Discovery During Audit Alone Does Not Justify Extended Limitation u/s11A: CESTAT Sets Aside Cenvat Credit Demand and Penalty of Rs. 1.81 Crore [Read Order]

The Principal bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi held that mere discovery of wrongly availed Cenvat credit during audit does not justify invoking the extended period of limitation under Section 11A(4) of the Central Excise Act.

M/s Vacmet India Limited, a manufacturer of polyester film, filed an appeal challenging the order-in-appeal dated 17.02.2023, passed by the Commissioner (Appeals), which had upheld the order-in-original denying Cenvat credit amounting to Rs. 1,81,11,167/- for the period March 2016 to June 2017. An equal amount was imposed as a penalty under Section 11AC of the CentralExcise Act, 1944.

The appellant availed Cenvat credit on input services and capital goods. During an audit, the department alleged that the appellant had wrongly availed the credit. Consequently, a show-cause notice was issued, invoking the extended period of limitation, claiming that the wrong availment was committed with the intent to evade duty and could only be discovered during audit.

The Joint Commissioner, in his order-in-original, confirmed the denial of credit and imposition of penalty, noting that the wrong availment was allegedly done willfully and with intent to evade duty, and therefore, the extended period of limitation and penalty were justified. Aggrieved by this order, the appellant filed an appeal before the Commissioner.

The appellant contended that all statutory returns were filed correctly and on time, and all transactions were recorded in business records, including balance sheets. Also, the extended period of limitation under Section 11A(4) could not be invoked merely because the irregularity was discovered during the audit.

It was further submitted that the relevant period for issuance of the show-cause notice under Section 11A is two years from the relevant date. Since the show-cause notice was issued on 16.02.2021, the demand was beyond the two-year limitation period and thus time-barred.

There was no allegation that the appellant had suppressed facts, misstated, or committed fraud in filing returns. The appellant argued that the audit merely identified what the departmental officers should have scrutinised, and this alone cannot form the basis for extended limitation.

The Commissioner (Appeals) upheld the order-in-original, reasoning that the alleged irregularities were detected during audit and could not have been discovered otherwise. The appellant had not refuted allegations of willful suppression or misstatement of facts. Therefore, the extended period under Section 11A(4) was correctly invoked, and the equal penalty under Section 11AC was justified. Aggrieved by this order of the Commissioner, the appellant then filed an appeal before the Tribunal.

The tribunal observed that the only ground cited for invoking the extended period was that the irregularity was discovered during the audit. It was further noted that the discovery during the audit does not automatically imply suppression, fraud, or intent to evade duty. The appellant had filed all returns properly, and the transactions were duly recorded.

The Tribunal observed that if the assessing officer had scrutinised the returns adequately, the alleged irregularity would have been noticed without invoking the extended limitation. In the absence of evidence demonstrating willful misstatement, fraud, or suppression of facts, the invocation of extended limitation and the penalty could not be sustained.

The two-member bench of Dilip Gupta(President) and P.V. Subba Rao (Technical Member) held that the demand and penalty cannot be sustained on the ground of limitation itself and set aside the impugned order, granting consequential relief to the appellant.

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