This article is based on findings of a project on standard of decisions.
Decision making is conducted in a world of uncertainty, and therefore the law requires that every legal actor, before making any sort of decision, must measure his or her degree of certainty against the ‘applicable’ standard.
In every sphere of law, lawmakers set standards in accordance with policy objectives, and an understanding of any branch of law is incomplete without a knowledge of the standards created by them. The standards have an intensely practical impact on outcome of legal disputes, for which reason the study of ‘applicable’ standard of decisions has great relevance in adjudication process and for Government’s policy formation.
In this project, a study has been attempted of the standard of decisions to decide disputes over Government’s demands of service tax and central excise duties that invoked the extended period of limitation under section 73 of Finance Act, 1994 and section 11A of Central Excise Act 1944.
Index of Contents
1 Abstract iv
2 Brief background of the provision on
limitation in Central Excise Law v
3. Evolution of a provision in Service Tax Law
on extended period of limitation ix
4. Treatment of provisions on extended
period in CESTAT and Higher Courts rulings xi
5. Relevance of experience in Income Tax
in structuring enforcement provisions xiv
6. Current status of VAT laws on extended
period of demand xvi
7. Legislative architecture to curb tax offences xviii
The success rate in CESTAT for obtaining decisions in favour of revenue in cases, where charge of “suppression of fact” has been made, is a cause of concern. A consistent standard of decision has not emerged which will provide certainty and predictability to this law.
The standard of proof is very high in service tax matters when the department alleges ‘suppression of fact” and seeks to demand duty on for five years instead of one. The adjudication proceeding to determine that charge assumes a quasi-criminal character. This was not always so. The Finance Act, 1994 had introduced section 73 in which provision for extended period was pari materia with similar provision in Income Tax and non-payment of tax was called ‘value escaping tax’; the offence was treated as being civil in nature. In 2004, the provision was amended and aligned with that in Central Excise Act 1944 and thereafter extended period of demand could be invoked only where mens rea of the assessee could be demonstrated.
In 2011 the Finance Act created a new category of offences which is materially the same as that which was created in erstwhile section 73, but assessees in this category could claim differential treatment at the stage of adjudication on imposition of penalty but not during the process for application of extended period. This study report finds that the remedy to departmental concerns on anti-evasion cases can be met by instituting the erstwhile provision of extended period in section 73 of Finance Act, 1994 in both Service Tax and Central Excise Laws. The current provision on suppression of law should be amended to restrict its application to cases of serious fraud.
During litigation conferences of Authorized Representatives, which is held in the offices of Authorized Representatives in CESTAT, in the course of which officers are prepared to argue before CESTAT, participants have been of the view that consistent standard of decisions have not emerged in our which creates uncertainty and unpredictability. Decisions on maintainability of demand on extended periods appear to be highly judge-centric and the situation needs a remedy. This study is focused on the jurisdictional aspects in relation to demands of duty for extended periods and imposition of penalty made on assessees’ who have evaded duties/taxes. The objective is to suggest amendments to the law that will provide legislative guidance to adjudicators and investigators. Thereafter fresh instructions on operational practices would need to be issued.
I. The provision on limitation in Central Excise Law
(i) Till the late 1960s the method of control over manufacturing units that produced excisable goods was pari materia with the customs control on imported and exported goods in the customs area, in land custom stations and sea ports. Customs law being much older coloured the Central Excise Law and Procedures. Revenue officers were posted inside the licensed premises of manufacturing units in the same manner as they were posted in sea docks. Without obtaining “out of charge”, a permission from these officers, no goods could be taken out either from the Customs dock or the Central Excise licensed manufacturing premise.
(ii) From 1970s onwards the procedures were liberalized and many units taken away from the physical control described in para foregoing. Thereafter the dominant mode of control over manufacturing units was ‘production based’ in which Central Excise officers visited and checked the records relating to production in different stages of the manufacturing process and counted the stock of goods produced which were ready for removal. While field officers visited factories inspecting records and taking stock of goods, there was a complex system of approvals and permissions which had to be taken before production of goods. All goods that were to be cleared were classified under the central excise tariff and their value was also determined by the Assistant Collector/Commissioner in charge of central excise division. The laws relating to extended period for issue of demand matured within Central Excise in the period of physical and production based controls.
(iii) The tone and tenor of the physical and production based controls in central excise was well expressed in a paragraph of the Basic Manual of Departmental Instructions on Excisable Manufactured Products (3rd Edition) [Corrected up to 31.8.1989 and published by Central Board of Excise and Customs]. Chapter IV of this manual relating to ‘Staffing Survey and Over time’, in Section Á’, on Staffing, reads as follows:-
“41. General principles of staffing of different factories producing excisable goods
Staffing a factory manufacturing excisable goods is required to be done after taking into consideration many aspects. The principle to be observed generally is that at least one officer must be in constant touch with the factory at all times when any operation connected with production of the goods is in progress excepting goods of small factories yielding negligible revenue, where posting of whole time staff may not be economical. The complement of the staff also will depend on the size of a factory and the number of shifts it works.”
The instructions serve to highlight the importance which tax administration accorded to the presence of central excise officers within a factory premises to maintain oversight over production activities.
(iv) The concept of an enlarged period of limitation for raising demand in the times of physical or production based central excise control was then associated with a clandestine activity of the manufacturer. He must have created certain devices by which the Central Excise officer was disabled from inspecting the production or was made to see such records of the factory which were false. Duty evasion in this environment became akin to common law criminal offences such as theft or cheating. This provided the background for enactment of extended period which could be invoked only for the reason of fraud or collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made there under with intent to evade payment of duty perpetrated by the manufacturer. The key words that link with all the alternative conditions are ‘intent to evade payment of duty’ and by mentioning the word ‘intent’ the law introduced the concept of mens rea in central excise laws and it converted adjudication proceedings which were otherwise were quasi-civil in nature, into quasi-criminal proceedings. This legal position was expressed in different ways in rulings of the Apex Court in which they held that there should have been a positive act on behalf of the manufacturer if the revenue is to invoke the extended period of limitation for demanding duty.
(v) The Central Government promulgated the Central Excise Rules 2001 whose rule 6 effected a paradigm shift in the method of assessment. The old practices of inspecting the production process, approving the classification and valuation of goods that were to be produced by the manufacturer were abandoned as the assesse was given the responsibility of assessing his own production and clearances. In this environment it is possible that the assessee may commit an assessment error just as an officer may do as his understanding may not be mature on the subject. Further it could also happen that the tax payer, based on information of trade practice or innovative interpretation provided by a consultant or his own staff, assumes that a certain duty was not payable and he then omits to make a declaration of that activity in his periodical return or in his record of registration. In the jurisprudence of democratic common law countries this misdemeanor on the tax payer’s part is regarded as being only civil in nature as long as there is no indication of a criminal design.
(vi) The magnitude of offences is depicted as on the horizontal bar of the dispute scale below:-
Doubtful demands Zero Point Tax Avoidance Tax Evasion /Organized Crime
Note: In the scale -25 to 0 points denote an area where the officers’ interpretation of law is weak and doubtful. Zero Point is position in which a taxpayer makes a mistake even though he has made a declaration of it to the designated assessing officer. Points 0 to 50 is the zone of tax avoidance and beyond point 50 is the zone of evasion. The length after point ‘F’ is generally occupied by organised crime.
Disputes on non-payment of taxes is ranged on a wide spectrum which have been assigned points on a horizontal scale in the diagram above. On the left hand side the first segment A relates to tax demands that are clearly not borne by the language of the statute and are against the spirit of legislation. Towards its right are cases where demands are made in situations where the words of the statute are ambiguous but the spirit of the statute favours the tax payer, such cases are shown as segment ‘B’. The stretch from point minus 50 to zero point is the zone of doubtful tax demands. No blame can be attached to the tax payer; they generally demonstrate the weakness of tax administration.
To the right on the scale is the Zero Point. Located at this point are cases where the tax payer has given declaration of relevant facts but due to inadvertence or failure of his own official machinery has short paid the duty or tax. The error is discovered either by taxpayer himself or in routine assessment and such cases to not result in dispute.
Towards right of this point are cases where the tax payer does not declare a certain facts because he assumes that no tax is payable on the basis of a strained construction of the words in the statute, and he would normally claim that his legal view is supported by a legal maxim. In such cases the spirit of that legislation favours revenue. These cases, marked as segment ‘C’, are contested sharply in courts and the outcome of litigation cannot be predicted though the higher courts of law may lean towards the department. Still further to the right are cases marked as segment ‘D’, where the interpretation taken by the tax payer is both highly improbable and is against the spirit of the law. A fair and competent treatment of such disputes in CESTAT should end it in favour of revenue. Since the tax payers in these two segments do not file intimation of the relevant facts in their statutory declaration, these cases have an element of offence.
Beginning from point 50 to point 100 is the zone of tax evasion. In segment ‘E’ are cases where a tax payer acts in blatant violation of a provision without giving intimation to the department. At the very end on right are cases of segment ‘F’, where the tax payer conducts his operation in the manner of an underworld activity, where no activity is conducted under the sight of any authority.
The middle segment of this spectrum from zero to fifty corresponds to what would be loosely called tax avoidance though the term has no formal definition and cases of tax avoidance and evasion may overlap. The right extreme of the spectrum are clearly cases of ‘tax evasion’. A tax evasion case may eventually get treated as tax avoidance in legal proceedings instituted against the tax payer, but tax evasion cases cannot be instituted with the standard of proof that’s adequate for tax avoidance cases only. This legal position regarding ‘tax avoidance’ has firmed ever after the highly acknowledged Learned Hand J. said as follows:-
"We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes." (Helvering v Gregory)
(vii) In 2011 the Union Budget provisions of Section 11A, 11AA, 11AB and 11AC were amended and the Memorandum to the Finance Bill 2011, states that ‘a new category of cases is being carved out in respect of which the period of limitation would be five years but which would attract general penalty of 50% of the duty” ( Annex-I ) By this bill the present section 11AC (1) (b) of the Central Excise Act, 1944 was born. The impost of reduced penalty applies to the cases where details relating to non-levy or short levy are available in the specified records of the asseessee.
(viii) Imposition of penalties are not independent adjudicatory processes; they follow other judicial determinations that hold that the same assessee is liable to pay duty for five years on the ground of suppression of fact or fraud etc. If the department accepts that the details on which the demand has been calculated was available in ‘specified records’, that fact would be strong evidence to prove that the assessee had no guilty intent under Section 11A (3) and therefore theirs was not a case for imposition of mandatory penalty of any amount. The existing rulings of the Apex Court would come to the assessee’s aid. The objective of legislature of carving out a new category of offence of civil nature, that which in common parlance is called ‘tax avoidance’, has remained unrealized. To borrow the language of sculpture, the legislative work of 2011 is a piece in ‘relief’, and to carry out the legislative intent with which amendments were made in the Budget of 2011, it needs to be ‘rounded’ away from the sculptor’s ‘stone block’ of ‘mens rea’; that rough surfaced block which requires the department to prove that the assessee has not paid duty for reason of fraud or collusion or any willful mis-statement or suppression of facts, or contravention of any provisions of the Act or rules with intent to evade payment of duty.
(ix) The CESTAT in a decision in the matter of M/s Lakhan Singh vs. CCE, Jaipur [2014(3)ECS(143)(Tri-Del.)] has made incisive comments on the changes that have taken place in the environment in which central excise operates now and how the liability relating to extended period must adapt itself to this change, in the following words:-
“All the cases pointed out were with reference to a registered assesse and before self-assessment system came into existence. With the scheme of self-assessment the onus on the part of the assessee to disclose information to the department has become all the more important. The first step in such disclosure is taking registration. The second step is in filing returns filling all columns in the return in a bona fide manner and not in a clever manner.”
The above decision shows sensitivity to the changed nature of central excise law control, but the decision has obliterated the difference between non-disclosure and suppression of facts, and therefore it does not distinguish between ‘tax avoidance’ and ‘tax evasion’. This decision may not withstand the rigors of judicial scrutiny because the text of the statute does not bear this interpretation, but the judgment flags the need to delete the statutory provision of “intent to evade” for raising demands in tax avoidance cases.
(x) While seeking a place for tax avoidance in indirect tax laws, it is important to assert that the need to establish intent to evade payment of duty has not become totally defunct for tax laws for certain categories offences. There are today operations which are entirely clandestine, where the units have no existence in the eyes of law of the land or alternatively units have been created in legal documents, which do not exist in reality. These devises are created to evade high tax regimes or to take fraudulent benefit of a very attractive exemption schemes. The extant provision on fraud, suppression of facts need to be preserved to deal with such cases. Law should treat such instances differently from more prevalent case of tax avoidance and therefore there is a need to continue the existing provision on extended period. Officers may not clearly understand what is a criminal intent and the method adopted in the Indian Evidence Act 1872 to explain the concepts through illustration should be adopted in indirect tax laws so that investigators do not use these provisions indiscriminately. Such segregation of the two types of offences, one civil the other criminal, will further prompt officers to be more persuasive in investigation fraud cases and to aim at launching prosecution in all such cases besides recovering monetary dues.
II Evolution of a provision in Service Tax Law on extended period of limitation
(i) Finance Act, 1994 which introduced service tax made a departure from other central indirect taxes in relation to provision of limitation of demand of tax. The Section 73 of the Finance Act, 1994 as enacted in 1994 enabled officers to invoke extended period for raising service tax demands where the tax payer who received value of any taxable service had for the reason of omission or failure failed to disclose all material facts “wholly and truly” about that value. This provision is substantially aligned to Section 147 of the Income Tax Act which talks of income chargeable to tax escaping assessment. The relevant provisions of Finance Act, 1994 the Central Excise Act 1944 and Indian Income Tax Act, 1961 are attached (Annex-II).
(ii) The erstwhile Section 73 of Finance Act, 1944 treated non-payment of tax as being a civil matter. There was no duty cast on the Service Tax officer to establish that the conduct of the tax payer proved that he had intention to evade duty. Since the factor of “mens rea” did not enter into disputes of service tax liability on extended period, the canvass of service tax disputes on extended period was the same as it was for income tax laws. In Income Tax laws the onus on department is low to prove that the information had not been disclosed because all that needs to be seen is whether that information upon which the fresh demand is based had been entered in the periodical return required under the tax statute. The disclosure under the Income Tax laws has to be explicit in the return itself which the law makes clear by an explanation. In net result in the tax law the meaning of disclosure becomes what has been explained by the Apex Court in the Calcutta Discount Co. Ltd Vs ITO (1961) 41 ITR 191 in the following words:-
“There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above., In view of the Explanation, it will not be open to the assessee to say, for example-" I have produced the account books and the documents: You, the assessing officer examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account-books and the documents". His omission to bring to the assessing authority's attention these particular items in the account books, or the particular portions of the documents, which are relevant, amount to " omission to disclose fully and truly all material facts necessary for his assessment." Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them-including particular entries in account books, particular portions of documents and documents, and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.”
The burden of proof on the Service Tax Officer was the same as it is in Income Tax laws today, and is limited to establishing that the tax payer had not made a disclosure to the Department in the concerned periodical return and an argument that the tax payer did not have a guilty state of mind in not making the disclosure had no relevance to the adjudication proceedings.
(iii). The provision of Section 73 of the Finance Act, 1994 was re-enacted in 2004 and the current provision is aligned with the corresponding provision in the Central Excise Act, 1944. This amendment reportedly was not effected for any such reason that the erstwhile provision under Section 73 was unworkable or that the interpretation of the provision had led to proliferation of litigation. The amendment had been in preparation of the Department taking up levy and collection of Goods and Service Tax, and it was assumed that the provision in the Central Excise statute, which was of an older vintage, must colour the provision of the younger statute for levy of Service Tax, which would then convert itself in to the law for Goods and Services Tax.
(iv). The judicial impact of the amendment to Section 73 of the Finance Act, 1994 in the year 2004 was to make it very difficult for officers to get a confirmation of demand on invocation of extended period from judicial fora. A decision of the CESTAT highlighted the implications of the amendment in all its dramatic contrast in the following words:-
“14. The show-cause notice invoked the proviso to Section 73(1) of the Finance Act, 1994 on the ground of suppression of facts etc. for recovery of service tax from the appellants for the period 16-7-2001 to 30-6-2005. It is not in dispute that the reinsurance brokerage received by the appellants was not included in the taxable value of ‘insurance auxiliary service’ rendered by them to insurers (including reinsurers) for the purpose of payment of tax for the above period. According to the appellants, they did not suppress material facts before the Department. We think, in this context, it is relevant to consider the Superintendent’s letter dated 3-6-2008 addressed to the appellants, which reads thus:-
“We request you to furnish the following particulars immediately:-
1. Copies of reinsurance contract/Agreement entered into by you with Indian/Foreign Insurance Companies.
2. The list of insurance companies for which your company act/acted as reinsurer as stated in para 20 of Order-in-Original No. 2/2007, dated 31-1-2007 and the details of reinsurance done by your company from July 2001.
3. Whether your commission payment was only from Insurance Companies or also from the reinsurer, was the payment received only in India, was it in Indian rupee, whether the payment was through your Bankers.”
It appears from the above letter that the show-cause notice was issued and the same was adjudicated upon without gathering all the relevant facts for the period of dispute. In this scenario, the allegation of suppression of facts is not sustainable against the assessee. Consequently, the demand for the period beyond the normal period of one year preceding the date of issue of show-cause notice cannot be sustained. However, for the period prior to 10-9-2004 [the date on which Section 73(1) of the Finance Act, 1994 was amended], mere omission or failure of the assessee in the matter of filing returns etc. was enough for the Department to invoke the larger period of limitation. Suppression of facts etc. was not necessary. In the present case, omission of the appellants to include reinsurance brokerage in the taxable value for the period from 16-7-2001 to 9-9-2004 is not in dispute and the same was enough to invoke the proviso to Section 73(1) of the Finance Act, 2006 as this provision stood prior to 10-9-2004. In the result, the tax liability of the appellants should be restricted to the normal period and beyond up to 10-9-2004 only. The learned Commissioner should requantify the demand accordingly.” [Suprasesh G.I.S. & Brokers P. Ltd. Versus CST Chennai, 2009 (13) S.T.R. 641 (Tri. - Chennai)]
The standard of decision adopted for dropping the charge of suppression of fact in the above decision under the present statute may be questioned but there is nothing to doubt the CESTAT when they firmly rule that the factors of suppression of fact etc. were irrelevant for interpretation of the erstwhile section 73.
(v) In service tax laws nearly all cases in this study appear to be instances of ‘tax avoidance’. However this may be so because officers have been over burdened with raising demands on the multitude of service providers who have not registered themselves, and that in course of time, when the law matures and practice firms up, it very possible that service tax officers may be able to demonstrate criminal intent in evading payment of taxes by certain unscrupulous service providers.
III. Treatment of provisions on extended period by CESTAT and higher courts.
In the AR Office project on standard of disputes, all officers are compiling information on standards used to determine whether extended period will apply in a certain factual premise in two different formats. The work is not completed but representative decisions were taken out and are analysed below.
(i) The allegations of ‘suppression of fact’ is invariably made where a tax assessee has either not taken registration as an assessee has not filed an ST 3 return showing the details of the manufacture he has performed or service provided. Except in cases investigated by DGCEI or Preventive Units of Commissionerates, no attempt is made to conduct further investigation and get evidence to indicate that the assessee had a guilty state of mind and failed to make the declaration deliberately. The CESTAT benches in Mumbai dealing with such cases, more often than not rule that in case a service tax provider does not make a declaration in his monthly return or has not taken a registration, he cannot claim that he had bona fide belief that the tax is not payable. In such cases the CESTAT upholds the demand on extended period and denies the benefit of section 80 to write off penalty. These decisions are made following Lakhan Singh standard discussed in para I (vi) above. Non-declaration of their service tax activity has been read to mean the same as suppression of fact with intent to evade payment of service tax. Most other benches of the CESTAT hold the opposite view that non declaration is not conclusive proof of the fact that the service provider or manufacturer has suppressed facts.
(ii) Even Members who uphold the Lakhan Singh standard, have held that the very fact that the records of the tax payer were audited by a team of departmental officers, the service tax provider’s responsibility to make full and true declaration stood discharged. They therefore drop demand made for the extended period of limitation.
(iii) There are decisions where it was held that if tax payer wrote a letter to the department seeking clarification, then the allegation of suppression of facts cannot be made against them. Members in some cases have said that if a service tax provider did not declare a certain activity on the basis of a tax consultant advice, this fact was adequate ground to demonstrate that he did not have intent to evade and thus allegation of suppression of fact would not hold against them. The CESTAT in a particular case found the issue of taxability highly debatable and on that premise proceeded to strike down the invocation of extended period for raising demand. In yet another case the CESTAT noted that all records had been properly maintained and that the manufacturer may have had a bona fide error in understanding the SSI Exemption notification number 8/2003, which was difficult to comprehend and therefore the extended period was not applicable. There are several decisions where the existence of contradictory judicial pronouncements on the legal issue in dispute was treated as valid ground for dismissing the charge of suppression of fact. The drift of these arguments is that if departmental officers, CESTAT Members and Judges could not be perfectly sure of whether a particular tax is demandable, then a layman such as the service tax provider or manufacturer, could not be expected to know that law requires payment of such a tax. Thus the CESTAT go on to conclude that not making a proper and truthful declaration does not show that tax payer has deliberately suppressed facts with intent to payment of duty and the extended period for raising demand must not be invoked notwithstanding the fact that they would not have made a declaration to the designated service tax officer.
(iv) The Lakhan Singh standard is a positive rule but the rest of decisions of CESTAT are based on ‘non-standards’ in the sense that the standard of decision is defined in a slew of negatives. Hence an assessee is said “not” to have suppressed facts if he was wrongly guided by a consultant or the text of a notification is difficult to comprehend, or different CESTAT benches or courts of law have passed contrary rulings, or that department’s audit officers visited his premises and did not detect that non-payment, or that the assessee wrote seeking guidance to some wing of the government.
(v) In a case where the CESTAT dropped charge of suppression of fact because there were conflicting views expressed by different benches of CSTAT, the Allahabad High Court has given salutary advice to the Tribunal in the matter of CCE vs. Deewan Sugar Mills (Central Excise Appeal No. 163 of 2014). They directed the CESTAT to limit their finding on the reasons given by the adjudicator of the first instance by which the demand for extended period was upheld and not be influenced by the fact that different benches have given divergent views on the issue. This judgment however does not go so far as to provide a positive standard of decision.
(vi) The different shades of opinion of CESTAT members and judges are influenced by few key decisions of the Apex Court. Three highly cited decisions are worth mentioning. In the matter of Pushpam Pharmaceuticals C. vs. CCE [1995 (78) E.L.T. 401 (S.C.)], the Supreme Court stated as below:-
“4. Section 11A empowers the Department to re-open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.”
This decision has been the foundation of the juridical view that the provision on extended period mandates that the adjudicator apply a quasi-criminal standard of decision.
(vii) Another decision which has had conditioned the minds of adjudicators, though that may have been an unintended effect of the decision, is ruling in Nizam Sugar Factory vs. CCE 2006(197) ELT 465 (SC), where the Supreme Court as follows:-
“9. Allegation of suppression of facts against the appellant cannot be sustained. When the first SCN was issued all the relevant facts were in the knowledge of the authorities. Later on, while issuing the second and third show cause notices the same/similar facts could not be taken as suppression of facts on the part of the assessee as these facts were already in the knowledge of the authorities. We agree with the view taken in the aforesaid judgments and respectfully following the same, hold that there was no suppression of facts on the part of the assessee/appellant.”
This decision appears to have been made on grounds of equity as the words used in the statute do not bear of this meaning given to them in the decision. The Gujarat High Court, in the matter of Commissioner v. Neminath Fabrics Pvt. Ltd. — 2010 (256) E.L.T. 369 (Guj.) and following it few CESTAT benches, have distinguished the above Supreme Court decision while adjudicating similar matters. Nonetheless the Nizam Sugar decision sets many adjudicators on the track of an enquiry on whether the department at any stage between the commission of the offence and issue of the demand notice became aware of the non-payment and that is seen to exonerate the tax payer from the allegation of suppression of fact.
(viii) The decision of Apex Court in the matter of Uniworth Textiles Ltd. Vs Commissioner of Customs 2013(288) ELT 161(SC), makes an interpretation of section 28 of the Customs Act which is substantially the same as section 11AC of Central Excise Act 1944 or Section 73 of Finance Act 1994.
“22. We are not persuaded to agree that this observation by the Commissioner, unfounded on any material fact or evidence, points to a finding of collusion or suppression or misstatement. The use of the word “willful” introduces a mental element and hence, requires looking into the mind of the appellant by gauging its actions, which is an indication of one’s state of mind. Black’s Law Dictionary, Sixth Edition (pp 1599) defines “willful” in the following manner :-
“Willful. Proceeding from a conscious motion of the will; voluntary; knowingly; deliberate. Intending the result which actually comes to pass…
An act or omission is “willfully” done, if done voluntarily and intentionally and with the specific intent to do something the law forbids, or with the specific intent to fail to do something the law requires to be done…”
23. In the present case, from the evidence adduced by the appellant, one will draw an inference of bona fide conduct in favour of the appellant. The appellant laboured under the very doubt which forms the basis of the issue before us and hence, decided to address it to the concerned authority, the Development Commissioner, thus, in a sense offering its activities to assessment. The Development Commissioner answered in favour of the appellant and in its reply, even quoted a letter by the Ministry of Commerce in favour of an exemption the appellant was seeking, which anybody would have found satisfactory. Only on receiving this satisfactory reply did the appellant decide to claim exemption. Even if one were to accept the argument that the Development Commissioner was perhaps not the most suitable repository of the answers to the queries that the appellant laboured under, it does not take away from the bona fide conduct of the appellant. It still reflects the fact that the appellant made efforts in pursuit of adherence to the law rather than its breach.”
The above decision proceeds on the premise that for individual different organs of the Government are one and the same. Hence if a person provides information to one wing it is evidence to show that he did not have the intent to evade duty. This reasoning assumes that the tax payer is not adequately aware of the deeply segmented style of working in large organizations and that he would have assumed that by taking the view of the Development Commissioner he has impliedly informed his assessing officer. This view appears based on equity on a presumption of naivety of a plaintiff since he also thought that the Development Commissioner is the right authority to give an official opinion on the subject. It has made adjudicators think of several other circumstances where such equitable considerations could be employed. A standard of decision should not only have intellectual consistency or fairness but it should also make the enforcement of the laws possible.
(ix) The treatment of provisions on extended period reveals that the Courts following the Pushpam Pharmaceuticals decision will not accept simple non declaration as conclusive proof of suppression of fact. No clear and positive standard of decision has been designated by case laws for deciding demands based on larger period of limitation. It seems appropriate that legislature should step in to lay positive standard of decisions by redefining offences and providing illustrations for guidance of adjudicators.
IV. Relevance of experience in Income Tax in structuring enforcement provisions.
(i) In the evolution of the direct and indirect tax laws in India have followed different trajectories and there has not been much inter-borrowing. Though all taxes are civil liabilities and all assesses are legal persons, the view that income taxes and taxes on goods and services are fundamentally different has influenced the thinking of tax policy advisers in the past. A study of tax administration experience of the two wings of Department of Revenue would show that the distinction between direct and indirect taxes is entirely an academic creation.
(ii) All taxes are levies on economic activities and the main distinction between tax on income on the one hand, and the tax on goods and services on the other, is the manner of calculation of the base on which rates of duty or tax are applied. The similarity between direct and indirect taxes becomes visible as one sees that Income Tax is a levy on the income that is derived from an agglomeration of a large number of transactions in which the tax payer has been engaged in course of one year, on the other hand, indirect tax are levied on each transaction. A tax payer does not see any difference in the impact of the two forms of levy on his business. The income tax that he deposits is drawn from the same monetary resource which he uses to pay indirect taxes and saving on indirect taxes have direct impact on the distributable profits of the business. The notion that the Income Tax is a charge on the tax assessee whereas an indirect tax is a charge on the customer of the assessee is hugely overdrawn.
(iii). Income Tax disputes are either over admissibility of a transaction, shown as expense, as a deduction or over the nature of “linear transaction” in which a tax payer tries to minimize his tax liability by using a third person as a conduit. The attempt of the tax payer is to prove to the court that the deduction sought is permitted by statute or that the linear transaction is a genuine commercial activity and not a mere device to avoid taxes. In both circumstances the discourse is on the character and value of individual transactions, which agglomerate to yield the taxable income.
(iv) The difference between civil and criminal liabilities was explained by Lord Denning in the Miller v Minister of Pensions
 2 All ER 372. In an adjudication on whether the affliction of cancer on an Army retiree could be related to the conditions of his Army service, he said as follows:-
“If at the end of the case the evidence turns the scale definitely one way or the other, the tribunal must decide accordingly, but if the evidence is so evenly balanced that the tribunal is unable to come to a determinate conclusion one way or the other, then the man must be given the benefit of the doubt. This means that the case must be decided in favour of the man unless the evidence against him reaches the same degree of cogency as is required to discharge a burden in a civil case. That degree is well settled. It must carry a reasonable degree of probability, but not so high as is required in a criminal case. If the evidence is such that the tribunal can say: “We think it more probable than not,” the burden is discharged but, if the probabilities are equal, it is not.”
The above principle of ‘preponderance of probability’ aptly applies to cases of tax avoidance where the burden of proof on the department is light but the penalties on the tax payer for breach is also light or even nil. There is a strong justification for creating limitation provisions in Central Excise and Service Tax laws where the liability is to be determined on a simple criterion; whether or not the tax payer filed a full and true declaration with the designated tax authority.
(v) In indirect taxes the major challenge to the department comes in the form of legal construction of the provisions on classification and valuation of transactions. Though the scope of tax dispute in direct and indirect taxes are different they both involve an argument over nature of transactions and their value. The liabilities under both the forms of taxation are civil in nature. There is therefore a strong case for seeking convergence in the statutory provisions of direct and indirect taxes to the extent that it does not militate against the essence of the levy. One area of seeking convergence is in the manner the provisions on extended period of demands is structured in all tax statutes.
(vi) There are distinct advantages in importing the concept of escapement which is regarded a civil offence and provide for separate limitation period, penalty and interest rates, and make it known that mens rea is not necessary for assuming jurisdiction over past demands in the limitation zone that has been postulated. Today the tax payers often litigate in CESTAT because the chances of winning their dispute on the ground of limitation is seen as bright. In the same case appellants may not approach the CESTAT if their case has been adjudicated as tax avoidance matter. Secondly, the demands of complying with requirements of providing non-relied upon seized documents and according an opportunity to the assessee to cross examine witnesses during adjudication proceedings is far less stringent on the department in a case of a civil nature. Income Tax disputes are rarely contested on such issues as presently all income tax adjudication are quasi civil proceedings. Most indirect tax offences do not contain element of mens rea and in trying to render such disputes as quasi-judicial generally results in reduction the demand period to that meant for routine assessment. The net impact would be reduction in time spent on investigation in tax avoidance cases, fewer litigation, faster realization of revenue, and a better focus on investigations in to cases of serious fraud.
(vii) Though all Income Tax offences are presently civil in nature, some experts have felt that there is perhaps need to institute provisions for limitation and penalties for quasi-criminal income tax offences. This would need a separate study with which the present one is not concerned. A uniform structure for statutory provisions on tax offences in India is a desirable legislative objective for the country. There is need to import the concept of escapement from Income Tax to Indirect laws, so also there may be need to raise provisions for direct tax offences of criminal nature in Income Tax Act. Tax laws need three layered legislative structure for dealing with different forms of tax offences: one that recovers taxes in course of routine assessment; second in which the tax payer has been avoiding taxes but the nature of offence cannot be regarded as criminal; the third comprises of specific types offences which the legislature treats as criminal.
V. Current status of VAT laws on extended period of demand
(i) The provisions on limitation in the VAT laws of different states show that a variation. Whereas the laws of the present and former Union Territories show a large degree of alignment with the existing Central Excise laws, there is little that can be said to be common in many laws. Few states use the concept of mens rea for laying down larger periods of limitation.
(ii) The legislation that do structure limitation on ground of deliberateness of the misconduct of a tax payer include Andhra Pradesh, where assessments can be re-opened within six years of assessment if there has been a willful evasion, though the normal period for doing so is four years. In Delhi demands can be made within six years if evidence is found that the tax payer has concealed information or non-payment is due to concealment, omission or failure to disclose fully material particulars on the part of the tax payer. In normal cases the time limit is four years. In Karnataka, the laws are more stringent. If it is found that the tax has not been paid fraudulently, the normal period for raising demands, which is five years from end of assessment period, is extended to ten years. The laws in Kerala on VAT are very strict on those who use bogus invoice or forged documents to take input tax credit. The normal period for re-opening a demand is five years but in case of misuse of input tax credit facility, demand can be raised regardless of time limit. In Uttar Pradesh VAT laws, the period in which reassessment can be made is three years but the Commissioner has the right to issue demand in a case for a period up to eight years and the ground for that demand may include a difference in opinion. The Uttar Pradesh provision for eight years is severe and the statute itself has not given guidelines on how this discretion for raising demand for the extended period has to be exercised. This provision will at least provide the department to come down on fraudulent tax payers. In Assam the time limit for raising demand has been linked to the filing of prosecution; in such cases demands can be raised regardless of time limits. The normal time limit for reassessment in Assam is five years. By relating limitless period for raising demand to prosecution the Legislature of Assam has brought in the element of mens rea as there can be no prosecution without criminal intent such as fraud or suppression of facts.
(iii) In many states the basis for extended period is simple escapement of tax caused by not making a full declaration. In Maharashtra the period in which any assessment can be reopened is three years. However if a taxpayer does not register himself or delays in taking registration then demand for period of five years can be raised. In Bihar the normal period from raising demand is five years where assessment to tax may have escaped for any reason. There are no provisions for extended period in case of escapement due to criminal intentions. In Gujarat laws on VAT there is similar provision with no mention of intent of the taxpayer. The period for raising demand is five years. In Haryana the duration within which reassessment can be made is two years but if assessment has not been made then the period becomes five years. In Odisha, tax can be demanded for past five years if it has not been paid without reasonable cause. The laws in Odisha appear to be weakest as officers would be within their discretion to drop any demand on the basis that the taxpayer had a reasonable ground for not paying. In Punjab demand can be raised within one year of close of assessment period, which is the same short duration as in central excise; and demand for three years can be raised if the taxpayer has not made correct or complete declaration. This extended period provision in Punjab’s VAT legislation is along the lines of erstwhile section 73 of the Finance Act 1994. In Tamil Nadu the provisions do not treat escapement and normal assessment mistakes separately. In all cases demands can be made within five years of the relevant period.
(iv) A GST law will demand that States adopt common yardsticks, and a consensus is developed amongst all States and the Union on what is the basic framework in which enforcement provisions in the law should be structured. The review shows that even though VAT was meant to be a uniform law throughout the country, States chose to keep their own provisions on basis and period of demand. Whereas period of demand is a matter of public policy, the enforcement machinery needs to recognize all three forms of non-payment, non-payment which is not covert and therefore innocent; cases of non-payment which are civil offences because the tax payer does not file intimation to department and does not pay because in his bona fide belief he is not liable to pay taxes and finally those which may merit prosecution and for which laws need to be stiffer and the proceedings are quasi-criminal.
VI. Legislative architecture to curb tax offences
(i) The law’s jurisdiction for recovery of tax dues and imposition of penalties has both been linked by legislatures to a taxpayer’s magnitude of non-compliance to tax laws. Limitation period is kept very long for raising demand from tax payers whose behaviour by the standard of the society is regarded as being criminal. All tax laws have provision for prosecution for tax frauds. The definition of a serious offence is generally framed by the legislature’s perception of how the public in the course of their economic life is likely to view that offence. If the perception of the tax code in relation to the gravity of an offence is vastly different from that of the commercial world, it will create dysfunction and cause friction. In cases where an offence may attract criminal prosecution, officers tend to use strong arm methods of evidence collection and if the public does not recognize that offence as serious, then that gives rise to public discontent over the executive’s functioning. Therefore there is always a need to maintain a balance between the nature of offences and the consequences that flow from under the enforcement provisions relating to the offences.
(ii) The experience of working with the present Section 73 of the Finance Act, 1944 and Section 11 A of Central Excise Act, 1944 has led to proliferation of appeals in CESTAT. Very large number of appeals are mainly aimed at getting relief of invocation of extended period of limitation. These cases are best described as civil offences or as “tax avoidance” matters and in these cases the department’s failure rate in defending the extended period is usually very high. Only two benches of CESTAT apply the Lakhan Singh legal theory and uphold the demand, the rest do not. The revenue augmentation measures get frustrated by the clogging of appeals in CESTAT. The Investigation Officers (I.O.) have also began to lose focus because of the frequent decisions of the CESTAT in which the demand for extended period is dropped.
(iii) Indian Income Tax laws do not demand of their tax investigators to face the rigors of quasi-criminal proceedings in the conduct of investigation. In course of time laws on Money Laundering have branched out of Income Tax laws and this new field demands officers to conduct criminal investigations in to offences that normally are dealt in income tax investigations. While the Finance Act, 1994 and the Central Excise Act, 1944 should be amended to provide exclusive provisions for dealing non-payment due to “tax avoidance” which will be dealt as a quasi-civil matter, there should be longer period of limitation for serious evasion cases where investigators would be expected to unearthed intention to evade duties or taxes. Such cases of serious nature would be expected to lead up to launching of prosecution just as investigations in money laundering cases are. The proposal is this that the erstwhile Section 73 of Finance Act, 1944 be re-inserted in the Act and the provisions in the first proviso of the current Section 73(1) be inserted as “73(C)” along with illustrations so that the scope of 73(C) is restricted to cases of serious fraud.
(iv) The object in introducing section amending sections 11A, 11AC etc. to introduce clause for reduction in penalty by 50% has been expressed in the Memorandum to Finance Bill 2011 (Annex 11). The object has not been achieved through the amendment that was effected. In order to carry out the legislative objective, the law should be amended so that three independent categories of offences which attract differential treatment are created. The three categories of law for the three types of non-payment of taxes would have the following characteristics:-
Category A. The assessee has complied with all procedural requirement in relation to the value that has escaped assessment but he did not pay tax because of inadvertence or wrong understanding of law.
Category B. The demand for duty or tax is based on records duly maintained in the specified records of the tax payer, but he has not filed information regarding that element of value to be taxed to the designated officer under the tax statute.
Category C The assessee is engaged in clandestine activity or has deliberately (knowingly) withheld information which makes the offence serious in nature.
(v) The tax law should clearly formulate differential treatment that should be meted out to the three categories of non-payment. The broad principles could be as follows;-
Category A. This is a simple matter of non-payment. Department should recover normal market rate of interest along with duty that was not paid.
Category B. This is a civil offence which attracts civil penalties and interest. The penalties need to be moderate but penal interest could be imposed as a deterrent
Category C. The current provisions are adequate to deal with serious offences where the assessee has been found to have acted with malicious intent. Officers could be directed to pursue such cases till prosecution is launched.