Holding

Penalty under Section 11AC is imposed only when the escaped duty is due to deliberate deception with intent to evade duty, and once applicable, the penalty must be 25% of the duty determined under Section 11A(2) with no discretion in its quantification.

Summary

The Supreme Court examined two appeals where the Central Excise Tribunal had set aside penalties imposed under Section 11AC of the Central Excise Act because the assessee had paid the short‑paid duty before a show‑cause notice was issued. The Court held that Section 11AC imposes a penalty only when the escaped duty results from deliberate deception with intent to evade duty, and that once the provision applies, the authority has no discretion in quantifying the penalty, which must be 25% of the duty determined under Section 11A(2). The Court clarified that the decision in Union of India v. Dharamendra Textile does not make penalty automatic for every short payment; the statutory conditions and mens rea must be satisfied. Consequently, the Tribunal’s orders were set aside and the matters remitted for fresh consideration. The appeals were allowed.

Issues considered

The conditions and circumstances that attract penalty under Section 11AC of the Central Excise Act.
Whether payment of short‑paid duty before issuance of a show‑cause notice bars the levy of penalty under Section 11AC.
The correct interpretation of Union of India v. Dharamendra Textile Processors regarding mandatory penalty under Section 11AC.
Whether Section 11AC requires mens rea (deliberate deception) and whether the assessing authority has discretion in fixing the quantum of penalty.

Legislation cited

Central Excise Act, 1944s. 11A, s. 11AA, s. 11AB, s. 11AC

Subjects

Central ExciseSection 11ACPenaltyShort levyNon‑levyDeliberate deceptionMens reaShow‑cause noticeExcise duty

Judgment

[2009] 9 S.C.R. 58

A UNION OF INDIA
v.
••
M/S. RAJASTHAN SPINNING AND WEAVING MILLS
(Civil Appeal No. 3527 of 2009)

MAY 12, 2009
B
[S.H. KAPADIA AND AFTAB ALAM, JJ.]

Central Excise Act - s.11AC - Penalty for short levy or
non-levy of duty - Conditions and circumstances that would
C attract imposition of such penalty -Decision of Supreme
Court in Dharamendra Textile case - Interpretation of - Held:
Penalty under s.11AC is punishment for act of deliberate
deception by assessee with intent to evade duty by adopting
any of the means mentioned in the section - Though
D application of s. 11 AC would Jepend upon existence or
otherwise of conditions expressly stated in the section, once
the section is applicable in a case, the concerned authority
would have no discretion in quantifying the amount and
penalty must be imposed equal to the duty determined under
E sub-section (2) of s.11A.

The issue regarding the conditions and the
circumstances that would attract imposition of penalty
under section 11 AC of the Central Excise Act arose for
consideration in the present appeals.
F
The Tribunal, by the impugned judgment, took the
view that there was no warrant for levy of penalty since
the respondent-assessees had deposited the balance
amount of excise duty (that was short paid at the first
G instance) even before the show cause notice was issued.

, In appeals to this Court, the Revenue contended
relying upon a recent decision of this Court in
Oharamendra Textile* that mere non-payment or short

H 58
--> UNION OF INDIA v. RAJASTHAN SPINNING AND 59
WEAVING MILLS
l payment of duty would inevitably lead to imposition of A
.,... penalty equal to the amount by which duty was short
I
paid.

Allowing the appeals, the Court

HELD:1.1. The reason assigned by the Tribunal to B
strike down the levy of penalty against the assessees is
as misconceived as. the interpretation of Dharmendra
Textile is misconstrued by the Revenue. One completely
fails to see how payment of the differential duty, whether
before or after the show cause notice is issued, can alter c
the liability for penalty, the conditions for which are clearly
spelled out in Section 11AC of the Central Excise Act.
-· [Para 2] [62-A-B]

1.2. The main body of Section 11AC lays down the D
conditions and circumstanc">S that would attract penalty
and the various provisos enumerate the conditions,
subject to which and the extent to which the penalty may
be reduced. The penalty provision of section 11AC would
come· into play only after an order is passed t:1nder
E'
section 11A(2) with the finding that the escaped duty was
the result of deception by the assessee by adopting a
't
means as indicated in section 11AC. Penalty under
~
section 11AC is punishment for an act of deliberate
deception by the assessee with the intent to evade duty
by adopting any of the means mentioned in the section. F
[Paras 17, 18 and 19] [75-F; 76-C-E]

1.3. In almost every case relating to penalty, the
decision of this Court in Dharamendra Textile is referred
to on behalf of the Revenue as if it laid down that in every GI
_,,,.. 4 case of non-payment or short payment of duty the
penalty clause would automatically get attracted and the
authority had no discretion in the matter. There is no
reason to understand or read the said decision in that
H
60 SUPREME COURT REPORTS [2009] 9 S.C.R.

~·

-
A manner. The decision in Oharamendra Textile cannot be
said to hold that section 11AC would apply to every case
of non-payment or short payment of duty regardless of '
the conditions expressly mentioned in the section for its
application. [Paras 20 and 21] [76-E; 78-D-E]
B
1..4. The decision in Dharamendra Textile must be
understood to mean that though the application of ,...
section 11 AC would depend upon, the existence or
otherwise of the conditions expressly state~ in the
section, once the section is applicable in a case the
c concerned authority would have no discretion in
quantifying the amount and penalty must be imposed
equal to the duty determined under sub-section (2) of ....
section 11 A. That is what Oharamendra Textile decides.
[Para 23] [79-E-F]
D
*Union of India v. Oharam&ndra Textile Processors, 2008
(231) ELT 3, explained.

Cosmic Dye Chemical v. Collector of Central Excise
(1995) 75 ELT 721 and Continental Foundation Jt. Venture
E
v. Commissioner of Central Excise, (2007) 216 ELT 177,
referred to.
·(
Case Law Reference: ..,,
2008 (231) ELT 3 explained Para 2
F
(1995) 75 ELT 721 referred to Para 11
(2007) 216 ELT 177 referred to Para 12

CIVIL APPELLATE JURISDICTION : Civil Appeal No.
G 3527 of 2009.
I- ......
From the Judgment & Order dated 02.03.2007 of the
Judicature for Rajasthan at Jodhpur in Central Excise Appeal
No. 76 of 2006.
H
UNION OF INDIA v. RAJASTHAN SPINNING AND 61
__..
'
WEAVING MILLS

WITH A

C.A. No. 3525 of 2009.

From the Judgment & Order dated 05.09.2006 in Order
No. 1486 of 2006 in Appeal No. El27412006 of the CESTAT,
South Zonal Bench, Bangalore. B

Commissioner of Customs & Gen. Excise ..... Appellant(s) 1

VERSUS

Mis. Lanco Industries Ltd. ..... Respondent(s) C

K. Radhakrishnan, Aruna Gupta, Anil Katiyar, 8. Krishna
Prasad, Rashmi Malhotra, Chinmoy P. Sharma for the
Appellants.
D
Ashok H. Desai, S.K. Bagaria, Vaneeta Bhargava, AJay
Bhargava (for Mis. Khaitan & Co.) Monish Panda and M.P.
Devanath for the Respondents.

The Judgment of t~e Court was delivered by I
IE
___,.
AFTAB ALAM, J. 1. Leave granted in both the SLPs.

2. What are the conditions and the circumstances that
would attract the imposition of penalty under section 11AC of
the Central Excise Act ('The Act', hereinafter)? In the two cases
before us the Tribunal has taken the view that there was no F
warrant for levy of penalty since the assessees had deposited
the balance amount of excise duty (that was short paid at the
first instance) even before the show cause notice was issued.
On the other hand, on behalf of the Revenue, the appellants in
the two appeals, it was contended, relying upon a recent G
decision of this Court in Union of India Vs. Dharamendra
Textile Processors, 2008 (231) ELT 3 that mere non payment
or short payment of duty (without anything else!) would inevitably
lead to imposition of penalty equal to the amount by which duty
H

I , -
A
62 SUPREME COURT REPORTS [2009] 9 S.C.R.

was short paid. In our view the reason assigned by the Tribunal r
-
to strike down the levy of penalty against the assessees is as
~
misconceived as the interpretation of Dharamendra Textile is
misconstrued by the Revenue. We completely fail to see how
payment of the differential duty,· whether before or after the
B show cause notice is issued, car. alter the liability for penalty,
the conditions for which are clearly spelled out in section 11AC
of the Act.

3. Though both the appeals turn on a question of law, it
would be nevertheless useful to take a brief look at the facts
c of the two cases. ~

4. lh the appeal arising from SLP (C) No.15927/2007 the
..-";
respondent- assessee is a manufacturer of PN yarn. On July
12, 2000 the Preventive Party of Central Excise Division,
D Udaipur visited the assessee's factory premises and on ....
scrutiny of its internal records took the view that in clearances
of goods on ex-mill sales there was short payment of duty by
Rs.1,09,682.00 and by Rs.69,900.00 on sales made from the
assessee's depot. The short payment of duty, according to the
E Revenue, took place in the following circumstances. The
assessee was collecting handling and forwarding charges at •
the rate of Rs.6.00 per bag/ carton up to October, 1996 and
after that at the rate of Rs.8/-. The amount of handling and
I
forwarding charges was shown in the invoices separately from
F the assessable value of the goods. During the material time
the assessee had collected a surn of Rs. 7,46,219.00 as
handling and forwarding charges on its sales from the mill. The
assessee paid duty only on the difference between the amount
collected by it and the actual expenditure incurred on loading
and handling of goods within the factory. In this way a sum of
G
Rs.5, 59,,603.00 was left out of reckoning for levy of excise duty.
The excise duty on the aforesaid sum came to Rs.1, 09,682.00. ;. .,__

In the _same manner there was short payment of duty amounting
to Rs.69, 900.00 en sales made from the assessee's depot.

H
UNION OF INDIA v. RAJASTHAN SPINNING AND 63
-· WEAVING MILLS [AFTAB ALAM, J.]
5. On the aforesaid facts the Additional Commissioner, A
i

... Central Excise, Jaipur issued a show cause notice to the
assessee on March 27, 2001. In the notice it was expressly
acknowledged that on being pointed out the assessee
deposited the full amount of duty (that is, Rs.1,09,682.00 +
Rs.69,900.00) on August 26, 2000. Nevertheless, the notice B
went on to say that with effect from October 1, 1996 the
requirement to submit the invoices to the Central Excise
f
department was dispensed wHh and the assessee had
discontinued submitting its invoices to the concerned
authorities. This resulted into suppression of material facts onc
its part that the handling and forwarding charges were not being
added on to the assessable value of the goods. The Additional
Commissioner, therefore, invoked the provision of penalty as
·-· well. The assessee filed its show cause against imposition of
penalty but the Joint Commissioner by his order dated
D
September 26, 2001 not only confirmed the demand of duty
(that was already deposited by the .assessee) but also imposed
penalty amounting to Rs.1, 79,5221- under section 11 AC of the
Act. On appeal, however, the Tribunal set aside the imposition
of penalty on the sole ground that the assessee had made '
payment of the full duty amount even before the issuance of E
notice.

6. Mis Lance Industries Limited, the respondent-assessee
)-
in the appeal arising from SLP (C) No. 407812008 is a company
"' engaged in the manufacture of pig iron. The assessee sold pig F ,
iron and molten metal to another company called Mis. Lance
Kalahasthi Castings Limited (LKCL) which was in existence at
the material time before its amalgamation with the respondent
company, with effect from, April 8, 2004 as per the order of the
' Andhra Pradesh High Court, dated February 20, 2004 in G
Company Petition no. 182-831 2003. LKCL had its factory at a
, . distance of about 150 metres from the assessee's factory
where the pig iron and molten metal, on sale, were transferred
for manufacture of ductile iron pipes by the transferee company.
H
i•

-4
64 SUPREME COURT REPORTS [2009) 9 S.C.R.

The sold goods were cleared from the factory of the assessee

..
A ~
on payment of central excise duty on transaction value, that is,
the price actually charged by it from LKCL. LKCL would get
full CENVAT credit for the duty paid by the respondent company
and would reimburse to the assessee the amount of duty at
B actuals.

7. The Central Excise officers on scrutiny of the annual
record of the respondent for the period July 1, 2000 to March
,.
31, 2004 took the view that the assessee had been clearing
molten iron and pig iron to Mis. LKCL on an improper
c assessable value. In the annual reports of the respondent
company for the years 2000-01 and 2001-02 LKCL was listed
as one of its associate companies. The annual reports further
,,_
revealed that the two companies had ci number of common
directors on their respective boards, as key managerial
D personnel. The common directors were also related to each -!-

other. The two companies were having related party ~=-
transactions in the form of sale of goods etc. In light of the facts
disclosed in the respondent company's annual reports the
Central Excise authorities took the view that after the
E amendment of Section 4 with effect from July 1, 2000, in
relation to the respor:tdent company, LKCL was 'related person'
within the meaning of s~ction 4(3) (b) (ii) of the Central Excise
Act. That being the position the value of molten iron and pig ~

iron cleared by the assessee to LKCL, for payment of duty was
F required to be determined in terms of Rule 8 of Central Excise
Valuation (Determination of Price of Excisable goods) Rules
2000, i.e., @ 115% of the cost of production upto August 4,
2003 and after that date @ 110% in terms of the amendment
introduced in the rule by notification No. 60/2003-CE (NT),
I G dated August 5, 2003. The authorities calculated the amount
of duty short-paid by the assessee for the period July 1, 2000
to March 31, 2004 at Rs. 56,04,274.00 for pig iron and Rs. ·
""'
70,05, 163.00 for molten metal, totalling to Rs. 1,26,09,437.00: · T

Accordingly, the Commissioner, Central Excise, issued notice
H .,
.
\
UNION OF INDIA v. RAJASTHAN SPINNING AND 65
WEAVING MILLS [AFTAB ALAM, J.]

i to the assessee on July 27, 2005 raising the demand of A
differential duty, besides interest and penalty, alleging that the
assessee had willfully suppressed the relevant facts from the
department with intent to evade the proper payment of duty.

8. The assessee in his reply explained that it had deposited
B
the entire amount of the demand on the same day (July 27,
2005). Moreover, the whole exercise was revenue neutral and,
+ therefore, there was no reason to impose interest, much less
any penalty. The Commissioner, however, not only confirmed
the demand of duty but by his order dated January 25, 2006 c.
also levied interest under section 11AB and 100% penalty
under section 11AC of the Act observing whether or not the
demand was revenue neutral was not relevant to the issue
before him. Against the order of the commissioner the
assessee filed an appeal before the Customs Excise and
~
Service Tax Appellate Tribunal. The Tribunal allowed the appeal D
by its order dated September 5, 2006 as noted above.

9. On behalf of the assessees in both the cases it was
submitted the stand of the Revenue that there was any short
payment of duty and the consequent demand for recovery of E
the differential duty was quite untenable but the assessees had
made payment of the demands simply in order to buy peace
and to avoid any litigation. In those circumstances the
\-
imposition of penalty was wholly unjust, unwarranted and
unauthorised in law. F
10. Mr. Ashok Desai, learned Senior Advocate appearing
for the assessee in the appeal arising from SLP (C) No. 4078/
2008 submitted that the view taken by the Revenue that the
assessee and LKCL, with respect to each other, were 'related
person' was quite unsound. Nevertheless, the assessee paid G
the entire demand of Rs.1,26,09,437.00 first, in order to avoid
litigation and secondly because the payment did not result in
any actual monetary outflow for the assessee; whatever
payment was made by the assessee, LKCL took CENVAT
H
/
66 SUPREME COURT REPORTS (2009] 9 S.C.R.

A credit for it and reimbursed the full amount of duty to the
~
assessee. He further submitted there was no question of
suppression of any material fact by the assessee since all the
information on which the show cause notice and the
adjudication order were based were admittedly taken from the
B assessee's annual report which was a material in public
domain. He also submitted that there could not be possibly any
intent to evade any excise duty as the whole exercise was
revenue neutral in as much as wl'latever sum the assessee paid
as excise duty on transaction with LKCL it got back as
c reimbursement from the transferee. There being no element.of >
fraud or suppression
I
of facts etc. with intent to evade payment
of duty any imposition of penalty was illegal and unauthorised ..

11. In a case' of non-payment, short-payment or erroneous
refund of duty normally three issues are likely to adse relating
D to (i) recovery, (ii) interest and (iii) penalty. The thr~e issues
+-
are dealt with under section 11A (Recovery of duties), section
11AA (Interest for the period from three months after the
determination of duty payable till the date of payment of duty),
section 11AB (Interest for the period from the first day of the
E month succeeding the month in which duty was payable till the
payment of duty) and section 11AC (Penalty for short levy or
non levy of duty).

Section 11A reads as follows: ~

F "11A. Recovery of duties not levied or not paid or short-
levied or short-paid or erroneously refunded.-(1) When t
any dutY of excise has not been levied or paid or has been
short-levied or short-paid or [ erroneously refunded,
whether or not such non-levy or non-payment, short-levy or
G short payment or erroneous refund, as the case may be,
was on the basis of any approval, acceptance or
assessment relating to the rate of duty on or valuation of
excisable goods under any other provisions of this Act or
the rules made thereunder], a Central Excis,,e Officer may,
H
UNION OF INDIA v. RAJASTHAN SPINNING AND 67
WEAVING MILLS [AFTAB ALAM, J.]
within [one year] from the relevant date, serve notice on A
i
the person chargeable with the duty which has not been
levied or paid or which has been short-levied or short-paid
or to whom the refund has erroneously been made,
requiring him to show cause why he should not pay the
amount specified in the notice; B

Provided that where any duty of excise has not been
-+ levied or paid or has been short-levied or short-paid or
erroneously refunded by reason of fraud, collusion or any
wilful mis-statement or suppression of facts, or
contravention of any of the provisions of this Act or of the
c
rules made thereunder with intent to evade payment of
duty, by such person or his agent, the provisions of this
sub-section shall have effect, [as if] for the words f'one
year'J, the words "five years" were substituted:
D
--<,
Explanation. - Where the service of the notice is stayed
by an order of a court, the period of such stay shall be
excluded in computing the aforesaid period of [one year]
or five years, as the case may be.
E
[(1A) When any duty of excise has not been levied or paid
or has been short-levied or short paid or erroneously
refunded, by reason of fraud, collusion or any wilful
misstatement or suppression of facts, or contravention of
any of the provisions of this Act or the rules made
thereunder with intent to evade payment of duty, by such F
person or his agent, to whom a notice is served under the
proviso to sub-section (1) by the Central Excise Officer,
may pay duty in full or in part as may be accepted by him,
and the interest payable thereon under Section 11AB and
penalty equal to twenty-five per cent of the duty specified G
in the notice or the duty so accepted by such person within
thirty days of the receipt of the notice.]

(2) The [Central Excise Officer] shall, after considering the
H
t--
I
68 SUPREME COURT REPORTS [2009] 9 S.C.R.

A representation, if any, made by the person on whom notice r
is served under sub-section (1 ), determine the amount of
duty of excise due from such person (not being in excess
of the amount specified in the notice) and thereupon such
person shall pay the amount so determined.
I
B .----
Provided that if such person has paid the duty in full •
together with, interest and penalty under sub-section (1A), t
the proceedings in respect of such person and other 1-
persons to whom notice are served under sub-section (1)
I l
(
I
shall, without prejudice to the provisions of section 9, 9A
c and 9AA, be deemed to be conclusive as to the matters
'"
stated therein:

Provided further that, if such person has paid duty
in part, ,interest and penalty under sub-section (1A), ·the
D Central Excise Officers, shall determine the amount of duty )....

or interest not being in excess of the amount partly due r
from such person.]

[(2A) Where any notice has been served on a person under ~
sub-section (1 ), the Central Excise Officer,- I
E
(a) in case any duty of excise has not been levied or
paid or has been short-levied or short-paid or t"
erroneously refunded, by reason of fraud, collusion
or any wilful mis-statement or suppression of facts, ---
F or contravention of any of the provisions of this Act
or the rules made thereunder with- intent to evade
payment of duty, where it is possible to do so, shall
determine the amount of such duty, within a period
of one year; and
G
(b) in any other case, where it is possible to do so,
shall determine the amount of duty of excise which
has not been levied or paid or has been short-
levied or short-paid or erroneously refunded, within

H
UNION OF INDIA v. RAJASTHAN SPINNING AND 69
WEAVING MILLS [AFTAB ALAM, J.]
a period of six months, from the date of service of A
the notice on the person under sub-section (1)

(28) Where any duty of excise has not been levied or paid
or has been short-levied or short-paid or erroneously
refunded, the person, chargeable with the duty, may pay
8
the amount of duty (on the basis of his own ascertainment
of such duty or on the basis of duty ascertained by a
Central Excise Officer] before service of notice on him
under sub-section (1) in respect of the duty, and inform the
Central Excise Officer of such payment in writing, who, on
receipt of such information shall not serve any notice under C
sub-section (1) in respect of the duty so paid:

Provided that the Central Excise Officer may
-\ determine the amount of short payment of duty, if any, which
in his opinion has not been paid by such person and, then, 0
the Central Excise Officer shall proceed to recover such
amount in the manner specified in this section, and the
period of "one year" referred to in sub-section (1) shall be
counted from the date of receipt of such information of
payment. E

Explanation 1. - Nothing contained in this sub-section shall
'r apply in a case where the duty was not levied or was not
paid or was short-levied or was short-paid or was
erroneously refunded by reason of fraud, collusion or any F
wilful mis-statement or suppression of facts, or
contravention of any of the provisions of this Act or of the
rules made thereunder with intent to evade payment of duty.

Explanation 2.- For the removal of doubts, it is hereby
declared that the interest under section 11AB shall be G"
payable on the amount paid by the person under this sub-
section and also on the amount of short-payment of duty,
if any, as may be determined by the Central Excise Officer,
but for this sub-section.
H
..'-

70 SUPREME COURT REPORTS [2009] 9 S.C.R.
..
,._

A (2C) The provisions of sub-section (28) shall not apply to
any case 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.]

(3) For the purposes of this section-
B
(i) "refund" includes rebate of duty of excise on r I
,.._
excisable goods exported out of India or on
excisable materials used in the manufacture of
goods which are exported out of India;
c
(ii) "relevant date" means,-

[(a) in the case of excisable goods on which duty
of excise has not been levied or paid or has been r-
short-levied or short-paid-
D
(A) where under the rules made under this Act
a periodical return, showing particulars of the
duty paid on the excisable goods removed
..J
during the period to which the said return
E relates, is to be filed by a manufacturer or a
producer or a licensee of a warehouse, as
the case may be, the date on which such -J_
return is so filed;

(B) where no periodical return as aforesaid is
F
filed, the last date. on which such return is to
be filed under the said rules;

(C) in any other case, the date on which the duty
is' to be paid under this Act or the rules made
~
G thereunder;]

(b) in a case where duty of excise is provisionally
assessed under this Act or the rules made
thereunder, the date of adjustment of duty after the
H final assessment thereof;
UNION OF INDIA v. RAJASTHAN SPINNING AND 71
WEAVING MILLS [AFTAB ALAM, J.]
(c) in the case of excisable goods on which duty of A
exdse has been erroneously refunded, the date of
such refund.]"

From sub-section 1 read with its proviso it is clear that in case
the short payment, non payment, erroneous refund of duty is
B
unintended and not attributable to fraud, collusion or any wilful
+ mis-:statement or suppression of facts, or.contravention of any
of the provisions of the Act or of the rules made under it with
intent to evade payment of duty then the Revenue can give
nottce for recovery of the duty to the person in default within one
year from the relevant date (defined in sub section 3). In other
c
words, in the absence of any element of deception or
malpractice the recovery of duty can only be for a period not
exceeding one year. But in case the non-payment etc. of duty
is intentional and by adopting any means as indicated in the
proviso then the period of notice and a priory the period for D
which duty can be demanded gets extended to five years.

12. In Cosmic Dye Chemical V Collector of Central
Excise, (1995) 75 ELT 721 a three Judges Bench of this Court
observed as follows: E
"5.The main limb of Section 11A provides limitation of six
~ months. In cases, where duty is not levied or paid or short-
levied or short-paid or erroneously refunded, it can be
recovered by the appropriate officer within six months from
the relevant date. (The expression 'relevant date' is defined F
in the Section itself). But the said period of six months
(substituted by one year with effect from May 12, 2000)
gets extended to five years where such non-levy, short levy,
etc., is "by reason of fraud, collusion or any wilful mis-
statement or suppression of facts or contravention of any G
of the provisions of this Act or of the rules with intenrto
evade payment of duty ....

"6. Now so far as fraud and collusion are concerned, it~s
evident that the requisite intent, i.e., intent to evade duty H
72 SUPREME COURT REPORTS [2009] 9 S.C.R.
""
y
A is built into these very words. So far as mis-statement or
suppression of facts are concerned, they are clearly
qualified by the word "wilful" preceding the words "mis-
statement or suppression of facts" which means with intent
to evade duty. The next set of words "contravention of any
B of the provisions of this Act or Rules" are again qualified
by the immediately following words "with intent to evade
payment of duty". It is, therefore, not correct to say that
there can be a suppression or mis-statement of fact,
which is not wilful and yet constitutes a permissible
c ground for the purpose of the proviso to Section 11 A. Mi$-
statement or suppression of fact must be wilful."

(emphasis added)

13. The same position was reiterated in Continental
D Foundation Jt. Venture vs Commissioner of Central E>«;ise,
(2007) 216 ELT 177 to which one of us (Kapadia J.) was a
party. In Paragraphs 10 and 12 of the judgment it was observed
as follows:

•. "10. The expression "suppression" has been used in the
E
· proviso to Section 11 A of the Act accompanied by very
strong words as 'fraud' or "collusion" and, therefore, has
to be construed strictly. Mere omission to give correct -f
information is not suppression of facts unless it was
deliberate to stop the payment of duty. Suppression means
F failure to disclose full information with the intent to evade
payment of duty. When the facts are known to both the
parties, omission by one party to do what he might have
done would not render it suppression. When the Revenue
invokes the extended period of limitation under Section
·G 11 A the burden is cast upon it to prove suppression of fact.
An incorrect statement cannot be equated with a wilful
misstatement. The latter implies making of an incorrect
statement with the knowledge that the statement was not
correct.
H
UNION OF INDIA v. RAJASTHAN SPINNING AND 73
WEAVING MILLS [AFTAB ALAM, J.]
__,
"12. As far as fraud and collusion are concerned, it is A
..... evident that the intent to evade duty is built into these very
words. So far as mis-statement or suppression of facts are
concerned, they are clearly qualified by the word 'wilful',
preceding the words "mis-statement or suppression of
facts" which means with intent to evade duty. The next set B
of words 'contravention of any of the provisions of this Act
+ or Rules' are again qualified by the immediately following
words 'with intent to evade payment of duty.' Therefore,
there cannot be suppression or mis-statement of fact,
which is not wilful and yet constitute a permissible ground c
for the purpose of the proviso to Section 11A. Mis-

- ~
statement of fact must be wilful."

(emphasis supplied)

14. Sub-section 1A of section 11A provides that in case D
the person in default to whom ~:ie notice is given under the
proviso to sub section 1 makes payment of duty in full or in part
~ as may be accepted by him, together with interest under
section 11 AB and penalty equal to 25% of the accepted
amount of duty within thirty days of the date of receipt of notice E
then the proceeding against him would be deemed to be
conclusive (without prejudice to the provisions of sections 9,
\ 9A and 9AA) as provided in the proviso to sub-section 2 of
- section 11A. Sub section 1A and the proviso to sub section 2
were inserted with effect from July 13, 2006 and, therefore, have F
no application to the periods relevant to the two appeals.

15. Sub-section 28 of section 11A provides that in case
the person in default makes payment of the escaped amount
of duty before the service of notice then the Revenue will not
give him the notice under sub section 1. This, perhaps, is the G
_,, ~ basis of the common though erroneous view that no penalty
would be leviable if the escaped amount of duty is paid before
the service of notice. It, however, overlooks the two explanations
qualifying the main proyision. Explanation 1 makes it clear that
H
74 SUPREME COURT REPORTS [2009] 9 S.C.R.

~
A the payment would, nevertheless, be subject to imposition of
interest under section 11AB. Explanation 2. makes ·it further .._
clear that in case the escape of duty is intentional and by
reason of deception the main provision of sub section 28 will
have no application.
B
16. The other provision with which we are concerned in this ..,._
case is section 11AC relating to penalty. It is as follows:

[11AC. Penalty for short-levy or non-levy of duty in certain
cases.- where any duty of excise has not been levied or
c paid or has been short-:-levied or short-paid or erroneously
/

refunded by reasons of fraud, collusion or any wilful mis-
statement or suppression of facts, or contravention 9f any
of the provisions of this Act or of the rules made
-
thereunder with intent to evade payment of duty, the
D person who is liable to pay duty as determined under sub-
section (2) of section 11 A, shall also be liable to pay a
penalty equal to the duty so determined:

[Provided that where such duty as determined under
E sub-section (2) of section 11 A, and the interest payable
thereon under section 11AB, is paid within thirty days from
the date of communication of the order of the Central
Excise Officer determining such duty, the amount of penalty -I
liable to be paid by such person under this section shall
be twenty-five per cent of the duty so determined:
F
Provided further that the benefit of reduced penalty
under the first proviso shall be available if the amount of
penalty so determined has also been paid within the
period-of thirty days referred to in that proviso:
G
Provided also that where the duty determined to be \ '<It
payable is reduced or increased by the Commissioner
(Appeals), the Appellate Tribunal or, as the case may be,
the court, then, for the purpose of this section, the duty as
reduced or increased, as the case may be, shall be taken ...
H
UNION OF INDIA v. RAJASTHAN SPINNING AND 75
WEAVING MILLS [AFTAB ALAM, J.]
~

into account: A
_.,
Provided also that in case where the duty determined
to be payable is increased by the Commissioner
(Appeals), the Appellate Tribunal or, as the case may be,
the court , then, the benefit of reduced penalty under the B
first proviso shall be available, if the amount of duty so
.....
increased, the interest payable thereon and twenty-five per
cent of the consequential increase of penalty have also
been paid within thirty days of the communication of the
order by which such increase in the duty takes effect.
c
Explanation. - For the removal of doubts, it is hereby
..... declared that-

(1) the provisions of this section _shall also apply to
" cases in which the order determining the duty under 0
sub-section (2) of section 11 A relates to notices
issued prior to the date on which the Finance Act,
2000 receives the assent of the President;

(2) any amount paid to the credit of the Central
Government prior to the date of communication of E
the order referred to in the first proviso or the fourth
-\ proviso shall be adjusted against the total amount .
due from such person.]

17. The main body of Section 11-AC lays down the F
conditions and circumstances that would attract penalty and the
various provisos enumerate the conditions, subject to which and
the extent to which the penalty may be reduced.

18. One can not fail to notice that both the proviso to sub·
G
..j section 1 of section 11A and section 11AC use the same
<'
expressions: " .... by reasons of fraud, collusion or any wilful
mis-statement or suppression of facts, or contravention of any
of the provisions of this Act or of the rules made thereunder
with intent to evade payment of duty, ... ". In other words the
H
76 SUPREME COURT REPORTS [2009] 9 S.C.R.

}-
A conditions that would extend the normal period of one year to
five years would also attract the imposition of penalty. It, -.....
therefore, follows that if the notice under section 11 A ( 1) states
that the escaped duty was the result of any conscious and
deliberate wrong doing and in the order passed under section
B 11A (2) there is a legally tenable finding to that effect then the
provision of section 11AC would also get attracted. The _,..
converse of this, equally true, is that in the absence of such an
allegation in the notice the period for which the escaped duty
may be reclaimed would be confined to one year and in the .
,___

c absence of such a finding in the order passed under section
11A (2) there would be no application of the penalty provision
in section 11AC of the Act. On behalf of the assessees it was _.....
also submitted that sections 11A and 11AC not only operate ...
in different fields but the two provisions are also separated by
time. The penalty provision of section 11 AC would come into >-
D
play only after an order is passed under section 11A(2) with
the finding that the escaped duty was the result of deception
by the assessee by adopting a means as indicated in section
11AC.

E 19. From the aforesaid discussion it is clear that pen.alty
under section 11AC, as the word suggests, is punishment for -~
an act of deliberate deception by the assessee with the intent
to evade duty by adopting any of the means mentioned in the
f •
~

section.
F
20. At this stage, we need to examine the recent decision
of this Court in Dharamendra Textile (supra). In almost every
case relating to penalty, the decision is referred to on behalf
of the Revenue as if it laid down that in every case of non-
payment or short payment of duty the penalty clause would
G
automatically get attracted and the authority had no discretion
....
.
in the matter. One of us (Aftab Alam,J.) was a party to the
decision in Dharamendra Textile and we see no reason to

H
understand or read that decision in that manner. In
Dharamendra Textile the court framed the issues before it, in ...
----- \.--

..
UNION OF INDIA v. RAJASTHAN SPINNING AND 77
WEAVING MILLS [AFTAB ALAM, J.1

~ paragraph 2 of the decision, as follows: A

"2. A Division Bench of this Court has referred the
controversy involved in these appeals to a larger Bench
doubting the correctness of the view expressed in Dilip N.
Shroff vs. Joint Commissioner of Income Tax, Mumbai
B
& Anr. [2007 (8) SCALE 304]. The question which arises
for determination in all these appeals is whether Section
11AC of the Central Excise Act, 1944 (in_ short the 'Act')
inserted by Finance Act, 1996 with the intention of
imposing mandatory penalty on persons who ev.aded
payment of tax should be read to contain mens rea as an
c
essential ingredient and whether there is a scope for
levying penalty below the prescribed minimum. Before the
Division Bench, stand of the revenue was that satd section
should be read as penalty for statutory offence and the
~
authority imposing penalty has no discretion in the matter D
of imposition of penalty and the adjudicating authority in
such cases was duty bound to impose penalty equal to the
duties so determined. The assessee on the other hand
referred to Section 271(1)(c) of the Income Tax.Act, 1961
(in short the 'IT Act') taking the stand that Section 11AC E
of the Act is identically worded and in a given case it was
open to the assessing officer not to impose any penalty.
The Division Bench made reference to Rule 96ZQ and
Rule 96ZO of the Central Excise Rules, 1944 (in short the
'Rules') and a decision of this Court in Chairman, SEBI F
vs. Shriram Mutual Fund & Anr. [2006(5) SCC 361] and
was of the view that the basic scheme for imposition of
penalty under section 271(1)(c) of ITAct, Section 11AC
of the Act and Rule 96ZQ(S) of the Rules is common.
According to the Division Bench the correct position in law G
was laid down in Chairman, SEBl's case (supra) and not
in Dilip Shroff's case (supra). Therefore, the matter was
referred to a larger Bench."

After referring to a number of decisions on interpretation and
H

l"
78 SUPREME COURT REPORTS (2009] 9 S.C.R.

A construction of statutory provisions, in paragra;ih.; 26 and 27
of the decision, the court observed and held as follows:

"26. In Union Budget of 1996-97, Section 11AC of the Act
was introduced. It has made the position clear that there
is no scope for any discretion. In para 136 of the Union
B
Budget reference has been rpade to the provision stating
that the levy of penalty is a mandatory penalty. In the Notes
on Clauses also the similar indication has been given.

"27. Above being the position, the plea that the Rules 96ZQ
c and 96ZO have a concept of discretion inbuilt cannot be
sustained. Dilip Shroff's case (supra) was not correctly
decided but Chairman, SEB/'s case (supra) has analysed
the legal position in the correct perspectives. The reference
is answered ........ .".
D
21. From the above, we fail to see how the decision in
Dharamendra Textile can be said to hold that section 11AC
would apply to every case of non-payment or short payment of
duty regardless of the conditions expressly mentioned in the
section for its application.
E
22. There is another very strong reason for holding that
Dharamendra Textile could not have interpreted section 11AC
in the manner as suggested because in that case that was not ;.
even the stand of the revenue. In paragraph 5 of the decision
F the court noted the submission made on behalf of the revenue
as follows:

"5. Mr. Chandrashekharan, Additional Solicitor General
submitted that .n Rules 96ZQ and 96ZO there is no
G reference tc any mens rea as in section 11AC where
mens rea i.; prescribed statutorily. This is clear from the
extended period of limitation permissible under Section
11A of the Act. It is in essence submitted that the penalty
is for statutory offence. It is pointed out that the proviso to
Section 11A deals with the time for initiation of action.
H
UNION OF INDIA v. RAJASTHAN SPINNING AND 79
WEAVING MILLS [AFTAB ALAM, J.]

-l
Section 11AC is only a mechanism for computation and A
the quantum of penalty. It is stated that the consequences
,.... of fraud etc .. relate to the extended period of limitation and
the onus is on the revenue to establish that the extended
period of limitation _is applicable. Once that hurdle is
crossed by the revenue, the assessee is exposed to B
penalty and the quantum of penalty is fixed. It is pointed
~
out that even if in some statues mens rea is specifically
provided for, so is the limit or imposition of penalty, that is
the maximum fixed or the quantum has to be between two
limits fixed. In the cases at hand, there is no variable and, c
therefore, no discretion. It is pointed out that prior to
insertion of Section 11AC, Rule 173Q was in vogue in
~
which no mens rea was provided for. It only stated "which
he knows or has reason to believe". The said clause
referred to wilful action. According to learned counsel what
D
was inferentially provided in some respects in Rule 173Q;
now stands explicitly provided in Section 11AC. Where the
outer limit of penalty is fixed and the statute provides that
it should not exceed a particular limit, that itself indicates
scope for discretion but that is not the case here."
--( E
23. The decision in Dharamendra Textile must, therefore,
be understood to mean that though the application of section
~
11AC would depend upon the existence or otherwise of the
conditions expressly stated in the section, once the section is
·- applicable in a case the concerned authority would have no F
discretion in quantifying the amount and penalty must be
imposed equal to the duty determined under sub-section (2) of
section 11 A. That is what Dharamendra Textile decides.

24. It must, however, be made clear that what is stated
G
above in regard to the decision in Dharamendra Textile is only
in so far as section 11AC is concerned. We make no
I'-
observations (as a matter of fact there is no occasion for it!)
with regard to the several other statutory provisions that came

... up for consideration in that decision.
H
-'!.

I
80 SUPREME COURT REPORTS [2009] 9 S.C.R.

A 25. In light of the discussion made above it is evident that
in both the appeals, orders were passed by the Tribunal on a
wrong premise. In both the appeals, therefore, the impugned
orders passed by the Tribunal are set aside and the matters
are remitted to the respective Tribunals for fresh consideration,
B in accordance with law. and ;ri light of this judgment. As the
matters are quite old it 1s hoped and expected that the Tribunal
would pass the final order within four months from the date of
the receipt of this order

26. The two appeals are allowed but with no order as to
C costs.

B.B.B. Appeals aliowed.

f