In a recent ruling, the Punjab & Haryana High Court clarified that findings of Excise duty non-compliance in a Comptroller and Auditor General ( CAG ) audit do not automatically lead to the imposition of penalty or interest under Section 11AA of the Central Excise Act, 1944 ( CEA ).
The Court stated that a Show Cause Notice ( SCN ) must be issued to uphold principles of natural justice. It was observed that the petitioner had voluntarily paid the excise duty before any interest or penalty was imposed.
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However, as Sections 11AA and 11AC of the Central Excise Act specify distinct scenarios for interest liability, an SCN was necessary to allow the petitioner to explain the delay and present its case.
Justices Sanjeev Prakash Sharma and Jasjit Singh Bedi stated that “A bare reading of the complete provisions of recovery of duties under Section 11AA of the Act reflects that the principles of natural justice are inherent and imbibe the same. Therefore, merely on the basis of CAG findings of non-compliance of duty payment timelines and potential interest and penalty demand, it cannot be said that the penalty and interest would be automatic. Any order or action which results in taking away civil rights of an individual would stand vitiated if it violates the principle of audi alteram partem.”
The brief facts is that the petitioner company, Haryana City Gas Distribution Limited is a unit of the SKN Group, engaged in the distribution of Compressed Natural Gas ( CNG ) and Piped Natural Gas ( PNG ) in Gurugram, duly registered under the Central Excise Act.
The company faced scrutiny when the Superintendent of Central Excise requisitioned records for audit from April 2018 to March 2023. During the audit, the Comptroller and Auditor General ( CAG ) found delays in depositing excise duty, leading to demands for interest and penalties.
The Revenue authorities, acting on the CAG report, issued multiple letters and ultimately froze the petitioner’s bank account under Section 11(2) of the Excise Act.
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The petitioner argued that the recovery proceedings, initiated solely on the basis of the CAG report, violated statutory provisions. They contended that Section 11A mandates a proper assessment and adjudication process, which includes issuing an SCN before any recovery or penalty can be imposed.
The petitioner further submitted that financial hardships caused by freezing its bank account, impacting its public utility services. The company pointed out that delays in duty payment occurred due to technical issues during the COVID-19 pandemic and had voluntarily deposited ₹1 crore under protest.
The Revenue, however, maintained that the petitioner had admitted to delayed payments and was liable to pay interest and penalty automatically under Section 11AA of the Act. They argued that the provisions do not require an SCN for such recovery.
The High Court rejected the Revenue’s stance, observing that the principles of natural justice are intrinsic to the Excise Act. It noted that Sections 11AA and 11AC specifically provide for issuing an SCN and granting an opportunity for the assessee to present its case before penalties are imposed.
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The Court also clarified that voluntary payment of duty prior to adjudication could exempt the assessee from penalties under certain conditions. It was held that any order impacting civil rights must adhere to the principles of audi alteram partem.
The bench stated that mere findings in an audit report cannot form the sole basis for imposing penalties or freezing bank accounts without following due process.
The High Court quashed the orders demanding interest and penalties, as well as the action freezing the petitioner’s bank account, deeming them unsustainable in law. The writ petition was allowed.
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