MARCH 02, 2009

By Sunil Achutan

SECTION 11AA was inserted by the Finance Act, 1995 w.e.f 26.05.1995 to recover interest on delayed payment of duty determined under section 11A(2) of the CEA’44.

It lays down that if an assessee does not pay the duty determined within three months from the date of the order (not communication) he would be required to pay interest as prescribed under a notification issued under the s.11AA.

Although this section made its appearance under the Finance Act, 1995, it still operated retrospectively as can be seen from the proviso clause appearing to s.11AA(1) and which is  -

“Provided that where a person chargeable with duty determined under sub-section (2) of section 11A before the date on which the Finance Bill, 1995 receives the assent of the President, fails to pay such duty within three months from such date, then, such person shall be liable to pay interest under this section from the date immediately after three months from such date, till the date of payment of such duty.”

A reading of the said proviso indicates that if there is any duty determination (confirmed demand) existing on the date before 26.05.1995, the assessee is given a three months time from 26.05.1995 i.e up to 25.08.1995 to pay up the dues and if he fails to pay the same within this stipulated date of 25.08.1995, he would be required to pay interest on the same, interest being calculated for the period from 25.08.1995 till the day/date the duty is paid.

The Explanation I to the s.11AA indicates that if the “duty determined to be payable” by the adjudicating authority is reduced by the Commissioner(A), Tribunal or Court, then such date of determination viz. the reduced duty liability is the date on which an amount of duty is first determined to be payable.  This means that in such cases where the duty determined initially is reduced by the appellate authority, Tribunal, Court, the date of order of such reduced duty liability is to be taken as the “date of determination” and the assessee would have three months beginning from this date to pay the amount without any interest.

So also, as per Explanation II, if the “duty determined to be payable” by the adjudicating authority is increased or further increased by the higher authorities, then in such cases, the three months (grace) period is to be computed from each such determination and it is only thereafter that interest is to be paid.

For eg.

If the adjudication authority confirmed a demand of Rs.2 lakhs on 01.01.1996, and this was increased to Rs.3 lakhs by the Commissioner (A) on 01.06.1996 and the same was further increased to Rs.5 lakhs by Tribunal on 01.12.1996, then in such cases, s. 11AA interest would be computed thus –

till the date of payment of duty.

It is pertinent to note that interest under section 11AA is applicable to all sorts of duty determination, whether it involves the normal period of limitation or the extended period and this was the legal position from 26.05.1995 to 28.09.1996 when s.11AB came onto the scene.

Section 11AB of the CEA’44 when it made its appearance on 28.09.1996 warranted payment of interest in those cases where the duty evasion was on account of fraud, collusion etc. viz. demands where extended period was invoked. The interest payable under this section was more stringent than s.11AA for the reason that it required an assessee to pay interest from the first day of the month succeeding the month in which the duty ought to have been paid till the date of payment of duty.

And but naturally, since section 11AB of the CEA’44 came on to the scene on 28.09.1996, s.11AA had to make way to alienate those cases covered under s.11AB and hence it saw an amendment by the Finance Act, 1996 with the insertion of the opening phrase …Subject to the provisions contained in s.11AB, … in s.11AA of the Act.

Simply put, where section 11AB is applicable, provisions of s.11AA would be inapplicable.

Section 11AA was stopped in its tracks by the Finance Act, 2001 (w.e.f 11.05.2001) as s.11AB changed its skin so as to accommodate all sorts of duty evasions, both for the normal period as well as the extended period. 

But for the fact that the pending cases in which interest was held payable and collectible u/s 11AA of the CEA’44 ought not to die a natural death, s. 11AA saw the following sub-section inserted by the Finance Act, 2001 and which reads -

“(2) The provisions of sub-section (1) shall not apply to cases where the duty becomes payable on and after the date on which the Finance Bill, 2001 receives the assent of the President.”

The above insertion serves another purpose and that is from 11.05.2001 any demand pertaining to clearances post 11.05.2001 and which is confirmed, interest on the said duty is payable and is to be computed in terms of s.11AB and not s.11AA. 

As a balancing measure, s.11AB also had the following clause coming into the picture –

“(2) The provisions of sub-section (1) shall not apply to cases 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.”

Note the usage of the terms “duty becomes payable” and “duty had become payable or ought to have been paid” in both the sub-sections which clearly alienates the cases which fall within the domain of s.11AA and s.11AB of the CEA’44.

In the light of the above referred provisions of s.11AA and s.11AB of the CEA’44, and the deduced logic, let us consider the following two illustrative cases.

Illustration 1: A normal period demand concerning clearances prior to 11.05.2001 and invoking s.11AA and in respect of which duty is determined/confirmed prior to/on 11.05.2001.

It is apparent from the provisions of s.11AA that such a duty confirmation attracts interest u/s 11AA of the CEA’44. This interest meter keeps on ticking till the determined duty is paid, subject of course, to any reduction or enhancement in the higher stages of appeal. It is a well known fact that litigations rarely see the end so quickly and hence the provisions of s.11AA still continue to find a mention in the CEA’44 and would continue to do so.

Coupled with the fact that interest rates are a dependent on the economy etc., the same are kept varying by the Central government by issue of notifications to the said effect. 

As for s.11AA interest, over the years they were –

Illustration 2:  A normal period demand notice covering a period prior to 11.05.2001 and invoking s.11AA but which is confirmed after 11.05.2001 or for that matter, recently.

In this situation, a question may arise as to whether interest is payable on this duty determination u/s 11AA of the CEA’44 OR whether s.11AB will come into picture although not invoked?

For finding an answer to this, we may be required to take a closer look at the terms “duty becomes payable” and “duty had become payable or ought to have been paid” employed in sections 11AA and s.11AB of the CEA’44 w.e.f 11.05.2001.

The usage of the said terms indicates that the imposition of interest u/s 11AA is governed by the factum of the “duty becoming payable” and not the factum of “duty being determined”.  An allegation is leveled in the notice that the “duty is payable/duty ought to have been paid” but the computing of the interest is associated with the event of determination of the demand by the adjudicating authority (appellate authority etc.). 

So, for demands prior to 11.05.2001 and belonging to the normal period of limitation, if the same are confirmed today, the interest section that would be applicable is s.11AA of the CEA ’44.

Applying s.11AB to such cases is ruled out for the simple reason that during the period when the duty ought to have been paid, s.11AB was not invokable (it was applicable only to extended period, fraud cases etc.).  Needless to mention, it cannot also be invoked now.

Incidentally, I may also point out the Tribunal decision in the case of CCE, Mumbai-V vs. Industrial Adhesive Enterprise [2008-TIOL-1082-CESTAT-MUM] where the Tribunal was concerned with the question as to where interest is payable u/s 11AB of the CEA, 1944 in cases of duty evaded by fraud prior to 11.05.2001. The Bench while dismissing the ROM application field by CCE, Mumbai-V held that since the old section 11AB(1) has been substituted without a saving clause, no interest is payable and section 6A of General Clauses Act, 1897 does not save the provisions which were substituted.

Sections 11AA and 11AB of the CEA’44 – they surely generate a lot of interest!

(The author is from the Department and the views expressed are strictly personal