Criminal Prosecution Under Central Excise Act Must Be Quashed If Tax Demand Is Set Aside On Merits By CESTAT: Punjab & Haryana High Court

"Once the very demand forming basis of the criminal complaint has been set aside by the competent Tribunal on merits, continuation of criminal proceedings would clearly amount to abuse of process of law," Punjab and Haryana High Court, in a significant ruling dated May 25, 2026, held that criminal prosecution under the Central Excise Act cannot be permitted to continue once a competent appellate tribunal has set aside the underlying tax demand on merits.

A Single Bench of Justice Mandeep Pannu observed that while adjudication and criminal proceedings can run simultaneously, the "very substratum of the prosecution" disappears when the demand forming the basis of the complaint is adjudicated in favour of the assessee.

The case originated from a criminal complaint filed by the Assistant Commissioner, Central Excise, Panipat, against M/S Dhillon Kool Drinks and Beverages Ltd. (a Pepsi manufacturer) under Sections 9 and 9AA of the Central Excise Act, 1944. The Department alleged that the company cleared goods involving duty of over ₹3.32 Crores by making fictitious entries in their account current and PLA accounts without actual deposits. Although the petitioners had deposited the duty with interest before the show cause notice, the Department initiated prosecution while an appeal was pending before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

The primary question before the court was whether a criminal complaint is maintainable after the competent Appellate Tribunal has set aside the duty demand on merits. The court was also called upon to determine whether a third quashing petition under Section 482 CrPC is maintainable if previous petitions were withdrawn while the appellate adjudication was still pending.

Petition Maintainable Despite Previous Withdrawals Due To Material Change In Circumstances

The Court first addressed the maintainability of the petition, as the respondent-Department argued that this was the petitioners' third attempt at seeking quashing. Justice Pannu noted that the earlier petitions were withdrawn at a stage when the CESTAT appeal was still pending, and no final adjudication had been rendered. The Court observed that since the previous petitions were not dismissed on merits and a fresh cause of action accrued following the CESTAT's final order, the present petition was maintainable.

Subsequent Adjudication By CESTAT Constitutes Material Change

The Bench emphasized that the subsequent adjudication by the CESTAT constituted a material change in circumstances. The Court noted that the earlier orders dated September 6, 2010, and February 25, 2011, clearly revealed that no adjudication was made by the High Court on the controversy at that time. Consequently, the petitioners were not barred from invoking the inherent jurisdiction of the Court under Section 482 CrPC once the Tribunal ruled in their favour.

Criminal Prosecution Cannot Survive If Tax Demand Quashed On Merits

Turning to the merits of the quashing plea, the Court found that the CESTAT had specifically held that the petitioners did not contravene Rule 8(3A) of the Central Excise Rules, 2001. Significantly, the Tribunal had set aside the demand of ₹1,69,38,241 on merits rather than on technical grounds. The Court observed that once the competent authority decides the matter on merits in favour of the assessee, criminal prosecution for the same alleged contravention cannot be allowed to proceed.

Court Distinguishes Between Technical Relief And Adjudication On Merits

Justice Pannu highlighted that the learned CESTAT did not grant relief to the petitioners on any technicality but recorded a categorical finding of non-contravention. The Court further noted the Tribunal’s observation that the disputed amount and interest were deposited much prior to the issuance of the show cause notice. The High Court reasoned that when the very basis of the prosecution—the tax demand—is wiped out by a merit-based order, the continuation of the criminal case is a futile exercise.

"The very substratum of the prosecution thus no longer survives after the final adjudication rendered by the learned CESTAT."

Department’s Concealment Of Stay Order Noted By Court

The Court also took a grim view of the fact that the Department instituted the criminal complaint on August 2, 2008, despite the CESTAT having already stayed the operation of the adjudication order on April 7, 2008. This concealment of the stay order at the time of filing the complaint further weakened the Department's position. The Court reiterated that while civil and criminal proceedings are distinct, they cannot be divorced from the reality of the underlying liability.

Reliance On Precedents Regarding Simultaneous Proceedings

The Bench placed reliance on the Coordinate Bench decision in M/s Dhillon Kool Drinks & Beverages Ltd. v. Government of India (2008) and Supreme Court rulings such as Joseph P. Bangera v. State of Maharashtra. These precedents establish that while both proceedings can continue simultaneously, prosecution must end if the appellate authority clears the assessee of the core charge. The Court held that allowing the trial to continue would result in an "abuse of the process of law" as the foundation of the criminal charge had been demolished.

The High Court allowed the petition and quashed the criminal complaint and the summoning order dated January 7, 2009. The Court concluded that since the CESTAT had already cleared the petitioners of the alleged excise violations on merits, the criminal proceedings under Sections 9 and 9AA of the Central Excise Act had lost their legal basis and could not be sustained.

Date of Decision: 25 May 2026