By TIOL News Service

MUMBAI, FEB 02, 2016: FACTS: ASCN was issued calling upon M/s Amrit Laxmi Machine Works, the licence holder and others, as to why 2033 pieces of Bearings as detailed in the notice should not be confiscated under the provisions of Section 111(d) of the Customs Act, 1962 read with the Foreign Trade (Development & Regulation) Act, 1992 and under Section 111(m) of the Customs Act, 1962; and without prejudice to above for the reasons of liability to confiscation of goods under Section 111 as to why penalty under Section 112(a) and/or 112(b) of the Customs Act, 1962 should not be imposed on each of them.

The SCN was adjudicated by the Commissioner of Customs (Adjudication), Mumbai and he confirmed the demand to the extent indicated therein. He imposed penalty under Section 112(a) of the Customs Act, 1962 on the following persons:-

(a) M/s Amrit Laxmi Machine Works : Rs.15 lakhs

(b) Mr.N.Nagdutt K. Brahmachari, Director : Rs.5 lakhs.

This order was challenged before the CESTAT and by an order dated 07.05.2012, the Appeal was dismissed.

In appeal, the substantial question of law before the Division Bench of the Bombay High Court was -

"Whether, the CESTAT has erred in imposing simultaneous penalties on both the Partner and Partnership firm?"

The appellant had submitted -

+ Once the Appellant is a firm registered under the Indian Partnership Act, 1932, then, the independent existence thereof and de-hors the partners is ruled out. In other words, a partnership firm cannot have an independent existence than that of a partner.

+ Law does not envisage imposition of dual or separate penalty - Commissioner of Customs (E.P.) v/s Jupiter Exports - 2007-TIOL-329-HC-MUM-CUS.

+ In Textoplast Industries v/s Additional Commissioner of Customs - 2011-TIOL-438-HC-MUM-CUS it is held that the view taken in   Jupiter Exports is contrary to the law laid down by the Supreme Court in the case of Standard Chartered Bank v/s Directorate of Enforcement - 2006-TIOL-16-SC-FERA-LB.

+ As there is a difference of opinion in the views taken in the aforesaid two decisions rendered by the Bombay High Court, therefore, a reference to a Larger Bench should be made for resolving the subject controversy.

The counsel for the Revenue submitted that the judgment in the case of Textoplast Industries (supra) is a later judgment and rendered by a Division Bench and by applying the apex Court decision in Standard Chartered Bank (supra) and, therefore, the same should be followed without referring the matter to the larger bench.

The Division Bench of High Court inter alia observed -

++ There is clear conflict, to our mind, in two views. One recognizes the settled concept and applies it, namely, a firm cannot be said to have an independent existence than that of partners even when it comes for imposition of penalty. Whereas, other holds that there is no difference between criminal prosecution and adjudication or penalty proceedings.

++ The Division Bench, therefore, does not agree with the principles applied in the earlier Division Bench judgment and expressly differs from it. This divergence of opinion, to our mind, is apparent and we cannot follow the later judgment in the case of Textoplast Industries (supra).

The following questions of law were, therefore, referred for opinion of a Larger Bench:-

(i) Whether, under the Customs Act, 1962 and particularly in exercise of the powers conferred by Section 112(a) thereof, simultaneous penalties on both the Partner and Partnership firm can be imposed?

(ii) Whether, the judgment in the case of Commissioner of Customs (E.P.) v/s Jupiter Exports - 2007-TIOL-329-HC-MUM-CUS holding that separate penalty on a partnership firm and a partner cannot be imposed, lays down the correct law or whether, as held by the later Division Bench in the case of Textoplast Industries v/s Additional Commissioner of Customs reported in - 2011-TIOL-438-HC-MUM-CUS it is permissible to impose penalty separately on a partnership firm and a partner particularly in adjudication proceedings under the Customs Act, 1962?

We reported this order as 2014-TIOL-588-HC-MUM-CUS.

The Larger Bench of the High Court has given its verdict.

Observations made in the Majority [2:1] decision inter alia are as under -

+ From the scheme of the Customs Act with regard to import of goods, it is clear that though the charge under the Act is on import/export of the goods, action can be initiated against offending goods which fall foul of Section 111 of the Act and also on any person whose act or omission to act has rendered the goods falling foul of Section 111 of the Act. Thus, the penalty under Section 112(a) of the Act is not restricted to only such a person who has filed a bill of entry i.e. the importer but includes within its scope any other person who acts or omits to do any act rendering such goods liable for confiscation, including one who has abetted the act or omission.

+ Further, the Act provides not only for quasi-judicial proceedings for imposition of penalty on the person and confiscation of goods in case they offend Section 111 of the Act but also for prosecution in criminal proceedings in Court of law under Chapter XVI of the Act. The criminal proceedings are subject of course to satisfying the additional requirement of doing the act or omitting to do the act with knowledge of the goods becoming liable for confiscation. It should be noted that Section 127 of the Act, which is a part of Chapter XIV of the Act provides that any action taken under Chapter XIV of the Act shall not bar/affect any proceedings taken under Chapter XVI of the Act. Thus, the Act itself provides for parallel proceedings for imposition of penalty under the Act and for prosecution under the Criminal Procedure Code, 1973 in terms of Chapter XVI of the Act.

+ It is undisputed that the decision in the case of Standard Chartered Bank (supra) was rendered in the context of FERA and we are concerned with the Act. Therefore, though the wordings of Section 68 of FERA and Section 140 of the Act are similar, there are significant differences between the two. In particular, the words used in Section 140 of the Act that it applies to offences under this Chapter i.e. Chapter XVI of the Act and it is not so in Section 68 of FERA. Thus, unlike Section 140 of the Act, Section 68 of the FERA does not restrict its operation only to offences and prosecutions but makes it applicable to all the contraventions across all sections of FERA. One more significant difference is that wherever the Parliament decided that the provisions of Chapter XVI of the Act is to be made applicable across all the provisions of the Act, it so specifically provided for it, as is noticed in Section 138B of the Act which is also a part of Chapter XVI of the Act. Thus, while interpreting Section 140 of the Act, meaning must be given to the words 'in this Chapter' occurring therein. It is a settled rule that while interpreting a fiscal or a penal enactment it is not open to ignore any words thereof on any assumed or supposed intention/object. Thus though aid /guidance could be taken from the decision of the Apex Court in Standard Chartered Bank (supra), the same cannot be applied, as it is, ignoring the differences in wordings of Section 68 of FERA and Section 140 of the Act.

+ The difference between Section 68 of FERA and Section 140 of the Act was noted by the Court (in Textoplast Industries case). However, the difference was ignored on the basis that accepting the same would lead to an anomalous situation and there is no logic for the difference. It is a well-settled rule of interpretation that in interpreting a fiscal and/or penal legislation, meaning must be given to each word of the statute and it cannot be ignored on the basis that it does not appear logical.

+ Moreover, it is clear that the Parliament had specifically provided in Section 140 of the Act that it shall have application only in respect of offences under this Chapter i.e. Chapter XVI of the Act. If Section 140 of the Act is juxtaposed with Section 138B of the Act both being a part of Chapter XVI of the Act, it would be clear that restricting the operation of Section 140 of the Act to only Chapter XVI of the Act is deliberate. This is so as whenever the Parliament intended that the provisions of Chapter XVI of the Act shall have application in relation to any other proceedings under the Act, it has so provided, as is evident from Section 138B(2) of the Act.

+ Therefore, we do not agree with the view of the Division Bench in Textoplast Industries (supra) to the extent it holds that the decision of the Apex Court in Standard Chartered Bank (supra) would apply to Section 140 of the Act so as to govern adjudication proceedings under Section 112(a) of the Act as in the case of Section 68 of FERA being applicable to Section 50 of FERA.

+ We are to consider only the issue of penalty under Section 112(a) of the Act without reading it with any other provisions. Section 112(a) of the Act consists of two parts viz. (i) strict liability arising on doing any act or omitting to do it, which renders the imported goods liable to confiscation and (ii) Abetting the act or omission rendering the goods liable to confiscation. Thus in first class of above cases where the allegation against the particular firm is not of abetment but one of doing or omitting to do any act which renders the imported goods liable for confiscation. Then in such cases i.e. where the importer is a partnership firm inasmuch as it is in possession of IEC code number and has filed a Bill of Entry for the import of goods and the allegation is not of abetment but of doing an act or omitting to do an act which rendered the goods liable for confiscation. It has nothing to do with mens rea/knowledge.

+ In such a case a penalty imposed upon the firm would be a penalty imposed upon all the partners of the firm as this has nothing to do with the knowledge of the breach rendering the goods liable for confiscation under Section 111 of the Act. It is a case of strict liability. However, in such cases, if the Revenue seeks to impose a penalty upon the partner, then the notice must make out a case of knowledge on the part of the partner in his individual capacity so as to make it a case of abetment by the partner in respect of the acts and/or omission of the partnership firm. This is on a plain reading of Section 112(a) of the Act. This is so as the breach on the part of the partner concerned is independent of the breach committed by the firm. To the above extent, it is a penalty imposed upon two separate persons for distinct breaches. It cannot be imposed on a partner ipso facto merely because penalty is being imposed upon the partnership firm under Section 112(a) of the Act.

+ Although the Division Bench of this Court in Textoplast Industries (supra) has held on first principles that Section 140 of the Act is to be read into all cases falling under Section 112(a) of the Act, we do not agree. Section 140 of the Act on first principles has to be read into only in cases where the notice to impose penalty under Section 112 (a) of the Act, the Revenue makes out a case of an offence prima facie satisfying the requirements of Section 135(1)(a) of the Act. It is only then that Section 140 of the Act can be invoked for purposes of imposition of penalty under Section 112(a) of the Act both upon the partner as well as the firm. In the second class of cases i.e. abetment under Section 112(a) of the Act a specific case of abetment against the partner would have to be made for a separate penalty upon him. The notice issued by the Revenue should make out a case of the partner having acted and/or omitted to act with knowledge in his individual capacity that such act and/or omission to act on the part of the firm would render the goods liable to confiscation. It has nothing to do with Sections 135 and 140 of the Act. However, penalty cannot be imposed on the partner merely because penalty is being imposed upon the firm. The burden is upon the Revenue in the show cause notice to make out a case that penalty is imposable under Section 112 of the Act upon the partner for abetment of the offence by the firm. This is so, as otherwise, a penalty imposed upon the firm would be a penalty imposed upon all the partners of the firm as this has nothing to do with the knowledge of the breach rendering the goods liable for confiscation on the part of the partners concerned. The liability is strict, therefore, imposed on all parties irrespective of the fact, whether the partner concerned is an active or sleeping partner.

+ According to the Appellants, though a partnership firm is a person for the purpose of Section 112 of the Act, yet it has no separate legal existence from its partners. It is only a compendious name to describe all the partners collectively. Inasmuch as it is not an entity distinct and different from its partners. There can be no dispute to the above general proposition of law. The above position is also clear by virtue of Sections 4, 25 and 26 of the Indian Partnership Act, 1932. However where the legislation specifically provides otherwise, then a partnership firm should be accorded a status of a separate legal entity. … Under the Act, undisputedly a Partnership firm is not given a status of a separate legal entity in the absence of Section 140 of the Act. Thus, in the absence of invoking Section 140 of the Act, no separate penalties under Section 112 of the Act would be imposed simultaneously on firm and its partners.

+ IEC number is in the name of the partnership firm which collectively represents all the partners as laid down under the Partnership Act. Therefore in the absence of Section 140 of the Act, a partnership firm does not have an identity different from its partners. …Further Section 140 of the Act has limited application only in respect of an offence specified under Chapter XVI of the Act of which Section 140 is a part. It cannot be read into Section 112 (a) of the Act, against the firm unless the notice issued invokes Section 135 of the Act. This breach is not only for imposition of penalty under Section 112(a) of the Act but also an offence under Chapter XVI the Act.

+ In view of the above, the decision of the Division Bench of this Court in Textoplast Industries (supra) to the extent it places reliance upon the Apex Court decision in Standard Chartered Bank (supra) does not seem to be appropriate as it was rendered under a different statute. Each of the two Act i.e. FERA and the Act, provides a different scheme for imposition of penalty. However, the decision in the case of Textoplast Industries (supra) to the extent it holds on first principle that simultaneous penalty is imposable is the correct view only to the following extent:-

(a) where the show cause notice makes out a case of an offence under Section 112(a) of the Act read with Section 135 (1)(a) of the Act, then alone, Section 140 of the Act is applicable for penalty upon the partner; or

(b) where the show cause notice makes out an independent case of abetment by the partner for the act or omission done by the partnership firm which has rendered the goods liable for confiscation under Section 111 of the Act. The notice in such a case need not invoke Sections 135 or 140 of the Act for simultaneous imposition of penalties.

The High Court also clarified - the issue posed before us was only in respect of a partnership firm registered under the Indian Partnership Act 1932. We have not in any manner dealt with partnership firm registered under the Limited liability Partnership Act, 2008 and the liability of its partners under Section 112(a) of the Act.

The lone dissenting view -

++ The first question is required to be answered in the affirmative, that is simultaneous penalties can be imposed on the firm and the partners under the Act and more particularly under Section 112(a) of the Act. However as the Act itself stipulates, the same would be subject to the parties proving that the contravention has taken place without their knowledge or despite exercise of all due diligence to prevent such contravention.

++ As regards the second question, the decision of the Division Bench of this Court in "Textoplast Industries Vs. Additional Commissioner of Customs" - 2011-TIOL-438-HC-MUM-CUS lays down the correct law in holding that it is permissible to impose penalty separately on partnership firm and the partners in adjudication proceedings under the Customs Act.

The reference was disposed of.

(See 2016-TIOL-186-HC-MUM-CUS-LB)