SEPTEMBER 18, 2006

By Joseph Prabakar, Advocate

FISCAL legislations generally contain provisions for collection of interest and levy of penalty and fine, in addition to collection of duty/tax. Excise and Customs laws also provide for this kind of recovery mechanism. The law which provides for the recovery of duty and levy of penalty, invariably confers the power of discretion on an official who acts in judicial or quasi-judicial capacity. This discretion is to be exercised very cautiously by the authority and this cautiousness many a times results in the original / first appellate authority confirming the demand without going into the facts of the case or without really appreciating the correct legal position. This is more so where the amount of duty involved is large.

In this background, the decision of the Supreme Court, rendered in the year 1999   in the case of Zunjarrao Bhikaji Nagarkar Vs Union of India (2002-TIOL-130-SC-CX) (herein after referred to as 'Nagarakar case' ) assumed great significance. Let us now look at the facts of 'Nagarakar' case .

In 1995, Nagarkar who was the Collector of Central Excise, Nagpur issued a show cause notice to M/s Hari Vishnu Packaging Ltd., Nagpur, that they had (a) clandestinely manufactured and cleared excisable goods and  (b) wilfully evaded excise duty. Accordingly confiscation of the goods was proposed and penalty under Rule 173Q of the Central Excise Rules, 1944, was sought to be imposed. Nagarkar adjudicated the matter and confirmed clandestine removal of goods and evasion of duty. However, Nagarkar did not levy penalty under Rule 173Q of the Central Excise Rules, 1944.

Action was initiated against Nagarkar under Central Civil Services (Classification, Control and Appeal) Rules, 1965, on the allegation that he favoured the assessee by not imposing penalty. Nagarakar then challenged the issue in the Supreme Court, after losing the case in CAT and then in Bombay High Court. In the Supreme Court, it was argued for Nagarkar that adjudication order is quasi-judicial in nature whereby he confirmed the confiscation of the goods, but had chosen not to impose penalty in the facts and circumstances of the case. Further, it was contended that merely on the ground of non-levy of penalty, Nagarkar could not be subjected to the disciplinary proceedings.

The Supreme Court decided the matter in favour of Nagarkar and ruled that in the matter of quasi judicial functions, an official could exercise discretion. The Apex Court based its decision on the argument that if an error of law was committed by an official in discharging quasi-judicial functions, the Government always had a remedy by preferring an appeal and restoring the position.

For the last six years it was thought that Nagarkar decision had become settled law on this subject until the Larger Bench of the Supreme Court, in its recent landmark decision rendered on April 21, 2006, in the case of Union of India Vs Duli Chand (2006-TIOL-78-SC-MISC-LB) had overruled the Nagarkar decision and had laid down a different legal position in these matters.

The issue in Duli Chand case whether disciplinary action could be taken against an official for gross negligence in discharging quasi-judicial functions. The Supreme Court, without really elaborating much on the legal position on the matter, simply referred to its own 1993 three Judge Bench decision in the case of Union of India Vs K K Dhawan (2002-TIOL-441-SC-MISC) (herein after referred to as KK Dhawan case). In KK Dhawan case, the Apex Court had dealt with an identical issue in a very detailed manner and had held that disciplinary action could be initiated against an official if there was gross negligence in discharging judicial or quasi-judicial functions, even where the negligence did not result in any favour to an assessee or even where the element of culpability was absent.

The Supreme Court observed that the decision in Nagarkar case rendered in 1999 had virtually resulted in reverting back to the earlier view of the matter (prior to 1993). Prior to KK Dhawan decision in 1993, the legal position was that disciplinary action could be taken against an officer discharging judicial functions only where there was an element of culpability involved.

The Supreme Court further reiterated the observations made in KK Dhawan case wherein the Apex Court had listed out six situations when disciplinary action could be taken. Two of those instances are acting recklessly and acting  negligently while discharging duty. On the basis of the above clear verdict in KK Dhawan case, the Supreme Court ruled that Nagarkar decision did not lay down the correct legal position.

In the light of the Duli Chand decision let us examine whether Nagarkar's action warranted initiation of disciplinary action by the department. It is crucial to note at this juncture that the charge against Nagarkar was that he did not levy any penalty even though he had confirmed clandestine manufacture and evasion of duty. The Apex Court in Nagarkar case had examined Rule 173Q and held categorically that imposition of penalty under Rule 173 Q was mandatory. In fact, if only Nagarakar had to levy a nominal penalty of 2% or 5% of the value of goods or a mere Rs 500/- or Rs 1,000/-, this issue would not have arisen at all. This is because Rule 173 Q only prescribed the maximum penalty and did not stipulate any minimum penalty. At this juncture it may be noted that there was no ambiguity whatsoever about the interpretation of Rule 173 Q at that point in time or earlier. If there was an iota of doubt on the issue, the proper course of action for an official would be to err on the right side by imposing at least a minimum penalty. If an official in the post of Commissioner did not know that levy of penalty under Rule 173 Q was mandatory, then the concerned officials' lack of fundamental and basic knowledge of excise law could well be construed as 'recklessness in discharge of duty and / or  negligence in exercise of statutory powers'. And this is precisely the point the Supreme Court made in Duli Chand case.

Now back to the Nagarkar decision, the Supreme Court, while delivering the decision in favour of Nagarkar, made a very interesting and pertinent remark on another related subject. The observations of the Apex Court in this regard are reproduced below.

' 43. Before concluding, there are two aspects of the matter which we wish to point out. These are :

1.........

2. There is a charge of misconduct against the Collector (now Commissioner) of Central Excise (Nagarkar). While disciplinary proceedings are pending against him, he is transferred to the National Academy of Custom, Excise and Narcotics to guide the probationers. It is certainly a paradoxical situation that a man who is not fit to hold the post of Collector is fit enough to impart training to the probationers entering the service. Best talent should be sent to the academy to teach the probationers. Posting to the academy should be considered as an honour and not punishment. Our comment is no reflection on the appellant herein as we have set aside the initiation of disciplinary proceedings against him. '

It is really ironical that the Government which had chosen to pursue a misconduct case at the Supreme Court had posted the same official at NACEN. Now, applying the analogy laid down by the Supreme Court in Duli Chand (based on KK Dhawan), the action of the officials responsible for posting Nagarkar to NACEN could well be viewed as 'recklessness in discharge of duty and / or negligence in exercise of statutory powers'.

On to the main issue, though Duli Chand decision had straightened the legal position, this decision would result in the unavoidable consequence of increase in confirmation of demands by the officials. The officials may have more reasons now to confirm the demands than ever before. The frequency of traveling up to the Tribunal to get justice even on clearly covered matters would increase for the hapless assessees.

(Author is a Chennai based advocate)

(The views expressed are strictly personal)