Whether appeal for enhancement of penalty sustainable when Tribunal has affirmed the availment of credit?

PJ/Case Study/2012-13/78

Prepared by: CA Neetu Sukhwani &
Prayushi Jain

Case study

Introduction:-

M/s J.M Metals are engaged in manufacturing of S.S Patta Patti. They had availed Cenvat credit of duty paid on the capital goods as well as claimed depreciation in respect of that portion of duty for which CENVAT credit had been availed by the assessee. The provision is clear that if any assessee has claimed depreciation under Income Tax Act, then they will not be entitled for availing Cenvat credit on such capital goods in terms of Rule 4(4) of the erstwhile Cenvat Credit Rules 2001/2002. The assessee had filed the revised income tax return rectifying the irregularity regarding the depreciation. However, the original adjudicating authority confirmed the recovery of cenvat credit along with interest and penalty of Rs. 10,000/- under section 11AC of the Central Excise Act. Although the amount of credit was Rs. 44,310/-, penalty under section 11AC was imposed for an amount of Rs. 10,000/- only. Hence, the assessee and department both preferred an appeal against the said order in original to the Commissioner Appeals. The assessee went for setting aside the recovery of credit demand and the revenue went for enhancement of penalty under section 11AC. The Commissioner Appeals set aside the order in original and allowed the assessee’s appeal while the revenue appeal for enhancement of penalty was pending in the Commissioner Appeals. Thereafter, the revenue filed appeal in the Tribunal against the order in appeal setting aside the order in original and the Tribunal upheld the admissibility of the credit but confirmed the penalty of Rs 10000/- under Rule 13 of Cenvat Credit Rules 2002, read with section 11AC of the Central Excise Act 1944. The present case study pertains to the appeal pending in the Commissioner Appeals for enhancement of penalty under section 11AC.

M/S J.M Metals [OIA 162(OPD) CE/JPR-11/2013 DATED 22.10.2013]

Relevant legal provisions:-

§ Rule 4(4) of Cenvat Credit Rules 2002.

§ Section 32 of Income Tax Act.

Issue Involved:-Whether appeal for enhancement of penalty sustainable when Tribunal has affirmed the availment of credit?

Brief facts:- Briefly stated the facts of the case are that M/s J.M METALS are engaged in manufacturing of SS Patta Patti falling under chapter sub heading No. 721920 of the schedule to Central Tariff Act, 1985. The audit while examining the income tax return, observed that they had added 50% of duty paid on capital goods in the value of plant & machinery and claimed depreciation under section 32 of income tax act, 1961. They had however availed Cenvat credit in the year 2001-02. Since the amount of Rs 44,310/- availed as credit on DG set on which depreciation had also been claimed by including the same in the value of DG set capitalized, the credit in terms of rule 4(4) of Cenvat credit rules, 2002 was not admissible. Shri Arun Kumar Surya, Partner of the unit had himself admitted the fact of claiming of depreciation on capital goods under section 32 of the Income Tax Act, 1961 and availment of Cenvat Credit and this fact was not intimated to the department. They then filed revised income tax return with the income tax department for the year 2001-2002 reducing the depreciation amount of Rs 44,310/-
Accordingly a show cause notice was issued to the assessee. The adjudicating authority disallowed the credit of Rs 44,310/- and ordered for recovery of the same along with interest under Rule12 of the Cenvat Credit Rules 2002. Penalty of Rs 10,000/- was imposed under Rule 13 ibid read with section 11AC of the Central Excise Act, 1944.

Consequently, the order of the adjudicating authority was reviewed by the Committee of Commissioners for examining its legality and propriety and it was found that the Deputy Commissioner of the Central Excise Division, Jodhpur has erred in not imposing the penalty equal to the Cenvat credit wrongly availed under rule 13 of the erstwhile Cenvat Credit Rules, 2002 read with section 11AC of Central Excise Act, 1944. The deputy commissioner thus filed the appeal on the ground that the adjudicating authority has not imposed penalty equal to the credit wrongly taken.
Aggrieved by the impugned order, assessee also filed an appeal before the Commissioner (Appeals-II), Customs & Central Excise, Jaipur. On examination of the impugned orders by the Commissioner Appeals, it was observed by the Commissioner that the order in original was not proper and legal and as the issue was already settled by the Hon’ble Tribunal in case Terna Shetkari S.S.K Ltd. v/s CCE Aurangabad [2003(159) ELT 777(Tri-Mumbai)]. Following the ratio of above decision, the Commissioner Appeals held that the Cenvat credit availed by the assessee was in order and consequently, the impugned order in original was set aside.

The appeal was also preferred by the revenue against the said order in appeal setting aside the order in original to the Tribunal. The Tribunal confirmed the availment of credit but upheld the penalty under section 11AC of Rs. 10,000/-.

This case study pertains to the decision given by the Commissioner Appeals with respect to appeal filed by the revenue for enhancement of penalty under section 11AC after the outcome of the Final order of the Tribunal.

Appellant’s Contention:- Revenue contented that the adjudicating authority had erred in imposing penalty of Rs 10000/- under Rule 13 of erstwhile Cenvat Credit Rules, 2002 read with section 11AC of the Central Excise Act, 1944 in the instant case. It is apparent from the facts of the case that the respondent had deliberately suppressed the facts of claiming depreciation on capital goods under section 32 of the income tax act, 1961 on the part of duty of Rs 44,310/- of which Cenvat credit was availed of.

The provisions of rule 13 ibid for imposition of penalty in the case of Cenvat credit availed by fraud, willful misstatement, suppression of facts etc. with the intent to avail and utilize the Cenvat credit are loud and clear and in such cases the penalty imposable shall be equal to the credit wrongly availed. In this case the respondent has availed Cenvat credit of Rs 44,310/- in contravention of provisions of rule 4 of erstwhile CCR and there was deliberate suppression of facts as regards claiming of depreciation on capital goods under section 32 of the Income Tax Act, 1961.

In the given facts of the case mandatory penalty equal to credit wrongly taken was required to be imposed by the adjudicating authority in terms of the provisions section 11AC of Central Excise Act, 1944 because the respondent had intentionally suppressed the facts of claiming depreciation on capital goods under section 32 of the Income Tax Act, 1961. It was also asserted that the demand was confirmed by invoking extended period of limitation which could be invoked if there was any willful misstatement of facts etc. The adjudicating authority had not given any reason for not imposing the mandatory penalty of Rs 44,310/- i.e. equal to the amount of wrongly availed Cenvat credit.

Respondent’s Contention:- The respondent had filed the revised the income tax return in response to audit para. They reversed the complete excess depreciation taken by them in the income tax. They contended that the Honorable Tribunal has held that if an assessee has revised return and surrendered his benefit then it should be considered. It is settled provision that if the revised return shows that the double benefit is not taken by the assessee then the Cenvat credit should not be reversed. Reliance was placed on following decisions:

ü Terna Shetkari Sahakari Karkhana ltd. Vs Aurangabad [2001 (98) ECR-490]
ü Pasari Spinning Mills Ltd. Vs CCE, Mangalore [2002 (141) ELT-172]

Respondent contented that Doctrine of Merger is applicable for the Final Order passed by the Tribunal against the order in appeal no. 115 (HKS) CE/JPR-II/2006 dated 03.02.2006, which quashed the recovery of credit and set aside the penalty. It is worth mentioning that the Hon’ble CESTAT has confirmed the availment of cenvat credit but has upheld the penalty confirmed by the order in original amounting to Rs. 10,000/-. The Tribunal has disposed of the said appeal vide final order No. 1045/2008-SM [BR]. The demand of credit has already been dropped through above order but the penalty imposed vide the order in original was upheld.

It was further submitted that as the appeal filed by the department for confirming the order in original has been disposed of on above terms and the imposition of penalty aspect has also been considered, the principle of doctrine of merger is applicable in the instant case and so the appeal filed by the department for enhancement of penalty is not sustainable as the issue has already been considered by the higher appellate authority. As such, the Tribunal has confirmed availment of credit and also upheld penalty imposed by the order in original. Therefore, when the availment of credit has been held has proper by the higher appellate authority, the question of enhancement of penalty does not arise. Aligning with the above, we also wish to place reliance on the decision given in the following cases:-

· COMMISSIONER OF CUS. (ICD), TKD, NEW DELHI VS LAXMI FLOAT GLASS LTD. [2009 (238) E.L.T. 472 (Tri. - Del.)]:-

This appeal has been filed by the department for enhancement of penalty.It was found that the duty demand and penalty have already been set aside while deciding appeals of the respondents vide Tribunal’s Final order No. C/575-577/08-CUS dated 27-8-2008. As such, the case for enhancement of penalty does not survive and, consequently, department’s appeals are dismissed.However, we notice, that the department filed the appeals in 2006 and the same were available in the Tribunal when appeals of the respondents were taken up for hearing in the month of August, 2008. As such, appeals filed by both sides should have been taken together for decision. Registry is directed to ensure that appeals filed by both sides against the same impugned order are listed together for hearing in future. The department is also directed to bring to the notice of the concerned Bench all the appeals arising out of the same impugned order.

· COMMISSIONER OF CENTRAL EXCISE, NOIDA VS MOSER BAER INDIA LTD. [2006 (2) S.T.R. 58 (Tri. - Del.)]:-

Appeal to Appellate Tribunal - Service tax - Res judicata - Demand when already set aside by Tribunal on appeal filed by assessee, appeal by Revenue against same impugned order challenging proportionate amount and for enhancement of penalty to be dismissed as infructuous - Section 86 of Finance Act, 1994. [para 5]

In light of the above cited decisions, it is very clear that when the demand itself has been set aside by the Tribunal, the question for enhancement of penalty does not arise and consequently the appeal filed by the department is not sustainable and is liable to be set aside.

On the basis of above submissions it is ample clear that in view of the disposal of the appeal by the higher appellate authority, i.e., Tribunal, the departmental appeal is not tenable and should therefore be set aside.

Reasoning of the Commissioner (Appeals):- The appeal filed by the assessee against the order in original was decided by the commissioner (appeals) vide OIA no.115 (HKS) CE/JPR-II/ 2006 dated 03.06.2006 and it was held that the credit availed by the respondent was in order in view of Hon’ble Tribunal decision in the case of Terna Shetkari Sahaakari Sakhar, Karkhana Ltd. Vs CCE Aurangabad 2003(159) ELT 777 as the respondent had filed revised income tax return on 20.08.2004, where the amount has been reduced in their return. The department thus filed the appeal before the Tribunal against the order of Commissioner (Appeals) which was decided vide final order no. 1045/2008-SM(BR) dated 02.06.2008.the tribunal wherein it was held that Commissioner (Appeals) has rightly set aside the denial of credit. It was however also held that the respondent availed the double benefit and therefore the penalty should be imposed on the respondent. Accordingly, the imposition of penalty by the adjudicating authority was justified. The department accepted the said order of the tribunal.

It is a matter of fact that respondent filed revised income tax return in which impugned amount of credit was not capitalized and reduced. As such the tribunal accepted the contention of the respondent and upheld the order of Commissioner (Appeals) allowing the credit. The tribunal however upheld the imposition of penalty of Rs 10,000/- by the adjudicating authority as the respondent availed double benefit in the year 2000-01 which was detected by the Central Excise officers during the audit and thereafter only the respondent filed the revised income tax return on 20.08.2004. Since the issue has been finally settled by the hon’ble Tribunal, the appeal filed by the department for the enhancement in the amount of penalty equal to the credit wrongly availed becomes redundant as credit was held admissible to them.

Thus, the appeal filed by the department is rejected and the Final order of the Tribunal is upheld.

Decision:- Appeal rejected.

Conclusion:-The crux of this case is that when the demand for recovery of credit itself has been quashed by the Tribunal, the appellate authority higher than the Commissioner Appeals, then the appeal filed by the revenue for enhancement of penalty with respect to the said demand is redundant and is liable to be rejected. This principle in legal terms is known as “Doctrine of Merger” which means that the order of the higher appellate authority merges with the order of the lower appellate authority.

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PJ/Case Study/2013-14/78
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