The Ahmedabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that an employee cannot be held liable for a company’s inadvertent error in claiming CENVAT credit unless malafide intent was proven.
Ajay Kuralkar, the appellant, was a Deputy Manager at Alok Industries Limited (AIL). A penalty of Rs. 2,00,000 was imposed on him under Rule 26 of the Central Excise Rules, 2002, read with Rule 15(1) of the CENVAT Credit Rules, 2004, for his alleged role in the company’s inadvertent availment of CENVAT credit of Rs. 5,10,14,355 on 31.03.2008.
The credit was related to the spinning unit of the company and was reversed voluntarily on 01.04.2009 without utilization, well before the issuance of the show cause notice. The company and the appellant argued that the credit was claimed mistakenly without malafide intent, as it related to an internal unit of the company.
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The department issued a show cause notice and the Commissioner passed an order imposing penalties on both the company and the appellant. Aggrieved by the penalty, the appellant approached the CESTAT arguing that the penalty was unjustified as it was a voluntary reversal and absence of any malafide action.
The appellant’s counsel relied on rulings such as Hubergroup India Pvt. Ltd. v. CCE & ST – Daman and Ran India Steels Pvt. Ltd. v. CC & CE, Salem arguing that Rule 26 penalties apply only when goods are liable for confiscation, which was not the case here.
The counsel also pointed out that the company underwent corporate insolvency resolution under the Insolvency and Bankruptcy Code ( IBC ), 2016, and all prior demands against the company were extinguished per the Supreme Court judgment in Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
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The single-member bench led by Ramesh Nair ( Judicial Member ) observed that the availment of credit was an inadvertent mistake and no malafide intent could be established. The tribunal further observed that AIL had voluntarily reversed the credit upon audit without dispute which showed that there was no loss to the revenue or undue gain to the company.
So, the tribunal ruled that penalties under Rule 26 of the Central Excise Rules, 2002 cannot be used in cases of inadvertent errors without malafide intent. The tribunal explained that penal action against an employee for a corporate error especially when the company was not found guilty of misconduct was unsustainable.
The tribunal set aside the penalty of Rs. 2,00,000 imposed and allowed the appellant’s appeal.
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