R.K.Hasija, Advocate
During investigations against corporate entities, statements of various persons are recorded. Investigations may result into issue of show cause notices demanding excise duty against the corporate entity. In addition to duty demand and proposal to impose penalty on the entity, penalty is invariably proposed against individuals. As a practice, individuals whose statements have been recorded are made party to show cause notice for imposition of penalty. In most of the cases, adequate reasons are not mentioned in the show cause notices for proposal to impose penalty on the individuals. Adjudication in most of the cases result in imposition of penalty on the individuals. The decisions are not uncommon where personal penalties have been dropped either at the adjudication level or at appellate level.
- The very purpose of introduction of provisions relating to penalty on the individuals is to thwart attempts of any wrong doing by any person so far as the payment of taxes are concerned. Personal penalties are imposed on the persons who are directly involved in the activities resulting in tax evasion by the entity they belong to, may he be a director, partner or an employee. Mens rea is again a significant ingredient for imposition of penalty on the co-noticee individual in view of the language used in the provision, e.g. in rule 26 of the Central Excise Rules, 2002. In this rule it has been provided that any person shall be liable to penalty who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules. The goods liable to confiscation are those which have led to tax evasion or attempt thereto. Therefore, any person dealing with the goods in the manner mentioned in Rule 26 and having knowledge that the goods which he has dealt with are liable to confiscation, is liable to penalty. The idea of legislating such provisions is to make those persons liable to penalty and to recover additional tax in the form of penalty. In the case of CST vs. Khemji Velji & Co. (1985) 58 STC 95 (SC)and Khemka & Co. (Agencies) P Ltd. vs. State of Maharashtra- [1975] 35 STC 571 (SC) it has been held that penalty under tax laws is only a civil liability although penal in character as additional tax.
Penalty in individuals
- The question arises whether co-noticee can be exonerated from imposition of penalty if the main noticee has paid duty, interest and 25% of penalty either after issue of show cause notice or within 30 days of adjudication order. In the case of Shri Ghanshyamdas C Goyal Vs CCE-2015-TIOL-756-CESTAT-MUMand in another case of CCE vs. Anand Agrawal – 2013-TIOL-26-CESTAT-DEL, the Hon’ble Tribunal has held that co-appellant cannot be exonerated from penalty imposed under Rule 26 of Central Excise Rules, 2002 even if the main appellant has paid the duty, interest and 25% of penalty in terms of proviso to Section 11A(2) of Central Excise Act, 1944 and that immunity is available to only those persons to whom the notice is issued under Section 11A(1). However, in the case of CCE vs.Vikas Garg- 2014 (306) E.L.T. 94 (P & H), Hon’ble High Court has held that once the proceedings against the firm stand concluded under Sector 11A(2), penalty proceedings against partners of the firm cannot continue as Rule 26 is not an independent provision but has to be read with Section 11A of the Act.
- Certain cases have been noticed where penalty has been proposed/ imposed against individuals under rule 15 of the CENVAT Credit Rules, 2004 in addition to the penalty under the same rule against the assesse who has allegedly taken inadmissible CENVAT credit. Rule 15 is meant for the person who has taken wrong CENVAT credit. An individual is thus not covered within the scope of Rule 15. In the case of Subhasri Pigments Pvt. Ltd. Vs. CCE – 2013 (298) E.L.T. 252 (Tri. – Ahmd.), it has been held that no penalty can be imposed on individuals under 15 of the CENVAT Credit Rules, 2004.
Penalty on corporate entities as co-noticees
- Corporates, firms etc., (other than individuals) who has no mind of its own cannot be alleged to have knowledge in order to attract penalty under Rule 26 as has been correctly held by Larger Bench of the Hon’ble Tribunal in the case of Steel Tubes of India vs. CCE – 2007 (217) E.L.T. 506 (Tri. – LB). By citing an illustration in the case of transport by Railways, the Larger Bench decided that penalty under Rule 2091A (pari-materia to Rule 26) cannot be imposed on companies. It held as under:
“….If in a given situation a parcel booking clerk of the Indian Railways, in order to have some personal gain, colludes with others to book the goods without any duty paying documents (though he has knowledge that the goods have to be booked on the basis of duty paying documents) and the goods are seized by the authorities at the destination point, can the Indian Railways be penalized under the provisions of Rule 209A of the Central Excise Rules, 1944? The resounding answer would be “NO” as Indian Railways is not having any knowledge that the goods so booked are liable for confiscation. The booking clerk is in knowledge and hence he is liable to be penalized under the said Rule 209A.”
- Language of Rule 26 refers toknowledgeof a person. Truly so, a corporate entity cannot have its mind to attribute knowledge. Corporate entity works through individuals. Only individuals have minds and thus can have knowledge. It has been rightly held in the case of Woodmen Industries vs. CCE – 2004 (164) E.L.T. 339 (Tri. – Kolkata)that penalty under Rule 26 can be imposed only on an individual partner and not on the firm and this case has been affirmed by the Hon’ble Supreme Court as reported at Commissioner v. Woodmen Industries – 2004 (170) E.L.T. A307 (S.C.). However, this argument has not found favour before the Hon’ble High Court of Delhi in the case of Sunil Mittal vs. CCE – 2013 (289) E.L.T. 441 (Del.). Hon’ble Delhi High Court has rejected the contention on the basis of two judgments : (1)Agarwal Trading Corporation and Ors. v. Assistant Collector of Customs, Calcutta – 1983 (13) E.L.T. 1467 (S.C.) and (2) Standard Chartered Bank v. Directorate of Enforcement — (2005) 275 ITR 81. However, it appears that the language in the provisions under the respective enactments were quite different from Rule 26. No doubt corporate entities are persons. However, going by the knowledge principle, the language used in Rule 26 is not found in the provisions which were under consideration under the two cases cited by Hon’ble Delhi High court. Further, it appears that the case of Woodmen Industries vs. CCE – 2004 (164) E.L.T. 339 (Tri. – Kolkata) affirmed by the Hon’ble Supreme Court was not brought to the knowledge of the Hon’ble Delhi High Court.As per the judgment of the Hon’ble Supreme Court in the case ofKUNHAYAMMED vs. State of Kerala – 2001 (129) E.L.T. 11 (S.C.),doctrine of merger applies if civil appeal is dismissed.Since in the caseofCommissioner v. Woodmen Industries -2004 (170) E.L.T. A307 (S.C.), civil appeal filed by the revenue was dismissed by the Hon’ble Supreme Court, applying the doctrine of merger, it has become the judgment of the Apex Court and therefore, prevails.
- Rule 26 has been amended with effect from 2007 wherein sub-rule (2) has been inserted making a provision for imposition of penalty on any person, who issues excise duty invoice without delivery of the goods specified therein or abets in making such invoice or any other document or abets in making such document, on the basis of which the user of said invoice or document is likely to take or has taken any ineligible benefit under the Act or the rules made thereunder like claiming of CENVAT credit under the CENVAT Credit Rules, 2004 or refund. Prior to amendment of this provision, it was argued that while issuing cenvatable invoice without delivery of goods, the person has not dealt in any goods so as to attract the vice of Rule 26. To overcome that fallacy, suitable amendment has been made and the defense of not dealing with the goods is no more available.
Penalty on professionals
- I had an occasion to go to the investigating agency to collect the non-relied upon documents on behalf of the main noticee i.e. MNC, against whom a huge demand of excise duty was raised denying legitimate benefit of exemption. During oral talks while collecting the non RUDs, one of the officers told me that since my law firm has given an opinion to the MNC, the investigating agency was contemplating to implicate the law firm for imposition of penalty under Rule 26, but somehow the idea was dropped. I was shocked to hear this. How a law firm can be implicated for undertaking a professional duty while providing legal opinion on which the MNC acted upon and availed certain legitimate benefits which the investigating agency has disputed.
- Legal opinion given by lawyers are advisory in nature, and hence a lawyer cannot be implicated in a case unless he has played a role in commission of an offence.Moreover, the Advocates Act, 1961 takes care of professional mis-conduct of Advocates, if any. Hon’ble Madras high court came to the rescue of a lawyer cited as co-accused in a property case. The matter relates to a complaint filed by one Mr. Ramasamy with an anti-land grabbing cell in Coimbatore, alleging that Mr. Anees (Advocate) had committed fraud and impersonation while dealing with property documents. Justice P Devadas, granting anticipatory bail to Mohamed Anees, said: “A legal professional cannot be implicated for his honest and bona fide discharge of professional duty. But there is a rider. If he has participated in the commission of an offence, such as conspiracy, common intention and abetment, then he will lose the status of a lawyer, and will have another status of accused. This principle applies to panel advocates, bank lawyers, chamber lawyers and court lawyers.”
- Hon’ble Bombay High Court in the case of Jayantilal Thakkar & Company vs. U.O.I.- 2006 (195) E.L.T. 9 (Bom.), has held that it is too much to allege or to presume that the advocates or the legal advisers or auditors of the company to handle muchless deal with the excisable goods as contemplated under Section 9(1)(bbb) of the Central Excise Act, 1944 or Rule 209A of the Central Excise Rules, 1944 (pari materia to Rule 26 of the Central Excise Rules, 2002) while discharging their professional duties.
Penalty on transporters
- Penalty under Rule 26 is often imposed on transporters who have transported the excisable goods which are found to have been removed clandestinely. However, in the absence of knowledge of the transporter about the goods having been cleared without proper documents, penalty is not warranted under the Rule. If a manufacturer provides a duty paying document or any other document which appears to be genuine to the transporter which is later found to be fake or bogus, knowledge of transporter cannot be attributed for the purpose of imposition of penalty under Rule 26.
Penalty on Custom House Agents/ Brokers
- In customs cases, penalties are invariable imposed on custom house agents/ brokers under Section 112/114 of the Customs Act, 1962. Penalty can be imposed under these sections provided a direct role has been played in evasion of customs duty or rendering the goods liable for confiscation. Even though the knowledge has not been mentioned in Section 112/114 of the Customs Act, 1962 unlike Rule 26 of the Central Excise Rules, 2002, mens rea is an important ingredient to attract these provisions. There should be a direct role of the CHA in doing or omitting to do any act which act or omission would render such goods liable to confiscation or abets such doing or omission of the act. Otherwise there are separate provisions to deal with the conduct of CHA /broker who is licensed to work in terms of Customs Brokers Licensing Regulations, 2013 (earlier Customs House Agents Licensing Regulations 2004) which is again a full-fledged code for regulating the grant of licensing and suspension/ revocation thereof.
- Abetment referred to in Section 112/114 is a serious charge. In the case of CC vs. M.Vasi & Ors. – 2003 (151) E.L.T. 312 (Tri. – Mumbai), the Hon’ble Tribunal has held abetment presupposes knowledge of the proposed offence and also presupposes benefit to be derived by the abettors therefrom and that in the absence of conscious knowledge, penalty on charge of aiding and abetting would not sustain. In this case of M.Shashikant and Company vs UOI reported in 1987 (30) ELT 868 (Bom), the Hon’ble High Court of Bombay has held that the person would be guilty of abetment provided he has connived or has actively associated in the commission of the unauthorised act. The High Court has held that the principal can never be guilty for wrongful acts of the agent, which were done without the notice of the principal. In the case of Mahadev Baburao Darekarvs. CC reported in 2001 (135) ELT 365, the Hon’ble Tribunal has held that for proving abetment, there ought to have been a pre-existing meeting of minds between the smuggler and the appellant which must be disclosed in the Show Cause Notice. Similar was the view of the Tribunal in the case of U. Sivasubramaniam vs. Commissioner of Customs reported in 2004 (165) ELT 97. In the case of Sri Ram vs. State of U.P. reported in AIR 1975 SC 175, the Hon’ble Supreme Court has held that in order to constitute abetment, the abettor must be shown to have ”intentionally” added to the commission of the crime. In the absence of such an allegation supported by evidence, the charge of abetment would not be sustainabl Conclusion
- The following emerges from the above analysis:
(i) Penalty under tax laws is only a civil liability although penal in character as additional tax;
(ii) Once the proceedings against the main noticee stand concluded under Sector 11A(2), penalty proceedings against individuals cannot continue as Rule 26 is not an independent provision but has to be read with Section 11A of the Act.
(iii) An individual is not covered within the scope of Rule 15of the CENVAT Credit Rules, 2004;
(iv) Entities other than individuals cannot be penalized under Rule 26(1).However, after insertion of sub-rule (2), entities can also be penalized if their role is established;
(v) Professionals such as Chartered Accountants or Advocates cannot be penalized under the provisions of Central Excise Rules or Customs Act merely on the ground of their professional mis-conduct;
(vi) Penalty on transporters cannot be imposed unless their knowledge is proved that the goods are liable for confiscation. Similar is the case of CHAs/ brokers;
(vii) Abetment is a serious charge and has to be proved beyond doubt.