Customs, Excise and Gold Tribunal - Tamil Nadu
Karnataka Minerals And Mfg. Co. Ltd. vs Collector Of C. Ex. on 14 December, 1988
Equivalent citations: 1989(22)ECR30(TRI.-CHENNAI), 1989(41)ELT444(TRI-CHENNAI)
ORDER K.S. Venkataramani, Member (T)
1. These appeals arise out of a common order dated 15.10.87 passed by the Collector of Central Excise, Belgaum, by which he had demanded duty of Rs.4,31,031.31 on O.P.Cement manufactured by the appellants under Rule 9(2) of the Central Excise Rules,1944, read with Section 11-A of the Central Excises & Salt Act, 1944 and the Collector in that order also imposed a total penalty of Rs.15,04,000/- on each of the appellants herein under the various Central Excise Rules including Rule 173Q.
2. The brief facts are that the appellants herein manufacture cement having their factory at Mathod in the Belgaum Collectorate. On 6.4.87, the Central Excise Officers of Dawangere and Headquarters Preventive Bangalore conducted simultaneous search on the factory premises of the appellants and at the premises of certain persons at various places. The current R.G. 1 Register which is a statutory record for the production of cement was not available at the factory. The officers then did a physical check of the cement stock which revealed that the physical stock of clinker was found to be 1547.840 M.T. as against balance of 3666 M.T. showing a shortage of 2,118.160 M.T. Similarly, there was a shortage in Gypsum also. The officers seized some of the records for further investigation. Based on the recovery percentage of the cement on the ratio of 1 Tonne of clinker to yield 98 to 100% of cement with addition of 5% Gypsum, the Department qame to the conclusion that the factory had manufactured a quantity of 2,118.160 M.T. of cement out of the equal quantity of clinker found short and that this quantity-had been removed by the appellants clandestinely without payment of Central Excise duty amounting to Rs. 4,76,586. The officers also searched the residential premises of one Hukkeri, Accounts Officer of the firm at Bangalore, and the seizure of certain documents therefrom, as well as the documents seized from the factory, led to the departmental conclusion that the factory had manufactured a quantity of 1915.695 M.T. of cement and removed it clandestinely without payment of duty of Rs. 4,31,031.38 during the period December, 1985 to April, 1987. Thus the total quantity on which Central Excise duty was evaded, according to Department, works out to 4,033.855 M.T. entailing a duty liability of Rs. 4,07,617.38. Shri M.R. Jayaram, appellant herein, Managing Director of the firm in a statement on 16.4.87 while admitting that there was shortage, said that it was attributable to Shri Hukkeri who is the Manager of the factory. He also admitted that there has been double transport of cement under one Gate Pass and removal thereof without duty. He also stated that the appellant company is prepared to pay the duty that is payable on these removals. Appellant Sitaram also gave a statement on 16.4.87 stating that he is the Director of the Factory and that Shri Hukkeri was appointed as Sales Officer and that for the omissions and commissions of Hukkeri, the Company is responsible. He also said that Shri Hukkeri was indulging in malpractices without his knowledge. Shri S.B.Hukkeri, Accounts Officer of the appellant firm also gave a statement on 16.4.87 in which he said that the sale of cement from the factory was strictly as per the written orders from the Head Office, Bangalore and oral orders of the Managing Director the whole-time Director and the Director. The despatches were made as per the advice from the Head Office. The cash relating to bona fide sales of cement was taken to the books of account but that which is received out of evasion of Central Excise Duty on cement was handed over to the Director at the site as well as at Bangalore. He also said that he was on leave from 7-3-1987 to 16-3-1987 during which period Shri Ramakrishna, Assistant Works Manager and the Stores Officer had sent the complete records to his residence at Bangalore in order to avoid being noticed in case of any search of the factory premises. He also admitted that he had made double transport under one Gate Pass as also to other malpractices found by the Department. Following further investigations, proceedings were initiated against the appellants which culminated in the Collector's order of adjudication against which the present appeals have been preferred.
3. Shri Naganand, the learned Counsel appearing for the appellants, submitted that he is not challenging that part of the Collector's order demanding duty and that the appellants are confining the appeals only to the question of penalty on the appellant firm as well as the other appellants viz. Shri Jayaram and Shri Sitaram. Appellant Jayaram is the Managing Director of the cement factory and appellant Sitaram is a Director in the Board of Directors. The learned Counsel contended that the appellants have from the beginning given the explanation that Shri Hukkeri, Accounts Officer was responsible for .the clandestine removal of cement from their factory and that the Managing Director and the Director were not aware of his activities. He further pointed out that it is significant that the incriminating documents have all been seized only from the residential premises of Hukkeri at Bangalore and not from the factory premises. The Assistant Works Manager of the factory in his statement following the visit of the officers had also said the same thing that Hukkeri was the right person to explain about the shortages. The learned Counsel argued that the functions of the Managing Director having overall control of the operation of the factory are such that he may not be aware of the mischievous activities of any one of his employees and in this context he pointed out that what has been held to be the quantity illegally cleared was a day and a half s production of the Mill and it took place over a period. He further pointed out that under Rule 173Q penalty is imposable only on the manufacturer, and hence, it cannot be imposed on the Managing Director of the firm holding the Central Excise licence. This follows, according to the learned Counsel, even from the definition of the term 'manufacturer' in the Act. The position as regards prosecution under Section 9 and Section 9AA of the Central Excises & Salt Act, 1944 was different because separate provision has been made under that Section for initiating proceedings against the firm and the persons in charge. He further pointed out that there had been non-compliance with the principles of natural justice in this case as the appellants were denied adequate opportunity of putting forth their case. This was because the Collector had made use of the material contained in the reply to the Show Cause Notice given to Shri Hukkeri in the order for fastening duty and penal liability without supplying to them the contents of his reply to the Show Cause Notice. In any case, the learned Counsel pleaded that the quantum of penalty on the company was harsh and excessive, and should be reduced and the penalty on the appellants Jayaram and Sitaram should be set aside. He also submitted that there was no motive for the appellants to evade duty and mentioned that theirs was one of the highest duty-paying factories in that area. Presently, the learned Counsel submitted, the company is under financial reconstruction as a sick unit.
4. Shri K.K. Bhatia, the learned S.D.R. submitted that the plea that the Managing Director was unaware of the activities of Hukkeri is not tenable in view of the evidence contained in the statement, given by the Managing Director on 16.4.87 wherein he has said that he was shown the letter dated 2.3.87 written by Mr. M.M. Pasha of M.E. Road-lines who is their Transport Contractor, stating that the appellant factory had forced him to indulge in double transport transporting of cement without Gate Pass and sending cement to two destinations using only one Gate Pass etc. Therefore, appellant Jayaram was quite aware of the activities of clandestine removal of cement from the factory. It is also significant, according to the learned S.D.R., that the appellants have not spelt out what steps they took or what enquiries were made by them to get at the root of the problem of clandestine removal attributed by them to Hukkeri. In any case the learned S.D.R. pointed out that even after the search and seizure of incriminating documents, the appellants had not filed any criminal complaint against Shri Hukkeri.
5. The submissions made by the learned Counsel and the learned S.D.R. have been carefully considered. The appellants herein are not contesting the duty demanded but they are only questioning the penalty imposed on the appellants. The argument that only Hukkeri was responsible for the clandestine removal of cement from the factory and his activities were unknown to the Managing Director is not very convincing. Shri Hukkeri in his statement on 16-4-1987 has clearly stated that cement was being sold from the factory strictly as per the written orders from the Head Office at Bangalore and also oral orders from the Managing Director, the wholetime Director and the Director. The statement of appellant Jayaram also contains material, as pointed out by the learned S.D.R., indicating that he was aware of the double transport of cement and other in regularities in transport as well as shortage in clinker. Yet another factor is that Shri Hukkeri in his statement has further said that during the period when he was on leave in March 1987, the Assistant Works Manager and the Stores Officer of the factory had sent all the records to Shri Hukkeri's residence at Bangalore as a precaution to avoid the records falling into the hands of Central Excise Officers. Therefore, the argument that because these documents were recovered from Hukkeri's house they cannot be attributed to the factory, does not have much force. Quite apart from this, if the appellant's claim is that Hukkeri is the villain of the piece, they ought to have cross examined him in the adjudication proceedings to establish their case for which they had the full opportunity, and the Show Cause Notice also had referred copiously to the statement of Hukkeri which was adverse to the appellants. The appellants had by their conduct and acquiescene must be deemed to have waived the rigiht of cross examination. The contention that the principle of natural justice has been violated because the copy of the reply to Show Cause Notice submitted by Hukkeri was not furnished to them is also untenable in the context of their waiver of their right to cross examine Hukkeri on the basis of contents of his statement. It is noted that Hukkeri's statement was recorded about 10 days after the seizure of the records and when he was still in the employ of the appellant, and yet the evidence contained in his statement as given in the Show Cause Notice had not been contested by the appellants by examining him during the adjudication proceedings. The fact also remains that till today the appellants have not filed any criminal complaint against Shri Hukkeri for the defalcation, which, they say, has been indulged in by him, even though in monetary terms Shri Hukkeri must have defalcated to the extent of nearly Rs. 15 lakhs.
6. As for the argument that under Rule 173Q, penalty could be only on the manufacturer and not on the Managing Director or the Director of the firm, we are unable to agree with the appellants because a perusal of Rule 221 and 225 of the Central Excise Rules, 1944 clearly show that separate penalty on the Managing Director and Director of a firm besides the penalty on the firm itself is lawful. Under Rule 221 read with Rule 225 of the Central Excise Rules,1944, Managing Director and Director being in charge of the company is liable to pay the excise duty on behalf of the company before the removal of excisable goods. Therefore, such employees of the company are also responsible and liable for penalty for contravention of the provisions of Central Excises & Salt Act and the rules made thereunder if any. This view has been taken by the Hon'ble Bombay High Court in Garda Chemicals Pvt. Ltd. v. Assistant Collector of Central Excise, Kalyan and Anr. reported in 1984(15) ELT 18 (Bombay). The High Court observed that a company which is a Central Excise Licensee has to act through its officers and that in the matter of responsibility of the corporate body for making declaration and obtaining licence the provisions have been made in Rule 221 of the Central Excise Rules, 1944. The Court also referred to Rule 225 which lays down that if any excisable goods are in contravention of any condition prescribed under the Rules removed by any person from the place where they are produced, manufactured or warehoused, the producer, manufacturer, or the licensee shall be held responsible for such removal and shall be liable to be dealt with according to the provisions of the Act or the Rules, as if he had removed the goods himself. In the light of these two rules, the Court observed that the Managing Director or the petitioner in that case was in overall charge of the company, and that the goods from the factory were removed as per the orders received rom the Head Office. The Managing Director being in overall charge, the Court ob-erved, it cannot be said that he had no concern with the removal of excisable goods from he factory without payment of excise duty. There is yet another judiciary pronouncement on the subject to which reference could usefully be made. The issue came up before the Hon'ble Delhi High Court in the case of Santanu Ray and Ors. v. Union of India and Ors. reported in 1988(19) ECR 257 (Delhi). There the petitioners challenged the issue of a Show Cause Notice to the Directors of the company besides the company it-self by the Department. In this case also the Court referred to Rule 221 of the Central Excise Rules and observed, "It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. So it is permissible to lift the corporate veil of Duncans to determine whether a particular Director could be proceeded against in pursuance to the impugned show cause notices or whether he is liable for the payment of all duties charged and to all penalties incurred."
This decision of Delhi High Court makes it clear that Director of a company can be proceeded against for short levy or for imposition of penalty, even though the licensee may be the company under the Central Excise Rules. Thereone, the argument put forth, that there is no separate provisions in the rules for imposition of penalty on the Managing Director, Director etc. of a firm who is a licensee unlike in Section 9 and 9AA of the Central Excises & Salt Act,1944, is not tenable. In the present case the evidence clearly shows that the removal of cement without payment of duty occurred at the direction of the Managing Director Shri Jayaram and we have also found on evidence that the version that it was all done by Shri Hukkeri without the knowledge of the management is not borne out. However, in the natter of the imposition of penalty on the employees of the company the observation of the Delhi High Court that the corporate veil will have to be lifted to determine the liability of a Director would necessitate, therefore, an assessment of the role played by the employees of the company in the offence and, on this principle the evidence on record clearly shows that the appellant Jayaram, being in overall charge of the unit, and on the basis of evidence that the removal took place with his knowledge and direction, has rightly been held to be liable for penalty. However, in the matter of appellant Sitaram, who is a Director of the company, the evidence on record discloses that this appellant did not have an active role to play in the offence by and large although admittedly as one of the Directors of the company, he had moral responsibility. In any case, the facts and circumstances of the case are such that the benefit of doubt can be extended to this appellant.
7. Yet another point urged before us is that the appellants were not given adequate opportunity to defend their case because they were not supplied with the contents of the reply to the show cause notice furnished by Shri Hukkeri. We are not impressed with this argument. It is seen that in the show cause notice Shri Hukkeri's statement was one of the documents relied upon and the contents of Hukkeri's statement which were admittedly adverse to the appellants had been brought out in the notice itself. If in spite of the fact of being put on alert by this notice, the appellants had not chosen to cross examine Hukkeri to test his evidence then it has to be held that they have waived this opportunity of defence. The reply to the Show Cause Notice was at a much later stage. Thereone, this argument is unacceptable.
8. In the result, we hold that the order imposing penalty on the firm is justified. However, having regard to the facts and circumstances of the case, we reduce the penalty on the appellant firm to Rs. 7.5 lakhs (Rupees Seven Lakhs Fifty Thousand) and the penalty on appellant Jayaram is reduced to Rs. 3 lakhs (Rupees Three lakhs). Appellant Sitaram is given the benefit of doubt for the reasons discussed above and the penalty on him is set aside on this ground. The appeals are disposed of in the above terms.