Whether the legal heirs are liable for duty demand of proprietorship concern?

Case: -COMMISSIONER OF C. EX., BANGALORE-III V/S DHIREN GANDHI

Citation: - 2012(27) S.T.R. 452 (Kar.)

Brief Facts:- This appeal has been preferred by the Revenue challenging the order passed by the Tribunal [2011 (266) E.L.T. 125 (Tri.-Bang.)] which has set aside the order passed by the Appellate Commissioner as well as the Original Authority, confirming the demand of Central Excise duty due from M/s. D&M Naturals & Fragrances.
Sri Prakash Gandhi was carrying on business in industrial fragrances, flavors, natural essential oils, etc., under the name and style `M/s. D&M Naturals & Fragrances'. It was his proprietary concern. He was a holder of Central Excise registration Certificate No. ACJPP2061KXM001. He was availing Cenvat credit on the inputs/capital goods as per the provisions of Rule 3 of the Cenvat Credit Rule, 2001/2002. He died on 15-9-2003. The Central Excise registration certificate was surrendered to the department by his son Sri Dhiren Gandhi. Sri Dhiren Gandhi took over the business on the basis of no objection given by his family members to carry on the business of the family as sole proprietor. The internal audit party, attached to the Central Excise Bangalore-III, Commissionerate, during the course of audit on the records of the assessee, observed that the assessee was availing Cenvat credit on the inputs/capital goods received into the factory for use in the manufacture of the aforesaid goods. On the date the registration certificate was surrendered, there was a stock of cenvat credit availed inputs/raw materials valued at Rs. 25,24,887/-. The audit party was of the view that, by surrendering the Central Excise registration, the assessee opted out of cenvat scheme or for that matter from the whole of the provisions of the Central Excise Act and the Rules made thereunder. Therefore the assessee was liable to reverse the cenvat credit relating to the inputs, held in stock valued at Rs. 25,24,887/- as on the date of surrendering the registration certificate i.e., on 13-10-2003 and the cenvat credit attributable, works out to Rs. 4,03,982/-. A show cause notice came to be issued to M/s. D&M Naturals & Fragrances, the trade name of the Sri Prakash Gandhi and it was served on his son Sri Dhiren Gandhi. He answered the show cause notice by contending that the show cause notice has been issued to a concern which has got nothing to do with the commissions or purported omissions of M/s. D&M Naturals & Fragrances. His business is known by the name M/s. Dee & Em Naturals & Fragrances. It cannot be mistaken for the erstwhile proprietorship of by Sri Prakash Gandhi. He also denied all other allegations in the show cause notice, the availability of the stocks as alleged. He further contended, there cannot be any demand against him because Sec. 11A does not provide for recovery of duty from a successor in business. The charging provisions under Sec. 3 of the Act is not attracted as he did not manufacture the goods prior to the date of demise of late Sri Prakash Gandhi and therefore he sought for dropping all the proceedings. The adjudicating authority, after going through the records, held that the material on record shows that M/s. D&M Naturals & Fragrances, under the proprietorship of late Sri Prakash Gandhi, had a closing stock worth Rs. 26,47,145/-. Sri Dhiren Gandhi filed the income tax return for the financial year 2003-04 enclosing balance sheet as on 31-3- 2004 of M/s. D&M Naturals & Fragrances, wherein the inventory of the assets of the firm has been shown as Rs. 26,18,574/-. From the above, it is distinctly clear that M/s. D&M Naturals & Fragrances is one legal entity with persons of the same family, as its proprietors. The demand in the show cause notice is made against a firm and not against any individual. Whatever argument/contention against the said demand is untenable for the aforesaid reasons and circumstances. The assessee was availing cenvat facility on inputs/capital goods and as a result of surrendering the registration, the assessee is bound to pay an amount equal to the cenvat credit, if any, allowed to them in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercisable in terms of Rule 9(2) of the Cenvat Credit Rules, 2002. Regarding the applicability of Sec. 11A, he held that proviso to Sec. 11A is rightly invokable for demanding duty for the extended period. Since the duty has not been paid, the same is liable to be paid along with interest at the rates prevalent during the said periods till the payment. Thus he confirmed, the demand of Rs. 4,03,982/- from M/s. D&M Naturals & Fragrances being the cenvat credit availed on the stock of inputs/raw materials held on the date of surrender of registration certificate and also confirmed the demand for interest, imposed penalty of equal amount and also a sum of Rs. 5,000/- under Rule 13(1) of the Rules.
Aggrieved by the said order, the assessee preferred an appeal. The Commissioner of Central Excise (Appeals), upheld the order of the adjudicating authority and dismissed the appeal. Against the said order, the assessee preferred an appeal to the Tribunal. The Tribunal, relying on the judgment of this court in the case of C.C.E., Bangalore v. Press Fab Precision Components Pvt. Ltd. - 2007 (207) E.L.T. 207 (Kar), held there is no provision to demand duty from the successor, therefore the provisions of Sec. 11 of the Central Excise Act, 1944, to demand duty from successor cannot withstand the test of law. Accordingly he allowed the appeal, set aside the impugned orders and granted relief to the assessee. Aggrieved by the said order, the Revenue filed this appeal.

Appellant’s Contention: - The appellant contended that the original assessee was a proprietor concern. After the death of the proprietor, his son surrendered the Central Excise registration certificate, but utilised the assets of the business and is carrying on the very same business under the very same name, as its proprietor. Therefore, once the registration certificate is surrendered, the cenvat credit availed should be reversed and consequently the duty representing the said cenvat credit should be paid to the department. It is in that context, the show cause notice was issued, and proviso to Sec. 11 is directly attracted, as he is the successor, he is liable to pay the duty demanded and therefore he submit that the Tribunal is not justified in setting aside the well considered order passed by the authorities.

Respondent’s Contention:- on the legal heirs of the deceased holder of a registration certificate. Therefore when once the cenvat credit was availed, but not used and utilised, and the assessee dies and his legal heirs surrender the certificate of registration, they are precluded from having the benefit of the cenvat credit. In those circumstances, question of the legal heirs paying the duty which represents the said cenvat credit availed, would not arise. Even otherwise, no proceedings under the Act can be initiated against the legal heirs of an assessee who was chargeable to tax under the Act. Therefore the entire proceedings initiated is one without jurisdiction and rightly the Tribunal has set aside the orders passed in such proceedings which is void ab initio and no case for interference is made out.

Reasoning of Judgment: - The Hon’ble High Court held that Sec. 11A of the Act deals with recovery of duties not levied or not paid or short levied or short paid or erroneously refunded. A reading of the provision of said Section makes it very clear, when any duty of excise which has not been levied or paid or has been short levied or short paid or erroneously refunded, the Central Excise officer may, within one year from the relevant date, serve notice on the person chargeable with duty to show cause, why he should not pay the amount specified in the notice. The proviso to the said provision only elongates the period of limitation if the case falls under any one of those circumstances mentioned therein. Therefore Sec. 11A can be invoked only to recover duty from a person chargeable with duty. Sec. 3 of the Act is the charging section. It provides that they shall be levied and collected in such a manner as may be prescribed, a duty of excise on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985. Therefore this provision makes it very clear, a person chargeable with duty under the Act, is the manufacturer.
The definition of the word 'manufacturer' shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages any other production or manufacture on his own account. Therefore, primarily the person who is chargeable with duty under the Act, is the manufacturer. Sec. 11 of the Act deals with recovery of sums due to the Government. If any duty or other sums of any kind is due to the Government under the Act, the officer empowered under the said provision has been vested with the power to levy such duty or require the payment of such sums and deduct the amount so payable from any money, owing to the person from whom such sums may be recoverable or due which may be in his hands or under the disposal or control or may recover the amount by attachment or sale of excisable goods belonging to such person. It is in the nature of a garnishee order.
The amount due to the Government under Sec. 11 is also recoverable from the person to whom the person chargeable to duty under the Act has transferred or otherwise disposed of its business or trade in whole or in part or effects any change in the ownership thereof in consequence of which he succeeded to such business or trade by any other person, i.e., monies can be recovered from the successor in respect of the amounts due from such predecessor at the time of such transfer or otherwise disposal or change. Therefore the proviso is attracted to cases in which the person chargeable to duty transfers or disposes of the business which he is carrying on during his lifetime. If any amount was due from the predecessor in title, the successor in title is liable and it is to be recovered from him. They do not find any provision in the Act which foists any such liability in the case of intestate succession. In other words, there is no provision which empowers the authorities to recover due from a deceased assessee by proceeding against his legal heirs. The way Sec. 11 and 11A are worded, it is amply clear, the legislature has consciously kept away the legal heirs from answering to liabilities under the Act. The reason is obvious. In the normal course, a manufacturing activity which involves huge investment and infrastructure is carried on by companies, partnership firms and association of persons. May be in very few instances, individuals undertake such commercial adventure. In all the cases of such commercial activity being carried on, except that of an individual, the death of any person who is involved in the manufacturing activity, has no impact on the business or manufacturing activity. Even after his death, the manufacturing activity goes on, the legal entity which is carrying on the business is not disrupted and the commercial activity is continued without any interruption. In the case of an individual, on his death, the manufacturing activity comes to an end. To hold his legal heirs liable for the dues under the Act from the manufacturer who is the person, who is charged with the duty to pay tax, would be unreasonable. If his family members were to take over the business after his death, continued to carry on the very same business, probably they would comply with the requirements of the statute. If they do not take over the business or comply with the provisions of the Act, they cannot be held liable of the dues of the deceased. That appears to be the principle underlining these two provisions.
In the instant case, admittedly father was carrying on the manufacturing activity. He had obtained a registration certificate in his favour. He had purchased raw material worth Rs. 25,24,887/-. In order to purchase that raw material, he had paid input tax. Having paid input tax, he had availed cenvat credit by making appropriate entry in the books of accounts. But he had not used or utilised the said cenvat credit. Once the legal heirs surrendered the certificate of registration, with such surrender, they are also precluded from using and utilising the said cenvat credit. The moment the certificate is surrendered, because they had availed cenvat credit by making an entry in the book, in law, the authorities would not get any right to claim the said cenvat credit which remained unused and unutilised. On the face of it, the very claim is one without jurisdiction. Even otherwise, when once his legal heirs surrendered the certificate, they are precluded from utilising the benefit of cenvat credit. Even if the legal heirs were to use the very same stock and carry on manufacturing activity and to sell those products, they have to necessarily pay the excise duty. In no way they are benefited by the cenvat credit. Under these circumstances, the question of any unjust enrichment at the hands of the legal heirs would not arise. As it is clear from Sec. 11, in particular the proviso which is pressed into service, this is not a transfer or disposal of a unit during the lifetime of the original assessee. Therefore they cannot be treated as successors who can be made available for the duty payable by the predecessor in title and therefore proviso to Sec. 11 is not attracted to the facts of this case.
They held that in this context, the revenue pointed out a judgment of the Kerala High Court in the case of Collector of C. Ex. & Customs v. Leelamma George - 2004 (163) E.L.T. 17 (Ker.) where, interpreting Sec. 11A, it has been held, the person against whom such proceedings are initiated, is the person chargeable with duty. That is a case of short levy of duty. The proceedings can be continued against the manufacturer, if he had removed the products paying the duty less than what is liable under the Act. Obviously he has to pay the balance duty as well, if there was a short levy. This demand has to be made, if it remained unpaid, from the legal representatives, even after the death of the predecessor. This is a case where the short levy has been noticed during the life of the predecessor. Therefore the said case has no application to the facts of this case. In this case there was no short levy or non-levy on the predecessor during his lifetime. Even otherwise, with great respect, they find it difficult to accept the interpretation placed on Sec. 11A to include the legal representatives as persons who are chargeable to duty, because if such an interpretation is placed, it amounts to the court rewriting the Section. The words 'legal representatives' into the said section should be read which is totally impermissible in law. In fact the Apex Court in the case of State of Punjab v. Jullundur Vegetable Syndicate - 1996 (17) STC 326 (SC) while interpreting a fiscal legislation, have held as under :
"It is a settled rule of construction that in interpreting a fiscal statute the court cannot proceed to make good the deficiencies, if there be any, in the statute. It shall interpret the statute as it stands and in case of doubt it shall interpret it in a manner favorable to the taxpayer. See C.A. Abraham v. Income tax Officer, Kottayam [1961] (41 ITR 425) (S.C.). In considering a taxing Act, the court is not justified in straining the language in order to hold a subject liable to tax."
The legislature, while amending Sec. 11 by introducing a proviso, did not impose any liability on the legal heirs of a deceased assessee under the Act. The intention is clear. That intention is to be accepted and that Courts cannot, under the guise of interpreting these provisions, bring within the network, the legal heirs who are not the person are chargeable to duty the Act and levy duty under the Act. Therefore the order passed by the Tribunal is in accordance with law and do not suffer from any legal infirmity.

Decision: - Appeal dismissed.

Comment:- this is very detailed and good decision wherein it is clearly held that the legal heirs of deceased manufacturer are not liable for payment of dues. When they carry on business, as a going concern, then they are liable for the same otherwise the liability does not arise under Section 11. This decision will help many as the department normally after the legal heirs for recovery of Government dues.

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PJ/Case Laws/2012-13/1251

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