ORDER
1. The petitioner-Company is the owner of a composite-mill in Davanagere - M/s. The Davanagere Cotton Mills Ltd. In the petitioner's mill different kinds of yarn which are ultimately consumed in the manufacture of different kinds of fabrics, are produced.
2. The petitioner had, in an earlier writ petition filed before this Court (Writ Petn. No. 19994/81), sought for a declaration that the yarn, produced by it and utilised in the manufacture of fabrics in its own factory, was not liable to pay excise-duty. The writ petition was later amended by adding an additional prayer challenging Rules 9 and 49 of the Central Excise Rules, as amended by Notification dated 20-2-1982 and also the validity of Section 51 of the Finance Act, 1982, which gave retrospective effect to the amended Rules, with effect from 28-2-1944 when the Central Excises and Salt Act, was enacted. This Court upheld the validity of the Rules and dismissed the writ petition by its order dated 3-3-1986.
3. After the dismissal of the writ petition, the Superintendent of Central Excise, Davanagere - Respondent - 2, issued a letter dated 2-5-1986 (Anx. B), demanding a sum of Rs. 2,11,86,467.27 being the duty liable to be paid by the petitioner on the clearances of cotton-yarn, cellulosic spun-yarn and non-cellulosic spun-yarn captively consumed by the petitioner-mill, without payment of duty during the period September 1981 to 20th July 1985. This demand is challenged by the petitioner in this writ petition which was filed on 26-9-1986.
4. The following contentions are urged in the writ petition challenging the demand as per Annexure B dated 2nd May 1986 :
(i) that the demand impugned in the writ petition is made in defiance of the order of this Court in W.P. No. 19994/81;
(ii) no notice was served on the petitioner before the letter dated 2-5-1986 was issued demanding central excise duty of Rs. 2,11,86,467.27;
(iii) that no demand can be made under the Act without an order of determination of the duty of excise due from the petitioner;
(iv) that no such determination of the amount can be made without issue of show cause notice as required under Section 11A(1);
It was contended during the arguments that
(v) the observations made by this Court in W.P. No. 19994/81 is no longer good law in view of the decision of the Supreme Court in - J. K. Cotton Mill's case : 1987(32)ELT234(SC) .
5. A statement of objections is filed on behalf of the Department by the Assistant Collector of Central Excise, Davanagere. It is the stand of the Department that by virtue of the observations and unambiguous directions given by this Court while dismissing the writ petition 19994/81, the ratio of the decision of the Supreme Court in J. K. Cotton Mills case would not be applicable to the petitioner's case. The learned Counsel also relied upon the procedure laid down in Chapter VII-A of the Central Excise Rules and it was contended that no adjudication was necessary to be made by the proper officer in the present case after the dismissal of the writ petition nor was any show cause notice required to be issued before making the demand. He placed strong reliance on Rule 173-I of the Central Excise Rules, 1944 (Rules), and contended that the petitioner was bound to first pay the duty as per its RT-12 returns and then remove the goods, but on account of the stay order in the writ petition, the duty was not collected by the Department. Therefore, after the dismissal of the writ petition, the Superintendent of Central Excise issued a demand computing the duty payable as per the monthly returns filed by the petitioner calling upon the petitioner to pay the excise duty payable by the petitioner for the period covered by the stay order.
6. Elaborating the contention it was argued by Sri K. Srinivasan, learned Counsel for the petitioner, that the Department issued the impugned demand straightaway without making an order of adjudication as directed by this Court, and, therefore, the said demand is illegal and issued in defiance of the order of this Court. The demand made, it was argued, is contrary to the mandatory requirements of Section 11A(2), under which the amount of duty of excise due from the assessee is required to be determined. It was also argued by the learned Counsel that the entire procedure in issuing the demand notice, without adjudication, is contrary to the provision of Section 11A(1) and (2), and the demand letter must be quashed as without authority of law.
7. It is also the contention of the petitioner that the directions issued by these Court in W.P. No. 19994/81 is no longer a good law in view of the Judgment of the Supreme Court in J. K. Cotton Mills case. Lastly, it was contended that the demand made without issuing a show cause notice is bad in law as held by the Supreme Court in Gokak Patel's case : 1987(28)ELT53(SC) .
8. On the arguments advanced by the learned Counsel for the petitioner and the Department, the following points arise for decision in this case :-
(i) Whether the observations made and directions given by this Court in Para 47 of the order made in W.P. No. 19994/81, is no longer good law in view of the ratio of the decisions of the Supreme Court in :
(a) Gokak Patel's case : 1987(28)ELT53(SC) and
(b) J. K. Cotton Mill's case - : 1987(32)ELT234(SC) ;
(ii) Whether the demand made as per the letter dated 2-5-1986, Annexure B to the writ petition, is a valid demand made in accordance with the provisions of Section 11A of the Central Excises Act; and
(iii) Whether the impugned demand is barred by limitation prescribed under Section 11A(1)
9. Since the petitioner has strongly relied upon the dictum of the Supreme Court laid down in J. K. Mill's case, I propose to refer to the said decision first and as to its applicability to the facts of this case.
10. The appellant in J. K. Cotton Mills Ltd., case was also a composite mill engaged in the manufacture of different types of yarns. That the yarn manufactured in the appellant's mill was liable to payment of excise duty on removal from the factory, was not in dispute. But the contention of the appellants was that no duty of excise could be levied and collected in respect of the yarn which was obtained at the intermediate stage and used in the manufacture of different fabrics in the same factory. The appellants had also challenged the constitutional validity of Section 51 of the Finance Act, 1982 and the amendment to Rules 9 and 49 of the Central Excise Rules with effect from 20-2-1982.
11. Interpreting Rules 9 and 49, both before amendment and after amendment, the Supreme Court observed that even under the old Rule 9, no goods produced could be removed from any factory for consumption, export, or manufacture of any other commodity in or outsider such place, until excise duty livable thereon was paid. The only amendment that was brought about by notification dated 20-2-1982 while amending Rules 9 and 49 was to add an explanation to Rule 9 and a corresponding explanation to Rule 49. The object of the amendment was to introduce 'deemed removal' in express terms, to levy excise duty on goods produced in a factory and consumed or utilised for the manufacture of any other goods, whether in a continuous process or otherwise.
12. Repelling all the contentions raised in challenging the validity of Rules 9 and 49, the Supreme Court held that Rule 9 clearly embraces within it, captive consumption of excisable goods, that is to say, when excisable goods manufactured in the factory are used for the production of another commodity. (Vide Para 22 of the Judgment)
13. But the apprehension of the appellants was that Rules 9 and 49 having been made retrospective with effect from 28-2-1944, the manufactures may have to pay enormous amount of duty in respect of the intermediate goods. This apprehension was repelled by the Supreme Court by observing that there was no cause for such apprehension in view of Section 11A of the Act. Their Lordships observed in this context (in para 33) that may such demand, though it may include within it, the demand for more than six months must be made within a period of six months from the date of amendment. It was categorically held by the Supreme Court that in the absence of any specific provision over-riding Section 11A, the amended rules would be subject to the restriction envisaged in Section 11A.
14. Keeping this enunciation in view, let me now examine the contentions of the petitioner as well as the Department in this case. The levy and collection of excise duty by the Department on different types of yarn manufactured by the petitioner was stayed by an interim order dated 18-9-1981 made by this Court in W.P. No. 19994/81. The petitioner-Mill was paying the central excise duty on the yarn manufactured by it and consumed in its mill without demur till the end of August 1981. The petitioner, thereafter, filed Writ Petition No. 19994/81 on 8-9-1981 for a declaration that the yarn manufactured by it and consumed in the manufacture of fabrics, was not dutiable without being removed from the factory. The effect of the amendment of Rule 9 on the petitioner's goods, was that the captive consumption of the yarn was also treated as removal for purposes of levy of central excise duty. The explanation inserted in Rule 9 reads thus :-
'Explanation. - For the purposes of this rule, excisable goods produced, cured or manufactured in any place and consumed or utilised -
(i) as such or after subjection to any process or processes; or
(ii) for the manufacture of any other commodity, whether in a continues process or otherwise, in such place or any premises appurtenant thereto, specified by the Collector under sub-rule (1), shall be deemed to have been removed from such place or premises immediately before such consumption or utilisation.'
15. A corresponding Explanation was inserted in Rule 49 also and the said explanation provide :
'Explanation - For the purposes of this rule, excisable goods made in factory and consumed or utilised -
(i) as such or after subjection to any process or processes; or
(ii) for the manufacture of any other commodity, whether in a continuous process or otherwise, in such factory or place or premises specified under Rule 9 or store-room or other place of storage approved by the Collector under Rule 47, shall be deemed to have been issued out of, or removed from such factory, place, premises, store-room or other place of storage, as the case may be, immediately before such consumption or utilisation.'
16. This Court, while dismissing the writ petition 19994/81, rejected all the contentions urged as to the constitutionality of these amendments. This Court gave certain directions and made observations in Para 47 of its order, [reported in ILR 1987 (2) Karnataka 1113], while dismissing the writ petition. Though only para 47 is relied upon and extracted in the writ petition, it would be necessary to reproduce Para 46 also for a better understanding of the observations made in Para 47.
17. Para 46 and 47 are reproduced below :-
'Para 46. On the foregoing discussion, it follows that all the challenges of the petitioner are liable to be rejected which necessarily means that it will be liable to pay excise duty on yarn manufactured but consumed for manufacture of textiles or fabrics within its own factory at the rates prevailing from time to time and the respondents are entitled to determine the excise duty payable thereon and recover the same in accordance with law'.
'Para 47. But, in its Writ petition, the petitioner sought for an injunction restraining the respondents from levying and collecting excise duty on different types of yarn manufactured and used in the manufacture of fabrics within the factory and that interim prayer granted by this Court on 18-9-1981 has continued ever since then without any modification. With the dismissal of this Writ petition, the interim order will stand terminated and the respondents are entitled to adjudicate and recover the amounts that may be found due for the said period also. The petitioner who had the benefit of the aforesaid interim order, cannot obviously plead the bar of limitation, if any, for such levy and collection of duty. In this view, it is undoubtedly open to the respondents to recover all the amounts from 18-9-1981 ignoring the bar of limitation if any under the Act and the Rules. In order to enable them to determine the taxes and collect the same it is undoubtedly open to the respondents to call upon the petitioner to produce all such books of accounts and other documents that are necessary for such determination. But, in recovering the huge arrears that now become due, it would be proper for the respondents to permit the petitioner to pay the same in reasonable instalments on such conditions as may be imposed by them. We have no doubt that the respondents will do so'.
18. In this context, it is also necessary to reproduce the Interim order passed by this Court in W.P. No. 19994/81 on 18-9-1981 :-
'Pending issue of rule nisi, it is ordered by the Court on 18-9-1981 (By the Hon'ble Mr. Justice M. V. Venkatachalaiah) 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 there of be and are hereby stayed for a period of 4 weeks from 18-9-1981.
Issued under my hand and the seal of this Court this the 18th day of September, 1981'.
19. This interim order was continued and was continued and was in operation against the Department till the Writ petition was dismissed on 3-3-1986. The demand, is now made, as per Annexure B, dated 2-5-1986, to pay the excise duty on yarn captively consumed for the period September 1981 to 20-7-1985 during which period there was no assessment of the duty payable by the petitioner. Some sample copies of the returns filed in Form RT-12 on which a uniform share was made by the petitioner for the entire period is extracted below :
'The central excise duty is not paid during the month of July 1985 from 1-7-1985 to 20-7-1985 is as follows in respect of Cellulosic spun yarn manufactured within the Mills. Duty is not paid due to stay order granted by High Court of Karnataka at Bangalore in Writ Petition No. 19994/81.'
20. On this factual situation and the orders made by this Court first at the interim stage and later at the final dismissal, it is contended by Sri Mukunda Menon for the Department that by virtue of the restraint on the Department imposed by this Court, no recovery could be made of the duty admitted to be due as per the RT-12 returns and what was prohibited by this Court was only the recovery of the duty, which was due by the petitioner, but for the interim order. An argument was, therefore, developed relying on Rule 173-I that it was incumbent on the assessee to pay the duty on the yarn and remove it, though for captive consumption, as it used to do till the writ petition was filed. The observations by this Court made in Para 47 (W.P. No. 19994/81), that all the arrears of duty may be recovered from the petitioner without bar of limitation, is very strongly utilised by the Departments Counsel to justify the demand.
21. I will now deal with the interpretation of the Department on the expression 'adjudicate' as stated in the statement of objections which needs careful examination. The term, 'adjudicate', according to the Department means, only quantification of the amount recoverable. The demand impugned in the present case is sought to be justified solely on the ground that the petitioner admitted its liability to pay the duty on the different types of yarns produced, the value of which was disclosed in the monthly returns and also on the fact that the petitioner had not disputed its liability to play duty on the yarn. It is also submitted that the excise duty payable on the yarn was not quantified for the period covered by the interim order made by this Court since the Department was restrained from levying the duty during the pendency of the writ petition. In addition to this argument, the Department also relied upon Rules 173F and G which provide for self-removal system on crediting the duty in its account in RG-23 Register under which, according to the Department, it was the statutory obligation of the manufacturer to remove the goods only after payment in the manner prescribed.
22. I have carefully considered the submissions of Sri Menon for the Department and the stand of the Department as set-out in its statement of objections. The procedure enumerated in Chapter VII-A of the Rules is meant to be observed by the manufacturers in normal cases and do not apply to cases where the levy and collection of duty is stayed by an order of Court. This argument ignores the mandatory provisions of section 11A(1) and (2), under which a show cause notice is required to be issued for the recovery of any duty of excise which is not levied or paid or has been short levied or short-paid. Such notice has to be issued on the person chargeable with the duty within six months from the relevant date to show cause why he should not pay the amounts specified in the notice. On the facts of the present case, such notice was required to be served on the petition within six months from the date/dates on which the monthly returns were filed, but for the stay order.
23. Sub-Section (2) of Section 11A contemplates adjudication of the duty payable by the assessee as determined by the Asst. Collector in the order to be made by him after considering the objections, if any, taken to the notice. This determination of the amount payable must be preceded by issue of the notice under sub-section (1) and it is a statutory duty cast on the Asstt. Collector, not only to issue notice by indicating the amount payable in the notice itself, but also to determine the amount payable as required under sub-section (2). That this the scheme of Act provided for recovery of duties not levied or not paid, cannot be disputed by the Department. Therefore, the arguments advanced on behalf of the Department that no such determination of the duty payable was required to be made by the Assistant. Collector under sub-section (2), has to be rejected as wholly untenable and opposed to the Scheme of Section 11A.
24. The other ground on which Sri Menon sought to justify the issue of the demand without an order of adjudication, is based on the observations made by this Court in Paragraph 47 of its order while dismissing the W.P. No. 19994/81. This argument has also to be rejected in view of the specific observations made by this Court in Paragraph 47 directing the Department to determine the duty payable by the petitioner as a result of the dismissal of the writ petition. The relevant direction given by this Court was, in these words :-
'the respondents are entitled to adjudicate and recover the amounts that may be found due for the said period also. The petitioner who had the benefit of the aforesaid interim order, cannot obviously plead the bar of limitation, if any, for such levy and collection of duty. In this view it is undoubtedly open to the respondents to recover all the amounts from 18-9-1981 ignoring the bar of limitation if any under the Act and the Rules'.
25. There is no satisfactory explanation, much less any explanation is offered as to why such determination was not made in accordance with law in this case after the dismissal of the writ petition.
26. On the other hand, an inconsistent stand is adopted by the Department, as can be seen from its statement of objections. It is admitted therein that the 'Explanation' to section 11A(1) applies to the facts of this case. Once this position is admitted, it is necessary to ascertain whether the Department took appropriate action in the light of the explanation which extended the period of limitation for issue of notice under Section 11A(1) and by the interim order dated 18-9-1981 which was in force upto 3-3-1986. By virtue of the explanation, the limitation to issue the notice as required under Section 11A(1), namely - six months or five years, as the case may be, is extended by the period of such stay, but does not dispense with the issue of notice after that period. It cannot also be disputed that the period that applies to this facts of this case for issue of such notice was, six months, from the date of dismissal of W.P. No. 19994/81.
27. This Court, no doubt, observed, while dismissing the writ petition, that the petitioner who had the benefit of interim order of stay cannot plead bar of limitation for the levy and collection of the duty payable consequent on the dismissal of the writ petition.
27A. As can be seen from the very directions issue by this Court, this Court did not dispense with the statutory requirement or the procedure required to be observed for determining the duty payable in accordance with law.
28. The Department's argument, as set out in Paragraph 5 of the objections therefore, deserves to be rejected as not only being contrary to the mandatory provisions of the law, but also contrary to the specific directions of this Court. This stand is also inconsistent with what is set-out in paragraph 4 of the statement that, 'explanation to section 11A applies to the facts of this case'.
29. It is, therefore, futile for the Department and indeed it is not open to the Department to put forward any plea or excuse for not issuing the notice and then determine the duty which was not levied or paid in accordance with Section 11A(1) & (2).
30. Therefore, the resultant position that emerges on these facts is, that no notice was issued by the Department under Section 11A(1) and the Department resorted to recover the duty by issue of letter of demand straightaway, as per Annexure B dt. 2-5-1986.
31. The point for decision, therefore, is : whether the demand made as per Annexure B, is in accordance with law
32. As already referred to in detail, as per the dictum of the Supreme Court and the ratio laid down in J. K. Cotton Mills case : 1987(32)ELT234(SC) , any recovery of duty not levied and not paid or short-paid for a period beyond six months is subject to the limitation prescribed in Section 11A(1) and should be recovered strictly in accordance with the provisions of Section 11A, including the procedure prescribed therein.
33. Therefore, the observations made by their Lordships in Paragraph 32 of the Judgment in J. K. Cotton Mills' case - provides the key to the understanding of the provisions of Section 11A and is a complete answer to the stand taken by the Department and the arguments of its Counsel, in this case.
34. It is best to reproduce what their Lordships said in their own words thus :-
'32 Under Section 11A(1) the excise authorities cannot recover duties not levied or not paid or short-levied or short-paid or erroneously refunded beyond the period of six months, the proviso to S. 11A not being applicable in the present case. Thus although S. 51, Finance Act, 1982 has given retrospective effect to the amendments of Rules 9 and 49, yet it must be subject to the provision of S. 11A of the Act. We are unable to accept the contention of the learned Attorney General that as S. 51 has made the amendments retrospective in operation since Feb. 28, 1944, it should be held that it overrides the provision of S. 11A. If the intention of the Legislature was to nullify the effect of S. 11A, in that case, the Legislature would have specifically provided for the same. Section 51 does not contain any non-obstinate clause, nor does it refer to the provision of S. 11A. In the circumstances, it is difficult to hold that S. 51 overrides the provision of S. 11A'.
35. In addition to the ratio laid down by the Supreme Court in the above case, the answer to the Departments contention would not be complete without reference to the earlier decision of the Supreme Court in Gokak Patel case : 1987(28)ELT53(SC) . The facts for that case would be relevant to be stated before adverting to the view expressed by their Lordships in that case.
36. The petitioner (appellant) had challenged the demand made by the Asst. Collector of Central Excise for the period 20-6-1976 to 28-2-1981 in the writ petition before the High Court. The writ petition was dismissed on 16-2-1981 before the High Court of Karnataka. During the pendency of the writ petition the High Court had stayed the collection of excise duty from the petitioner. After disposal of the writ petition, the department issued a demand to recover the duty for the period covered by the stay order. This demand was challenged by the petitioner before the High Court on the ground that the demand was not preceded by a show cause notice as complicated under Section 11A(1). The High Court dismissed the writ petition and on appeal by the assessee to the Supreme Court, it was held that without issue of show cause notice and without determining the duty liable to be paid, no demand to pay the duty can be issued. The demand made against the petitioner was held invalid and unenforceable by the Supreme Court and the demand was quashed and the duty paid was directed to be refunded to the assessee.
37. The Supreme Court observed in the course of the order that there was no interim direction by the High Court in the matter of issue of notice for the purpose of levy of duty for the period in dispute and no such notice was issued by the Department during the pendency of the writ petition. What was stayed by the High Court was only the collection of central excise duty as a fabric and the writ petition was disposed of directing the petitioner to urge all the contentions before the Department in reply to the show cause notice. It is on these facts that the Supreme Court categorically held that the issue of show cause notice to recover any duty not paid or short-paid for a period of beyond six months, was mandatory. The Department lost the revenue for failure to issue show cause notice in that case.
38. One other decision of the Supreme Court in Collector of Central Excise, Baroda v. Kosan Metal Products Ltd., [1988 (38) ELT 573] rendered on 26-10-1988, was cited by Sri Srinivasan, learned Counsel for the petitioner, on the same point. Though no reference is made to the two earlier decisions viz. cases of Gokak Patel and J. K. Cotton Mills, which were rendered in 1987, the appeal of the Department was dismissed for the very same reason. It was found, on facts, that a proper notice under Section 11A had not been issued by the Department to recover the duty in that case. Referring to Section 11A, it was observed by the Supreme Court as under :-
'The said section provides that when any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, a notice may be served on the concerned person within a period of six months. In the instant case, the time taken for the service of the notice is beyond a period of six months'.
39. After giving a careful thought, and considering all important aspects of the case, I should, at the outset, observed that, on facts, the present case is in no way different from Gokak Patel's case : 1987(28)ELT53(SC) . Applying the law as enunciated in J. K. Cotton Mills case : 1987(32)ELT234(SC) , to this fact situation, the retrospective application of Rules 9 and 49 of Central Excise Rules would be subject to Section 11A in so far as it imposes limitation to issue show cause to recover the duty not levied or paid.
40. In view of the law enunciated by the Supreme Court in J. K. Cotton Mills' case, so far as the limitation under Section 11A is concerned, the following observations made by this Court in Para 47 of its order in W.P. 19994/81 :-
'the respondents are entitled to adjudicate and recover the amounts that may be found due for the said period also. The petitioner who had the benefit of the aforesaid interim order, cannot obviously plead the bar of limitation, if any, for such levy and collection of duty. In view it is undoubtedly open to the respondents to recover all the amounts from 18-09-1981 ignoring the bar of limitation if any under the Act and the Rules'.
should be held as not good law and not binding on the Department and, I hold so.
41. For the reasons stated above, the demand notice as per Annexure B dated 2-5-1986 calling upon the petitioner to pay a sum of Rs. 2,11,86,467.27 must be held as one made without authority of law and hence illegal.
42. In the result, the writ petition is allowed and the Demand letter dated 2-5-1986 (Annexure B), is quashed.
43. This Court, while issuing 'Rule nisi' on 28-10-1986 made an interim order permitting the petitioner to pay the duty demanded, as per Annexure B, in twelve equal instalments starting from 10th January 1987.
44. Consequent on the Demand Notice dated 2-5-1986 (Annexure B), being quashed, the petitioner is entitled for the refund of the excise duty paid in obedience to the direction of this Court made by interim order dated 28-10-1986. I, therefore, order issue of a mandatory mus to the Union of India (impleaded as a Respondent to the writ petitions with the permission of the Court) to refund the excise duty (collected by way of instalments), i.e. a sum of Rs. 1,69,75,724.79 as per Respondents Memo within six months from the date of receipt of this order.
45. The petitioners Counsel has filed a Memo dated 20-3-1991 giving the particulars of payment made in respect of the disputed levy, according to which the petitioner is entitled for refund of Rs. 2,53,59,661.79.
46. The petitioner is at liberty to make a separate claim for refund before the Department in respect of payments made other than by way of instalments mentioned above. The Department is directed to examine the rest of the claim in accordance with law.
47. A prayer is made by the petitioner for award of interest on the refund amount. I am not convinced that this a case where interest should be aware on the refund. The instalments were granted by this Court on the prayer made by the petitioner relying on the Associated Company case. I reject the prayer for award of interest.
48. Before parting with the case, I deem it appropriate and necessary to observe, with some concern, that the Department was not vigilant and failed to issue notice for recovery of the arrears of excise duty which was not levied and not paid during the period covered by the stay-order. It is needless to point out that any such notice should have been issued within six months from the date of dismissal of the writ petition. But the Department, on the other hand, chose to issue a demand straightaway on 2-5-1986 as per Annexure B, calling upon the petitioner to pay excise duty in a sum of Rs. 2,11,86,467.27 ps. due for the period from September 1981 to 20th July 1985.
49. The present case is a classic instance of large revenue being lost on a technical ground. There is obviously no organisation in the Department, at any level, to review cases where considerable amounts of duty are involved.