IMPORTANT POINT
Senior management can be held liable for penalties under Rule 26 of the Central Excise Rules for knowledge and complicity in clandestine activities, even without direct involvement in daily operations.

ORDER :

Bhargav D. Karia, J.

1. Heard learned advocate Mr.Dhaval Shah for the appellants/applicants.

2. These Tax Appeals are filed under Section 35 of the Central Excise Act, 1944 (for short ‘the Act’) arising out of the order dated 23.01.2023 passed by the Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad (for short ‘the CESTAT’) in Excise Appeal No.1651 of 2010, 1652 of 2010 and 1654 of 2010.

3. The appellants have proposed the following common substantial questions of law arising from the impugned order of the CESTAT :

“(A) Whether penalty can be imposed upon the Appellant under Rule 26 of the Central Excise Rules, 2002 only because the Appellant was the in-charge Managing Director?

(B) Whether the Appellate Tribunal erred in law in upholding the Order In Original and confirming the penalty under Rule 26 of the Central Excise Rules, 2002, without specifying which particular clause of Rule 26 had been allegedly contravened by the Appellant?

(C) Whether the penalty under Rule 26 can be imposed without there being any proposal and order for the confiscation of the goods in question?

(D) Whether the Appellate Tribunal is justified in relying upon the statement partly, which suits the version of the adjudicating authority and brushes aside the part which is in favour of the Appellant?

(E) Whether the Appellate Tribunal justified in upholding the penalty under Rule 26 of the Cenvat Credit Rules, though no mens rea was established?”

4. The brief facts of the case are as under :

4.1. M/s. Shree Sardar Co-operative Sugar Industries Limited was manufacturing Sugar and was supposed to sale the Sugar as per the fixed Government quota allowed to it.

4.2. However, it was found that the said Company was clearing Sugar in excess to the quota allowed and for such excess clearance, parallel invoices were issued and no duty was paid on such excess clearance. Thus, there was a clandestine removal of the Sugar by the said Company.

4.3. The Company recorded the clandestine clearance in the books of accounts as deposit of sale proceeds against the respective customers and such clearance was not reflected in Form ER-1 returns filed under the provisions of the Act.

4.4. Accordingly, the demand was quantified by Order-in-Original dated 27.07.2010 and adjudicating authority also levied penalty upon the appellants under Rule 26 of the Central Excise Rules, 2002 (for short ‘the Rules’) as applicable at the relevant period during 2007-2008.

4.5. The adjudicating authority for levy of the penalty upon the appellants has observed as under :

“26.1. With regard to imposition of penalty under Rule 26 of the Central Excise Rules 2002 on S/Shri Jaykant Ambalal Patel - President, Devendra Ambalal Thakkar - Vice-President, N.C. Solanki - Incharge Managing Director, Kanubhal Patel - Ex-Managing Director, it has been contended on their behalf that being senior functionaries of the Company, they do not attend to day-to- day work related to clearances on regular basis; that for the administration and functioning of the Company, the Company has appointed other staff who looks after the accounting and excise work; that it is not their decision alone as a whole to decide and sell the Sugar in the Market in excess of the allotted/ released quota, but were the decisions of the Board of Directors of the Company. It is thus submitted that they alone have not involved themselves directly in day-to-day activities and functioning of the Company. During the personal hearing held on 15.7.2010, it has also been argued on behalf of Shri Kanubhai Patel - Managing Director that he was not even subjected to investigations for imposing penalty. Therefore, It has been pleaded that these persons hardly had any opportunity to know, much less to interfere or involve themselves in normal working activities of the Company so as to render them liable for penalty under Rule 26.

26.2. Further, in the separate defence arguments advanced on behalf of. Shri Parantap Joshi - Managi