Customs, Excise and Gold Tribunal - Delhi
Shakti Engineering Works vs Collector Of Central Excise on 13 November, 1986
Equivalent citations: 1989(40)ELT95(TRI-DEL)
ORDER M. Santhanam, Member (J)
1. As common questions on facts and law are involved in both these actions, they were heard together and are being disposed of by this common order.
2. Appeal No. 1005/82-B-I is the revision application filed before the Govt. of India against the order of the Central Board of Excise dated 18.8.1981 and has been transferred to this Tribunal. Appeal No. 1862/85-B-I is the supplementary appeal filed by M/s. M.G. Industries who are parties to the main adjudication and a common order had been passed by the Board.
3. M/s. Shakti Engg. Works, Batala is a registered partnership firm consisting of Shri Walaiti Ram (Individual), Km. Saroj and Shri Subhash Chander. This firm was started in 1957. M/s. M.G. Inds. was started in 1971. This firm consists of Sh. Walaiti Ram (Karta of the HUF), Smt. Prema Wad, Sh. Subhash Chander, Master Navin and Master Dinesh. Km. Saroj and Subhash Chander are also individually members of the partnership. It is seen from the order of the Board that in Shakti Engg. Works, the shares are as follows:-
Sh. Walaiti Ram (Individual) 60 P Kumari Saroj 20 P Subhash Chander 20 P In M.G. Industries, the shares are as follows: Sh. Walaiti Ram (Karta of the HUF) 10 P Kumari Saroj 45 P Subhash Chander 45 P
Both the units are engaged in the manufacture of goods falling under Item 68 C.E.T. The Units are Small Scale Sectors with capital investment from time to time on Plant & Machinery of less than Rs. 10 lakhs each. They are also engaged in the manufacture of castings under Item 25. Under Notification No. 89/79 C.E., dt. 1.3.79 goods falling under Item 68 C.E.T. cleared for home consumption on or after the first day of April in any financial year by or on behalf of a manufacturer from one or more factories are exempted, from the whole of the Central Excise Duty in the case of first clearance upto an aggregate value not exceeding Rs. 15 lakhs. This Notification also prescribes conditions in respect of the capital investment but there is no dispute or controversy on that account. The clearances of the two firms during the years 1978-79 and 1979-80 were as follows:-
YEAR 1978-79 1979-80
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(i) M/s. Shakti Engg. Works, Rs. 15,15,178.00 Rs. 12,66,988.50
Batala Sale Value
(ii) M/s. M.G. Industries, Batala. Rs. 15,08,564.00 Rs. 13,69,215.00
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Rs. 30,23,743.00 Rs. 26,36,203.50
The Asstt. Collector, Central Excise, Jullundur issued a show cause notice on 24.11.80 to both the appellants separately to show cause as to why Central Excise Duty at the appropriate rate should not be levied on the goods valued at Rs. 26,36,203.50 and should not be demanded from them under Rule 9(2). They were also asked to show cause as to why penalty should not be imposed under Rule 173 Q of the Central Excise Rules. It was mainly alleged in the show cause notice that the two firms namely Shakti Engg. Works, Batala and M.G. Industries, Batala were having the same partners and they jointly removed the excisable goods falling under T.I. 68 valued at as stated above. It was also pointed out that during the previous years clearances had exceeded Rs. 30 lakhs.
4. It was mainly contended on behalf of the appellants that the value of the clearances of the two firms should not be clubbed as both the firms are separate legal entities and each unit is entitled to separate exemption under Notification 89/79. The units had been separately registered under the Factories Act, Partnership Act, Sales-Tax Act and Income-Tax Act. As they were distinct and separate legal entities, the clearances should not be clubbed. They also raised a further question that the value of the clearances of goods manufactured were not as alleged by the department. The Collector, Central Excise, Chandigarh in his adjudication order held that the two partnership firms were owned by the same partners. He was of the view that Sh. Walaiti Ram (Karta of the HUF) and a partner in M.G. Industries could be treated only in his individual capacity as HUF had no legal competence to enter into a partnership. He gave directions to the Asstt. Collector to determine the excise duty and also imposed a penalty of Rs. 5000/- on each of the partners.
5. There was an appeal to the Central Board who under the impugned order upheld the orders of the Collector, Central Excise and observed that for purposes of determining liability of the two firms under Notification (cited supra) the turnover of the two firms had to be clubbed. The penalties were, however, set aside. The present appeals are against the order of the Board.
6. Sh. C.L. Beri, Advocate for M/s. Shakti Engg. Works submitted that the two firms are distinct and separate legal entities. He contended that Sh. Walaiti Ram was a partner in Shakti Engg. Works in his individual capacity while in the other (M.G. Industries) he was representing the joint family. Shri Beri placed reliance on the ruling reported in 1983 (14) ELT 1994 (G.D. Industries v. C.C.E., Chandigarh). In that case the Tribunal relying on Section 3(42) of the General Clauses Act, 1897 held that a partner of the firm was not the same person as the firm itself. In that case the question arose whether the value of the goods cleared from each of the three factories solely owned by the appellants could be aggregated. In an elaborate judgment the Tribunal came to the conclusion that "a person who happens to be a partner in a plurality of firms cannot be said to own the sum total of powerlooms possessed by the firms nor can a plurality of partnership firms treated as one entity because of a common partner, if a person is a partner in two partnership firms, these two firms cannot be treated as one and the same." Shri Beri also placed reliance on the ruling reported in 1982 (10) ELT 329 (in Re: Smt. Sham Kumari and Ors.) where the Central Board of Excise had come to a different conclusion. The same Member of the Central Board who had decided these cases had come to a contrary conclusion. Shri Beri urged that there was no material to show that these two factories were created for the purpose of availing the exemption or dummy institutions who cleared the goods on behalf of the other. There was no intention to evade the Central Excise Duty because these firms were constituted long before the duty arose in respect of the products.
7. Shri Beri urged that Rule 9(2) would not be applicable to the facts of the case because there was no clandestine removal of the goods with a view to evade Central Excise Duty. He placed reliance citations on 1977 E.L.T. J 193 (Murugan & Co.) and 1984 (15) E.L.T. 211 (Indian Iron & Steel Co.). He pointed out the absence of any allegation in the show cause notice about XX fraud or intent to evade duty. Both the Board and the Collector have relied on decisions which have no bearing or application to the present facts.
8. Shri R.K. Jain, Consultant who appeared for M/s. M.G. Industries stated that notification contemplated "by or on behalf of a manufacturer" from one or more factories". There was no allegation that these appellants were manufacturers of goods on behalf of other appellants or vice versa. The definition of a "manufacturer" in Section 2 (f) of the Central Excises and Salt Act referred to included not only a person (emphasis supplied) who employed hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacture on his own account. Shri Jain urged that the Central Excises and Salt Act or Rules do not define the word "person" and hence one has to apply the definition of "person" in the General Clauses Act. Section 3 (42) General Clauses Act defines a person as including any company or association or body of individuals whether incorporated or not. Shri Jain, therefore, urged that in the absence of any definition of person, the definition in General Clauses Act should be applicable and the two firms should be treated as distinct entities. He argued that two separate show cause notices have been issued. M.G. Industries have been issued a separate Central Excise Licence. Each of the appellants fulfilled all the conditions of the Notification. The decision of the Hon'ble Supreme Court in cases relating to the Company Law would not be applicable to the present facts. He urged that the ratio of profits between the two firms was distinct and different. The shareholders constituting a company are not the same as partners in a partnership. Shri Jain referred to the ruling on 1970 (77) ITR 10:-
"When the Karta of a Hindu Undivided Family joins a firm as a partner, even though he contributes his share from out of the family funds, the other members of family do not ipso facto become partners of that firm."
Shri Jain urged that this decision proceeded on a different footing and the question of representation was considered. The learned Consultant cited AIR 1966 SC 1295 (State of Punjab v. Jullundur Vegetables Syndicate). That was a decision under the Sales-Tax Act. It is observed that a firm is an independent unit for the purpose of assessment. According to Shri Jain, the Collector had given directions to the Asstt. Collector in respect of valuation which was not proper as it would amount to a pre-mature determination of the contravention.
9. Mrs. Zutshi argued that the notification referred to clearances "by or on behalf. She stated that these two firms are not distinct legal entities. In 1969 1 SCR 691 (Kapurchand Shrimal v. Tax Recovery Officer, Hyderabad and Ors.), the Supreme Court has pointed out that Hindu Undivided Family has been treated by the Legislature as Taxable entity distinct from the individual members. She stated that in the absence of similar provisions in the Central Excise Act and as the Karta was not competent to enter into a partnership, the two firms should be treated as the common manufacturer and the clearances could be clubbed. She also laid emphasis on the decision at 1978 ELT J-67 (P. Vinayaka Rao v. Asstt. Collector, C.E., Hyderabad). That was a decision of the Andhra Pradesh High Court where it was held that a firm cannot have a separate legal entity apart from its partners. Mrs. Zutshi also urged that Rule 9(2) would apply to the facts of the case and the manufacture was by the same partners.
10. The point for determination in this appeal is whether the department was justified in clubbing the clearances of the two units. Before coming to a conclusion, we have to find out whether the two units are distinct legal entities. It is seen from the records that Shakti Engg. Works was registered as a small scale unit in 1961. The partnership deed of M/s. Shakti Engg. Works, dt. 30.8.76 indicates the names of the 3 partners and their respective shares. It is a self-contained document with all relevant clauses. The Certificate of Registration issued under the Punjab General Sales-Tax Act discloses that M/s. Shakti Engg. Works has been registered under the provisions of that Act. The Income-Tax clearances for the two firms appear to be distinct and separate. When we come to M.G. Industries the partnership deed indicates that they are carrying on business in terms of prior partnership dated 18.12.75. In this connection we may point out that Shakti Engg. Works appear to have been carrying on partnership business from 1974, The Balance Sheet, Registration for a Dealer under the Punjab General Sales-Tax Act, certification of Registration as a small scale unit and also the certificate of annual installed capacity relating to M.G. Industries are separate. They have been assessed to Income-Tax separately. These are factors which make out that these are two distinct legal entities. Of course, it is open to the department to establish that these units have been created with a view to evade tax liability or that in reality there were no two firms. We must say that such a proof is wanting in this case. We may also observe that there is no such allegation in the show cause notice or a finding to that effect. These aspects of the case persuade us to hold that these two units are distinct legal entities.
11. The main ground on which the authorities below have come to the conclusion that the clearances should be clubbed is on the basis that one of the partners was described as Karta of joint family. This factor, according to the Department will have no material bearing and that the two units should be considered as the same manufacturer for the purpose of clubbing the clearances. In this connection we have to state that an ordinary partnership is composed of distinct individuals who enter into a contract to carry on business either for a limited time or during their pleasure. Section 5 of the Partnership Act lays emphasis that the relationship of partnership arises from contract and not from status. It is, therefore, obvious that partnership arises only from an agreement and is not created by status or obtained by birth. If a Karta or a Managing Member of the joint family or any other adult enters into a partnership with outsiders, the other members of the family do not ipso facto become partners. But only such of the member who has in fact entered into a contractual relation with the outsider would be the partner. This is corollary arising out of Section 5 because partnership arises out of a contract between the parties and not as a result of any status. So far as the outsider is concerned, Karta alone is recognised as a partner. But as between the partners, the question whether the Karta acted in his individual capacity and for his own benefit or he did so representing his joint family and for their benefit would depend on the facts and circumstances of each case. So one cannot decide the issue mainly on the basis of the provisions of the Partnership Act. If the adult member of the co-percenary or the other member are able to show that the Karta or Managing Member entered into a partnership showing an intention that he was doing so on behalf of the joint family, then the question would be different in respect of the matters arising inter se between them.
12. Mrs. Zutshi laid emphasis on the decision of the Supreme Court in Aggarwal & Co. 1970 (77) ITR 10. In that decision it is indicated that if the partnership deed showed that the partners have entered into a partnership in their individual capacity and there was nothing to indicate that they have done so as Karta himself, in respect of the joint family, it is not open to the Income Tax Officer to go behind the deed and find out the purpose of registration. That decision will have no application to the present facts because ex facie the deed did not show that any of the partners had joined the deed as representatives of their Hindu Undivided Families. In (cited supra) it is observed that under the partnership law a firm is not a legal entity but only consists of individuals partners for the time being for tax law, income-tax as well as sales-tax, it is a legal entity. This decision, therefore, shows that the firm is treated as a unit of assessment and as a distinct assessable entity. It may be argued that the Income-Tax Act or the Sales-Tax Act contain in built provision and in the absence of any in the Excise Law, the Tribunal ought not to enlarge the scope. But the fallacy in the argument is that there is no definition of a person under the Central Excise Law then recourse has to be had to the General Clauses Act which would include an association of persons as well. The decision in Bhagyalaxmi & Co. [1965 (55) ITR 660], at Page 664 contains the following observations:-
"A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the Karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity."
Thus this decision shows that Shri Walaiti Ram has a dual capacity in that he has an individual share in Shakti Engg. Works whereas he represents his branch of the HUF in M.G. Industries.
13. The decision in (cited supra) relied on by the SDR will have no application to the present facts because it was held that the Legislation having treated a HUF as a taxable entity distinct from the individual members constituting it, it was not open to the Tax Recovery Officer to initiate proceedings against the manager of the HUF for his arrest. In 1980 (121) ITR 911 (K.C. Rajan Co. v. Commissioner of Income-Tax, New Delhi) 3 out of be. A partners hud entered into a partnership in their representative capacity as Kartas of respective HUF. When a question arose whether the salaries paid to the partners were allowable as reduction, it was held that the HUF could not enter into contract or partnership and so far the firm was concerned, it was the Karta who alone was recognised as partner. At Page 913, we find the family observations as follows:-
"It is now well-settled that a HUF cannot, as such, enter into a contract of partnership with another person or persons. The Karta of the HUF, however, may and frequently does enter into partnership with others on behalf of and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of the firm. So far as the firm and its other partners are concerned, it is the Karta who alone is and is, in law, recognised as a partner."
This decision, therefore, shows that the members of the family have no right to interfere in the management or claim any account of the partnership qua the firm. It is clear from these decisions that in the absence of any evidence that these two firms are created with a view to evade the tax liability, the normal legal incidence should flow and they should be treated as distinct legal entities whatever may be the rights and liabilities inter se among the members of the family.
14. Even assuming that the members of the HUF cannot be recognised as partners, then the ratio of the decision of the Tribunal in 1983 ELT 1994 would apply to the present facts. The commonness of partners alone cannot be the basis to hold that one of the Units was a dummy or a camouflage created to evade tax liability. In this decision it is laid down that a person who happens to be a partner in plurality of firms cannot be said to own a sum total of the powerlooms possessed by the firms nor can a plurality of partnership firms treated as one entity because of common partners. The ratio of that decision would, therefore, squarely apply. Hence having regard to the legal position and the authorities cited above, we are of the view that the two firms are distinct and independent firms and their clearances ought not to be clubbed.
15. Shri R.K. Jain argued that in respect of the value certain directions have been issued by the Appellate Collector to the Assistant Collector and to that extent the order would be invalid. He also raised a question of time-bar. But in the light of our findings on the main issue these questions do not strictly arose. However, we must observe that being a quasi-judicial function, the Appellate Collector should have directed the Assistant Collector to give his findings on the value rather than prescribing the mode of working out the same.
16. However, on the question of time-bar, in the absence of any finding that the goods were removed clandestinely or without the knowledge of the department, the finding cannot be supported.
17. In the result, we are of the view that the impugned orders cannot be justified and they are set aside. The appellants should be entitled to consequential reliefs, if any.