National Dyeing Centre and ors. Vs. Collector of Central Excise - Court Judgment

Excerpt:
1. all these appeals are being disposed of under this common order since the issues involved in the main are common, though there are certain factual differences which will be noticed at the appropriate stage. for purpose of convenience the appellants, though in different appeals, shall be referred to in this order as appellants 1 to 5 respectively.2. all the appellants were engaged during the relevant period in the processing of either cotton fabrics or man-made fabrics or both. to be very specific, appellants 2 and 4 were processing man-made fabrics, appellant 5 cotton fabrics only and appellants 1 and 3 both types of fabrics. in about the middle of june 1984 the central excise officers visited these factories and subsequently show cause notices were issued to all the appellants charging them that they had processed and removed the fabrics abovesaid without obtaining licence and without payment of duty though they were not entitled to do so on and after 24-11-1979.the reason was that on and after that date the benefit of exemption notification no. 297/79 (in respect of man-made fabrics) and notification no. so/76 (in respect of cotton fabrics) was not available insofar as the appellants had carried out within the same factory certain processes other than the processes specified in the tables appended to the notifications. after receipt of reply and on adjudication the collector of central excise, new delhi in four cases and the additional collector, new delhi in one case under separate orders, held the charges established and confiscated the seized goods giving an option for redemption on payment of fine as indicated in the respective orders; demanded central excise duty and handloom cess as indicated in the several orders and also imposed penalties. these appeals are against the said orders.3. as earlier mentioned, all the appellants carried out the process of bleaching and dyeing. in addition, certain other processes, some with power and some without power, were being carried out by them in the same factory. appellants 1, 2, 3 and 4 carried out the processes of calendaring with the aid of power and appellant 5 the process of hydro extraction with the aid of power. there is no dispute that, all the appellants would have been dis-entitled to the benefit of exemption under the respective notifications during the relevant period if the notifications are construed literally since they would have been carrying out certain other processes (other than the processes specified in the notifications) within the same factory.4. the argument for the appellants is that if the words "within the factory" is strictly construed this would lead to discrimination since a person who erects a dividing wall in the same factory and carries out the different processes in the different sections would be free of duty, while the person carrying out all the processes within the same factory, but without a dividing wall, would be denied the exemption. we are unable to agree that the words of the notification should be so read as to avoid any such purported discrimination. the words are clear and a construction of the words as they stand does not lead to absurdity nor would it defeat the intention behind the notification. in the circumstances we are unable to accept the argument that we must interpret the words in the manner suggested for the appellants. the meaning of the term "factory" is not so fragile that if walls are erected dividing different sections of the same factory, all those sections would cease to be parts of the said factory. anyway there was no such wall in any of the cases before us and it is unnecessary to go into this argument further.5. another argument is that the words in the proviso to the notification should be so read that it was only when dutiable goods were further processed in the same factory that exemption should be denied, or that dutiable processes other than the processes specified in the table should be carried out. here again we will have to observe that such extrapolation of additional words would be justified only if, without such extrapolation, the notification would become either unworkable or lead to absurd results. no such case could be made out with reference to the words as they stand in the notification, since the said words are clear and application thereof in the normal manner would not lead to either absurdity or any unworkable situation.6. we are, therefore, satisfied that the words of the notification should be read as they stand and then applied to the facts. there is no dispute that if this is done the removals by appellants 1, 2, 3 and 4 during the period covered by the show cause notices should have been done on payment of duty only and since the same was not done the demand was justified.7. so far as the demand for payment of handloom cess is concerned, some arguments were advanced initially on the basis that as the levy was on "cloth" as defined in section 2(b) of act 12 of 1953 and there was no such word as "cloth" in the first schedule to the central excises and salt act during the relevant period the demand was not justified. but, on a subsequent hearing, shri lachman dev himself conceded that under the finance act of 1955 and later under the finance act of 1960 the definition of "cloth" had been suitably amended. in view thereof the above argument cannot be sustained. shri sood for new fine dyeing however, submitted that since the definition of "cloth" in the khadi and other handloom industries development (additional excise duty on cloth) act 1953 did not cover processed cloth, cess could not be collected from the appellants on such processed cloth. we are unable to accept this contention because the amended definition of the entries in the first schedule to the central excises and salt act (brought about in 1979 spelling out processed fabrics in addition to unprocessed fabrics) would apply also to the levy of handloom cess in view of the definition of "cloth" in the 1953 act. the definition makes it clear that the term "cloth" has the meaning assigned to cotton, woollen and rayon or artificial silk fabrics as defined in the first schedule to the central excises and salt act. since the definition in the central excises and salt act covers processed cloth it would follow that the same definition will hold good for the levy of handloom cess.8. the question then would be whether the demand for payment of duty or cess was sustainable for the period confirmed by the collector. the following chart will indicate the necessary information :___________________________________________________________________________appeal date of show period period for whichno. cause notice confirmed___________________________________________________________________________124/87 15-12-1984 11-10-1980 to 27-6-1984 in full187/87 15-12-1984 8-11-1983 to 27-6-1984 in full242/87 15-12-1984 11-10-1980 to 27-6-1984 in full281/87 15-12-1984 31-1-1983 to 27-6-1984 in full365/87 14-12-1984 april 1983 to june 1984 confirmed from 10-4-1984 9. the argument for the appellants is that they were all illiterate and not familiar with central excise law and procedure and had been carrying out their activity openly and to the knowledge of the central excise officers and they were unaware of the withdrawal of the exemption on and from 24-11-1979 under the notifications cited and, therefore, continued to carry on their business as usual under the bona fide belief that they were entitled to carry out the work without any licence and remove the goods without payment of duty and there was never any intention to contravene, the relevant provisions or to wilfully evade payment of duty. it is argued that the central excise officers who were, or must be deemed to be, aware of the activity being carried out by the appellants openly, had also not taken any action for a period of nearly 5 years and had suddenly initiated action in june 1984 and followed it up with the the show cause notices. it is pointed out that the collector himself in his several orders had expressed his sympathy to the appellants indicating that he was aware that they had been acting bona fide. for the department it is urged that there had been intentional evasion by suppressing the fact of manufacture leading to excisability and hence the larger period of limitation was available to the department.10. the collector has observed in the several orders that a clear case of suppression of facts has been established. he has further observed that no business can be conducted by really illiterate persons and the appellants were not such persons since they had been maintaining accounts, issuing receipts, etc. he had also observed that ignorance of law will not be an excuse and it was not the duty of the department to make enquiries of all persons who might possibly be manufacturing excisable goods.11. the fact remains that these appellants had been carrying on the same work for a long time before 24-11-1979. the work then done by them did not involve payment of excise duty. it was by virtue of the notifications 297/79, dated 24-11-1979 and 292/79 of the same date that the removals by the appellants became liable for payment of excise duty. that is to say, there was no change in the nature of the work being carried out by the appellants but while before 24-11-1979 the said work did not involve liability for payment of excise duty, the same work carried with it such a liability on and from 24-11-1979. it is argued that the work was being carried out by these appellants openly and in an area visited frequently by excise officers and yet.they were not informed by any of the said authorities, for a period of nearly 5 years, that they were contravening the provisions and were, therefore, liable to penalty and payment of duty. as earlier mentioned, the visit by the officers was by about the middle of 1984 and that was followed by the issue of the show cause notices. it is in this background that we have to appreciate the respective contentions.12. under section 11a of the central excises and salt act the department would be entitled to invoke the larger period of limitation if they are able to establish that there had been fraud or collusion or wilful misstatement or suppression of facts or contravention of the relevant provisions with intention to evade payment of duty. the words fraud, collusion, wilful misstatement, suppression etc. all indicate that the acts must have been done with a guilty intent. they should not have been done without the necessary mala fide intention. this intention is spelt out in the later part of the section as the intention to evade payment of duty. we have, therefore, to determine whether in the period after 24-11-1979 the appellants were guilty of suppression of facts (that is the charge held by the collector to be established against these appellants) and such suppression was with intention to evade payment of duty.12a. we have seen that the appellants had been carrying on the same activity before as well as after 24-11-1979 and that before 24-11-1979 no excise duty was payable on the carrying out of the said activity.the appellants have claimed that the said activity was being carried on openly, and not clandestinely. they have also claimed that they were carrying out work in an area frequently visited by the central excise officers. it is not as if they have been informed that, consequent on the issue of two notifications on 24-11-1979, they have become liable to payment of excise duty and were carrying on the said manufacture activity thereafter also without payment of duty. the first occasion the department appears to have told them of this was after the visit by the officers in june 1984, nearly five years after the issue of the two notifications. in these circumstances we are inclined to hold that the failure on the part of the appellant'; to lake out a licence, or to pay duty, was due to a bona fide mistaken impression on their part and not due to any mala fide intention of evasion of duty. in any event this would appear to be a case where the benefit of doubt should be extended to the appellants. we, therefore, hold that the demands under the respective show cause notices could be enforced only for removals within a period of six months preceding the respective show cause notices.13. so far as the 5th appellant (k.d. processors) is concerned it is claimed that they were not at all, in any event, liable to payment of duty. this is on the ground that the only activity carried out by them with power was the process of hydro extraction and this tribunal had held in the case of adreena industries [1987 (28) elt 364)] that the process of hydro extraction was not a process of manufacture. but we note that notification no. 80/76, as amended by notification no.292/79-c.e., exempted cotton fabrics, when subjected to the processes specified in column 2 of the table of the notification, from the whole of the duty of excise leviable thereon but that under the proviso to the notification no such exemption was available when the said cotton fabric, was subjected to any other process than that specified in the table. in the present case the 5th appellant had, in the same factory, subjected the cotton fabric to dyeing as well as hydro extraction.therefore, the benefit of total exemption claimed by the 5th appellant, based on the decision in the case of adreena industries, is not correct. further, the decision in the case of adreena industries related to dyeing of yarn. the supreme court had in the case of empire industries ltd. [1985 (20) elt 179] held that dyeing of fabrics was a manufacturing process. for the above reasons the argument for the 5th appellant (of total exemption from payment of duty) is rejected.14. it is further urged for all the appellants that the collector had erred on the question of valuation. this was on the basis that he had not taken into consideration the element of discount etc. we see that it is so. we, therefore, direct that in quantifying the duty payable, the question of valuation will have to be gone into and on the basis thereof the quantum of duty will have to be reworked.15. so far as the penalties imposed on the appellants we hold that in the light of our discussion earlier the penalties will have to be set aside since there had been no conscious contravention of the liability for payment of duty.16. so far as redemption fine imposed on the confiscated goods we are of the opinion that the same also merits reduction to a nominal sum.the quantum of redemption of fine is reduced to rs. 250/- in each case.17. in the result the orders of lower authority in each case is modified in the following manner : (a) the demand for duty is confined in each case to the period of six months preceding the show cause notice; (b) the question of valuation will be gone into afresh and based on the finding thereon the quantum of duty will be reworked; (d) the redemption is reduced in each case to rupees two hundred and fifty.

Judgment:
1. All these appeals are being disposed of under this common order since the issues involved in the main are common, though there are certain factual differences which will be noticed at the appropriate stage. For purpose of convenience the appellants, though in different appeals, shall be referred to in this order as appellants 1 to 5 respectively.

2. All the appellants were engaged during the relevant period in the processing of either cotton fabrics or man-made fabrics or both. To be very specific, appellants 2 and 4 were processing man-made fabrics, appellant 5 cotton fabrics only and appellants 1 and 3 both types of fabrics. In about the middle of June 1984 the Central Excise officers visited these factories and subsequently show cause notices were issued to all the appellants charging them that they had processed and removed the fabrics abovesaid without obtaining licence and without payment of duty though they were not entitled to do so on and after 24-11-1979.

The reason was that on and after that date the benefit of exemption Notification No. 297/79 (in respect of man-made fabrics) and Notification No. SO/76 (in respect of cotton fabrics) was not available insofar as the appellants had carried out within the same factory certain processes other than the processes specified in the tables appended to the notifications. After receipt of reply and on adjudication the Collector of Central Excise, New Delhi in four cases and the Additional Collector, New Delhi in one case under separate orders, held the charges established and confiscated the seized goods giving an option for redemption on payment of fine as indicated in the respective orders; demanded central excise duty and handloom cess as indicated in the several orders and also imposed penalties. These appeals are against the said orders.

3. As earlier mentioned, all the appellants carried out the process of bleaching and dyeing. In addition, certain other processes, some with power and some without power, were being carried out by them in the same factory. Appellants 1, 2, 3 and 4 carried out the processes of calendaring with the aid of power and appellant 5 the process of hydro extraction with the aid of power. There is no dispute that, all the appellants would have been dis-entitled to the benefit of exemption under the respective notifications during the relevant period if the notifications are construed literally since they would have been carrying out certain other processes (other than the processes specified in the notifications) within the same factory.

4. The argument for the appellants is that if the words "within the factory" is strictly construed this would lead to discrimination since a person who erects a dividing wall in the same factory and carries out the different processes in the different sections would be free of duty, while the person carrying out all the processes within the same factory, but without a dividing wall, would be denied the exemption. We are unable to agree that the words of the notification should be so read as to avoid any such purported discrimination. The words are clear and a construction of the words as they stand does not lead to absurdity nor would it defeat the intention behind the notification. In the circumstances we are unable to accept the argument that we must interpret the words in the manner suggested for the appellants. The meaning of the term "factory" is not so fragile that if walls are erected dividing different sections of the same factory, all those sections would cease to be parts of the said factory. Anyway there was no such wall in any of the cases before us and it is unnecessary to go into this argument further.

5. Another argument is that the words in the proviso to the notification should be so read that it was only when dutiable goods were further processed in the same factory that exemption should be denied, or that dutiable processes other than the processes specified in the table should be carried out. Here again we will have to observe that such extrapolation of additional words would be justified only if, without such extrapolation, the notification would become either unworkable or lead to absurd results. No such case could be made out with reference to the words as they stand in the notification, since the said words are clear and application thereof in the normal manner would not lead to either absurdity or any unworkable situation.

6. We are, therefore, satisfied that the words of the notification should be read as they stand and then applied to the facts. There is no dispute that if this is done the removals by appellants 1, 2, 3 and 4 during the period covered by the show cause notices should have been done on payment of duty only and since the same was not done the demand was justified.

7. So far as the demand for payment of handloom cess is concerned, some arguments were advanced initially on the basis that as the levy was on "cloth" as defined in Section 2(b) of Act 12 of 1953 and there was no such word as "cloth" in the first Schedule to the Central Excises and Salt Act during the relevant period the demand was not justified. But, on a subsequent hearing, Shri Lachman Dev himself conceded that under the Finance Act of 1955 and later under the Finance Act of 1960 the definition of "cloth" had been suitably amended. In view thereof the above argument cannot be sustained. Shri Sood for New Fine Dyeing however, submitted that since the definition of "cloth" in the Khadi and other Handloom Industries Development (additional excise duty on cloth) Act 1953 did not cover processed cloth, cess could not be collected from the appellants on such processed cloth. We are unable to accept this contention because the amended definition of the entries in the first Schedule to the Central Excises and Salt Act (brought about in 1979 spelling out processed fabrics in addition to unprocessed fabrics) would apply also to the levy of handloom cess in view of the definition of "cloth" in the 1953 Act. The definition makes it clear that the term "cloth" has the meaning assigned to cotton, woollen and rayon or artificial silk fabrics as defined in the first Schedule to the Central Excises and Salt Act. Since the definition in the Central Excises and Salt Act covers processed cloth it would follow that the same definition will hold good for the levy of handloom cess.

8. The question then would be whether the demand for payment of duty or cess was sustainable for the period confirmed by the Collector. The following chart will indicate the necessary information :___________________________________________________________________________Appeal Date of show Period Period for whichNo. cause notice confirmed___________________________________________________________________________124/87 15-12-1984 11-10-1980 to 27-6-1984 In full187/87 15-12-1984 8-11-1983 to 27-6-1984 In full242/87 15-12-1984 11-10-1980 to 27-6-1984 In full281/87 15-12-1984 31-1-1983 to 27-6-1984 In full365/87 14-12-1984 April 1983 to June 1984 Confirmed from 10-4-1984 9. The argument for the appellants is that they were all illiterate and not familiar with Central Excise Law and procedure and had been carrying out their activity openly and to the knowledge of the Central Excise Officers and they were unaware of the withdrawal of the exemption on and from 24-11-1979 under the notifications cited and, therefore, continued to carry on their business as usual under the bona fide belief that they were entitled to carry out the work without any licence and remove the goods without payment of duty and there was never any intention to contravene, the relevant provisions or to wilfully evade payment of duty. It is argued that the Central Excise Officers who were, or must be deemed to be, aware of the activity being carried out by the appellants openly, had also not taken any action for a period of nearly 5 years and had suddenly initiated action in June 1984 and followed it up with the the show cause notices. It is pointed out that the Collector himself in his several orders had expressed his sympathy to the appellants indicating that he was aware that they had been acting bona fide. For the department it is urged that there had been intentional evasion by suppressing the fact of manufacture leading to excisability and hence the larger period of limitation was available to the Department.

10. The Collector has observed in the several orders that a clear case of suppression of facts has been established. He has further observed that no business can be conducted by really illiterate persons and the appellants were not such persons since they had been maintaining accounts, issuing receipts, etc. He had also observed that ignorance of law will not be an excuse and it was not the duty of the Department to make enquiries of all persons who might possibly be manufacturing excisable goods.

11. The fact remains that these appellants had been carrying on the same work for a long time before 24-11-1979. The work then done by them did not involve payment of excise duty. It was by virtue of the Notifications 297/79, dated 24-11-1979 and 292/79 of the same date that the removals by the appellants became liable for payment of excise duty. That is to say, there was no change in the nature of the work being carried out by the appellants but while before 24-11-1979 the said work did not involve liability for payment of excise duty, the same work carried with it such a liability on and from 24-11-1979. It is argued that the work was being carried out by these appellants openly and in an area visited frequently by excise officers and yet.

they were not informed by any of the said authorities, for a period of nearly 5 years, that they were contravening the provisions and were, therefore, liable to penalty and payment of duty. As earlier mentioned, the visit by the officers was by about the middle of 1984 and that was followed by the issue of the show cause notices. It is in this background that we have to appreciate the respective contentions.

12. Under Section 11A of the Central Excises and Salt Act the Department would be entitled to invoke the larger period of limitation if they are able to establish that there had been fraud or collusion or wilful misstatement or suppression of facts or contravention of the relevant provisions with intention to evade payment of duty. The words fraud, collusion, wilful misstatement, suppression etc. all indicate that the acts must have been done with a guilty intent. They should not have been done without the necessary mala fide intention. This intention is spelt out in the later part of the Section as the intention to evade payment of duty. We have, therefore, to determine whether in the period after 24-11-1979 the appellants were guilty of suppression of facts (that is the charge held by the Collector to be established against these appellants) and such suppression was with intention to evade payment of duty.

12A. We have seen that the appellants had been carrying on the same activity before as well as after 24-11-1979 and that before 24-11-1979 no excise duty was payable on the carrying out of the said activity.

The appellants have claimed that the said activity was being carried on openly, and not clandestinely. They have also claimed that they were carrying out work in an area frequently visited by the Central Excise officers. It is not as if they have been informed that, consequent on the issue of two notifications on 24-11-1979, they have become liable to payment of excise duty and were carrying on the said manufacture activity thereafter also without payment of duty. The first occasion the department appears to have told them of this was after the visit by the officers in June 1984, nearly five years after the issue of the two notifications. In these circumstances we are inclined to hold that the failure on the part of the appellant'; to lake out a licence, or to pay duty, was due to a bona fide mistaken impression on their part and not due to any mala fide intention of evasion of duty. In any event this would appear to be a case where the benefit of doubt should be extended to the appellants. We, therefore, hold that the demands under the respective show cause notices could be enforced only for removals within a period of six months preceding the respective show cause notices.

13. So far as the 5th appellant (K.D. Processors) is concerned it is claimed that they were not at all, in any event, liable to payment of duty. This is on the ground that the only activity carried out by them with power was the process of hydro extraction and this Tribunal had held in the case of Adreena industries [1987 (28) ELT 364)] that the process of hydro extraction was not a process of manufacture. But we note that Notification No. 80/76, as amended by Notification No.292/79-C.E., exempted cotton fabrics, when subjected to the processes specified in column 2 of the table of the notification, from the whole of the duty of excise leviable thereon but that under the proviso to the notification no such exemption was available when the said cotton fabric, was subjected to any other process than that specified in the table. In the present case the 5th appellant had, in the same factory, subjected the cotton fabric to dyeing as well as hydro extraction.

Therefore, the benefit of total exemption claimed by the 5th appellant, based on the decision in the case of Adreena Industries, is not correct. Further, the decision in the case of Adreena Industries related to dyeing of yarn. The Supreme Court had in the case of Empire Industries Ltd. [1985 (20) ELT 179] held that dyeing of fabrics was a manufacturing process. For the above reasons the argument for the 5th appellant (of total exemption from payment of duty) is rejected.

14. It is further urged for all the appellants that the Collector had erred on the question of valuation. This was on the basis that he had not taken into consideration the element of discount etc. We see that it is so. We, therefore, direct that in quantifying the duty payable, the question of valuation will have to be gone into and on the basis thereof the quantum of duty will have to be reworked.

15. So far as the penalties imposed on the appellants we hold that in the light of our discussion earlier the penalties will have to be set aside since there had been no conscious contravention of the liability for payment of duty.

16. So far as redemption fine imposed on the confiscated goods we are of the opinion that the same also merits reduction to a nominal sum.

The quantum of redemption of fine is reduced to Rs. 250/- in each case.

17. In the result the orders of lower authority in each case is modified in the following manner : (a) the demand for duty is confined in each case to the period of six months preceding the show cause notice; (b) the question of valuation will be gone into afresh and based on the finding thereon the quantum of duty will be reworked; (d) the redemption is reduced in each case to Rupees two hundred and fifty.