Extended period of demand is unsustainable if there is no malafide intention to evade tax

The CESTAT, New Delhi in the case of Kanoria Energy & Infrastructure Ltd. v. Commissioner, CGST & Central Excise [Final Order No's 58092-58097/2024 dated August 28, 2024] held that an assessee may genuinely believe that duty is not leviable, while the department may believe that duty is leviable. The assessee may, therefore, not pay duty in the self-assessment carried out by the assessee, but this would not mean that the assessee has wilfully suppressed facts. To invoke the extended period of limitation, atleast one of the five necessary elements must be established and their existence cannot be presumed merely because the assessee is operating under self-assessment. Even otherwise, merely because facts came to light only during the audit does not prove that there is an intent on the part of the assessee to evade payment of duty. Hence, intention to evade tax must be proved by the Department. Thus, the extended period of limitation contemplated under the proviso to Section 11A(1) of the Central Excise Act, 1944 cannot be invoked, the impugned order passed by the Commissioner deserves to be set aside as the entire demand is covered under the extended period of limitation.

Facts:

M/s Kanoria Energy & Infrastructure Ltd.("Appellant") was engaged in the manufacture of Asbestos Cement Pressure Pipes & Couplings. AC Pressure Pipes were manufactured by employing two processes namely "Mazza Process" and "Magnani Process". Asbestos fibre, cement, and fly-ash were the three basic raw materials required for the manufacture of AC Pressure Pipes & Couplings. Of the said three raw materials, the Appellant claims that fly ash is available free of cost, but the other two materials namely asbestos fibre and cement are purchased for a price from the market. Asbestos fibre is usually imported and costs around Rs. 45,000/- per metric ton, while the cost of cement is around Rs. 4,000/- per metric ton. During the period from 2003-04 to 2005-06, fly ash was procured by the Appellant free of cost.

The Appellant had been maintaining all the required records, and had filed the required returns and intimations, as provided for in Trade Notice dated May 16, 1997 issued by Commissioner of Central Excise, Jaipur, including Form A, Form B, Form C (monthly return), and Form D (D3 Intimations).

The Office of the Central Excise Commissionerate, Jaipur II also conducted an audit of the records of the Appellant between January 27, 2005 to January 31, 2005 pertaining to the period from April 2003 to April 2004. The Appellant asserted that the Office of the Central Excise Commissionerate also did not raise any objection about the non-utilization of fly-ash.

The Office of the Accountant General, Rajasthan also conducted an audit of the central excise records of the Appellant at the factory premises in Bhilwara during the period from November 21, 2005 to November 25, 2005, but the Office of the Accountant General, Rajasthan did not raise any objection regarding non-utilization of fly-ash.

Based on an intelligence, the Officers of DGCEI in association with the officers of the Central Excise Commissionerate, Jaipur-II, searched the factory premises of the Appellant on March 09, 2006. The office premises of the Appellant were also searched on March 10, 2006.

A show cause notice ("SCN") dated December 31, 2008 was issued based primarily on the statements of the dharamkanta owner, truck drivers and officials of KSTPS, who denied that fly ash was supplied or transported to the factory. The Appellant claimed the benefit of Exemption Notification 06/2002-CE dated March 01, 2002 and cleared asbestos cement pipes manufactured by it with the use of fly ash by showing quantity of fly ash as not less than 25% by weight, but investigations revealed that the Appellant had fabricated the records. Thus, suppressed facts by giving wrong information in the statutory returns about the production and utilization of fly ash with an intent to evade payment of central excise duty.

The Appellant filed a written reply to the SCN by letters and denied the allegations. The Appellant also urged that the extended period of limitation could not have been invoked in the facts and circumstances of the case as there was no suppression of facts on the part of the Appellant and the allegations were based only on presumptions.

The SCN was adjudicated upon by the Commissioner by order dated March 30, 2021. The benefit of exemption under the notification dated March 01, 2002 was denied and demand of duty of excise amounting to Rs. 11,02,12,141/- was confirmed with interest and penalty of Rs. 11,02,12,141/.

It is against the said order that the Appellant had earlier filed an appeal before the Tribunal. The Tribunal, by order dated October 03, 2019, set aside the order of the Commissioner and remanded the matter to the Commissioner.

Pursuant to the aforesaid order of the Tribunal, the Commissioner ("the Respondent") passed a fresh Order dated March 31, 2021 ("the Impugned Order"). The Impugned Order disallowed the benefit of exemption Notification No. 06/2002-CE dated March 01, 2002 as amended in respect of the clearances of excisable goods during the period December, 2003 to March 2006 and demand with penalty and interest was generated.

Hence, aggrieved by the Impugned Order, the present appeal was filed by the Appellant.

Issue:

Whether extended period of demand is sustainable merely on presumption because the assessee is operating under self-assessment?

Held:

The CESTAT, New Delhi in Final Order No's 58092-58097/2024 held as under:

• Noted that, an assessee may genuinely believe that duty is not leviable, while the department may believe that duty is leviable. The assessee may, therefore, not pay duty in the self-assessment carried out by the assessee, but this would not mean that the assessee has wilfully suppressed facts.
• Opined that, to invoke the extended period of limitation, atleast one of the five necessary elements must be established and their existence cannot be presumed merely because the assessee is operating under self assessment. If some duty escapes assessment, the officers of the department can always call upon the assessee to submit further documents and he may also conduct an enquiry. In fact when an audit is conducted, the officers of the audit team scrutinize the records and, therefore, notice should be issued within the stipulated time from the date the audit was conducted. Even otherwise, merely because facts came to light only during the audit does not prove that there is an intent on the part of the assessee to evade payment of duty.
• Observed that, the Appellant had not suppressed any facts, much less with an intent to evade payment of central excise duty. The extended period of limitation could not, have been invoked in the present case even if the returns were self-assessed.
• Opined that, as the extended period of limitation contemplated under the proviso to section 11A(1) of the Central Excise Act, 1944 could not have been invoked, the Impugned Order passed by the Commissioner deserves to be set aside as the entire demand is covered under the extended period of limitation.

Our Comments:

It is well settled principle of law that in order to invoke proceedings under Section 11A of the Central Excise Act, 1944 or Section 73(1) of the Finance Act, 1994, the intention to evade tax is mandatory.

The Delhi High Court in the case of Bharat Hotels Limited vs. Commissioner of Central Excise [2018 (12) GSTL 368 (Del.)] also examined at length the issue relating to the extended period of limitation under the proviso to section 73 (1) of the Finance Act, 1994 and held that invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty or take out a license without the presence of such intention.

Further, the Tribunal in M/s. Kalya Constructions Private Limited vs. The Commissioner, Central Excise Commissionerate, Udaipur[Service Tax Appeal No. 54385 of 2015 decided on November 15,2023] observed that the fact that the alleged short payment came to light only during audit does not prove the intent to evade payment of service tax by the appellant, but it only proves that the Range Superintendent had not done his job properly. For these reasons, the demand for the extended period of limitation cannot be sustained.

In this context, the judgment of the Hon'ble Supreme Court in in the case of Assistant Commissioner (ST) & Ors. v. M/s. Satyam Shivam Papers Pvt. Limited &Anr. dated January 12, 2022 [Special Leave Petition (C) No. 21132/2021] held that there was no intent on the part of the writ petitioner to evade tax and rather, the goods in question could not be taken to the destination within time for the reasons beyond the control of the writ petitioner. When the undeniable facts, including the traffic blockage due to agitation, are taken into consideration, the State alone remains responsible for not providing smooth passage of traffic.

Further, the Hon'ble Supreme Court in the case of Commissioner of CGST and Central Excise, Jabalpur v. M/s. Birla Corporation Limited [Civil Appeal No. 6410 of 2023 dated October 03, 2023], dismissed the appeal filed by the Revenue Department, holding that the extended period of limitation for issuing Show Cause Notice has to be invoked as per facts of the case, thereby denying the benefit of the extended period of limitation to the Revenue Department.

Also, in the GST Regime, the Hon'ble Supreme Court in in the case of Assistant Commissioner (ST) & Ors. v. M/s. Satyam Shivam Papers Pvt. Limited &Anr. dated January 12, 2022 [Special Leave Petition (C) No. 21132/2021] held that there was no intent on the part of the writ petitioner to evade tax and rather, the goods in question could not be taken to the destination within time for the reasons beyond the control of the writ petitioner. When the undeniable facts, including the traffic blockage due to agitation, are taken into consideration, the State alone remains responsible for not providing smooth passage of traffic.

Further, to invoke the extended period of limitation, at least one of the five necessary elements must be established as per Section 11(A)(4) of the Central Excise Act, 1944, which are as follows:

"(4) Where any duty of excise has not been levied or paid or has been short levied or short-paid or erroneously refunded, by the reason of-

(a) fraud; or

(b) collusion; or

(c) any wilful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, by any person chargeable with the duty, the Central Excise Officer shall, within five years from the relevant date, serve notice on such person requiring him to show cause why he should not pay the amount specified in the notice along with interest payable thereon under section 11AA and a penalty equivalent to the duty specified in the notice."

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