Karnataka High Court
Chairman, Cbec And Ors. vs Davangere Cotton Mills on 28 August, 1995
Equivalent citations: ILR1995KAR2690, 1995(5)KARLJ277
JUDGMENT
1. These two cross-appeals are directed against the order dated March 25, 1991 passed by the learned Single Judge in W.P. No. 17545/86 and can be conveniently disposed of by this judgment. By the impugned order the learned Single Judge quashed the demand notice dated May 2, 1986 served by the Superintendent of Central Excise upon M/s the Davangere Cotton Mills Ltd., (hereinafter referred to as 'the Mills' for the sake of brevity). The learned Single Judge also directed the Superintendent to refund the sum of Rs. 1,69,75,742.79 to the Mills. The learned Judge further directed the department to examine whether any further amount is required to be refunded in accordance with the claim made by the Mills. The learned Judge declined to award interest on the amount of refund.
2. The facts which give rise to the passing of this order are not in dispute and are required to be set out to appreciate the grievance made in the two appeals.
M/s Davangere Cotton Mills Ltd. is a composite mill and manufactures cotton and fabrics. The mills also manufacture different kinds of yarn and which is ultimately consumed in the factory for manufacture of different kinds of fabrics. The expression "composite mill" means a manufacturer, who is engaged in spinning of cotton yarn or weaving and processing of cotton fabrics with the aid of power in the same factory. The different kinds of yarn manufactured by the Mills was liable to payment of excise duty under Tariff Item 18-III, 18A and 18E of the First Schedule to the Central Excises and Salt Act, 1944 (hereinafter referred as 'the Act'). The Mills were paying excise duty on yarn manufactured and consumed till August 9, 1981. The Mills then became aware of the decision rendered by the Delhi High Court in Delhi Cloth and General Mills Co. Ltd. v. Joint Secretary, Govt. of India [1978 Cen-Cus 55D (Del.) = 1978 ELT (J 121)]. The Delhi High Court held that yarn manufactured in the factory and exclusively consumed within the same factory is not liable for payment of excise duty. The Mills thereupon preferred W.P. No. 19994/81 in this Court under Article 226 of the Constitution. The Mills claimed that manufacture of yarn captively consumed is not liable to payment of excise duty. The petition was admitted in September 1981 and the interim order was passed to the following effect :
"Pending issue of rule nisi, it is ordered by the Court on 18.9.1981 that the levying and collecting excise duty by the respondents on different types of yarn manufactured and used for the manufacture of fabrics within the factory premises without removal thereof be and are hereby stayed for a period of 4 weeks from 18.9.1981."
It is not in dispute that the stay order remained in operation till the disposal of the petition.
The petition was then amended and the constitutional validity of Rules 9 and 49 of Central Excise Rules, 1944 (hereinafter referred to as 'the Rules') and Section 51 of Finance Act, 1982 was challenged. The petition was heard by the Division Bench and by judgment reported in M/s Davangere Cotton Mills Ltd. v. Union of India [1986 (7) ECR 137 (Karnataka) = ILR 1987 (2) Karnataka p. 1113] the petition was dismissed. The Division Bench upheld the validity of Rules 9 and 49 as amended by Finance Act. The Division Bench also held that the decision of the Delhi High Court, on which relief in the petition was based, is no longer good law in view of the decision of the Supreme Court in M/s J.K. Cotton Spinning and Weaving Mills Ltd. and Anr. v. Union of India and Others . The Division Bench while dismissing the petition observed in para 47 of the judgment that the interim order stands terminated and the department is entitled to adjudicate and recover the amounts that may be found due for the period during which the interim relief was in operation. The Division Bench further observed that the Mills cannot plead bar of limitation and it is open for the department to recover all amounts due from the date of grant of interim-relief.
3. The Mills had opted for advantage of the procedure prescribed under Chapter VII-A of the Rules and were filing the returns as contemplated under Rule 173-G(1)(iii) of the Rules at the end of each month. The returns were filed in Form RT-12 prepared under Rule 173G of the Rules. Rule 173-I provides that the officer on the basis of the information contained in the returns filed by the assessee under sub-rule (iii) of Rule 173G(1) shall assess the duty due on the goods removed and complete the assessment memorandum on the returns. The Rule further provides that the assessee shall pay the deficiency of the duty determined within 10 days of receipt of the copy of the returns. Inspite of the order of stay granted by this Court from levy and collection of duty, the Mills had filed Form RT-12 from month to month. The assessment memorandum is printed at the foot of the form. While filing the return the Mills made an endorsement on the form that yarn was removed to weaving section without paying excise duty in pursuance of the stay order granted by the High Court. the Central Excise Officer therefore did not complete the assessment. RT-12 form clearly sets out the quantity removed without payment of duty during each month.
After the dismissal of the writ petition preferred by the Mills and after the stay order for levy and collection stood vacated, the Superintendent of Central Excise by letter dated May 2, 1986 informed the Mills that a sum of Rs. 2,11,86,467.27 is due for the period commencing from September 1981 ending with July 20, 1985 for the clearance of cotton yarn, Cellulosic spun yarn and non-cellulosic spun yarn captively consumed by the Mills for the manufacture of fabrics without payment of duty. The Mills were called upon to make payment within a period of ten days. The demand letter was also accompanied by detailed worksheets setting out how the amount of duty was calculated. The calculations were made on the basis of returns filed by the Mills. There was no dispute about the rate at which the duty was payable.
4. The Mills challenged the demand notice by filing writ petition under Article 226 of the Constitution on October 28, 1986 before the learned Single Judge. The grievance of the Mills is that the Superintendent of Central Excise served demand notice without giving an opportunity to the Mills to show cause. The two prayers made in the petition are -
(a) Writ of certiorari for quashing the demand letter dated May 2, 1986, and
(b) Writ of mandamus directing the Superintendent of Central Excise to render a decision or to pass an order determining the excise duty liability of the Mills.
The reliefs sought by the Mills were resisted by the department by claiming that the procedure prescribed under Rule 173-I of the Rules does not demand for service of notice before issuing assessment memorandum under form RT-12. The department further claimed that the claim of the Mills that the demand letter was issued beyond the period of limitation prescribed under Section 11A of the Act is without merit because the department was restrained by an order of this Court from levy and collection of duty. The department pointed out that the interim order prevented the Superintendent of Central Excise from completing the assessment and as soon as the petition was dismissed, the assessment was completed and demand was made. The department pointed out that the assessment was nothing but an arithmetic calculation because the quantity of goods cleared was not in dispute nor the rate of excise duty.
The hearing commenced before the learned Single Judge in January 1991 and during the hearing an application was filed on behalf of the Mills for amendment of petition and the application was granted. The Mills claimed that Rule 9 of the Rules is subject to limitation prescribed under Section 11A of the Act and therefore this Court had no authority to hold that the Mills could not plead limitation for the period during which interim relief was in operation. The Mills also claimed that the demand must precede with show cause notice and in the absence thereof, the demand cannot be sustained. The Mills further claimed that as the demand was invalid the amount paid by the Mills pending the petition in accordance with the interim order should be directed to be refunded. To appreciate the claim of refund, it is necessary to set out the portion of the interim relief dated October 28, 1986 passed by the learned single Judge in the writ petition.
"As regards the interim prayer, the learned counsel for the petitioner invited my attention to an interim order granted by the Supreme Court in the appeals presented by the Associated Cement Company Limited granting stay subject to the petitioners therein paying the entire amount due in four equal quarterly instalments. The learned counsel submitted that having regard to the fact that in the present case the liability of the petitioner is to the extent of 2.2 crores, the petitioner may be permitted to pay in twelve equal quarterly instalments. In the circumstances, I make the following order :
There will be no stay of the impugned order. But the petitioner shall pay the entire amount due by it to the respondents in twelve equal quarterly instalments. The petitioner shall pay the first instalment before 10th January 1987."
The Mills claimed that in accordance with the order a sum of Rs. 1,69,75,724.79 was paid and this should be refunded along with interest.
5. The learned Single Judge by the impugned order held that procedure in Chapter VIIA of the Rules is to be observed in normal cases and has no application when levy and collection was stayed by order of this Court. The learned Judge further held that the provisions of Section 11A (1) and (2) of the Act contemplate adjudication of duties not levied or not paid after service of notice. The learned Judge held that the grant of interim-relief by this Court not to levy and collect duty does not dispense with service of notice, nor the final order of this Court dismissing the petition filed by the Mills can provide for dispensation of service of notice before issuance of demand. It was further held that the department failed to give an explanation as to why the determination of duty payable was not made in accordance with law. The learned Judge held that the facts of the case are identical to those before the Supreme Court in Gokak Patel Volkart Ltd. v. Collector of Central Excise and therefore the demand letter should be held to be barred by limitation and required to be quashed. After recording these findings, the learned Judge directed that the amounts of instalments paid by the Mills in pursuance of the interim relief granted by this Court shall be refunded. Though the claim of interest was turned down. The learned Judge further directed that department should examine the claim of the Mills that in fact Rs. 2,53,59,761.79 and not only Rs. 1,69,75,724.79 were paid. The decision of the learned Single Judge is under challenge.
6. The learned counsel for the department submits that the learned single Judge failed to appreciate that the demand letter was issued in pursuance of the procedure prescribed under Chapter VIIA of the Rules which do not provide for issuance of any notice prior to the completion of the assessment. The counsel for the department submitted that the learned Single Judge overlooked the provisions of Rule 173G(1)(iii) and 173-I of the Rules and erroneously assumed that the demand under Rule 173-I must precede notice to the assessee. It was further contended that the assumption of the learned Single Judge that the provisions of Section 11A of the Act are attracted to the demand made is erroneous, and indeed Section 11A had no application whatsoever to the facts of the case. It was further contended on behalf of the department that the Mills could not take advantage of the interim relief secured from this Court to claim that the department was duty bound to make demand of excise duty due for the period September 1981 to July 20, 1985 within a period of six months. The counsel for the Mills on the other hand submitted that the decision of the learned Single Judge that the demand must precede with notice to the assessee and assessment can be completed only after notice is correct and does not suffer from any infirmity. The counsel for the Mills tried to sustain the impugned decision by reference to the decision of the Supreme Court in the case of Gokak Patel Volkart Ltd. , and some observations made in Union of India and Others v. Madhumilan Syntex Pvt. Ltd. . In our judgment the impugned decision is not correct and is required to be set aside.
7. It is not in dispute that the Mill is a composite mill in the sense that the yarn manufactured by the mill is consumed in the mill itself for the manufacture of cotton fabrics. Rule 9 of the Central Excise Rules prescribes that no excisable goods shall be removed from its place where they are produced or manufactured until the excise duty leviable thereon has been paid. The Rule permits the Collector to provide that instead of payment of duty in respect of separate consignment of goods, the assessee can open an account and the duties payable can be deposited at intervals not exceeding one month. Rule 49A inter alia provides that where a manufacturer who manufactures cellulosic spun yarn falling under Item 18-III(1) of the First Schedule to the Act and uses the whole part of the yarn so manufactured in the manufacture of cotton fabrics in his own factory, can make an application to the Collector and the Collector may permit the manufacturer to pay duty leviable on such yarn along with duty on cotton fabrics in the manner prescribed in Rule 52. Rule 49A was inserted by Finance Act, 1982 with the object of avoiding separate payment of duty twice by the same manufacturer when the yarn manufactured in the factory is consumed in the factory itself for manufacture of cotton fabrics.
Chapter VIIA of the Rules deals with the subject of removal of excisable goods on determination of duty by producers, manufacturers or private warehouse licencees. Rule 173G deals with the procedure to be followed by the assessee who keeps an account with the Collector for excisable goods falling under different items of the schedule to the Act. Sub-rule (3) of Rule 173G prescribes that within seven days after the close of each month, every assessee shall in lieu of the returns prescribed under Rule 54, file before the officer in quadruplicate a monthly return in the proper form showing the quantity of excisable goods manufactured during the month, the quantity used within the factory for the manufacture of another commodity and the quantity removed without payment of duty. The rule sets out in detail the requirements the assessee has to comply while filing the returns and the form prescribed is Form RT-12. Rule 173-I reads as follows :
"173-I. ASSESSMENT BY PROPER OFFICER. -
(1) The proper officer shall on the basis of the information contained in the return filed by the assessee under sub-rule (3) of Rule 173G and after such further inquiry as he may consider necessary, assess the duty due on the goods removed and complete the assessment memorandum on the return. A copy of the return so completed shall be sent to the assessee.
(2) The duty determined and paid by the assessee under Rule 173F shall be adjusted against the duty assessed by the proper officer under sub-rule (1) and where the duty so assessed is more than the duty determined and paid by the assessee, the assessee shall pay the deficiency by making a debit in the account-current within ten days of receipt of copy of the return from the proper officer and where such duty is less, the assessee shall make credit in the account-current for the excess on receipt of the assessment order in the copy of the return duly counter-signed by a Superintendent of Central Excise."
8. The Mills had opted for special procedure prescribed under Chapter VIIA and the returns were filed in Form RT-12 and consequently the officer had to assess the return under Rule 173-I. It is not in dispute that before completing the assessment, the officer is not required to serve any notice on the assessee who files a return in the form prescribed under Form RT-12. The learned single Judge was in error in observing that the procedure under Chapter VIIA is to be observed in normal cases and not when levy and collection is stayed by the order of the Court. We are unable to share the observation of the learned Judge because the applicability of the procedure under Chapter VIIA does not depend upon the orders of the Court. The order dated September 18, 1981 passed by this Court on the petition filed by the Mills was to restrain the department from levy and collection of duty. The order did not dispense with filing of Form RT-12 and the Mills continued to file the forms during the pendency of the petition. This Court merely prevented the department to complete the assessment and to recover the duty. The Supreme Court in N. B. Sanjana, Assistant Collector of Central Excise, Bombay & Ors. v. The Elphinstone Spinning and Weaving Mills Co. Ltd. pointed out the difference between the expressions 'levy' and 'assessment'. The Supreme Court observed that the term 'levy' is wider in its import than the term 'assessment' and will include both imposition of tax as well as assessment. The term 'imposition' is generally used for levy of tax or duty relating to the provisions indicating the subject matter of the tax under which it has to be taxed. The term 'assessment' on the other hand is generally used for the actual procedure adopted in fixing the liability. Indeed Article 265 of the constitution makes a distinction between 'levy' and 'collection' and Section 3 of the Act provides that there shall be levied and collected duties of excise. As this Court by interim order restrained the department from levy and collection of excise duty in respect of yarn manufactured by the Mills, it was not possible for the officer to complete the assessment order. The learned Single Judge was in error in observing that the department could not have completed assessment in accordance with the provisions of Rule 173-I of the rules after interim-order passed by this Court came to an end without giving prior notice to show cause before completing the assessment under Rule 173-I of the Rules. The department has followed the procedure prescribed under Rule 173-I and called upon the Mills to pay the duty within a period of ten days. The exercise carried out by the department did not demand prior notice to the assessee.
It cannot also be overlooked that the Mills had filed returns in Form RT-12 and there was no dispute about the quantity of yarn cleared for consumption in the Mills premises. There was also no dispute as regards the rate of duty to be paid. The department accepted the returns filed by the Mills and the duty demanded is in accordance with the returns filed. The Mills did not choose to file any appeal against the determination of the quantum and we are unable to appreciate how the demand can be nullified on the ground that prior notice before carrying out exercise of arithmetic calculation was necessary.
9. The learned counsel for the Mills submitted that even if the procedure prescribed under Rule 173-I did not demand issuance of prior notice before ascertaining the quantum of duty payable, still the department was bound to give an opportunity to the Mills to show cause why the quantum as determined is not payable. It was contended that there cannot be any valid adjudication without prior notice and this Court while dismissing the earlier petition preferred by the Mills had directed the department to adjudicate the duty payable by the Mills. We are unable to find any merit in the contention. The expression 'adjudicate' used by this Court while dismissing the petition of the Mills cannot be understood as determination after giving notice to the assessee. The expression 'adjudicate' merely means calculation of duty payable as per form RT-12. The exercise to be performed by the department was merely to ascertain by arithmetic calculation the amount payable by the Mills. Reliance was placed on behalf of the Mills on the decision in Union of India v. Madhumilan Syntex Pvt. Ltd. & Anr. to claim that before any demand is made on any person for payment of duty a notice requiring him to show cause why he should not pay the amounts specified in the notice must be served on him. The reliance on the decision of the Supreme Court is inaccurate. The observation made by the Supreme Court was in the context of demand made under Section 11A of the Act and which prescribes service of notice in respect of duty not levied or duty not paid. The provisions of Section 11A of the Act cannot be imported while determining the duty payable under Rule 173-I of the Rules.
10. The learned counsel for the Mills then submitted that even assuming that notice was not a condition precedent for determining the liability under Rule 173-I, still as duty demanded was not paid by the Mills, it was incumbent upon the department to commence proceedings within a period of six months in accordance with the provisions of Section 11A of the Act. Sub-section (1) of Section 11A of the Act provides that when a duty of excise has not been levied or paid or short levied or short paid or erroneously refunded, then within six months from the relevant date a notice may be served on the person chargeable with the duty calling upon to show cause why the amounts specified in a notice should not be paid. The expression 'relevant date' means the date on which duty of excise though due has not been levied or not paid. The explanation to sub-section (1) provides that where the service of the notice is stayed by an order of the Court, the period of such stay shall be excluded in computing the period of six months. The learned counsel submitted that the demand was made by the Superintendent of Central Excise on May 2, 1986 and as duty was not paid, it was necessary for the department to commence proceedings within six months in accordance with the provisions of Section 11A of the Act. The submission is devoid of any merit for more than one reason. In the first instance, it was not necessary for the department to commence any proceedings for recovery of duty set out in the demand letter dated May 2, 1986, because the Mills preferred writ petition in this Court before the expiry of six months i.e. on October 28, 1986. As mentioned hereinabove this Court declined to grant stay of enforcement of the demand by order dated October 28, 1986. The Mills thereupon requested the court to grant instalments for payment of the amount of duty and on the request of the Mills, this Court granted 12 equal quarterly instalments for making the payment. It is not in dispute that the Mills paid certain quarterly instalments as promised. In view of the voluntary payment made by the Mills, the question of adopting the proceedings under Section 11A of the Act did not arise. The contention of the learned counsel that the case of the Mills falls within the ambit of Section 11A of the Act as the Mills did not pay the duty is not correct. There is second aspect of the matter which cannot be overlooked. Section 11 of the Act provides for recovery of sums due to the Government and inter alia sets out that in respect of a duty and any other sums payable to the Central Government under any of the provisions of the Act or the Rules, the Officer can recover the amount by attachment and sale of excisable goods belonging to the assessee and in case the amount is not so recovered then the officer can issue a certificate and the Collector of the District in which the assessee resides or conducts his business is entitled to proceed to recover the amount as arrears of land revenue. It is unnecessary in every case that the department must resort to Section 11A of the Act and resorting to that section is required only in cases where duty has not been levied or not paid. In the present case the duty was levied and was paid by the assessee in quarterly instalments and because of the assurance given by the assessee, the occasion to resort to the proceedings under Section 11 of the Act did not arise. The assumption of the Mills and the learned Single Judge that the recovery can be made only by resort to Section 11A of the Act is not correct. In this connection reliance by the learned counsel for the department on the decision of the Division Bench in Swan Mills Limited v. Union of India [1989 (25) ECR 18 (Bom.) = 1989 (44) ELT 601] is appropriate. Section 11A comes into the picture for assessing duty only in situation mentioned therein and is independent of provisions of Rule 173-I of the Rules. It was further held that when the assessment orders are passed under Rule 173-I then the amount has to be recovered under the provisions of Section 11 of the Act. We are in agreement with the view taken by the Division Bench. The contention that the provisions of Section 11A of the Act are attracted to the duty demanded and therefore the recovery is barred by limitation is without any merit. The reliance on sub-section (2) of Section 11A of the Act which inter alia provides that the Collector of Central Excise after considering the representation made by the assessee on whom the notice is served under sub-section (1) can determines the amount is not appropriate on the facts and circumstances of the case. the occasion to serve notice under sub-section (1) of Section 11A did not arise in the facts and circumstances of the case. The assumption of the learned Single Judge that the adjudication or ascertainment of duty by the department was not permissible without prior service of notice under sub-section (1) of Section 11A is entirely incorrect. The further assumption that the stay order issued by this Court in earlier litigation does not dispense with the notice is also inaccurate inasmuch as there was no occasion to serve any notice under Rule 173-I of the Rules.
11. The learned single Judge held that the dispute in the present proceedings stands covered by decision of the Supreme Court in Gokak Patel Volkart Ltd. v. Collector of Central Excise . We are afraid we cannot share the view of the learned single Judge. In the case before the Supreme Court, the fate of the dispute depended upon the meaning and scope of the Explanation to sub-section (1) of Section 11A of the Act. The assessee had filed a petition in Karnataka High Court and interim relief was granted restraining the department from collection of excise duty as a fabric, but the assessee was directed to pay excise duty as yarn. The writ petition was ultimately dismissed. The Assistant Collector thereupon served a notice on the assessee for the period from June 1976 to February 1981 for recovery of differential duty. For the earlier period from April 1975 to August 1975 another show cause notice was also issued on January 9, 1976. It was not in dispute before the Supreme Court that appropriate period of limitation to apply to the facts of the case was six months as provided under Section 11A of the Act and notice dated May 20, 1982 was beyond that period. The Revenue relied upon Explanation to sub-section (1) of Section 11A for claiming extension of the period. The Supreme Court held that the High Court had only stayed the collection of excise duty which is a stage following the levy and has not given any interim direction in the matter of issue of notice or levy of duty. The Supreme Court then observed in para 5 of the judgment :
"5. ******The Explanation in clear terms refers to stay of service of notice. The order of the High Court did not at all refer to service of notice. Therefore, there is force in the submission of the appellant that the benefit of Explanation is not available in the facts of the case."
It was further observed that notice was not issued within the period of limitation and instead an out-right demand had been served. The demand therefore cannot be sustained. The notice is a condition precedent to demand under sub-section (2) of Section 11A of the Act.
In our judgment, the decision of the Supreme Court has no application whatsoever to the facts of the present case. The Supreme Court was examining the ambit of Explanation to sub-section (1) of Section 11A of the Act. In the case before the Supreme Court, it was not in dispute that the provisions of Section 11A of the Act are clearly attracted and the dispute was whether the period of limitation was extended because of interim relief granted by the Court. Such is not the dispute in the present case. As mentioned hereinabove, the assessment is completed under Rule 173I of the Rules and the question of recovery under Section 11A of the Act did not arise as the Mills voluntarily offered to pay the duty demanded in 12 equal quarterly instalments. In our judgment, the decision of the Supreme Court was wrongly relied upon by the learned Single Judge to invalidate the demand made by the Revenue. The decision of the learned Single Judge cannot be sustained.
As the challenge to the demanded falls, consequently the order of the learned Single Judge directing the Revenue to refund the amount of Rs. 1,69,75,724.79 to the Mills must automatically fall. The learned Single Judge was in error in directing the department to refund the duty which was voluntarily paid by the Mills. The department is entitled to recover the balance amount due from the Mills.
12. The appeal preferred by the Mills claiming that the learned Single Judge should have directed the department to refund the amount along with interest does not survive for consideration. In any event the Mills could have never claimed interest on the amount of duty voluntarily paid. Accordingly W.A. No. 1769/91 preferred by the Revenue is allowed and Order dated March 25, 1991 passed by the learned Single Judge in W.P. No. 17545/86 is set aside and the petition stands dismissed. Cross Appeal being W.A. No. 2066/91, preferred by the Mills is dismissed. The Mills shall pay costs of the department throughout in both the appeals.