Commissioner of Customs, Mumbai Vs. M.M.K. Jewellers & another  INSC 413
(11 March 2008)
Ashok Bhan & Dalveer Bhandari (With Civil Appeal Nos. 822-824, 818-820, 815-817, 825-827, 1537- 1539, 4641
of 2004 and Civil Appeal No. 7274 of 2005) Dalveer Bhandari, J.
1. The questions of law involved in all these appeals are identical,
therefore, we propose to dispose of these appeals by this common judgment. For
the sake of convenience, the facts of Civil Appeal Nos. 813-814 of 2004 are
recapitulated as under:
2. The respondent M/s M.M.K. Jewellers is a unit in Santacruz Electronics
Export Processing Zone, engaged in the manufacturing of plain/studded/unstudded
gold jewellery for export from directly imported gold or from the gold procured
from MMTC in terms of Notification No. 196/87-Cus dated 5.5.1987 which was
further amended by Notification No.
155/92-Cus dated 30.3.1992 and Notification No. 177/94-Cus dated 21.10.1994.
The said notification, inter alia, permitted graded percentage of gold wastage
or loss depending on the value addition achieved, on the jewellery of the
description specified therein, and provided that scrap, dust or sweepings may
be forwarded to the Government Mint by the importer for conversion into
standard gold bars and returned to the said zone in accordance with the
procedure specified by the Commissioner of Customs in this regard. Amongst
other conditions, the said notification required that the importer shall
maintain a proper account of import, consumption and utilization of the goods
and of exports made by him. Public Notice No.2/1988 dated 28.7.1988 issued by
the Commissioner of Customs, Airport in terms of the abovesaid notification
required the units in SEEPZ to maintain registers as per proforma annexed
3. On 11.11.1995, acting on information that the Gem &
Jewellery Units in SEEPZ have been misusing the facility by showing excess
manufacturing wastage or loss than permissible under the above mentioned
notification, causing shortage in physical stock, claiming it to be lying in
the form of dust, the Officers of the Mumbai Customs Preventive Commissionerate
visited the premises of the said unit and verified the records from the period
of inception of the unit and took the physical stock of gold followed by
detailed investigations which resulted in the detection of a shortage of
6410.885 grams of gold, valued at Rs.28,72,076.48. The respondent unit was
found to have not been maintaining the Wastage Account Register prescribed vide
Public Notice No.
2/88 dated 28.7.1988.
4. During the investigation, the respondent unit claimed that the excess
manufacturing wastage/loss took place in the production of jewellery and the
same was available in the form of dust/slurry and the gold was recoverable by
refining the same and the claim of loss made at the time of export was
5. The EXIM Policy (1992-97) in para 90 prescribes the admissibility of gold
wastage or manufacturing loss as specified in para 147 of the Hand Book
Procedures and the Table-I thereto whereby the actual wastage or loss is
admissible only upto the extent prescribed and as according to the
said Customs Notification issued in this behalf.
6. The wastage norms specified in para 147 of the Hand Book of
Procedures in respect of mounting and findings are applicable only in
cases where the mountings and findings have been manufactured from imported
gold and exported as such and no wastage is admissible if the mountings and
findings are imported as they are used as such in jewellery which is then
exported in terms of the explanation given below in the Table to
clause 10 of Notification No. 177/94 and as clarified by the Ministry of
Finance vide letter F.No.305/91/94FTT dated 11.10.1994.
7. No further loss is permitted on the repairs of the imported products as
the claim of loss is admitted at the time of an initial export of the products.
8. From the above, it appears that the respondent has failed to maintain the
Wastage Account Register for the purpose of monitoring the actual
manufacturing wastage or loss but claimed the maximum wastage/loss of claim as
mentioned above was made farce and thus they violated the conditions of the
aforesaid notification and Public Notice No. 2/88 of 28.7.1988.
9. It also appears that the respondent has failed to export/account for
6410.885 grams of gold valued at Rs.28,72,076.48 claiming it to be lying in
dust and claiming protection under sub-proviso to condition.
10. It, therefore, appears that the aforesaid duty free gold weighing
6410.885 grams and valued at Rs.28,72,076.48 were neither exported nor were
available in the physical stock and thereby violating the conditions of the
aforesaid Customs Notification and, consequently, appear to have rendered
themselves liable for confiscation under section 111(o) of the Customs Act, 1962.
11. It, therefore, prima facie indicates that the respondent did or omitted
to do an act which act or omission rendered the abovesaid duty-free gold
weighing 6410.885 grams and valued at Rs.28,72,076.48 liable for confiscation
under section 111 of the Customs Act, 1962
or abetted to do an act or omission of such an act and dealt with the said gold
which they knew or had reason to believe were liable to confiscation under
section 111 of the Customs Act, 1962
as indicated above and thus rendered themselves liable for penal action under
clauses (a) and (b) respectively of section 112 of the Customs Act, 1962
and also the mandatory penalty under section 114A of the said Act.
12. Now, therefore, the respondent was called upon to pay Rs.20,82,255.45 as
customs duty at the rate of 50% (BCD) + 15% CVD (as applicable on 11.11.1995)
on the aforesaid shortage of gold weighing 6410.885 grams valued at
Rs.28,72,076.48 as specified above under section 28 of the Customs Act, 1962
and in terms of the Bond executed with the Assistant Commissioner of Customs,
SEEPZ and explain in writing to the Commissioner of Customs (Preventive), New
Customs House, Ballard Mumbai 400 038, as to why the aforesaid amount should
not be recovered and penalty imposed under sections 112(a) and (b) and 114A of
the Customs Act, 1962.
13. On behalf of respondent M.M.K. Jewellers, reply to the show cause notice
was filed by Mr. A.S. Sunder Rajan, Advocate vide his letter dated 24.2.1998.
In the said letter, he contended that the Officers during the stock taking on
11.11.1995 detected a shortage of 6410.885 grams of gold and the gold was reportedly
lying in the form of dust and slurry.
He also stated that in terms of the general bond, the importer has to
maintain a proper accounting of import, consumption and utilization of the
goods and there is no reference to the wastage and that only vide Public Notice
20/96 dated 8.11.1996, the requirement of maintaining of wastage register was
14. The respondent submitted that the present show-cause notice dated
13.11.1997 relates to import from 1992-1993 and, therefore, the show-cause
notice is time barred. It was also submitted on behalf of the respondent that
non- accounting of gold or the wastage thereof does not amount to violation of
any provisions of the Customs Act, 1962
or the conditions of Customs Notification No.177/94 issued on 21.10.1994.
15. The respondent submitted that the proprietor of the company in his
statement informed that the gold is available in dust and slurry lying in his
unit, which is recoverable and the same has been subsequently recovered and,
therefore, there is no shortage. In view of this, the invocation of section
111(o) and section 112 is not sustainable. It was also submitted that section
114A of the Customs Act, 1962 was applicable only in respect of a case where duty has not been
levied or has been short levied and since the present case relates to
accounting of gold, question of levy or penalty does not arise.
16. The respondent stated that the unit had recovered a substantial amount
of metal against the shortage of 6410.885 grams alleged in the show-cause
notice. Regarding imposition of penalty under section 112 of the Customs Act,
it was stated that the show-cause notice was issued under section 28 of the
Customs Act, 1962
for the purpose of recovery of duty and hence provision of section 112 cannot
be invoked. It was asserted that the imported gold has been used for the
manufacture of jewellery and that the said section can be invoked only in case
where imported gold has not been utilized in a manner prescribed in the said
notification. The matter of dispute is only regarding the quantum of wastage
and recovery of gold therefrom and, therefore, section 111(o) of the Customs
cannot be invoked and, consequently, section 112(a) or 114A of the Customs Act,
also cannot be invoked. It was further submitted that the show-cause notice is
time barred and that since the show-cause notice is issued under section 28 of
the Customs Act, 1962 penalty under section 112 cannot be levied.
17. It was also submitted that section 114A of the
Customs Act, 1962 has
no application to the facts of this case as the said section came into force
w.e.f. 28.9.1996 and the show- cause-notice pertains to an earlier period. It
was pointed out that section 114A is applicable only in a case where the duty
has been short-levied by reason of collusion, wilful misstatement or
suppression of facts and since there is no such allegation, section 114A cannot
18. The Commissioner of Customs in his order dated 27.7.2001, after
considering the show-cause-notice and the reply filed by the respondent,
observed that on 11.11.1995, the Officers attached to Preventive
Commissionerate of Mumbai Customs conducted the stock taking and verification
of records which resulted in detection of shortage of 6410.885 grams of gold,
valued at Rs.28,72,076/-. During the investigation, the respondent unit claimed
that the said quantity of gold found short was recoverable from the dust/slurry
lying in the unit. Shri Mohanlal M. Kedia, Proprietor of the firm in his
statement recorded under section 108 of the Customs Act, 1962
stated that the quantity of 6410.885 grams was the loss taken place at the time
of manufacturing and the year-wise excess loss from 1990-91 to 1995-96 was
ranging between 1.16% to 3.21% whereby the average excess loss for the period was
They also admitted that they did not maintain wastage register. Therefore,
by their own admission they had been incurring wastage of gold more than the
permissible limit as prescribed in the Notification 196/87-Cus and 177/94-Cus and
also vide Para 147 of the Hand Book of Procedures read with Para 90
of the EXIM Policy, 1992-97.
19. The Commissioner of Customs found that there was no dispute regarding
computation of shortage. However, the only claim was that so much gold was
recoverable by refining the dust/slurry lying in the unit. The respondent took
the preliminary objection that the demand of duty under section 28 of the
Customs Act, 1962
has been made after six months of the detection of the shortage because the
demand has been made to the extent of duty on the goods which were found to
have been violated.
20. According to the Commissioner of Customs, the gold imported into the
unit was permitted duty free clearance from time to time under Notification
No.196/87(Custom) till 21.10.1994 and thereafter under Notification
Both these notifications have inherent conditions which are to be complied
with by the respondent unit. These conditions inter alia permitted certain
quantity of manufacturing loss/wastage on gold and the remaining quantity has
to be exported in the form of jewellery. While computing the shortage during
the time of stocking this fact has been taken into account and it is not disputed.
Therefore, the Commissioner found that the duty on such shortage is recoverable
and also such non-fulfilment of the conditions of the Notification and EXIM
Policy would render the goods found short, liable for confiscation under
section 111(d) and 111(o) of the Customs Act, 1962
and, consequently, the Unit would be liable to penal action under section
112(a) of the Customs Act, 1962
as it was due to their acts of commission and/or omission which gave rise to
such shortages rendering the goods found liable for confiscation.
21. The Commissioner of Customs, in his order, has held that to the extent
of maintaining of prescribed register, the respondent violated the conditions
of the said notifications.
The Commissioner also held that the claim of recovery of gold from the
slurry/dust cannot be adjusted towards the shortage of gold found during stock
checking. The Commissioner held that the shortage of 6410.885 grams of gold was
valued at Rs.28,72,076/- and, therefore, the custom duty of Rs.20,82,225/- as
demanded in the show cause notice was also payable. The Commissioner of Customs
held that the above shortage is violation of the conditions of the Notification
No. 196/87 and 177/94-Cus and the EXIM Policy and, therefore, 6410.885 grams of
gold valued at Rs.28,72,076/- was liable to confiscation under sections 111(d)
and 111(o) of the Customs Act, 1962. He, however, held that these goods are not available for
confiscation, therefore, by virtue of their acts of commission and/or omission,
the respondents have rendered the said goods liable for confiscation and
rendered themselves liable for penalty under section 112(a) of the Customs Act,
The Commissioner of Customs in his order observed that no cause of collusion,
wilful misstatement or suppression of facts has been brought out in the show
cause notice so as to invoke the provisions of section 114A of the Customs Act,
Therefore, he did not find that it was a fit case for invoking section 114A of
the Customs Act, 1962 relating to the penalty.
22. The Commissioner of Customs passed the following order:
(a) I confirm the demand of duty of Rs.20,82,255/- (Rupees Twenty Lakhs
Eighty Two Thousand Two Hundred Fifty Five only) under Section 28 of Customs
(b) Though the said 6410.885 gms of gold, valued at Rs.28,72,076/- found
short is liable for confiscation, since the same is not available for
confiscation, while confirming its liability of confiscation under section
111(d) and 111(o) of Customs Act, 1962,
I am not ordering confiscation of the said goods.
(c) I impose penalty of Rs.2,87,000/- (Rupees Two Lakhs Eighty Seven
Thousand only) on M/s.
M.M.K. Jewellers (M/s. Jewel Exports Pvt.
Ltd.) under Section 112(a) of Customs
23. The respondent, aggrieved by the said order of the Commissioner of Customs,
preferred an appeal before the Customs, Excise and Gold (Control) Appellate
Tribunal, West Regional Bench, Mumbai (for short the Tribunal).
24. The Tribunal decided all these 14 identical appeals by a common judgment
dated 19.6.2003. The Tribunal held that the confirmation of demand of duty by
the adjudicating authority under Section 28 of the Customs Act, 1962
is wrong in law and facts and the impugned order of the Commissioner of Customs
cannot be sustained. The Tribunal also held that the confirmation of duty is
barred by limitation. The Tribunal observed regarding clauses (5) and (8) of
the notification that one has to be practical that when the jewellery is
manufactured out of the raw material and when the gold is converted from
primary form to the end product, there may be certain dust which may fly from
the place of manufacture or it may even be irrecoverable loss due to the
process of manufacture of the final product. It can be invisible. The Tribunal
observed that the table of the notification also stated the percentage of gold
which could be allowed for wastage.
The appeal filed by the respondent was allowed with consequential relief.
25. The appellant Commissioner of Customs, Mumbai, aggrieved by the said
judgment of the Tribunal, has preferred this appeal under section 130E(b) of
the Customs Act, 1962.
26. Since the respondent has laid serious stress on the question of
limitation and imposition of penalty therefore, we deem it appropriate to
reproduce the provisions (sections 28 and 114A) dealing with limitation and
penalty in the Customs Act, 1962.
Sections 28 and 114A are reproduced as under:
28. Notice for payment of duties, interest, etc. (1) When any duty has
not been levied or has been short-levied or erroneously refunded, or when any
interest payable has not been paid, part paid or erroneously refunded, the
proper officer may, (a) in the case of any import made by any individual for
his personal use or by Government or by any educational, research or charitable
institution or hospital, within one year ;
(b) in any other case, within six months, from the relevant date, serve
notice on the person chargeable with the duty or interest which has not been
levied or charged or which has been so short- levied or part paid or to whom
the refund has erroneously been made, requiring him to show cause why he should
not pay the amount specified in the notice:
Provided that where any duty has not been levied or has been short-levied or
the interest has not been charged or has been part paid or the duty or interest
has been erroneously refunded by reason of collusion or any wilful misstatement
or suppression of facts by the importer or the exporter or the agent or
employee of the importer or exporter, the provisions of this sub-section shall
have effect as if for the words "one year" and "six
months", the words "five years" were substituted.
Explanation.-Where the service of the notice is stayed by an order of a
court, the period of such stay shall be excluded in computing the aforesaid
period of one year or six months or five years, as the case may be.
(1A) When any duty has not been levied or has been short-levied or the
interest has not been charged or has been part paid or the duty or interest has
been erroneously refunded by reason of collusion or any willful misstatement or
suppression of facts by the importer or the exporter or the agent or employee
of the importer or exporter, to whom a notice is served under the proviso to
sub-section (1) by the proper officer, may pay duty in full or in part as may
be accepted by him, and the interest payable thereon under section 28AB and
penalty equal to twenty-five per cent. of the duty specified in the notice or
the duty so accepted by such person within thirty days of the receipt of the
(2) The proper officer, after considering the representation, if any, made
by the person on whom notice is served under sub-section (1), shall determine
the amount of duty or interest due from such person (not being in excess of the
amount specified in the notice) and thereupon such person shall pay the amount
Provided that if such person has paid the duty in full together with
interest and penalty under sub- section (1A), the proceedings in respect of
such person and other persons to whom notice is served under sub-section (1)
shall, without prejudice to the provisions of sections 135, 135A and 140, be
deemed to be conclusive as to the matters stated therein:
Provided further that, if such person has paid duty in part, interest and
penalty under sub-section (1A), the proper officer shall determine the amount
of duty or interest not being in excess of the amount partly due from such
(2A) Where any notice has been served on a person under sub-section (1), the
proper officer,-- (i) in case any duty has not been levied or has been
short-levied, or the interest has not been paid or has been part paid or the
duty or interest has been erroneously refunded by reason of collusion or any
willful mis-statement or suppression of facts, where it is possible to do so,
shall determine the amount of such duty or the interest, within a period of one
year; and (ii) in any other case, where it is possible to do so, shall
determine the amount of duty which has not been levied or has been short-levied
or erroneously refunded or the interest payable which has not been paid, part
paid or erroneously refunded, within a period of six months, from the date of
service of the notice on the person under sub-section (1).
(2B) Where any duty has not been levied or has been short-levied or
erroneously refunded, or any interest payable has not been paid, part paid or
erroneously refunded, the person, chargeable with the duty or the interest, may
pay the amount of duty or interest before service of notice on him under
sub-section (1) in respect of the duty or the interest, as the case may be, and
inform the proper officer of such payment in writing, who, on receipt of such
information, shall not serve any notice under sub-section (1) in respect of the
duty or the interest so paid:
Provided that the proper officer may determine the amount of short-payment
of duty or interest, if any, which in his opinion has not been paid by such
person and, then, the proper officer shall proceed to recover such amount in
the manner specified in this section, and the period of "one year" or
as the case may be, referred to in sub-section (1) shall be counted from the
date of receipt of such information of payment.
Explanation 1.-Nothing contained in this sub- section shall apply in a case
where the duty was not levied or was not paid or the interest was not paid or
was part paid or the duty or interest was erroneously refunded by reason of
collusion or any willful mis-statement or suppression of facts by the importer
or the exporter or the agent or employee of the importer or exporter.
Explanation 2.-For the removal of doubts, it is hereby declared that the
interest under section 28AB shall be payable on the amount paid by the person
under this sub-section and also on the amount of short-payment of duty, if any,
as may be determined by the proper officer, but for this sub- section.
(2C) The provisions of sub-section (2B) shall not apply to any case where
the duty or the interest had become payable or ought to have been paid before
the date on which the Finance Bill, 2001 receives the assent of the President.
(3) For the purposes of sub-section (1), the expression "relevant
date" means, (a) in case where duty is not levied, or interest is not
charged, the date on which the proper officer makes an order for the clearance
of the goods;
(b) in a case where duty is provisionally assessed under section 18, the
date of adjustment of duty after the final assessment thereof;
(c) in a case where duty or interest has been erroneously refunded, the date
(d) in any other case, the date of payment of duty or interest.
114A. Penalty for short-levy or non-levy of duty in certain cases.Where
the duty has not been levied or has not been short-levied or the interest has
not been charged or paid or has been part paid or the duty or interest has been
erroneously refunded by reason of collusion or any willful mis- statement or
suppression of facts, the person who is liable to pay the duty or interest, as
the case may be, as determined under sub-section (2) of section 28 shall, also
be liable to pay a penalty equal to the duty or interest so determined:
Provided that where such duty or interest, as the case may be, as determined
under sub-section (2) of section 28, and the interest payable thereon under
Section 28AB, is paid within thirty days from the date of the communication of
the order of the proper officer determining such duty, the amount of penalty
liable to be paid by such person under this section shall be twenty-five percent
of the duty or interest, as the case may be, so determined:
Provided further that the benefit of reduced penalty under the first proviso
shall be available subject to the condition that the amount of penalty so
determined has also been paid within the period of thirty days referred to in
Provided also that where the duty or interest determined to be payable is
reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or,
as the case may be, the court, then, for the purposes of this section, the duty
or interest as reduced or increased, as the case may be, shall be taken into
Provided also that where the duty or interest determined to be payable is
increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case
may be, the court, then, the benefit of reduced penalty under the first proviso
shall be available if the amount of the duty or the interest so increased,
along with the interest payable thereon under Section 28AB, and twenty-five per
cent of the consequential increase in penalty have also been paid within thirty
days of the communication of the order by which such increase in the duty or
interest takes effect:
Provided also that where any penalty has been levied under this section, no
penalty shall be levied under Section 112 or Section 114.
Explanation.-For the removal of doubts, it is hereby declared that- (i) the
provisions of this section shall also apply to cases in which the order
determining the duty or interest under Sub-section (2) of Section 28 relates to
notices issued prior to the date on which the Finance Act, 2000 receives the
assent of the President;
(ii) any amount paid to the credit of the Central Government prior to the
date of communication of the order referred to in the first proviso or the
fourth proviso shall be adjusted against the total amount due from such
27. Section 114A can be invoked for imposition of equivalent amount of duty
as penalty in cases where the short levy or non-levy has occurred due to
mis-declaration or suppression of facts on the part of the assess-importer.
Section 114A is a mirror-image of proviso to section 28 of the Customs Act.
28. It has been asserted on behalf of the respondents that in view of the
findings of the Commissioner of Customs that there is no suppression or
mis-declaration on the part of the respondent, consequently, the duty short
levied or not levied has to be demanded under section 28(1) itself and not
under the proviso to section 28(1). It was submitted that when there is no
suppression or mis-declaration on the part of the respondent, the impugned
order confirming the duty beyond the period of six months from the relevant
date is not sustainable in law.
29. In the counter affidavit, it is incorporated that assuming that the
manufacturing loss is in excess of the specified limits mentioned in para 10 of
Notification No.177/94-Cus, even then no duty can be demanded on the loss of
gold when there is no allegation or evidence that the imported gold has been
diverted for other purposes, other than for the manufacture and export of gold.
The requirement of Notification No.
177/94-Custom stands satisfied even in such cases.
30. The respondent has also dealt with the distinction between recoverable
scrap and irrecoverable loss. In the counter affidavit, a table has also been
given to demonstrate that there is no shortage as alleged by the appellant.
31. The appellant filed an additional affidavit through Mr.
Promod Kumar, Superintendent of Customs (Preventive). It is mentioned in the
additional affidavit that the import could be either direct or through the
Minerals and Metal Trading Corporation (MMTC). The exemption was subject to
certain conditions, and the importer was to execute a general bond undertaking
to fulfil the export obligation and the conditions stipulated in the
notification. It is mentioned in the additional affidavit that the allowable
percentage of loss varied from the type of jewellery and the degree of value
addition in the jewellery being manufactured. Thus, there was a graded scale
for allowable loss, which was linked to the degree of value addition. It is
also incorporated that on 28.7.1988, the Collector of Customs issued Public
Notice specifying interim procedure for customs clearance at the Gem and
Jewellery Complex, SEEPZ. The Units in the SEEPZ were required to maintain
accounts of imported raw materials and capital goods, finished goods, rejected
goods etc. The units were also expected to maintain registers annexed to the
Copy of the Register Format has been annexed along with the additional
affidavit as Annexures A1, A2 and A3.
32. In the additional affidavit, it is incorporated that on 13.11.1997, a
show cause-cum-demand notice was issued to the respondent both under section 28
of the Customs Act, 1962
and in the terms of the bond executed by the respondent. It has given the
details of how the shortage of gold in the stock was calculated. Column 1 of
the table indicates the year. Column 2 indicates the direct imports made in the
relevant year and column 3 indicates the procurement from MMTC in that year.
Column 4 which is titled Total Weight, is the sum of columns 2 and 3
and it denotes the total quantity imported (either directly or through MMTC).
Column 5 refers to Actual Weight of Export which is the quantity of
goods actually exported. Column 6 denotes the claimed wastage which, as per the
Handbook, is a deemed export. The claim wastage figure in the table is taken
from the wastage claimed and recorded in the export registers. The unit had
been claiming the maximum permissible wastage, whereas it should have been
claiming only actual wastage upto the maximum permissible limit. Column 7 is
the sum of columns 4 and 5 and it denotes the total weight of export. The
difference between the total weight of quantity imported (in column 4) and the total
weight of export (in column 7) is the closing balance or the book balance. This
is reflected in column 8. If this book balance is found lying with the unit as
physical stock, the shortage would be nil. However, if the physical stock is
less than the book balance, there will be a corresponding shortage. It may be
noted that the calculation of closing balance or book balance is based on
records maintained by the respondent itself, as per the prescribed registers.
Column 9 represents the physical balance which is found lying with the unit on
inspection, to the extent that the figure in column 9 is less than the figure
in column 8, there is a shortage and this is reflected in column 10. The
shortage in the case of the respondent was 6410.885 grams.
33. It is submitted in the affidavit that the total imports and total
exports are calculated (based on records maintained by the respondent). If
there is a gap between quantity imported and quantity exported, it is the
closing balance or book balance. This is the quantity that the respondent
should have as physical stock. To the extent that the actual physical stock is
less than the book balance, there is a shortage. This shortage is in excess of
the permissible wastage because such wastage was already counted as a deemed
export. Duty would have to be paid on such shortage.
34. It must be noted that the shortage detected on inspection cannot be
attributed to any particular year. The shortage is calculated based on the
difference between total closing balance (for all the years taken collectively
since inception of the unit) and physical balance (which is the physical stock
lying with the unit at the time of inspection). Thus, a comparison of closing
balance and physical balance can only indicate that as of the date of
inspection, there had been excess wastage above and beyond the maximum
permissible limit. The particular date/year in which the shortage occurred is
35. It is submitted that by not maintaining any Wastage Account
Registers, the respondent suppressed vital information and thus, there is
a clear case for invocation of the extended period of limitation of five years
under the proviso to section 28(1) of the Customs Act, 1962.
With respect to the relevant date from which the limitation period must
commence, it is stated that section 28(3)(a) does not apply. Section 28(3)(a)
states that the relevant date means (a) in case where duty is not levied,
or interest not charged, the date on which the proper officer makes an order
for the clearance of the goods. It is stated that the sub-section must be
interpreted to pre-suppose that duty was leviable at the time of clearance. In
the case of bonded goods, duty was not payable at the time of clearance and the
exemption from duty was contemporaneous with the unit complying with the
conditions of the exemption notification. Only on inspection when it was found
that the respondent unit had shortage in physical stock, that duty became
leviable on the shortage amount. As already indicated, the shortage/excessive
wastage may have occurred in any of the previous years. The year in which the
wastage took place cannot be ascertained nor can the wastage be linked to
specific bills of entry which were cleared. Thus, the date of clearance of the
goods cannot, in fact, be determined, rendering the application of section
28(3)(a) an impossibility. Sections 28(3)(b) and 28(3)(c) are also
inapplicable. Section 28(3)(d) states that the relevant date means (d) in
any other case, the date of payment or duty or interest. As per this
section, in the present case, since duty is yet to be paid, there would
effectively be no limitation period. In any event, in the case of bonded goods,
the limitation period would not apply in the same manner as it does to other
goods. Both under section 72(1)(d) which deals with warehousing bonds and
section 143(3) which deals with import of goods on execution of bond, there is
no time limit for the proper officer to make a demand in cases where the
conditions of the bond have been violated. In effect, bonded goods stand on a
different footing. The show cause-cum- demand notice was made both under
section 28 and the terms of the bond. In calculating the limitation period, regard
must be taken to the fact that there are bonded goods. Even if the provisions
of section 28(3) were to be applied, it is submitted that section 28(3)(d) is
the only provision capable of application and as per that sub-section there
would be no limitation period in cases where duty is yet to be paid.
Various benches of the Tribunal have passed orders holding that in the case
of bonded goods, the relevant date is date of payment of duty. Thus, the
present show cause-cum-demand notices were not barred by limitation. It may
also be noted that the rate of duty applied to the goods and the valuation of
the goods is based on prevalent rates as on the date of the inspection. In the
alternative, therefore, the date of inspection of stock and detection of shortage
may be deemed to be the date of clearance and the limitation period may be
taken to mean five years from such date. In this case too, the notices are not
barred by limitation.
36. The respondent contended that the shortage amount was actually lying
with the unit in the form of dust/scrap/slurry, or had been sent for conversion
into gold bars, as per the prescribed procedure. It is submitted that the
dust/scrap/ slurry which can be converted into gold bars is included in the
allowable wastage and not in addition to it. Wastage is allowed up to
permissible limits. If some of this wastage is lying with the unit as
dust/scrap/slurry, it may be converted into gold bars and brought back to the
unit. But the provision for conversion of dust/scrap/slurry cannot be
interpreted in a manner where it allows for wastage beyond permissible limits.
The respondents contention that there is a distinction between
recoverable and invisible loss, finds no support in the applicable
notifications and policies. As the order-in-original has correctly noted, a
percentage of gold cannot vanish as such and, therefore, the allowable loss
itself contemplates that the wasted amount is lying with the unit in some other
To the extent that it can be re-converted into gold bars, the notifications
make certain enabling provisions. The respondent has sought to exploit this
liberty accorded to them by the notification. Further, as stated earlier, the
respondent has not maintained the Wastage Account Registers, which
must form the basis of any claim of allowable loss. In such circumstances, the
non-maintenance of registers constitutes suppression and creates suspicion
about the conduct of the respondent units.
37. In the said affidavit, it is incorporated that the respondent unit has
failed to maintain the requisite records documenting wastage. Even if the
maximum permissible wastage was allowed to the respondent as a manufacturing
loss, there is still a shortage in the physical stock. Duty is payable on this
shortage amount. The goods in question are bonded goods and this must be borne
in mind while computing the limitation period that the limitation is not
applicable to bonded goods in the same manner as it does to other goods.
38. We have heard Mr. Gopal Subramanium, the learned Additional Solicitor
General for the appellant and Mr. V.
Lakshmikumaran, the learned Advocate for the respondent at length and
critically analysed the cases cited by him in support of his case.
39. We deem it appropriate to deal with the preliminary objection regarding
limitation raised by the respondent. The respondent has drawn our attention to
the findings of the Commissioner of Customs in appeal. The relevant portion of
the findings reads as under:
No case of collusion, wilful mis-statement or suppression of facts has
been brought out in the show cause notice.
40. According to the respondent, in this appeal and in all connected appeals
stock checking was carried out on 11.11.1995 and the show cause notice was
issued after two years i.e. on 13.11.1997 demanding duty and the penalty from
the respondent. The respondent submitted that the appellant cannot take benefit
of the extended period of limitation under the proviso to section 28 of the
Customs Act, 1962
in view of the categoric findings of the Commissioner of Customs. The
respondent further submitted that the order of the Commissioner of Customs had
acquired finality because no appeal was preferred against the said order of the
Commissioner of Customs. It was further submitted that the Commissioner of
Customs has specifically given findings against the appellant and in favour of
the respondent regarding applicability of section 114A of the Customs Act, 1962. Those
findings are reproduced as under:
16. I find that section 114A of
Customs Act, 1962
has been invoked in the show cause notice without giving any proper reasons
thereof. No case of collusion, wilful mis-statement or suppression of facts has
been brought out in the show cause notice so as to invoke the provisions of
section 114A of the Customs Act, 1962.
Therefore, I do not find that this is a fit case for invoking section 114A of
the Customs Act, 1962.
41. The appellant in this appeal and connected appeals cannot invoke the
extended period of limitation in view of the Commissioners categoric
findings that no case of collusion, wilful misstatement or suppression of facts
has been brought out in the show cause notice so as to invoke the provisions of
section 114A of the Customs Act, 1962.
42. Penalty under section 114A is imposable only when the demand is
confirmed under the proviso to section 28(1) of the Act. In view of the clear
findings of the Commissioner that the respondent-assessees are not guilty of
suppression of facts or are guilty of collusion or misstatement and, therefore,
duty cannot be imposed by invoking the extended period of limitation. When the
duty itself cannot be imposed, no order of imposing the penalty under section
114A of the Customs Act can be
43. Reliance has been placed on P & B Pharmaceuticals (P) Ltd. v.
Collector of Central Excise (2003) 3 SCC 599. In this case, the question was
whether the extended period of limitation could be invoked where the Department
has earlier issued show-cause notices in respect of the same subject- matter.
It has been held that in such circumstances, it could not be said that there
was any wilful suppression or misstatement and that, therefore, the extended
period under Section 11-A could not be invoked.
44. This case was followed in the subsequent judgment of this court in ECE
Industries Ltd. v. Commissioner of Central Excise, New Delhi (2004) 13 SCC 719.
In this case, this court again held that as there is no suppression, penalty
cannot be imposed.
45. This court relied on these judgments in the case of Nizam Sugar Factory
v Collector of Central Excise, A.P.
(2006) 11 SCC 573. In this case, this court again reiterated the legal
position and held that when there is no suppression of facts, the department
would not be justified in invoking the extended period of limitation.
46. In view of the clear legal position crystallized by a series of
judgments that in case where the assessees are not guilty of suppression of
facts, collusion or wilful misstatement of facts, therefore, the extended
period of limitation cannot be invoked under proviso to section 28(1) of the
Customs Act, 1962
in the instant appeal and the other connected appeals.
Consequently, this appeal and other connected appeals filed by the appellant
have to be dismissed being time barred.
47. Since this appeal and other connected appeals are dismissed on the
ground of limitation, therefore, we do not deem it necessary to deal with the
other submissions made by the parties.
48. This appeal and other connected appeals filed by the appellant are
accordingly disposed of. The demand and penalty raised against the respondent
in this appeal and against the other respondents in the connected appeals, if
any, are dropped. In the facts and circumstances of the case, we direct the
parties to bear their own costs.
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