Judgment:
2.1 On 3.8.93, officers of Central Excise intercepted a tempo loaded with 355 pairs of footwear. The driver of the vehicle produced Challan No 26 dated 3.8.93 issued by the appellants vis. M/s S.S. Enterprises Agra, which did not indicate the value of the said goods and the progressive value of footwear cleared by the party till date. The officers, on the same day, also visited the factory premises of the appellants and, in the presence of Sh. Mohd. Naseem, partner of the firm, checked the stock of goods and inspected the machinery installed in the factory. They found there a stock of 1454 pairs of fully finished footwear, 410 pairs of semi-finished footwear, 70 pairs of semi-finished bellies and 250 pairs of uppers of shoes. They also found a pasting machine installed in the factory. The officers got the goods and machine photographed and also drew samples of the footwears in the presence of Sh. Mohd. Naseem and two independent witnesses. They also recorded a statement of Sh. Mohd. Naseem under Section 14 of the Central Excises and Salt Act, 1944, wherein Sh. Naseem stated that his factory was not registered with the Central excise department or (as an SSI Unit) with the Director of Industries, that no declaration had been filed with the department, that the turnover of sales of footwear in 1992-93 and 1993-94 were respectively over Rs. 23 lakhs and over Rs. 17 and that the pasting machine was an electrically operated one. Sh.
Naseem produced on challan book from which Challan No. 26 dated 3.8.93 had been issued. From all the information gathered by the officers, it appear to (sic) the appellants were engaged in the manufacture of footwear falling under Tariff Sub-Heading 6401.11 of the Central Tariff Schedule, with the aid of power. It further appeared to them that the 1454 pairs of footwear were kept without accountal for the purpose of clandestine removal and were therefore liable to be confiscated. They arrived at similar observation in respect of the 355 pairs of footwear which had been detained along with the vehicle earlier in the day.
Accordingly, the officers seized the 1454 pairs and the 355 pairs of footwear under Section 110 of the Custom Act, 1962 as made applicable to Central Excise seizures. Subsequent enquiries revealed that the appellants had supplied footwear to M/s National Federation Industries Co-operative Ltd. (in short, BLC). Statement of the Manager of NAFIC Ltd. was recorded under Section 14 of the Central Excises and Salt Act, wherein he stated that NAFIC Ltd. had purchased footwears from the appellants during the years 1991-92 and 1992-93 and thereafter, in proof of which he produced photocopies of the invoices issued by the appellants. M/s BLC, by reply dated 5.8.93 to queries of the Central Excise department, stated that the appellants had supplied footwears to them during the years 1990-91, 1991-92 and 1992-93. Later on, Sh. Mohd.
Naseem submitted an affidavit along with copies of the balance sheets prepared by his Chartered Accountants. In the affidavit, Sh. Naseem stated that the statement of 3.8.93 had been made under duress and that, during 1989-90 and 1990-91, they had manufactured footwear only by hand process for 1 1/2 months, in addition to trading. Sh. Naseem further claimed in his affidavit that, during the visit to his factory by the officers on 3.8.93, no manufacturing activity was undertaken but only packing of the footwear purchased from the market was under way.
After examining the contents of the affidavits and scrutinising the balance sheets and considering all other evidence gathered by the officers, the department concluded that the appellants were engaged in the manufacture of footwear since 1989-90 with the aid of power and had clandestinely cleared footwear, valued at over Rs. 62 lakhs, during the period 1990-91 to 1992-93 without payment of Central Excise duty to the tune of Rs. 11,98,551.50.
2.2 Therefore, the department issued show-cause notice [SCN] dated 16.1.95, by invoking the extended period of limitation, demanding Central Excise duty as above from the appellants and proposing to impose penalty on them for alleged contravention of Central Excise Rules. The appellants contested the SCN. In their reply, they denied having stated at any time earlier that they were manufacturing footwear with the aid of power. They maintained that their activity was trading in footwear and any occasional manufacture was done by manual process only during the period in question and therefore had not taken Central Excise registration of filed declaration or observed other Central Excise formalities. They pointed out that no machinery other than a manually driven pasting machine, and that too lying idle, was found in their premises at the time of the officers' visit to the premises. The appellants, in their reply, further submitted that neither any sewing machine not any raw material was found in their premises by the officers. They were undertaking only the business of trading in footwear and all the figures of sales turnover contained in the balance sheets and the stock found lying in the premises were covered by such trading activity only. The appellants further claimed that the statements of the partner, tempo driver and other witnesses were only dictated by the officers. They further submitted that there was no evidence to show that the supplies made to NAFIC and BLC were of footwear manufactured with the aid of power. The dispute which arose out of the SCN was adjudicated by the Commissioner of Central Excise, who confirmed the demand of duty against the appellants and imposed on them a penalty of Rs. 1 lakhs. The present appeal is against the order of the Commissioner.
4. Ld. Advocate, Sh. L.P. Asthana for the appellants submitted that, during the period in question, the appellants were engaged in the business of trading in footwear. At times only, they manufactured footwear and that was by manual process without the aid of power. There was no evidence on record to show that power was used for manufacture of footwear in the appellants' premises during the material period. No workers were found in the appellants premises by the officers at the time of seizure. The inspection report of the Labour Department, which was produced to the adjudicating authority, also showed that no workers were employed by the appellants. M/s NAFIC Ltd. and M/s BLC purchased footwears from the appellants, but such goods were not manufactured by the latter but only supplied by them in the normal course of their trading activity. The assessment orders of the Sales Tax authorities, produced to the adjudicating authority, supported the appellants' plea of trading activity. Ld. Counsel further submitted that neither the statement of the Manager of NAFIC Ltd. nor the letter of M/s BLC was any proof of the goods purchased by them having been manufactured in the appellants' premises with the aid of power. Various machines were required for manufacture of footwear with the aid of power, but no machinery other than a pasting machine was found by the officers in the appellants' premises. Even that pasting machine was purchased in July, 1993 only. There was, thus, no evidence on record to show that the appellants were engaged in the manufacture of footwear with the aid of power during the material period. The incriminating contents of the partner's statement dated 3.8.93 were not to be relied upon inasmuch as the statement was retracted by him. Ld. Counsel, therefore, submitted that, in the absence of any evidence of power having been used for the manufacture of footwear in the appellants' premises during the material period. there was no justification for the Commissioner to confirm the demand of duty on the clearances of footwear for such period and, for the matter, there was no warrant for imposing any penalty on the party.
5. Ld. SDR, Sh. Rajeev Tandon opposed the above submissions. He submitted that the fact that a power-operated pasting machine was found installed in the appellants' factory at the time of the officers' visit was enough to indicate that the appellants were engaged in the manufacture of footwear with the aid of power. The appellants had, admittedly, supplied huge quantities of fully manufactured footwear to M/s NAFIC Ltd. and M/s BLC during the material period, and such supplies on large scale could only have been made out of manufacturing activity rather than trading activity. The balance sheets produced by the appellants' indicated purchase of raw material (Leather) for the material period. Machinery, tools etc. were found to have been purchased during the year 1989-90 and depreciation of value was found to have been claimed on such items for purposes of Income Tax rebate.
The photographs taken of the finished and semi-finished goods and the pasting machine at the time of (sic) officers' visit to the appellants' premises indicated that the appellants were manufacturing footwear with the aid of power. Non-accountal of stock was also found by the officers. Thus the preponderance of evidence on record established that the appellants were engaged in the manufacture of footwear with the aid of power and in the clandestine removal of the goods so manufactured during the material period. Ld. SDR, in this context, relied on the decision of the madras High Court in the case of Santhanam Vs.
Collector of C.Excise and Customs, Madurai [1995 (79) ELT 564 (Mad.)], wherein it was held that the adjudicating authority was concerned only with preponderance of probability indicating the involvement of the petitioner and could not be tied down by strict rules of evidence. Ld.
SDR, therefore, pressed for sustaining the order of Commissioner.
6. We have carefully examined the above submissions. The primary issue before us is whether the appellants were engaged in the activity of manufacture of footwear with the aid of power during 1990-91, 1991-92 and 1992-93. The Commissioner appears to have dealt with this issue mainly with reference to the following three facts alleged in the SCN :- (i) An electrically operated pasting machine was found installed in the factory on 3.8.93; (ii) The balance sheets produced by the party indicated purchase of raw material in 1990-91, 1991-92 and 1992-93; (iii) Machinery, tools and furma worth Rs. 3450/-, Rs. 590/- and Rs. 5520/- respectively were purchase during 1989-90. In the context of considering the above fact relating to pasting machine, the Commissioner appreciated the evidence of invoice No. 820 dated 27.7.93 of M/s Peelu Sales Corporation, Agra (which the appellants had produced in proof of their having purchase the pasting machine from M/s Peelu Sales Corporation only in July, 1993) and recorded a finding as under :- "There is nothing on record to contradict the party's contention that the electric pasting machine was installed in their unit only in July, 1993." We note that this categorical finding is, by and large, determinative of the question whether the appellants were engaged in the manufacture of footwear with the aid of power prior to July 1993. The question can receive an answer in the negative only, in the light of the above finding, unless there is sufficient other independent evidence on record to show such manufacture as having taken place prior to July 1993 in the appellants' premises. The mere purchase of machinery, tools etc. in 1989-90 by the appellants would not, by itself, indicate any such manufacture with the aid of power during the material period. It should have been shown that the machinery, tools etc. so purchased were either electrically operated or only capable of being used with electrically operated machinery in footwear industry. Department could not prove any such thing. Countering the department's allegation that large quantities of raw material (leather) were shown in the balance sheets to have been purchased in 1990-91, 1991-92 and 1992-93, the appellants explained that it was only a typographical error on the part of their Chartered Accountant whereby "purchase shoes" happened to be mentioned wrongly as "Purchase leather". The adjudicating authority dismissed this explanation as an afterthought, apparently without verifying the purchase ledgers produced in proof of purchases of shoes in 1991-92 and 1992-93. We further note that the Sale Tax assessment order for 1990-91 and 1991-92 produced by the party in support of their claim that during the said period only trading activity had been undertaken by them were not duly looked into by the Commissioner, nor did he give any weightage to the Labour Department's inspection report for 1991-92 produced by the appellants in proof of their claim that they had not employed any workers during the period. "Notwithstanding the identical observations made by the Labour department and Sales Tax department", the adjudicating authority arrived at the finding that "it is beyond doubt that clearances of manufactured shoes worth lacs of rupees were made to M/s NAFIC and M/s BLC during 1990-91 to 1992-93".
If, by the expression "manufactured shoes", the Commissioner meant "shoes manufactured by the appellants", we are at a loss to understand the logic of the finding. Neither in the NAFIC Manager's statement not in the BLC letter is there anything to indicate that the supplies they had received from the appellants were of shoes manufactured by the latter. Futher, in the detection of 410 pairs of semifinished footwear, 70 pairs of semi-finished bellies of shoes and 250 pairs of uppers of shoes in the appellants' premises by the officers on 3.8.93, the adjudicating authority appears to have found an evidence against the party. Again, we are unable to accept such a finding because existence of any stock of semi-finished goods on 3.8.93 cannot prudently indicate that goods were being manufactured in the premises during 1990-91, 1991-92 and 1992-93 with the aid of power.
7. The only electrically operated machine which the officers found in the appellants' unit on 3.8.93 was a pasting machine and that machine was purchased by them only in July 1993. The adjudicating authority has correctly noted that it has found nothing on record to contradict the above fact, and we have not found that there is no other valid finding in the impugned order. Therefore, we hold that the department has not succeeded in substantiating its case that the appellants were engaged in the manufacture of footwear with the aid of power during 1990-91 to 1992-93.
8. With regard to ld. SDR's reliance on the decision of the High Court, we observe that any question of looking into preponderance of probability was virtually obliterated by the adjudicating authority's categorical finding that the electrically operated pasting machine had been installed in the appellants' factory only in July, 1993. Therefore the ruling of Hon'ble High Court is not relevant to the instant case.
9. In view of out findings recorded above, we would conclude that the order of the Commissioner confirming the demand of duty and imposing penalty is contrary to his own finding on the crucial question of fact and, therefore, cannot be sustained in law. We uphold his finding that the pasting machine was installed in the factory only in July 1993 and, further, hold that the department did not succeed, by adducing any other evidence, in proving its allegation that the appellants were engaged in the manufacture of footwear with the aid of power during the material period. Accordingly, we set aside the impugned order and allow the appeal.
[operative part of this order has already been pronounced in open Court].