CAN SHOW CAUSE NOTICE BE ISSUED IF TAX AND INTEREST IS PAID BEFORE SHOW CAUSE NOTICE? V S Datey As a general rule, it is said that ignorance of law is not an excuse. However, there is no presumption that everyone knows the law. In case of service tax, ignorance of law can be an excuse for non-imposition of penalty. If assessee pays service tax and interest before show cause notice, notice cannot be issued unless there was suppression of facts or wilful misstatement. 1. Background Often, assessee is liable to pay service tax on some services, but he is not aware of liability. After being pointed out this, either by audit party or his own auditor or consultant, he pays service tax with interest. Issue is whether a show cause notice proposing penalty can be issued after payment of service tax. In case of service tax, section 76 (penalty for failure to pay service tax) and section 77 (penalty for contravention of any provision for which no penalty is provided), do not envisage mens rea. (Mens rea means guilty mind). Section 78 of Finance Act, 1994 provides for penalty in case of fraud, collusion, wilful misstatement or suppression of facts. This obviously requires mens rea. Section 80 of Finance Act provides that notwithstanding anything contained in provisions of section 76, 77 and 78, penalty is not imposable if assessee proves that there was reasonable cause for the failure to pay service tax. As discussed below, my submission is that ‘ignorance of law’ can be given as excuse for avoiding penalty, as there is no presumption that everyone knows the law. Ignorance of law can be ‘reasonable cause’ for failure to pay service tax. Further, no notice can be issued if tax and interest is paid before SCN. 1.1 No SCN after tax is paid As per section 73(3) of Finance Act, 1994, if assessee pays service tax with interest on his own or on the basis of assessment of central excise officer, he should inform to department and then, the central excise officer shall not serve any notice u/s 73(1) ‘in respect’ of the amount so paid. No short payment when tax is already paid - Since assessee has already paid the service tax and interest, there is no question of issuing any show cause notice u/s 73(1), since notice u/s 73(1) can be issued only if there is short payment or non-payment of service tax. When tax and interest is already paid, there is no question of notice for ‘short payment’. Thus, show cause notice after payment of service tax with interest can be only in respect of penalty. 1.2 Meaning of ‘in respect’ of Section 73(3) prohibits notice ‘in respect’ of the service tax. ‘In respect of’ can be given wide meaning as 'in relation to' or 'with reference to' Tularam Relumlal v. State of Bombay AIR 1954 SC 496. The phrase 'in respect of' has wider connotation that 'in' - Godavaris Misra v. Nandakishore AIR 1953 Ori 111 * CIT v. Chunilal AIR 1968 Pat 364. The words 'in respect of' admit of a wide connotation UOI v. Vijay Chand Jain AIR 1977 SC 1302. The show cause notice proposing penalty is certainly ‘in respect of’ the service tax, which has already been paid along with interest. 1.3 Show cause notice can be issued after payment of service tax only if there was suppression of facts, wilful misstatement etc. The exception to section 73(3) is provided in section 73(4) of Finance Act, 1994, that even despite such payment, notice can be issued if the short payment was on account of fraud, collusion, suppression of facts etc. Obviously, such notice can be only for penalty, as assessee has already paid the tax with interest As an obvious corollary, show cause notice cannot be issued if there was no fraud, collusion, suppression of facts or wilful misstatement with intention to evade payment of duty. If show cause notice can be issued even when there was no suppression of facts, then section 73(4) would become redundant and otiose. It is well established rule of construction that Court would not adopt a construction which would render some of the words in a statutory provision nugatory and/or superfluous - Royal Hatcheries (P.) Ltd. v. State of AP (1994) 92 STC 239 (SC) = 53 ECR 200 = AIR 1994 SC 666 = (1994) Supp 1 SCC 429. In J K Cotton Weaving & Spinning Co. Ltd. v. State of UP - (1961) 3 SCR 185 = AIR 1961 SC 1170, it was observed - 'The Courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of statute should have effect. Normally, no word should be considered redundant or superfluous in interpreting the provisions of a statute. The Courts always presume that the legislature inserted every part thereof with a purpose and the legislative intention is that every part of the statute should have effect. – Sankar Ram & Co. v. Kasi Naicker (2003) 11 SCC 699 = AIR 2003 SC 4156 = 2003 AIR SCW 3732 – quoted with approval in Sri Ram Saha v. State of West Bengal AIR 2004 SC 5080 = (2004) 11 SCC 497. Summary - Thus, assessee can take a stand that the notice issued after payment of service tax and interest is void ab initio, if there is no suppression of facts with intention to evade duty. 2. Ignorance of law is an excuse Ignorantia legis neminem excusat - Ignorance of law is no excuse – Bharat Electronics Ltd. v. DCCT (2005) 142 STC 417 (SC 3 member bench) * State of UP v. Twin City Jewellers Association (2006) 147 STC 354 (SC). [However, ignorantia facti excusat (ignorance of fact is excusable)] 2.1 There is no presumption that everyone knows law In Motilal Padampat Sugar Mills Co. Ltd. v. State of UP - (1979) 118 ITR 326 (SC) = AIR 1979 SC 621 = (1979) 2 SCR 641 = (1979) 44 STC 42 (SC); it has been held that there is no presumption that every person knows the law. There is no such maxim that every one is presumed to know law. However, there is the rule that ignorance of law does not excuse. Thus, even if ignorance of law is not an excuse for non-payment of tax, there is no presumption that every person knows the law. One can always plead that he was not aware of the legal position and hence did not pay the tax. It is only that even if assessee was ignorant of law, he will be still liable to pay tax, duty or penalty. Impossible to keep track of all changes in law and correctly interpret them - Almost every day, law is changing through Acts, amendments, rules, regulations and notifications. There are so many changes taking place every day that it is impossible for every person to keep track of all the changes. Even if one tries to keep track of all changes (which is humanly impossible), correctly understanding and interpreting them is further Herculean task. When even judges of Apex Court differ in issues relating to interpretation, it is naïve to expect that every person will correctly understand and interpret any law. .3. No suppression if assessee was ignorant In Tamilnadu Housing Board v. CCE 1995 Supp(1) SCC 50 = 1994 (74) ELT 9 (SC) = 55 ECR 7, it was observed, ‘Intention to evade payment of duty is not mere failure to pay duty. It must be something more, i.e. that assessee must be aware that duty was leviable and he must deliberately avoid payment of duty. ‘Evade’ means defeating the provision of law of paying duty. It is made more stringent by the use of word ‘intent’. In other words, the assessee must deliberately avoid payment of duty payable under the law.’. 3.1 Mere inaction is not Suppression of Facts Suppression means not providing information which the person is legally required to state, but is intentionally or deliberately not stated. Hon. Supreme Court, in Collector v. Chemphar Drugs 40 ELT 276 = 1989 (2) SCC 127 = AIR 1989 SC 832, has held that mere inaction or failure on part of manufacturer will not amount to suppression of facts. Conscious or deliberate withholding of information when the manufacturer knew otherwise, is required to be established, before saddling the manufacturer with liability for suppression of fact [reiterated in Lubri-Chem Industries Ltd. v. Collector - 1994 (73) ELT 257 (SC) = 1994(2) Supp SCC III 258 = 1994 AIR SCW 3672 = AIR 1994 SC 2604 = 1994(4) RLT 239 (SC)] – same view in M K Kotecha v. CCE AIR 2005 SC 1147 = 179 ELT 261 (SC 3 member bench). In the case of Padmini Products v. CCE - 1989 (43) ELT 195 (SC) = (1989) 4 SCC 275 = AIR 1989 SC 2278 = 25 ECR 289 = (1990) 76 STC 411 (SC), it has been held by Apex Court that mere non-declaration is not sufficient to invoke charge of suppression of fact but some more positive act is required – followed in Jaiprakash Industries v. CCE 2002 AIR SCW 4840 = (2003) 1 SCC 67 = 146 ELT 481 (SC 3 member bench) * Cadila Laboratories v. CCE 2003 AIR SCW 1115 = 152 ELT 262 (SC) * Gopal Zarda Udyog v. CCE 2005 (188) ELT 251 (SC 3 member bench). Mere omission to give correct information did not constitute suppression unless that omission was made wilfully in order to evade duty. Suppression would mean failure to disclose full and true information with the intent to evade payment of duty - CCE v. Ballarpur Industries Ltd. (2007) 11 STT 6 (SC) – same view in Continental Foundation Jt Venture v. CCE (2007) 216 ELT 177 (SC) * Anand Nishikawa Co. Ltd. v. CCE 2005 (188) ELT 149 = 2 STT 226 = AIR 2005 SCW 4923 (SC) – quoted with approval in CCE v. Damnet Chemicals (2007) 216 ELT 3 (SC). A mere omission or negligence would not constitute a deliberate act of ‘suppressio veri’ or ‘suggestio falsi’ – Dilip N Shroff v. Jt CIT (2007) 11 Taxman 218 = 291 ITR 519 (SC) – quoted in CWT v. Smt. Shakuntala Devi Dalmia (2008) 172 Taxman 162 (All HC DB). Mere omission to declare does not mean suppression of facts – Ramply (India) Ltd. v. CCE (2007) 216 ELT 129 (CESTAT 3 member bench). 3.2 No suppression if facts not required to be disclosed are not disclosed There can be no suppression of facts if facts which are not required to be disclosed are not disclosed - Smt. Shirisht Dhawan v. Shaw Brothers - 1992 (1) SCC 534 = 1992 AIR SCW 1649 = AIR 1992 SC 1555 - Apex Electricals (P.) Ltd. v. UOI - 1992 (61) ELT 413 (Guj HC), followed in * Unique Resin Industries v. CCE - 1995 (75) ELT 861 (CEGAT). same view in * Gammon Far Chems Ltd. v. CCE - 1994 (71) ELT 59 (CEGAT) * Gufic Pharma P Ltd. v. CCE - (1996) 85 ELT 67 (CEGAT) * CCE v. Moti Laminates P Ltd. 1997(96) ELT 191 (CEGAT) * Balsara Extrusions v. CCE 2001(131) ELT 586 (CEGAT) * Ranka Wires v. CCE 2005 (187) ELT 374 (CESTAT) * Pioneer Electronics v. CCE 2005 (189) ELT 71 (CESTAT). 3.3 There can be no suppression if assessee was ignorant Aforesaid decisions make it clear that ‘suppression’ has to be wilful. If assessee was ignorant of a legal provision or if his understanding was wrong, there can be no suppression. ‘Intention’ means assessee was aware that tax is payable but still he avoided payment by suppressing the facts. If he was ignorant, there is no question of his ‘not declaring’, particularly when really no such declaration was required. 4. Conclusion Assessee can always plead ignorance of law as there is no presumption that everyone knows the law. If assessee was ignorant of a legal provision, there can be no suppression of facts or wilful misstatement with intention to evade duty. Ignorance of law can be pleaded as ‘reasonable cause’ for non-payment of service tax. When there is no intention to evade tax, show cause notice cannot be issued in view of section 73(3) read with section 73(4), if service tax and interest is paid before show cause notice. In my view, such notice, if issued, would be illegal and void.