEBI’s case  (supra) and not in Dilip Shroff’s case (supra). Therefore,  the matter was referred to a larger Bench.”

After referring to a number of decisions on interpretation and construction of  

statutory  provisions,  in  paragraphs  26  and  27  of  the  decision,  the  court  

observed and held as follows:

“26. In Union Budget of 1996-97, Section 11AC of the Act  was introduced.  It has made the position clear that there is  no  scope for  any discretion.   In  para  136 of  the  Union  Budget reference has been made to the provision stating  that  the  levy  of  penalty  is  a  mandatory  penalty.  In  the  Notes  on  Clauses  also  the  similar  indication  has  been  given.

“27.  Above  being  the  position,  the  plea  that  the  Rules  96ZQ  and  96ZO  have  a  concept  of  discretion  inbuilt  cannot  be sustained.  Dilip Shroff’s  case (supra)  was not  correctly decided but Chairman, SEBI’s case (supra) has  analysed the legal position in the correct perspectives.  The  reference is answered………”.

21. From  the  above,  we  fail  to  see  how the  decision  in  Dharamendra  

Textile  can be said to hold that section 11AC would apply to every case of  

non-payment or short payment of duty regardless of the conditions expressly  

mentioned in the section for its application.  

22. There  is  another  very  strong  reason  for  holding  that  Dharamendra  

Textile  could not have interpreted section 11AC in the manner as suggested  

because in that case that was not even the stand of the revenue.   In paragraph  

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5 of the decision the court noted the submission made on behalf of the revenue  

as follows:

“5.  Mr.  Chandrashekharan,  Additional  Solicitor  General  submitted  that  in  Rules  96ZQ  and  96ZO  there  is  no  reference to any mens rea as in section 11AC where mens  rea  is  prescribed  statutorily.  This  is  clear  from  the  extended  period  of  limitation  permissible  under  Section  11A of the Act. It is in essence submitted that the penalty  is for statutory offence. It is pointed out that the proviso to  Section 11A deals  with the time for initiation of action.  Section 11AC is only a mechanism for computation and  the quantum of penalty. It is stated that the consequences  of fraud etc. relate to the extended period of limitation and  the onus is on the revenue to establish that the extended  period  of  limitation  is  applicable.  Once  that  hurdle  is  crossed by the revenue, the assessee is exposed to penalty  and the quantum of penalty is fixed. It is pointed out that  even if in some statues mens rea is specifically provided  for,  so  is  the  limit  or  imposition  of  penalty,  that  is  the  maximum fixed or  the  quantum has  to  be  between  two  limits fixed.  In the cases at hand, there is no variable and,  therefore,  no  discretion.  It  is  pointed  out  that  prior  to  insertion  of  Section 11AC,  Rule  173Q was in  vogue in  which no mens rea was provided for.  It only stated “which  he  knows  or  has  reason  to  believe”.  The  said  clause  referred  to  wilful  action.   According  to  learned  counsel  what was inferentially provided in some respects in Rule  173Q,  now stands  explicitly  provided  in  Section  11AC.  Where the outer limit of penalty is fixed and the statute  provides that it  should not exceed a particular limit, that  itself indicates scope for discretion but that is not the case  here.”

23. The decision in Dharamendra Textile must, therefore, be understood to  

mean that  though the application of section 11AC would depend upon the  

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existence or otherwise of the conditions expressly stated in the section, once  

the  section is  applicable  in a  case the  concerned authority  would have no  

discretion in quantifying the amount and penalty must be imposed equal to the  

duty  determined  under  sub-section  (2)  of  section  11A.  That  is  what  

Dharamendra Textile decides.

24.      It must, however, be made clear that what is stated above in regard to  

the  decision in  Dharamendra Textile is  only in  so far as  section 11AC is  

concerned.  We make no observations (as a matter of fact there is no occasion  

for it!) with regard to the several other statutory provisions that came up for  

consideration in that decision.   

25. In  light  of  the  discussion  made  above it  is  evident  that  in  both  the  

appeals, orders were passed by the Tribunal on a wrong premise. In both the  

appeals, therefore, the impugned orders passed by the Tribunal are set aside  

and  the  matters  are  remitted  to  the  respective  Tribunals  for  fresh  

consideration, in accordance with law, and in light of this judgment.  As the  

matters are quite old it is hoped and expected that the Tribunal would pass the  

final order within four months from the date of the receipt of this order.  

26. The two appeals are allowed but with no order as to costs.

          ………………………………..J.

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                                                                        [S.H. Kapadia]

        …………………………………J.           [Aftab Alam]                

New Delhi, May 12, 2009.

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