Important High Court Ruling: Recovery Proceedings Pending Stay Application

The Central Board of Excise and Customs (“CBEC”) in supersession of seven previous circulars on the same subject issued Circular No. 967/01/2013 CX on 1st January, 2013, directing the departmental officers to initiate recovery actions in cases where 30 days have expired after the filing of appeal by an assessee before an appellate authority. This action by CBEC is most unprecedented and totally unjust and unfair inasmuch as it has resulted in penal consequences for reasons beyond the control of an assessee and has rendered the statutory right of appeal nugatory. The said CBEC Circular is unjust and unfair for various reasons and in particular due to the fact that in large number of cases, stay applications are not disposed of due to inaction at the end of the concerned appellate authority and for no fault of the assessee.

In this regard, significant observations made by the Honourable Supreme Court of India (reproduced hereafter) in Commissioner of Cus & CE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC), have been totally ignored by CBEC:

“Para 6

The sub-section which was introduced in terrorem cannot be construed as punishing the assessees for matters which may be completely beyond their control For example, many of the Tribunals are not constituted and it is not possible for such Tribunals to dispose of matters. Occasionally by reason of other administrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed within the time specified. ….”

Bombay High Court Ruling in Larsen & Toubro Ltd. vs. UOI (2013) 288 ELT 481 (Bom) – Automatic Stay of recovery after filing of Stay Application – No coercive actions unless assessee resorts to dilatory tactics.

A Writ Petition was filed under Article 226 of the Constitution challenging the CBEC Circular dated 1-1-2013. The Petitioners pleaded that when the stay application remains to be disposed of due to inability of the appellate authority to take up the application for hearing and disposal without any default on the part of the assessee, it would be arbitrary to penalise the assessee by enforcing the recovery, despite the pendency of the application for stay. The Honourable High Court noted the ruling in Collector vs. Krishna Sales (P) Ltd. (1994) 73 ELT 519 (SC) and relied on the rulings in CCE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC); Mark Auto Industries Ltd. vs. UOI (1998) 102 ELT 542 (DEL) and Nedumparambil P George vs. UOI (2009) 242 ELT 523 (BOM), while making important observations set out hereafter. As regards CBEC’s directive that even though stay application was filed before Commissioner (Appeals)/CESTAT which is pending, recovery could be initiated upon completion of 30 days after filing of appeal if no stay is granted, the following was observed:

 • If on failure of Appellate Authority to dispose of appeal or stay is not due to default of assessee or their dilatory tactics, to initiate recovery by coercive measures in the meantime, is unjustified, arbitrary, travesty of justice and violative of Article 14 of Constitution of India.

• It is unjust to penalise the assessee for inability of judicial/quasi judicial authority to dispose stay application within thirty days. The fact that a period of thirty days is allowed to lapse after filing of appeal is immaterial as Commissioner (Appeals)/CESTAT may not have heard the stay application within these thirty days.

• Lack of adequate infrastructure, unavailability of officer before whom stay application had been filed, absence of bench of CESTAT or sheer volume of work, are some causes due to which applications for stay remain pending, which are beyond control of assessee.

• Protection of revenue has to be balanced with fairness to assessee. That is why even though Section 35C(2A) of Central Excise Act, 1944 prescribes that stay order stands vacated where appeal before Tribunal is not disposed of within 180 days, it is not applicable where appeal remains pending for reasons not attributable to assessee. In such a scenario, Revenue’s plea that when there is no stay and thus there is no prohibition of recovery of confirmed demand immediately, and it is a matter of government policy to how long it should wait before initiating recovery is rejected.

• The fact that Revenue officers initiating recovery are independent of adjudicating/appellate forum, and have no means of verifying status of stay application and it is for assessee to inform them when recovery action is initiated, is not a valid justification for penalising assessee whose conduct is otherwise free from blame with modern technology, this can be overcome. However, if a stay application remains pending for more than reasonable period, due to default/improper conduct of assessee, recovery proceedings can be initiated. As regards CBEC’s directive that in cases where Commissioner (Appeals)/CESTAT or the High Court confirms the demand, recovery has to be initiated immediately, the Court observed as under:

• This directive ‘deprives’ the assessee even a reasonable time to exercise the remedy provided to them under the law of filing an appeal with CESTAT, High Court or Supreme Court as the case may be along with an application of stay.

• Further, there is no justification to commence recovery immediately following the order–in– appeal where period of limitation has been laid down for challenging it under the law. As regards adoption of modern information technology in regard to appeal and adjudication processes, the following important observations, were made by the Court at Para 16:

• Union Ministry of Finance should take steps to ensure that proceedings before the adjudicating authorities as well as the Appellate Authorities including the Commissioner (Appeals) and the CESTAT are recorded in the electronic form.

• Once an appeal is filed before the Commissioner (Appeals), the filing of the appeal must be recorded through an entry made in the electronic form. Every appellant, including the assessee, must indicate, when an appeal is filed, an email ID for service of summons and intimation of dates of hearing.

• We would also recommend to the Union Ministry of Finance the urgent need to introduce electronic software that would ensure that the orders and proceedings of the CESTAT are duly compiled, collated and published in the electronic form.

• Matters involving Revenue have large financial implications for the Union Government. The incorporation of electronic technology in the functioning of judicial and quasi-judicial authorities constituted under the Central Excise Act, 1944, the Customs Act, 1962 and cognate legislation would provide a measure of transparency and accountability in the functioning of the adjudicating officers, the appellate Commissioners as well as the Tribunal. But equally significant is the need to protect the interest of the Revenue which the adoption of electronic technology would also achieve.

•    The fact that an application for stay may be kept pending for an indefinitely long period of time at the behest of an unscrupulous assessee and a willing administrative or quasi judicial authority. This would be obviated by incorporating the requirement of disseminating and uploading the proceedings of judicial and quasi-judicial authorities under the Central Excise Act 1944 as well as the Customs Act 1962 in an electronic form. This would ensure that a measure of administrative control can be retained with a view to safeguarding the position of the Revenue as well as in ensuring fairness to the assessees.

The Court finally at Para 17 held as follows:

“For these reasons, we have come to the conclusion that the provisions contained in the impugned circular dated 1st January, 2013 mandating the initiation of recovery proceedings thirty days after the filing of an appeal, if no stay is granted, cannot be applied to an assessee who has filed an application for stay, which has remained pending for reasons beyond the control of the assessee. Where however, an application for stay has remained pending for more than a reasonable period, for reasons having a bearing on the default or the improper conduct of an assessee, recovery proceedings can well be initiated as explained in the earlier part of the judgment”

Stay by other Courts

In addition to Bombay High Court, interim stay has been granted against operation of CBEC Circular dated 1-1-2013 by the High Courts of Andhra Pradesh, Delhi, Karnataka and Rajasthan. [Reference can be made to Bharat Hotels Ltd. vs. UOI (2013) 288 ELT 509 (DEL); Texonic Instruments vs. UOI (2013) 288 ELT 510 (KAR) and R.S.W. M Ltd vs. UOI (2013) 288 ELT 511 (RAJ)

Directions given by the Bombay High Court in Patel Engineering Limited 2013-TIOL-150-HC -MUM-ST The assessee had filed a writ petition in the Bombay High Court against the Circular dated 1-0-2013. The assessee’s facts are similar to those of Larsen & Toubro case (supra). The Honourable High Court after considering the decision in Larsen & Toubro (supra ) held that recovery proceedings be stalled and further issued directions for the authorities to issue a circular to follow the directions as stated in the Larsen & Toubro case (supra) before initiating recovery proceedings. Further, the Honourable High Court also held that the law laid by the Court is applicable to all the authorities under the jurisdiction of this Court.

Conclusion

The above assumes greater importance for the simple reason that despite the Court Rulings of Larsen & Toubro (supra), it is understood that at practical level, field formations are initiating recovery actions based on CBEC Circular insisting that Court Ruling is applicable to the concerned petitioner only. It is high time that the Supreme Court intervenes in the matter and issues appropriate directions or alternatively, the Union Ministry of Finance urgently acts upon the directions given by the Honourable High Court and move towards establishing accountability and reforming tax administration in the country.