Incorrect Understanding Of Law Can’t Automatically Be Treated As Tax Evasion Intention: CESTAT

The Mumbai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that incorrect understanding of law cannot automatically be treated as tax evasion intention. The bench of Dr. Suvendu Kumar Pati (Judicial Member) has observed that where credit has already been reversed prior to issuance of a show cause notice, recovery proceedings must be confined only to the balance amount, in line with statutory provisions. The case arose from an appeal against an order of the Commissioner (Appeals), Pune, which had upheld the denial and recovery of CENVAT credit amounting to ₹3.38 lakh along with interest and an equal penalty under the CENVAT Credit Rules, 2004. The dispute related to credit availed during the period April 2013 to June 2017 on inputs and capital goods by a sugar manufacturing unit engaged in the production of sugar, molasses, and by-products. During an EA-2000 audit, the department pointed out certain wrong availments of credit. The assessee reversed a substantial portion of the disputed amount—₹2.87 lakh—prior to the issuance of the show cause notice, leaving a balance of ₹51,294. Despite this, the department issued a notice seeking recovery of the entire amount along with interest and penalty, which was confirmed by the adjudicating authority and later by the Commissioner (Appeals). Before the Tribunal, the appellant contended that issuing a show cause notice for the full amount, despite prior reversal of most of the credit, was contrary to Section 11A(2) of the Central Excise Act, 1944. It was argued that once the credit was reversed voluntarily, proceedings should have been restricted only to the remaining amount. The appellant further submitted that the balance credit related to a composite contract covering design, supply, installation, commissioning, and erection, and that credit had been taken under a bona fide belief based on interpretation of the CENVAT Credit Rules. The department, however, maintained that credit was inadmissible specifically on the erection portion of the contract and justified the recovery, interest, and penalty confirmed by the appellate authority. It argued that the disputed invoice clearly showed service tax paid on erection activity, which was excluded from the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. After examining the records, the Tribunal noted that both the original and appellate orders acknowledged that a major portion of the credit had been reversed prior to the issuance of the show cause notice. It held that in such circumstances, the demand should have been confined only to the balance amount, and imposition of interest and equal penalty on the already reversed credit was contrary to Section 11A(2) of the Central Excise Act. The Tribunal also accepted the contention that no interest was payable on the reversed amount since the credit was reversed from an account where sufficient balance was available. The Tribunal recorded that the appellant ultimately conceded that credit was not admissible on the erection portion of the service. However, it emphasized that the contract was composite in nature and the availment of credit arose from an erroneous interpretation of the rules. Such an error, the Tribunal held, cannot be equated with an intent to evade duty, nor can it justify invocation of extended limitation or imposition of penalty. The Tribunal allowed the appeal and set aside the order of the Commissioner (Appeals). While granting relief from interest and penalty, it observed that the appellant was at liberty to voluntarily pay the inadmissible credit of Rs. 51,294 along with applicable interest, without any compulsion. Case Details Case Title: M/S. Bhima Sahakari Sakhar Karkhana Ltd Versus The Commissioner CGST Case No.: Excise Appeal No. 85613 Of 2021 Date: 22.01.2026 Counsel For Petitioner: Abhiram S. Apte Counsel For Respondent: Rajiv Ranjan Click Here To Read Order Read More: Justice Ujjal Bhuyan Flags Executive Influence in Collegium Transfers, Cites Constitutional Concerns

Incorrect Understanding Of Law Can’t Automatically Be Treated As Tax Evasion Intention: CESTAT

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