FEBRUARY 28, 2015

By Pradeep Jain, CA & Neetu Sukhwani, CA

AMENDMENT proposed in section 11AC:-

Sub-section (1) of section 11AC of the Central Excise Act, 1944

Sub- section (2) of section 11AC states that where the appellate authority or the Tribunal or Court modifies the amount of duty of excise determined by the Central Excise Officer under sub-section (10) of section 11A, then, the amount of penalty payable under clause (c) of sub-section (1) and the interest payable under section 11AA shall stand modified accordingly and after taking into account the amount of duty of excise so modified, the person who is liable to pay duty as determined under sub-section (10) of section 11A shall also liable to pay such amount of penalty and interest so modified.

Sub-section (3) of section 11AC states that where the amount of duty or penalty is increased by the appellate authority or tribunal or court over the amount determined under sub-section (10) of section 11A by the Central Excise Officer, the time within which the interest and the reduced penalty is payable under clause (b) or clause (e) of sub-section (1) in relation to such increased amount of duty shall be counted from the date of the order of the appellate authority or tribunal or court.

Explanation 1.- For the removal of doubts, it is hereby declared that–

(i) any case of non-levy, short-levy, non-payment, short-payment or erroneous refund where no show cause notice has been issued before the date on which the Finance Bill , 2015 receives the assent of the President shall be governed by the provisions of section 11AC as amended by the Finance Act, 2015;

(ii) any case of non-levy, short-levy, non-payment, short-payment or erroneous refund where show cause notice has been issued but an order determining duty under sub-section (10) of section 11A has not been passed before the date on which the Finance Bill, 2015 receives the assent of the President, shall be eligible to closure of proceedings on payment of duty and interest under the proviso to clause (a) of sub-section (1) or on payment of duty, interest and penalty under clause (d) of sub-section (1), subject to the condition that the payment of duty, interest and penalty, as the case may be, is made within thirty days from the date on which the Finance Bill, 2015 receives the assent of the President;

(iii) any case of non-levy, short-levy, non-payment, short-payment or erroneous refund where an order determining duty under sub-section (10) of section 11A is passed after the date on which the Finance Bill, 2015 receives the assent of the President shall be eligible to payment of reduced penalty under clause (b) or clause (e) of sub-section (1), subject to the condition that the payment of duty, interest and penalty is made within thirty days of the communication of the order.

Explanation 2.–– For the purposes of this section, the expression “specified records” means records maintained by the person chargeable with the duty in accordance with any law for the time being in force and includes computerised records.”

Erstwhile provisions of section 11AC in brief:-

Section 11AC (1): The amount of penalty for non-levy or short levy or non-payment or short-payment or erroneous refund shall be as follows:-

(a) Where any duty of excise has not been paid or short paid by reason of fraud, or collusion or any wilful mis-statement or suppression of facts with intention to evade payment of duty, the person shall also be liable to pay penalty equal to duty so determined.

(b) Where details of any transaction are available in the specified records, penalty shall be restricted to 50% of the duty so determined.

(c) If duty along with interest as determined in the order is paid within 30 days of the communication of the order, then the penalty shall be restricted to 25% of the duty determined provided penalty is also paid within 30 days.

(d)  Where appellate authority or tribunal or court modifies any amount of duty, the person shall also pay penalty and interest so modified.

(2) Where the amount modified by the appellate tribunal or court is more than the duty determined by the order, then the time within which the interest or duty is payable under this Act shall be counted from the date of the order of the appellate authority or tribunal or court in respect of such increased amount.

Impact of amendment:- The drastic change that has been introduced in the section is that from now onwards, the penalty under section 11AC will also be imposable when there is no fraud, collusion, wilful misstatement or suppression of facts with intention to evade payment of duty. Earlier, the penalty under section 11AC was imposable if and only if the ingredients of fraud, collusion, wilful misstatement or suppression of facts with intend to evade payment of duty were specifically present. Moreover, the assessees have got relief from the imposition of equal penalty under section 11AC solely on the grounds that there was no trace of any fraud. It is worth mentioning here that recently, the Hon'ble Madras High Court has categorically held in the case of CCE vs M/s Crocodile India Pvt Ltd. 2013-TIOL-518-HC-MAD-CX that the penalty under section 11AC is not leviable in each and every case of non-payment or short payment of duty and that penalty is imposable under section 11AC only if the conditions of the section are satisfied. Accordingly, the contention that there was no fraud, collusion or wilful misstatement or suppression of facts with intention to evade payment of duty cannot be taken because there are different clauses applicable in case where there is fraud and in case where there is no fraud. However, the difference in the quantum of penalty imposed when there is no fraud is appreciable.

Furthermore, the additional benefit given by the government when duty and interest is paid after issuance of show cause notice is also welcomed. However, there is minute difference in the benefit provided when there is no fraud because in case the penalty is covered by clause (a) of the section 11AC(1), if the assessee pays duty and interest either before issue of show cause notice or within 30 days of issue of show cause notice then the assessee will enjoy the benefit of zero penalty. It is worth noting here that the words that are used are “issue of show cause notice” and not “receipt of show cause notice”. Consequently, if the show cause notice is received by the genuine assessee after a period of 30 days from the date of issue of show cause notice, he will be devoid of the benefit of no penalty as contained in the proviso to section 11AC(1)(a) as stated above. However, in case where there is fraud, if the assessee pays duty, interest and 15% of the duty as penalty within a period of “30 days from the date of communication of the show cause notice” the amount of penalty under section 11AC will be restricted to 15% of the duty demanded. The intention of the government to distinguish the benefit by using the words “issue of show cause notice” in one clause and “communication of show cause notice” in another clause is not understandable and appears to be a drafting error. However, such usage of words is liable to create litigation and disputes that will travel upto Tribunal.

Not only this, the Explanation also seeks to add further fire in the probability to dispute as the explanation (ii) seeks to give benefit of “NO PENALTY” as stated in the proviso to section 11AC(1)(a) OR the benefit of 15% penalty as specified under clause (d) of section 11AC(1) if the order has not been passed before the date on which the Finance Bill, 2015 receives the assent of the President, provided that the duty, interest and penalty (if any) within a period of 30 days from the date on which the Finance Bill, 2015 receives the assent of the President. Simultaneously, the Explanation no. (iii) seeks to provide the benefit of clause (b) of section 11AC(1) and clause (e) of the section 11AC(1) as regards reduced 25% penalty if duty, interest and 25% penalty paid within 30 days from the date of communication of order, if the order determining duty under section 11A(10) is passed after the date on which the Finance Bill, 2015 receives the assent of the President. It is submitted that any assessee will be keen to avail the benefit of explanation (ii) rather than explanation no. (iii) but the revenue department will make all its efforts to pass orders before the assessee avails the benefit of the explanation no. (ii). The hapless assessees that have no control over the passing of orders by the revenue department will have to forego the benefit of explanation (ii) as granted by the Hon'ble Finance Minister, particularly, when they are far below achieving the targets assigned to them and its almost the end of the financial year.

Before Parting:- The amendment in section 11AC providing certain additional benefits as compared to the earlier section looks lucrative at the outset but the pros and cons of the substituted section will be witnessed in the days to come. In the end, we can just hope that the much awaited budget proves to fulfill the ultimate objective of the Government of “Non-Adversarial Tax Environment”.