Supreme Court Reiterates: Issuance of Specific Show Cause Notice is Mandatory for Imposition of Penalty

Supreme Court Reiterates: Issuance of Specific Show Cause Notice is Mandatory for Imposition of Penalty

The Supreme Court by its coram comprising of Justices Dinesh Maheshwari and Sanjay Kumar while quashing the debarment and penalty order issued by Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited/ Power Distribution Company (in short DISCOM) has reiterated that issuance of a specific show-cause notice is mandatory for imposition of penalty.

The brief background of the case is that Appellant- Isolators and Isolators, being a proprietorship firm, has been in the business of manufacturing and repairing of transformers, for 30 years. The only customers of the appellant are the distribution companies (DISCOMs).

The Appellant contended that a purchases order was issued by the Respondent- Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited. The period for the supply was specified as six months starting from the third month of the purchase order issue date. However, the Appellant received the purchase order through email on 13 September, 2017 and physically on 15 September, 2017. Thereafter, the Appellant made a request to the DISCOM to modify the delivery schedule due to the delay in receipt of the purchase order.

The Appellant submitted that despite making several requests to reschedule the supply, the DISCOM did not reschedule the supply, and instead imposed late supply penalties on the appellant's bills.

The grievance of the Appellant was that despite their efforts to supply Level-I transformers, starting from 2 May, 2018 and delivering 300 transformers, the Respondents did not reschedule the supply, and instead imposed late supply penalties on the Appellant's bills; and deducted penalties to the tune of over Rs. 11 lakh from the bills of the Appellant for 300 transformers.

The Appellant challenged the debarment and penalty order before the Madhya Pradesh High Court, who upheld the debarment order. The review petition filed by it was also summarily rejected by the High Court.

The contention raised by the Appellant before the Apex Court was that though the show-cause notice issued by the respondent DISCOM was only about debarment, the latter proceeded to pass orders debarring the appellant for 3 years along with imposing penalty. Thus, it argued that the order imposing penalty was patently illegal and deserves to be set aside.

The bench while referring to the show-cause notice concluded that the debarment and penalty order cannot be upheld.

The Court was of the view that with respect to the principles of law applicable to the case, it was squarely covered in the case of case UMC Technologies Private Limited vs. Food Corporation of India and Anr. (2021).

As regards the question of penalty, the Court found force and substance in the contentions urged on behalf of the Appellant that such an imposition cannot be approved for two major factors.

The first and foremost being that in the show-cause notice dated 26 November, 2019, the Appellant was put to notice only as regards the proposition of debarment and in the said notice, nothing was indicated about the proposed imposition of penalty.

The Court reckoned, “finality attaching to the action of cancellation cannot be read as a due notice for imposition of penalty even if the respondents chose to employ the expression ‘cancelled with imposition of penalty’ in those orders. Looking to the terms of contract, quantification of the amount of penalty (if at all the penalty is considered leviable) could not have been carried out without affording adequate opportunity of response to the appellant.”

That being the position, the action of the respondents in imposing the penalty without even putting the appellant to notice as regards this proposed action cannot be approved, opined the Apex Court.

Secondly, the Court noted that the authority had imposed the maximum of penalty to the tune of 10% of the deficit supply without specifying as to why the maximum of penalty was sought to be imposed.

In this regard, the Court was of the view that the relevant factors as indicated by the Appellant could not have been ignored altogether.

“This is for the simple reason that imposition of penalty against the appellant cannot be approved because of the want of specific show-cause notice. Moreover, no specific quantum of loss has been specified by the respondents so as to justify the imposition of maximum of penalty. Viewed from any angle, the impugned order dated 17 August, 2020 is required to be set aside,” the Court held.

Further the bench while taking note of the written submissions on behalf of the respondents, stated that it had failed to answer the root question in the matter as to how the Appellant could have been made solely responsible for delay or default in supply after the communication dated 18 September, 2019 when the respondents themselves informed the appellant that taking of balance delivery was being deferred (until further instructions).

In this regard, the Court remarked that in the length and breadth of the arguments on behalf of the respondents, it was nowhere pointed out if such ‘further instructions’ were ever issued to the Appellant before issuance of the cancellation orders dated 19 September, 2019 and 21 September, 2019 as also before issuance of show-cause notice dated 26 September, 2019.

Hence, the Court concluded that the debarment order had been issued against the appellant without due regard to the undeniable factual situation where the entire blame could not have been foisted upon or shifted towards the appellant.

The Court expressed its dismay at the fact that the High Court had chosen to dismiss the review petition without even looking into the relevant factors, including the one concerning the impact of the communication dated 18 September, 2019.

Thus, the Apex Court set aside the judgment and order of the Madhya Pradesh High Court, while quashing the debarment and penalty order issued by the respondent DISCOM.