SEPTEMBER 25, 2014

By S J Singh, Advocate

IN an overzealous attempt to "safeguard the interest of revenue", the Parliament, in its collective wisdom has, knowingly or unknowingly, enacted a provision of law which is devoid of any rationality and sense of justice and may even prove to be in contravention of Constitution. Do the law makers of the country believe that the tax payers have to suffer in all events even if they have been put into a position by the acts or omissions of the taxing authority? Can there not be honest difference of opinions and consequently the genuine conflict of interests? Should not the law be equally applicable to the contending parties in such conflicts? Should the tax payer who has been wronged by the acts or omissions of the legal authorities be kept at disadvantageous position even when he is pursuing the appellate remedies?The provisions of the Finance Act, 2014, relating to pre-deposit before appeal against an order of an adjudicating authority or first appellate authority, appear to be irrational, unjust and unconstitutional. 

The Finance Act, 2014 has substituted Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962. The two Sections of two different statutes are identically worded. Any interpretation about one or implication of one would be equally applicable about the other.

Before its substitution, Section 35F read as under:

35F. Deposit, pending appeal, of duty demanded or penalty levied.-  Where in any appeal under this Chapter, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of central excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded or the penalty levied:

Provided that where in any particular case, the Commissioner (Appeals) or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.

Provided further that where an application is filed before the Commissioner (Appeals) for dispensing with the deposit of duty demanded or penalty levied under the first proviso, the Commissioner (Appeals) shall, where it is possible to do so, decide such application within thirty days from the date of its filing.

Explanation. -For the purposes of this section "duty demanded" shall include, -

(i) amount determined under section 11D;

(ii) amount of erroneous CENVAT credit taken;

(iii) amount payable under rule 57CC of Central Excise Rules, 1944;

(iv) amount payable under rule 6 of CENVAT Credit Rules, 2001 or CENVAT Credit Rules, 2002 or CENVAT Credit Rules, 2004;

(v) interest payable under the provisions of this Act or the rules made thereunder.

After its substitution the Section reads as under:

"35F. The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal,-

(i) under sub-section (1) of Section 35, unless the appellant has deposited seven and a half percent of the duty in case where duty or duty and penalty are in dispute or penalty, where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise;

(ii) against the decision or order referred to in clause (a) of sub-section (1) of Section 35B, unless the appellant has deposited seven and a half percent Of the duty in case where duty or duty and penalty are in dispute or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against;

(iii) against the decision or order referred to in clause (b) of sub-section (1) of Section 35B, unless the appellant has deposited ten percent of the duty  in case where duty or duty and penalty are in dispute or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against:

Provided that the amount required to be deposited under this section shall not exceed rupees ten crores:

Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.

Explanation.- For the purposes of this section "duty demanded" shall include,-

(i) amount determined under section 11D;

(ii) amount of erroneous Cenvat credit taken;

(iii) amount payable under rule 6 of the Cenvat Credit Rules, 2001 or the Cenvat Credit Rules, 2002 or the Cenvat Credit Rules, 2004.

From the above it is clear that prior to substitution of Section 35F, the appellant was required to deposit whole of duty confirmed or penalty imposed on the appellant during the pendency of appeal. However, under the first proviso, the Appellate Authority had the power to dispense with such deposit if the Appellate Authority was of the view that deposit of duty confirmed or penalty imposed was likely to cause undue hardship to the appellant.

The Appellate Authority, under the earlier proviso, could dispense with whole or part of the deposit looking to the facts of a particular case. The discretion of the Appellate Authority was circumscribed by two factors; (i) undue hardship to the appellant and (ii) safeguarding of interest of revenue. The Appellate Authority was required to maintain a subtle but judicious balance between the two factors. The cardinal principle applied by the Appellate Authorities was that they were to protect the interest of the revenue without causing undue hardship to the appellant.

Accordingly, the Appellate Authorities were deciding the quantum of the pre-deposit. If the appellant had, prima facie, a good case in his favour,the appellate authorities were ordering total waiver of the pre-deposit. This was happening in many situations, including but not limited to, demand confirmed on the grounds not mentioned in the show cause notice, demand confirmed in violation of principles of natural justice, when the interpretation of law by the adjudicating authority/first appellate authority was not in conformity with the interpretation of law by an authority whose decision was binding on the original adjudicating authority/first appellate authority, precarious financial condition of the appellant. If the appellant had a case which involved contradictory judicial precedents and the appellate authority was of the opinion that detailed examination of the conflicting stands and/or opinions could swing the case either way, then normally total waiver of pre-deposit was not ordered. In such situations the quantum of the pre-deposit depended on the facts of each case and evidence adduced by the appellant about undue hardship.In such situations the pre-deposit was normally not heavy. If the revenue had the strong case in its favour then unless the appellant had adduced credible evidence of financial hardship, the pre-deposit could be high. In some cases it was as high as 50% or even 75%. But in all cases, a judicial or at least a quasi-judicial authority had examined the facts of the case and had decided the quantum of pre-deposit. The order about the quantum of pre-deposit of Commissioner (Appeal) or the Appellate Tribunal was not final and was open to scrutiny by higher judicial authorities. There, thus, was an inbuilt system of checks and balances to prevent the miscarriage of justice or capricious exercise of power by appellate authority even with respect to the quantum of pre-deposit.

In contrast, the new system is inflexible, insensitive and unsympathetic. It lays down rigid law for fixed pre-deposit of 7.5% or 10% of duty involved when both duty and penalty are involved or 7.5% or 10% of penalty involved when only penalty is involved, for all appellants who are placed in myriad situations. It provides no discretion with any authority to prevent the miscarriage of justice even if the conscience of the appellate authority is shaken either by the acute hardship to which the appellant has been put to or by the lack of justice or even legality in the order appealed against. No appeal is to be entertained unless the amount mentioned in new Section 35F is paid.

The Constitution of India bestows ‘Fundamental Right’ both on persons and citizens of India. Right to "Equality before law" is granted to all persons by Article 14. The right to equality does not mean that all persons are to be treated equally at all the times and in all circumstances. It only means that persons who are equally situated are to be treated equally. The Article 14 permits classification of persons in different classes and then guarantees that the persons within the class should be treated equally. The permissible classification must satisfy two conditions, namely, (i) it must be found on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (ii) the differentia must have a rationale to the object sought to be achieved by the statute in question with the qualification that differentia and the object are different so that the object by itself cannot be the basis of classification.

The equal treatment to unequally situated persons, on the other hand, is also an inequality which Article 14 seeks to prevent. To put unequal class of persons at par is wholly unjustified, arbitrary and unconstitutional as it violates Article 14 as held by honourable Supreme Court of India in the case of Onkar Lal Bajaj vs Union of India, [AIR 2003 SC 2562].It was held in the case of St. Stephen’s College vs University of Delhi, [AIR 1992 SC 1630] that unequals are not only permitted to be treated unequally but also they should be so treated. Dealing with the question of equality between the creamy layer of backward class and the rest of the backward class, the honourable Supreme Court of India, in the case of Indra Sawhneyvs Union of India, [AIR 2000 SC 498], held "…….non exclusion of creamy layer will also be violative of Articles 14, 16(1) and 16(14) since unequals (creamy layer) cannot be treated as equal to the rest of the backward class".

The resolute judicial opinion is that unequally situated persons should not be treated equally as such treatment violates the fundamental right guaranteed by Article 14. Any law, including the law under which tax is imposed, which violates the Constitution is a bad law.

In the Constitution Bench decision of the Apex Court in the case Raja Jagannath Baksh Singh vs State of Uttar Pradesh [AIR 1962 SC 1563], while considering whether the court can strike down a legislative measure as violative of Article 14 of the Constitution of India, it has been held in para 16:

"16. A taxing statute can be held to contravene Art. 14 if it purports to impose on the same class of property similarly situated an incidence of taxation which leads to obvious inequality. There is no doubt that it is for the Legislature to decide on what objects to levy what rate of tax and it is not for the Courts to consider whether some other objects should have been taxed or whether a different rate should have been prescribed for the tax. It is also true that the Legislature is competent to classify persons or properties into different categories and tax them differently, and if the classification thus made is rational, the taxing statute cannot be challenged merely because different rates of taxation are prescribed for different categories of persons or objects. But, if in its operation, any taxing statute is found to contravene Art. 14, it would be open to Courts to strike it down as denying to the citizens the equality before the law guaranteed by Art. 14."(underlined supplied)

There may be two classes of appellants before the appellate authorities. For the sake of convenience they may be called "untainted" and "tainted". The "Untainted" may be the appellants in whose case the duty has been confirmed and penalty has been imposed by the original adjudicating authority or first appellate authority in following circumstances:

(i) On the grounds not mentioned in the show cause notice.

(ii) In violation of the principles of natural justice.

(iii) In violation or rather in defiance of a binding judicial precedent.

In all such situations the orders are void abinitio. The authority concerned had capriciously exercised the power vested in him and had put the interest of the appellant to avoidable jeopardy. As the orders, in such situations, are illegal on the face of it hence the appellate authority has no discretion but to set aside such orders. However, the appellant, without any commission and omission on his part and who had failed to get justice when he should have got it would be required to pre-deposit the amount as set out in new Section 35F.

In case of a "tainted" appellant, there may be proven charges of clandestine manufacture and removal without payment of duty but the appellant may be contesting the order only on the quantum of penalty on imaginary or real mitigating circumstances. He would also be required to make pre-deposit as set out in Section 35F.

The new provisions relating to pre-deposit treat both "untainted" and "tainted" appellants equally. The appellate authority shall not entertain the appeal of even an "untainted" appellant if the pre-deposit has not been made even if the appellate authority is totally convinced about the reasonableness of the grounds of appeal of "untainted" appellant and had found the order appealed against as illegal, unreasonable and unjust. It amounts to equal treatment of unequally situated persons. It violates the right to equality.

The learned author Sh. H. M. Seervai, has observed in his commentary on "Constitution Law of India", Fourth Edition, Volume 1, at page 512, "Where, however, a taxing Act makes no attempt to adopt any rational classification, the Act contravenes Article 14 and is void." The author has substantiated his observation by quoting judgement of honourable Supreme Court of India in the case of State of Kerala vs Haji K. Kutty,[AIR 1969 SC 378]. The court had observed:

"Where objects, persons or transactions essentially dissimilar are treated by imposition of uniform tax, discrimination may result, for refusal to make rational classification may itself in some cases operate as denial of equality."

Section 35F treats two different classes of appellants equallyand no attempt has been made to rationally classify the appellants who are discernibly differently situated. Discrimination has resulted as there is refusal to make rational classification when the circumstances of two classes of appellant warranted such classification. The law cannot treat an appellant who has been wronged by capricious exercise of power by the taxing authority and the appellant who has knowingly violated the law or adopted dubious means to defraud the revenue. Section 35F, therefore, denies equality before law as enshrined in Article 14.

It can be argued that the new provision has been introduced in public interest as it shall save the valuable time of the appellate authorities that they spend in deciding millions of applications for determination of quantum of pre-deposit. The time thus saved shall be used for quick and final disposal of the appeals. Further, the provisions no way affect the merits of the cases before the appellate authorities. The appellate authorities have full freedom and discretion to do justice to the cause of appellant at the time of final disposal of the appeal. It may also be argued that the appellate authorities earlier had the uncontrolled discretion to dispense with the requirement of pre-deposit and the interest of the revenue was not being protected.

It should be kept in mind that no laudatory objective of any legal provision can save it, if it infringes provisions of the Constitution of India. Section 35F violates the guarantee of equality before law. The said legal provision, thus, appears to be wholly unjustified, arbitrary and unconstitutional.

The appellate authorities that are being trusted with the final determination of rights and liabilities of the tax payers and the revenue should also be trusted with their power of passing an interim order to determine the quantum of pre-deposit according to the facts of each case with an object of avoiding undue hardship to the appellant and protecting the interest of revenue. It should not be left to the legislature to design a cap that fits all heads. Such a design has inherent imperfection. Unequal sizes of heads and more pertinently unequal qualities of heads cannot be treated equally.

It is suggested that the norms of pre-deposit fixed in Section 35F should be retained as a rule but it should be provided that in exceptional cases, the appellate authority, for the reasons to be recorded in writing, may dispense with the pre-deposit if such deposit is likely to cause undue hardship or likely to cause grave injustice to the appellant.

(The author is a former Commissioner of Central Excise.)