The Hindu Business Line : Legal theory and legal reality

Roscoe Pound, the legendary Dean of Harvard Law School, commented that there is often a gap between legal theory and legal reality. The greater the gap, the more ineffective are the legal provisions. In our legal system, there is a serious gap between what is enacted by Parliament and what is actually practised.

For example, in Central Excise and Customs law, legal theory is completely different from what happens in practice. Nowhere is this more evident than in the process of adjudication.

The law mandates that a show-cause notice be issued to an assessee before a demand is made. The assessee has to be given an opportunity to be heard. Documents relied on by the Department must be disclosed to him. After hearing his explanation, the demand can either be confirmed, modified or dropped. In actual practice, there are several instances where a demand is made even without a notice, leaving the assessee with no option but to go to the High Court.

Farcical exercise

In cases where show-cause notices are issued, the hearing in 99 out of 100 cases is a mere farce. Even if an issue is covered by a decision of the Tribunal, High Court or Supreme Court, the demand is invariably confirmed. This is even more pronounced in cases where the demand is substantial.

In 1985, Section 11A of the Central Excise Act and Section 28 of the Customs Act were amended to enable demands to be issued for a five year period (as against the normal time of six months) in cases of fraud, suppression, collusion or misstatement with intention to evade duty.

The object of the amendment was indeed laudable. Assessees who evade duty by practising fraud or misrepresentation deserve no sympathy and the larger period of limitation can be rightfully invoked against them.

But the legal theory degenerated into widespread abuse and notices invoking the five-year period were indiscriminately issued.

This was sought to be curtailed by empowering only the Commissioner to invoke the larger period of limitation. But this did not alter the situation. Case after case, the larger period was indiscriminately invoked without any case of fraud or misrepresentation.

There is often a genuine dispute about the proper classification of the product or the method of determining the assessable value. If the assessee adopts a particular classification which the Department thinks is incorrect, it cannot be a ground to allege fraud or suppression.

Over the years, a number of Supreme Court judgments have discussed scope of the power to demand duty for the larger period of five years. The apex court has repeatedly pointed out that there should be a clear case of intention to evade duty before the larger period can be invoked.

If an assessee has a bona fide belief that the goods are not dutiable and makes a declaration, the Department cannot take the plea of wilful mis-declaration or suppression.

If the assessee had claimed his goods as falling under a particular classification, nothing prevented the Department from examining this claim and taking a contrary view. They cannot, after a few years, invoke the extended period of limitation.

Unfortunately, the Department continues to issue show-cause notices which are completely contrary to the principles laid down by the Supreme Court. These demands are merrily confirmed invoking the larger period of limitation.

Assessees hit

In several cases, these absurd demands are perhaps raised just to attain certain revenue targets with little concern for the havoc they can cause to assessees.

In most cases, goods have been sold and any burden of the excise duty has to be borne by the assessee.

To add to their woes, there is a mandatory penalty equivalent to 100 per cent of the duty under Section 11AC of the Act. This penalty is routinely invoked and confirmed. The demand of duty and penalty is several times the profit of an assessee and sometimes even more than its turnover.

If such demands are enforced, several assessees will certainly go into liquidation. Indeed, several medium- and small-scale industries have been ruined by absurd demands made by the Department.

But, unfortunately, the officer who makes an absurd demand is not accountable at all for the trail of devastation he leaves behind. It is necessary to compile statistics of the demands raised by the Department and the percentage of orders in which these demands have been confirmed.

There is something seriously wrong when almost all cases are blindly confirmed. Surely, it cannot be that almost all assessees have no merits in their case.

The farce of the adjudication process is demonstrated by the fact that more than 75 per cent of these demands are eventually set aside by the Tribunal or the superior courts.

(The author is a senior advocate of the Madras High Court.)

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