The Customs Excise & Service Tax Appellate Tribunal, Mumbai West Zonal Bench, has delivered a definitive ruling affirming that the issuance of a mandatory show cause notice under Section 28 of the Customs Act, 1962 is indispensable for recovery of erroneous refunds, and that adjudication after a delay of over two decades constitutes a fundamental violation of natural justice. This judgment reinforces procedural safeguards for taxpayers and sets a critical precedent against administrative inaction.
Background & Facts
The Dispute
The appellant, M/s. Hindustan Copper Ltd., imported a consignment of tyres, tubes, and flaps on 12.09.1990. The goods were assessed and duties, including Countervailing Duty (CVD) and Special Additional Duty (SAD), were paid. On 26.04.1991, the appellant identified an overcharge in CVD and filed a refund claim. The Assistant Commissioner (Refund) accepted the claim, re-assessed the duty, and sanctioned a refund of Rs.8,42,613.70 on 30.03.1994.
Key Facts
- Import transaction date: 12.09.1990
- Refund claim filed: 26.04.1991
- Refund sanctioned and paid: 30.03.1994
- Central Revenue Audit (CRA) raised objection: 17.11.1994
- Demand notice issued under Section 28: 18.12.1995 (for Rs.8,00,485/-)
- Appellant’s reply to audit objection: No formal response required until 2014
- First notice of personal hearing issued: 07.03.2014 (19 years after demand notice)
- Appellant’s reply on procedural prejudice: 10.03.2016 (stating key personnel retired, records lost)
- Order-in-Original passed: 22.03.2018 (23 years after demand notice)
- Order-in-Appeal confirmed: 27.12.2021
- Final order passed by CESTAT: 07.05.2026
The demand notice dated 18.12.1995 sought recovery of Rs.8,00,485/-. However, the Adjudicating Authority, in its Order-in-Original dated 22.03.2018, confirmed a demand of Rs.8,42,613/- - an amount not specified in any notice and not amended thereafter.
Procedural History
- 12.09.1990: Import of tyres, tubes, and flaps
- 26.04.1991: Appellant files refund claim
- 30.03.1994: Refund of Rs.8,42,613.70 paid
- 17.11.1994: CRA raises objection to re-assessment
- 18.12.1995: Demand notice issued for Rs.8,00,485/-
- 07.03.2014: First notice of personal hearing issued
- 10.03.2016: Appellant replies disclosing loss of records and personnel
- 22.03.2018: Adjudicating Authority passes Order-in-Original confirming demand of Rs.8,42,613/-
- 27.12.2021: Commissioner of Customs (Appeals) confirms the order
- 07.05.2026: CESTAT Mumbai sets aside the orders
The Parties' Positions
Appellant: Argued that no show cause notice was issued as required under Section 28 of the Customs Act, 1962; that the demand notice was not a substitute; and that the 23-year delay destroyed its ability to defend itself due to loss of records and personnel.
Respondent (Revenue): Contended that the demand notice served as substantial compliance with Section 28 and that the delay was due to audit review, not negligence.
Relief Sought
The appellant sought quashing of the Order-in-Original dated 22.03.2018 and the Order-in-Appeal dated 27.12.2021, on grounds of procedural illegality and inordinate delay.
The Legal Issue
The central question was whether Section 28 of the Customs Act, 1962 requires issuance of a mandatory show cause notice before recovery of an erroneous refund, and whether adjudication after a delay of twenty-three years violates the principles of natural justice and the right to a fair hearing.
Arguments Presented
For the Appellant
The appellant’s counsel relied on Metal Forgings v. Union of India (2002) to argue that Section 28 mandates a show cause notice that explicitly invites the noticee to show cause why the demand should not be confirmed. The demand notice dated 18.12.1995 was a unilateral directive to deposit money, not an invitation to defend. The appellant further argued that the 23-year delay rendered its defence impossible, as key personnel had retired and records were lost, violating the principle of audi alteram partem.
For the Respondent
The Revenue’s authorised representative contended that the demand notice fulfilled the substantive purpose of a show cause notice by informing the appellant of the liability. It argued that the delay was attributable to internal audit processes and that the appellant had not been prejudiced.
The Court's Analysis
The Tribunal held that the distinction between a demand notice and a show cause notice is not formal but substantive. A demand notice merely asserts liability; a show cause notice under Section 28 must invite the noticee to explain why the proposed recovery should not be made. The Tribunal emphasized that this distinction is rooted in the constitutional guarantee of fair procedure under Article 14 and the doctrine of audi alteram partem.
"The show cause notice is the instrument by which the adjudicatory authority's jurisdiction is properly invoked. It defines the boundaries of the proceeding and ensures that the noticee is not taken by surprise. In its absence, the entire proceeding is vitiated at the root."
The Tribunal further held that the increase in demand from Rs.8,00,485/- to Rs.8,42,613/- without any amended or supplementary notice rendered the adjudication ultra vires. An authority cannot adjudicate beyond the scope of the initiating notice.
Regarding delay, the Tribunal cited Parle International Ltd. v. Union of India (2021) to affirm that adjudication after more than a decade defeats the purpose of notice and defence. Here, the delay of twenty-three years was not merely inordinate - it was fatal. The appellant’s disclosure that employees who handled the 1990 import had retired and records were unavailable established irreparable prejudice.
"No party can be reasonably expected to preserve business records, maintain institutional memory of routine import transactions, or produce witnesses after the passage of nearly a quarter century."
The Tribunal concluded that the department’s inaction amounted to constructive abandonment. Having slept on its rights for over two decades, the Revenue could not now revive the proceeding to the appellant’s severe disadvantage.
The Verdict
The appellant succeeded. The CESTAT set aside the Order-in-Original dated 22.03.2018 and the Order-in-Appeal dated 27.12.2021. The recovery proceedings initiated under Section 28 are quashed in their entirety. No further demand for the amount of Rs.8,42,613/- or any part thereof shall be pursued against the appellant. Costs are awarded to the appellant.
What This Means For Similar Cases
Show Cause Notice Is Non-Negotiable
- Practitioners must insist on strict compliance with Section 28 before any recovery of erroneous refunds
- A demand notice alone cannot substitute a show cause notice - the notice must explicitly invite explanation
- Any adjudication based solely on a demand notice is void ab initio
Delay of More Than a Decade Is Fatal
- Adjudication proceedings initiated more than 10 years after the cause of action are likely to be set aside
- Loss of records or personnel due to delay is a valid ground for prejudice
- Revenue authorities must act with reasonable diligence; inaction cannot be weaponized later
Jurisdiction Is Limited to Notice Amount
- Adjudicating authorities cannot confirm demands exceeding the amount specified in the initiating notice
- Any increase in demand requires a fresh or amended show cause notice
- Failure to do so renders the order ultra vires and liable to be quashed
