In areas such as income-tax, Customs and Excise, there is a general perception that the Revenue department pursues cases without much seriousness and, thereby, loses an otherwise good case. If the department loses a strong case, the officials are not questioned because the obligation for an official ends when an appeal is filed or when a show-cause notice is issued.

At present, there is no effective mechanism to monitor how the officials pursue a matter in a show-cause notice or appeal. Also, the discretionary power conferred upon them in their judicial or quasi-judicial functions is generally used for confirmation of demands, to avoid being hauled up by audit, especially when the disputed amount is large.

A significant decision

In this regard, the Supreme Court decision in the Zunjarrao Bhikaji Nagarkar vs Union of India 1999 (112 ELT 772) case assumes significance. As per the facts of the case, in 1995, Nagarkar, the then Collector of Central Excise, Nagpur, issued a show-cause notice to a company alleging that it had (a) clandestinely manufactured and cleared excisable goods; and (b) wilfully evaded excise duty.

Accordingly, confiscation of the goods was proposed and penalty under Rule 173Q of the Central Excise Rules, 1944, was sought to be imposed. Nagarkar adjudicated the matter by confirming clandestine removal of goods and evasion of duty. However, Nagarkar did not levy penalty under Rule 173Q.

Action was initiated against Nagarkar under the Central Civil Services (Classification, Control and Appeal) Rules, 1965, that he favoured the assessee by not imposing penalty. Nagrakar approached the Central Administrative Tribunal, Mumbai, and thereafter the Bombay High Court. In both the forums he lost the case. Nagarakar then challenged the issue in the Supreme Court.

In the apex court, it was argued for Nagarkar that adjudication order is quasi-judicial in nature and merely on the ground of non-levy of penalty one could not be subjected to disciplinary proceedings. The court ruled that in quasi-judicial functions, an official could exercise discretion and observed that if an error of law was committed by an official, the Government always had a remedy by preferring an appeal.

The Nagarkar decision was thought to have become settled law on this subject until the Larger Bench of the Supreme Court, in its recent landmark decision rendered on April 21, 2006, in the Union of India vs Duli Chand (2006-TIOL-78-SC-MISC-LB) case, overruled the Nagarkar decision and had laid down a different legal position.

Gross negligence

The issue in Duli Chand case was whether action could be taken against an official for gross negligence in discharging quasi-judicial functions. The Supreme Court referred to its own 1993 three-judge Bench decision in Union of India vs K. K. Dhawan (1993 2 SCC 56), wherein the apex court had held that disciplinary action could be initiated against an official if there was gross negligence in discharging judicial or quasi-judicial functions, even where the negligence did not result in any favour to an assessee or even where the element of culpability was absent.

The Supreme Court further reiterated the observations made in the Dhawan case, wherein the court had listed out six situations when disciplinary action could be taken in such matters, including recklessness in the discharge of duty and acting negligently while exercising statutory powers. Accordingly, the Supreme Court held that the Nagarkar decision was contrary to the larger Bench decision in the Dhawan case and ruled that the Nagarkar decision did not lay down the correct legal position. Now let us examine whether Nagarkar had an option of not levying any penalty even after confirming clandestine manufacture and evasion of duty. The apex court had examined Rule 173Q and held categorically that imposition of penalty under the Rule was mandatory. In fact, if only Nagarakar had levied a nominal penalty of 3 or 4 per cent of the value of goods or a mere Rs 750 or Rs 1,500, this issue would not have arisen at all.

It must be noted that there was no ambiguity whatsoever on the interpretation of Rule 173Q at that point in time or earlier. If an official in the post of Commissioner did not know penalty under Rule 173Q was mandatory, then his lack of fundamental and basic knowledge of excise law could well be construed as `recklessness in discharge duty and/or negligence in exercise of statutory powers'. And this is the most important point laid down by the Supreme Court in the Duli Chand case.

The Supreme Court, by implication, ruled that the fact as to whether the Department had an option of preferring an appeal and restoring the position or not, was of no relevance.

In this regard, it is worth mentioning here that TaxIndiaOnline.Com had recently listed out certain instances where the departmental officers have been negligent and callous in carrying out their work. In one instance, a Commissioner (Appeals) computed the time limit by taking the date of issue of the order, instead of the date of receipt of order, and wrongly rejected the appeal on time bar.

Other cases

In another instance, the Tribunal dismissed an appeal preferred by a Commissioner who did not mention a single ground of appeal. In yet another instance, the department preferred an appeal on claim of drawback before CESTAT, whereas the Customs Act, 1962, provides that in case of drawback, an appeal would lie only before the Revisional Authority, Government of India. Clearly, if one applies the ratio laid down in the Duli Chand case (based on the Dhawan case) to all these cases, then the official concerned could be said to have made a fundamental error and, accordingly, be said to have acted negligently/recklessly while discharging his duties in the capacity of Commissioner/Commissioner (Appeals).

The Duli Chand decision will result in the unavoidable consequence of increased confirmation of demands by the original and appellate authorities. The officials would have more reasons now to confirm the demands than ever before. Also, the Department would tend to prefer appeals against decisions rendered in favour of the assessee without ascertaining whether they have a reasonably good case or not.

Joseph Prabhakar
(The author is a Chennai-based advocate.)