Central Excise Act- No Separate Notice Necessary For Recovery Of Erroneous Refund Granted: Supreme Court

The Supreme Court has held that no separate notice under Section 11A of the Central Excise Act is necessary for the recovery of an erroneous refund granted.

The division bench of Justice M. R. Shah and Justice Krishna Murari has observed that once the order originally sanctioning the refund came to be set aside, there was no question of any further notice under Section 11A of the Central Excise Act.

The issue raised was whether the separate notice under Section 11A of the Central Excise Act is necessary for the recovery of the amount when an erroneous refund is granted through the speaking order and is reviewed under Section 35E.

The respondent/assessee was a manufacturer of cotton yarn, which it consumed captively in its composite mills for weaving fabric. The Delhi High Court held in the case of M/s. J.K. Cotton Spinning & Weaving Mills Company Ltd. vs. Union of India 1981 (8) ELT 887 in October 1980 that the removal of yarn consumed within the factory for production did not amount to removal under Rules 9 & 49 of the erstwhile Central Excise Rules, 1944. Hence, set aside the duty demand made on such captively consumed yarn.

The respondent company filed a revised classification list, in which they declared that no duty was payable on the yarn captively consumed. By an order issued in April 1981, the classification list was rejected by the Department, and the respondent company was directed to file a fresh classification list.

The respondent company filed a writ petition before the Delhi High Court challenging the levy and collection of duty on the yarn captively consumed by them. By judgment and order dated January 11, 1983, the High Court disposed of the said writ petition, upholding the validity of Rules 9 and 49 and holding that the recovery could only be done as per the time limit prescribed in Section 11A.

In pursuance of the interim directions granted by the Supreme Court on March 15, 1983, the bank guarantee given by the respondent company was kept alive from time to time. The Supreme Court decided the case and directed, among other things, that if notice under Section 11A was not served, the department was entitled to serve it within the time limit prescribed by Section 11A.

On the basis of the judgment and order passed by the Apex Court, the Divisional Assistant Commissioner issued a show cause notice demanding a duty. Subsequently, by passing O-I-O dated March 27, 1996, the Assistant Commissioner confirmed the demand. Out of the amount demanded, Rs. 1,48,073,132.84 was paid on different dates between April 18, 1983, and December 28, 1984, as per the directions of this court.

On March 28, 1996, the balance of Rs. 1,48,073,132.91 was recovered by encashing bank guarantees executed by the respondent company. Being aggrieved with the decision of the Assistant Commissioner dated March 27, 1996, the respondent-assessee or company filed an appeal before the Commissioner (Appeals).

By order dated June 13, 1996, the Commissioner (Appeals) dismissed the appeal and upheld the Assistant Commissioner's decision.

The respondent-assessee filed an appeal before the Tribunal against the order of the Commissioner (Appeals). The Tribunal set aside the order passed by the Commissioner (Appeals) on the ground that there was no demand issued by the Department under Section 11A of the Central Excise Act.

The department challenged the order passed by the Commissioner (Appeals), which was dismissed by order. In the meantime, since the company filed a refund claim, it was found that the refund claim was not sustainable. A show-cause notice was issued for deciding the issue of Section 11B of the Central Excise Act. The Deputy Commissioner of Central Excise adjudicated the show cause notice and ordered a refund of the entire amount to the respondent-company. According to the order, the amounts were paid under protest by the party, so the time limit does not apply.

The department contended that Sections 35E and 11A of the Central Excise Act operate in different fields and are invoked for different purposes as different time limits are, therefore, set out. The recovery of the excise duty cannot be made pursuant to an appeal filed after invoking the provisions of Section 35E if the time limit provided in Section 11A has expired.

Even otherwise from the scheme of the Central Excise Act, 1944, it is quite apparent that where the proceedings under Section 35E are initiated and the appeal is filed against the order sanctioning a refund, there is no need to issue any notice under Section 11A. With a review of the order sanctioning the refund under Section 35E, a notice under Section 11A would be meaningless. It is submitted, based on the interpretation given by the Revenue and affirmed by the High Court, that without notice under Section 11A, amounts becoming due to be recovered under Section 35E cannot be recovered, which renders Section 35E ineffective and redundant.

The respondent company contended that the erroneous refund cannot be recovered by merely filing an application under Section 35E(2) of the Central Excise Act unless the notice under Section 11A is issued within the stipulated time. The issuance of a show cause notice under Section 11A of the Central Excise Act is a prerequisite for recovering the alleged erroneous refund within the normal period of limitation prescribed under Section 11A, even if the Revenue initiates proceedings under Section 35E against the order granting the refund.

The court held that Sections 35E and 11A of the Central Excise Act operate in different fields and are invoked for different purposes.

The Apex Court quashed the order passed by the High Court and Tribunal and restored the order passed by the Commissioner (Appeals), Mumbai.

Case Title: Commissioner Of Central Excise, Mumbai – 1 Versus M/S. Morarjee Gokuldas Spg. & Wvg. Co.Ltd.

Citation:  2023 LiveLaw (SC) 259

Central Excise Act 1944- no separate notice under Section 11A of the Central Excise Act is necessary for the recovery of erroneous refund-once the order in original sanctioning the refund came to be set aside in a proceeding under Section 35E of the Act and the proceedings under Section 35E was initiated within the time prescribed under Section 35E of the Act, thereafter there is no question of any further notice under Section 11A of the Central Excise Act

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