After Dharmendra Textile, does penalty follow automatically from every default?
No. Whether the penalty provision applies at all depends on the conditions expressly stated in it. Once it does apply, the authority loses discretion over the amount — but not before.
Decided by the Supreme Court (Aftab Alam and S.H. Kapadia, JJ (judgment delivered by Aftab Alam J)) on 2009-05-12, reported as (2009) 238 ELT 3 (SC); [2009] 180 Taxman 609 (SC); [2009] 224 CTR 1 (SC); [2009] 20 STT 481 (SC); Civil Appeal Nos. 3525 and 3527 of 2009. It bears on section 271(1)(c), section Central Excise Act s.11A, section Central Excise Act s.11AC of the Income Tax Act 1961, in Penalty matters.
It is the answer to an officer who cites Dharmendra Textile as if it made penalty automatic. The conditions of the section still have to be established, and the burden of establishing them is not yours.
Binding on every court and authority in India.
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Two appeals by the revenue, for the period 1 July 2000 to 31 March 2004 and for a 2000-01 short payment. In one, a manufacturer of P/V yarn had left part of its handling and forwarding charges out of assessable value, paid the full differential duty of about Rs 1.8 lakh when it was pointed out and before the show-cause notice, and was nonetheless penalised under s.11AC. In the other, a pig iron manufacturer was held to have cleared goods to an associate company at an improper assessable value, paid the entire demand of about Rs 1.26 crore on the day the notice was issued, and argued that the exercise was revenue-neutral because the buyer took CENVAT credit and reimbursed the duty. In both, the Tribunal set aside the penalty on the single ground that the duty had been paid before the show-cause notice. The revenue appealed, relying on Union of India v. Dharmendra Textile Processors for the proposition that mere non-payment or short payment inevitably attracts penalty equal to the duty short paid.
Both sides were wrong. Payment of the differential duty, whether before or after the show-cause notice, cannot alter liability for penalty, whose conditions are spelled out in s.11AC, so the Tribunal's reason for cancelling the penalty was misconceived (para 2). Equally, Dharmendra Textile cannot be read as holding that s.11AC applies to every case of non-payment or short payment regardless of the conditions expressly stated in the section (para 21). Penalty under s.11AC is punishment for an act of deliberate deception by the assessee with intent to evade duty by one of the means named in the section, and it comes into play only after an order under s.11A(2) containing a legally tenable finding to that effect (paras 18 and 19). Dharmendra Textile must therefore be understood to mean that whether s.11AC applies depends on the existence of those conditions, but that once it applies the authority has no discretion in quantum (para 23). The Court expressly confined this reading of Dharmendra Textile to s.11AC and made no observation on the other statutory provisions considered there (para 24). Both Tribunal orders were set aside and the matters remitted for fresh consideration, with an expectation of final orders within four months (para 25).
The Court read s.11A and s.11AC together. The proviso to s.11A(1), which extends the recovery period from one year to five, uses the identical expression as s.11AC — fraud, collusion, wilful mis-statement or suppression of facts, or contravention with intent to evade duty — so the conditions that extend limitation are the same conditions that attract penalty. It follows that where the notice alleges conscious and deliberate wrongdoing and the order under s.11A(2) contains a legally tenable finding to that effect, s.11AC is attracted; and, conversely, where there is no such allegation and no such finding, s.11AC has no application (para 18). On the Tribunal's reasoning, s.11A(2B) protects a person who pays before service of notice from receiving a notice, but Explanation 1 excludes intentional escapement by deception from that sub-section altogether and Explanation 2 preserves interest, so the common view that early payment defeats penalty is wrong (para 15). The Court took the meaning of suppression and wilful mis-statement from Cosmic Dye Chemical v. CCE and Continental Foundation Jt. Venture v. CCE: intent to evade is built into fraud and collusion, and mis-statement or suppression must be wilful, mere omission to give correct information not being enough (paras 12 and 13). Turning to Dharmendra Textile, it set out the question that decision had framed and the passage in which it was answered, and observed that the revenue's own case there had not been that s.11AC applies irrespective of the statutory conditions, so the decision could not bear the meaning pressed on it (paras 20 to 22).
The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A.
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Handle my notice → Ask a CA on WhatsAppNo. Whether the penalty provision applies at all depends on the conditions expressly stated in it. Once it does apply, the authority loses discretion over the amount — but not before. This was decided by the Supreme Court (Aftab Alam and S.H. Kapadia, JJ (judgment delivered by Aftab Alam J)) and bears on section 271(1)(c), section Central Excise Act s.11A, section Central Excise Act s.11AC of the Income Tax Act 1961. It is reported as (2009) 238 ELT 3 (SC); [2009] 180 Taxman 609 (SC); [2009] 224 CTR 1 (SC); [2009] 20 STT 481 (SC); Civil Appeal Nos. 3525 and 3527 of 2009. It is the answer to an officer who cites Dharmendra Textile as if it made penalty automatic. The conditions of the section still have to be established, and the burden of establishing them is not yours. If it applies to you, the first step is this: Make the department identify which limb of the section it says is attracted, and on what material.
Two appeals by the revenue, for the period 1 July 2000 to 31 March 2004 and for a 2000-01 short payment. In one, a manufacturer of P/V yarn had left part of its handling and forwarding charges out of assessable value, paid the full differential duty of about Rs 1.8 lakh when it was pointed out and before the show-cause notice, and was nonetheless penalised under s.11AC. In the other, a pig iron manufacturer was held to have cleared goods to an associate company at an improper assessable value, paid the entire demand of about Rs 1.26 crore on the day the notice was issued, and argued that the exercise was revenue-neutral because the buyer took CENVAT credit and reimbursed the duty. In both, the Tribunal set aside the penalty on the single ground that the duty had been paid before the show-cause notice. The revenue appealed, relying on Union of India v. Dharmendra Textile Processors for the proposition that mere non-payment or short payment inevitably attracts penalty equal to the duty short paid. The matter was decided on 2009-05-12 by the Supreme Court (Aftab Alam and S.H. Kapadia, JJ (judgment delivered by Aftab Alam J)). On those facts the Supreme Court held as follows. Both sides were wrong. Payment of the differential duty, whether before or after the show-cause notice, cannot alter liability for penalty, whose conditions are spelled out in s.11AC, so the Tribunal's reason for cancelling the penalty was misconceived (para 2). Equally, Dharmendra Textile cannot be read as holding that s.11AC applies to every case of non-payment or short payment regardless of the conditions expressly stated in the section (para 21). Penalty under s.11AC is punishment for an act of deliberate deception by the assessee with intent to evade duty by one of the means named in the section, and it comes into play only after an order under s.11A(2) containing a legally tenable finding to that effect (paras 18 and 19). Dharmendra Textile must therefore be understood to mean that whether s.11AC applies depends on the existence of those conditions, but that once it applies the authority has no discretion in quantum (para 23). The Court expressly confined this reading of Dharmendra Textile to s.11AC and made no observation on the other statutory provisions considered there (para 24). Both Tribunal orders were set aside and the matters remitted for fresh consideration, with an expectation of final orders within four months (para 25).
The Court read s.11A and s.11AC together. The proviso to s.11A(1), which extends the recovery period from one year to five, uses the identical expression as s.11AC — fraud, collusion, wilful mis-statement or suppression of facts, or contravention with intent to evade duty — so the conditions that extend limitation are the same conditions that attract penalty. It follows that where the notice alleges conscious and deliberate wrongdoing and the order under s.11A(2) contains a legally tenable finding to that effect, s.11AC is attracted; and, conversely, where there is no such allegation and no such finding, s.11AC has no application (para 18). On the Tribunal's reasoning, s.11A(2B) protects a person who pays before service of notice from receiving a notice, but Explanation 1 excludes intentional escapement by deception from that sub-section altogether and Explanation 2 preserves interest, so the common view that early payment defeats penalty is wrong (para 15). The Court took the meaning of suppression and wilful mis-statement from Cosmic Dye Chemical v. CCE and Continental Foundation Jt. Venture v. CCE: intent to evade is built into fraud and collusion, and mis-statement or suppression must be wilful, mere omission to give correct information not being enough (paras 12 and 13). Turning to Dharmendra Textile, it set out the question that decision had framed and the passage in which it was answered, and observed that the revenue's own case there had not been that s.11AC applies irrespective of the statutory conditions, so the decision could not bear the meaning pressed on it (paras 20 to 22). In the words reproduced by the source cited on this page: "The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A." The decision followed or applied Explains Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 (SC); Applies Cosmic Dye Chemical v. CCE 1995 (75) ELT 721 (SC); Applies Continental Foundation Jt. Venture v. CCE 2007 (216) ELT 177 (SC).
It was decided by the Supreme Court on 2009-05-12 and is reported as (2009) 238 ELT 3 (SC); [2009] 180 Taxman 609 (SC); [2009] 224 CTR 1 (SC); [2009] 20 STT 481 (SC); Civil Appeal Nos. 3525 and 3527 of 2009. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 271(1)(c), section Central Excise Act s.11A, section Central Excise Act s.11AC, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Both sides were wrong. Payment of the differential duty, whether before or after the show-cause notice, cannot alter liability for penalty, whose conditions are spelled out in s.11AC, so the Tribunal's reason for cancelling the penalty was misconceived (para 2). Equally, Dharmendra Textile cannot be read as holding that s.11AC applies to every case of non-payment or short payment regardless of the conditions expressly stated in the section (para 21). Penalty under s.11AC is punishment for an act of deliberate deception by the assessee with intent to evade duty by one of the means named in the section, and it comes into play only after an order under s.11A(2) containing a legally tenable finding to that effect (paras 18 and 19). Dharmendra Textile must therefore be understood to mean that whether s.11AC applies depends on the existence of those conditions, but that once it applies the authority has no discretion in quantum (para 23). The Court expressly confined this reading of Dharmendra Textile to s.11AC and made no observation on the other statutory provisions considered there (para 24). Both Tribunal orders were set aside and the matters remitted for fresh consideration, with an expectation of final orders within four months (para 25). It arises in Penalty matters, on section 271(1)(c), section Central Excise Act s.11A, section Central Excise Act s.11AC of the Income Tax Act 1961, and was decided by Aftab Alam and S.H. Kapadia, JJ (judgment delivered by Aftab Alam J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Argue the conditions before you argue the quantum — the quantum is where discretion has gone. Cite it together with Dharmendra Textile rather than against it; it is a gloss, not a contradiction.
Still good law. Relied on by the Supreme Court in CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 (SC), decided 24 August 2009. No decision doubting or overruling it was found. For income tax, note that s.271 is inoperative for AY 2017-18 onwards, s.270A having taken its place. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a Central Excise decision and it says so about its own reach. At para 24 the Court made clear that its reading of Dharmendra Textile is 'only in so far as section 11AC is concerned' and that it made no observation about the several other statutory provisions considered in that case — which include s.271(1)(c). So the familiar proposition that penalty under s.271(1)(c) is not automatic and that the statutory conditions must first be satisfied does not come from this judgment; it comes from the way later income-tax decisions, including CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 (SC), have used it. Cite it accordingly. Note also the other half of the holding, which cuts against assessees: paying the differential duty before the show-cause notice does not by itself defeat penalty, because s.11A(2B) does not apply where the escapement was intentional. The disposal was a remand to the Tribunals. No ITR citation for this judgment was found; the report carries it at [2009] 180 Taxman 609, [2009] 224 CTR 1 and [2009] 20 STT 481. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both sides were wrong. Payment of the differential duty, whether before or after the show-cause notice, cannot alter liability for penalty, whose conditions are spelled out in s.11AC, so the Tribunal's reason for cancelling the penalty was misconceived (para 2). Equally, Dharmendra Textile cannot be read as holding that s.11AC applies to every case of non-payment or short payment regardless of the conditions expressly stated in the section (para 21). Penalty under s.11AC is punishment for an act of deliberate deception by the assessee with intent to evade duty by one of the means named in the section, and it comes into play only after an order under s.11A(2) containing a legally tenable finding to that effect (paras 18 and 19). Dharmendra Textile must therefore be understood to mean that whether s.11AC applies depends on the existence of those conditions, but that once it applies the authority has no discretion in quantum (para 23). The Court expressly confined this reading of Dharmendra Textile to s.11AC and made no observation on the other statutory provisions considered there (para 24). Both Tribunal orders were set aside and the matters remitted for fresh consideration, with an expectation of final orders within four months (para 25).
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