Slotco Steel Products Pvt. Ltd. & ... vs Union Of India & Anr.
2011 Latest Caselaw 3891 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                             Date of Decision: 11th August, 2011

+      W.P.(C) 5786/2011

       SLOTCO STEEL PRODUCTS PVT LTD & ANR ..... Petitioners
                     Through Mr.Sidharth Luthra, Sr.Advocate with
                             Ms.Arundhati Katju, Adv.
                     versus

       UNION OF INDIA & ANR                                   ..... Respondents

                     Through                Mr.Himanshu Bajaj, Adv. R-1
                                            Mr.Satish Kumar, Adv. R-2

       CORAM:
       HON'BLE THE CHIEF JUSTICE
       HON'BLE MR. JUSTICE SANJIV KHANNA

1. Whether reporters of the local papers be allowed to see the judgment? Yes

2. To be referred to the Reporter or not? Yes

3. Whether the judgment should be reported in the Digest? Yes

DIPAK MISRA, CJ

By this writ petition preferred under Article 226 of the Constitution

of India, the petitioners have prayed for declaring the second proviso to

Rule 4(3) of the Central Excise (Compounding of Offences) Rules, 2005 (for

short ‗the 2005 Rules') as ultra vires the Central Excise Act, 1944 (for

brevity ‗the Act') as it runs counter to the provisions of the Act and also as

it plays foul of Article 14 of the Constitution of India.

WP (C) No. 5786/2011 page 1 of 12

2. We have heard Mr.Sidharth Luthra, learned senior counsel along

with Ms.Arundhati Katju, learned counsel for the petitioner, Mr.Himanshu

Bajaj and Mr.Satish Kumar, learned counsel for the respondents No.1 and

2 respectively.

3. It is submitted by Mr.Luthra, learned senior counsel that the proviso

to the Rule in question runs counter to the language employed in Section

9A(2) of the Act and also travels beyond the rule making power as

enshrined under Section 37(2)(id) of the Act. It is his submission that by

incorporating such a provision by way of an amendment in the Rules in

2007, the right to appeal of the petitioner under Section 35G of the Act

stands frustrated and once a statutory right of appeal is provided in an

enactment, the same cannot be defeated by envisaging such conditions, as

has been done in the Rule in question. It is also highlighted by him that

the concept of compounding has a different connotation under the Code of

Criminal Procedure and in a criminal case an accused at best can be

convicted and burdened with fine but for the purpose of compounding,

the rule making authority has imposed such conditions which are really

rigorous and, therefore, it frustrates the concept of reasonableness, which

offends Article 14 of the Constitution of India.

WP (C) No. 5786/2011 page 2 of 12

4. Learned counsel for the respondents have submitted that the

challenge is absolutely baseless and does not deserve acceptation.

5. To appreciate the submissions put forth by Mr.Luthra, it is apposite

to refer to Section 9A of the Act. It reads as follows: -

―9A. Certain offences to be non-cognisable.

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1898 (5 of 1898), offences under section 9 shall be deemed to be non-

cognizable within the meaning of that Code.

(2) Any offence under this Chapter may, either before or after the institution of prosecution, be compounded by the Chief Commissioner of Central Excise on payment, by the person accused of the offence to the Central Government, of such compounding amount as may be prescribed.

Provided that nothing contained in this sub-section shall apply to -

(a) a person who has been allowed to compound once in respect of any of the offences under the provisions of clause (a), (b), (bb), (bbb), (bbbb) or

(c) of sub-section (1) of section 9;

(b) a person who has been accused of committing an offence under this Act which is also an offence under the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985);

(c) a person who has been allowed to compound once in respect of any offence under this Chapter for goods of value exceeding rupees one crore;

WP (C) No. 5786/2011                                                 page 3 of 12
               (d)      a person who has been convicted by the court
                       under this Act on or after the 30th day of
                       December, 2005.‖

6. Section 37, which confers power on the Central Government to make

rules in sub-section (1) clearly postulates the Central Government may

make rules to carry into effect the purposes of this Act. Section 37(2)(id)

lays the following postulates: -

―37. Power of Central Government to make rules. -

(1) The Central Government may make rules to carry into effect the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may --

              (i) to (ic)    xxx   xxx   xxx

              (2)(i)(d)    provide for the amount to be paid for

compounding and the manner of compounding under sub-section (2) of section 9A.‖

7. In pursuance of the aforesaid provision, the 2005 Rules have been

framed and there has been insertion of the second proviso to Rule 4 in

2007, which is under assail. For the sake of completeness, we shall

produce Rule 4 in entirety.

"4. Procedure on receipt of application under rule 3.

WP (C) No. 5786/2011 page 4 of 12 (1) On receipt of an application under rule 3, the compounding authority shall call for a report from the reporting authority with reference to the particulars furnished in the application, or any other information, which may be considered relevant for examination of such application.

(2) Such report shall be furnished by the reporting authority within a period of one month or within such extended period as may be allowed by the compounding authority, from the date of receipt of communication from the compounding authority.

(3) The compounding authority, after taking into account the contents of the said application, may, by order, either allow the application indicating the compounding amount in terms of rule 5 and grant him immunity from prosecution in terms of rule 6 or reject such application:

Provided that application shall not be rejected unless an opportunity has been given to the applicant of being heard and the grounds of such rejection are mentioned in such order.

Provided further that application shall not be allowed unless the duty, penalty and interest liable to be paid have been paid for the case for which application has been made.

(4) A copy of every order under sub-rule (3) shall be sent to the applicant.

(5) The applicant shall, within a period of thirty days from the date of receipt of order under sub-rule (3) allowing the compounding of offences, pay the compounding amount, as ordered to be paid by the compounding authority and shall furnish the proof of such payment to the compounding authority.

WP (C) No. 5786/2011 page 5 of 12 (6) The compounding amount once paid shall not be refunded except in cases where the court rejects grant of immunity from prosecution.

(7) The applicant cannot claim, as of right, that his offence shall be compounded.‖

8. First, we shall advert to the contention whether the said proviso

runs counter to the statutory provision or supplants it or anyway

transgresses the mandate of the provision. Mr.Luthra would submit that

Section 9A(2) uses the terms ―such compounding amount‖ but there is no

prescription that the compounding amount would include tax, penalty

and interest. Learned senior counsel would submit that even Section

37(2)(id) stipulates the amount to be paid but there is no envisagement that

it would include tax, penalty and interest and, therefore, the Rule

fundamentally travel beyond the statutory provisions.

9. It is worth noting that Section 9A permits compounding of criminal

offences under the Act. Rule 31(2)(1)(d) empowers the Central

Government to make rules both on the amount to be paid for

compounding and the manner in which the compounding can be made

under Section 9A(2) of the Act. The compounding amount has not been

defined or prescribed in the Act though it is implicit that to compound an

offence, payment of the compounding amount has to be made. In terms of

WP (C) No. 5786/2011 page 6 of 12 rule making power, the compounding amount has been fixed under the

Rules. There cannot be any dispute that the Act postulates rules shall be

framed to fix the compounding amount. The contention of the learned

senior counsel for the petitioner that the compounding amount will only

mean the amounts specified as specified in the table and will not include

duty, penalty or interest payable by an assessee should be rejected.

Compounding an offence under the Act has an insegregable nexus with

the evasion of duty, etc. and consequently tax, penalty and interest is

payable thereon. There is no cavil over the factum that duty, penalty and

interest are adjudicated. At the time of launching of prosecution the

person concerned is well aware of the duty, penalty and interest element.

Read in this manner, the compounding amount can mean the amounts

specified in the rule as well as duty, penalty and interest relatable to the

alleged evasion/offence and payable by the assessee. The legislative

intendment that can be gathered from the scheme of the Act supports the

said interpretation. Any other interpretation would lead to absurdity with

only the compounding amount being paid without any obligation to pay

tax, penalty and interest due on account of the evasion/offence. The same

would result in the dropping of prosecution on payment of the

WP (C) No. 5786/2011 page 7 of 12 compounding amount but the person concerned can continue to avoid

payment of tax, penalty and interest due. What the rule seeks to do is to

prescribe and fix the compounding amount, which means a

prescribed/fixed amount to be paid in addition to the duty, penalty and

interest. The rule has rightly fixed and quantified the compounding

amount least it is left to the discretion of the authorities. However, the

compounding amount would include the duty, penalty and interest also.

10. Secondly, Section 37(2)(1)(d) authorizes and empowers the Central

Government to make rules about the manner in which compounding will

be undertaken. The term ―manner‖ is very wide. Consequently, the

impugned proviso stipulates that unless duty, penalty or interest are paid,

a compounding application would not be heard and allowed. The rule

prescribes the manner in which the compounding application would be

entertained and dealt with. The rule, therefore, is not ultra vires the parent

enactment and the rule making power. Therefore, we are disposed to

think that the second proviso does not supplant the statutory provision or

travel beyond the rule making power, as we are of the considered opinion

that Section 9A and 37(2)(id) have to be read in a conjoint manner as that is

the basic purpose of the legislature's intention. Thus, we are not

WP (C) No. 5786/2011 page 8 of 12 persuaded by the aforesaid submission of Mr.Luthra.

11. The second plank of submission of Mr.Luthra that the rule itself

creates an anomalous situation inasmuch as the offence and the

compounding amount which is a part of the table does not include the tax,

penalty and interest. For the sake of completeness, we reproduce the table

herein: -

Sl.No. Offence Compounding amount

1. Offence specified under section Rupees fifty thousand for the 9(1)(a) of the Act first offence and to be increased by hundred per cent of this amount for each subsequent offence.

2. Offence specified under section Upto fifty percent of the 9(1)(b) of the Act amount of duty evasion, subject to minimum of ten percent of duty evasion.

3. Offence specified under section Upto fifty percent of the 9(1)(bb) of the Act amount of duty evasion, subject to minimum of ten percent of duty evasion.

4. Offence specified under section Upto twenty five percent of 9(1)(bbb) of the Act the amount of duty evasion, subject to minimum of ten percent of duty evasion.

5. Offence specified under section Upto fifty percent of the 9(1)(bbbb) of the Act amount of CENVAT Credit wrongly taken or utilized, subject to minimum of ten percent of said amount.

6. Offence specified under section Rupees fifty thousand for the 9(1)(c) of the Act first offence and to be

WP (C) No. 5786/2011 page 9 of 12 increased by hundred per cent of this amount for each subsequent offence.

7. Offence specified under section Upto twenty five percent of 9(1)(d) of the Act the amount of duty evasion, subject to minimum of ten percent of duty evasion.

12. On a bare perusal of the said table, what has been provided therein

is the rate for first offence or the percentage qua in respect of the

punishment for certain offences. The said table does not anyway run

counter to the concept of tax, penalty and interest. There is no waiver

therein. The table is in accord with the rule and the anomalous situation,

which has been conceived by Mr.Luthra is not acceptable.

13. Learned senior counsel would further submit that his right to

appeal, which is statutory one under Section 35G stands frustrated. It is

urged by him that once he has challenged the demand, the tax, penalty

and interest in the statutory forum, he has to pay the same for

compounding. It is apt to note that the concept of compounding is

different under the Code of Criminal Procedure and, therefore, the fixation

of the amount is rigorous. In essence, learned senior counsel has

endeavoured to bring it under the umbrella of protection of the Article 14

WP (C) No. 5786/2011 page 10 of 12 of the Constitution of India. Section 9A makes every offence non-

cognizable notwithstanding anything contained in the Code of Criminal

Procedure. That apart, in a non-cognizable offence, if a person tries to get

the benefit to avoid a criminal prosecution, he has to satisfy the conditions

precedent. It is optional. It is not statutorily mandatory that the person

should apply for compounding. Whether or not to apply for

compounding is the wish of the person concerned. The person can contest

the prosecution proceedings on merits. A person, who intends to avoid

facing a criminal prosecution, has to fulfill the said condition. It is well

nigh impossible to visualize that a person would apply for compounding

but state that he would not pay the tax, penalty and the interest due. The

cases wherein the conditions are treated to be rigorous lie in a different

realm. In this regard, in certain cases where at the first instance of

adjudication an amount is fixed as a pre-deposit like SARFAESI Act, the

Apex Court in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311

had declared the said provision to be illegal. However, where pre-deposits

are prescribed as mandatory, the said provisions have been declared to be

constitutionally valid. [See: Governance of A.P. v. Laxmi Devi, (2008) 4

SCC 720, Gujarat Agro Industries Co. Ltd. v. Municipal Corporation of

WP (C) No. 5786/2011 page 11 of 12 City of Ahmedabad, AIR 1968 SC 623 and Shyam Kishore v. MCD, (1993) 1

SCC 22.]

14. In the case at hand, as we perceive, when there is a compounding for

the purpose admitting a tax evasion, the condition stipulated for

entertaining the application cannot be regarded as onerous. Section 9A(2)

also uses the terminology ―in such manner of compounding‖. The manner

cannot be said to be in the realm of a prescription or procedure alone. Had

it been so, the legislature would have used the word ―in the mode of

payment‖. The manner, while prescribing, can lay down certain

conditions precedent, it does not whittle down the purpose of

compounding.

15. Thus judged, we find the second proviso to Rule 4(3) of the Rules

does not become ultra vires. In the result, we do not find any merit in this

writ petition and, accordingly, the same stands dismissed without any

order as to costs.

                                                  CHIEF JUSTICE



AUGUST 11, 2011                                   SANJIV KHANNA, J
kapil



WP (C) No. 5786/2011                                           page 12 of 12