Union of India and ors. Vs. Zenith Silk Mills - Court Judgment

Excerpt:
customs - interim order - order 39 rule 1 of code civil procedure, 1908 - consideration to be weighed while deciding prima facie and balance of convenience at interim stage - social interests must prevail over private interest - incalculable and irreparable loss likely to be caused to society at large because of damage caused to many projects and public utilities - adverse affect on socio-economic development - consequences of postponement of collection of tax - in such matters stay should be an exception and not rule - prejudice likely to be caused to taxpayer in event of tax being held invalid could be resolved by an undertaking of tax authority to refund or adjust disputed tax. - - the union of india, appeared in the suit and filed written statement as well as reply to application.....order1. what should be the approach of court in passing interim order in matters where the imposition and recovery of tax is challenged by a litigant? can the court be oblivious of the socio-economic consequences of its orders? how, and by taking into consideration which factors the question as to 'prima facie case' and 'balance of convenience' should be decided? these are some of the questions which have arisen in this petition filed by the union of india under article 227 of the constitution challenging the legality and validity of an ex parte injunction order dated january 31, 1983 passed by the civil judge (sd), surat.2. respondent no.1-original plaintiff is a company having its office and factory at surat. ('respondent-company', for short). the respondent-company imported certain.....

Judgment:
ORDER

1. What should be the approach of court in passing interim order in matters where the imposition and recovery of tax is challenged by a litigant? Can the court be oblivious of the socio-economic consequences of its orders? How, and by taking into consideration which factors the question as to 'prima facie case' and 'balance of convenience' should be decided? These are some of the questions which have arisen in this petition filed by the Union of India under Article 227 of the Constitution challenging the legality and validity of an ex parte injunction order dated January 31, 1983 passed by the Civil Judge (SD), Surat.

2. Respondent No.1-original plaintiff is a Company having its office and factory at Surat. ('respondent-Company', for short). The respondent-Company imported certain manmade fibre filament yarn which was subject to custom duty. On the goods imported in India, the custom duty was leviable at the relevant time as mentioned in Schedule I to the Custom Tariff Act, 1975. The duty leviable at the relevant time was as follows:

1. Basic customs duty chargeable under Section 12 of the Customs Act, 1962 read with Section 2 of the Act.

2. Additional duty (countervailing duty) chargeable under Section 3of the Act.

3. Auxiliary duty on imported goods, recoverable under Section 44 of the Finance Act, 1982.

The Government issued an exemption notification (as amended from time to time) being No. 149 of 1977 dated July 15, 1977 exempting viscose filament yarn below 600 Deniers and other commodities on filament yarn from the whole of that duty of customs leviable thereon which is specified to the First Schedule of Custom Tariff Act, 1975. Similarly another notification No. 38 of 1978 dated September 1, 1978 (as amended from time to time) was issued by the Government exempting polyester filament yarn and other goods specified therein from so much of that portion of the duty of customs leviable thereon as is in excess of the rates specified in Column 3 of the Customs Tariff Act. The respondent Company desired to have these notifications so construed as exempting the goods imported by them from all customs duties, that is, not only the basic duty of Customs, but also additional customs duty under Section 3 of the Customs Tariff Act and auxiliary duty under Section 44 of Finance Act No. 2 of 1982. Therefore, the respondent-Company preferred a Writ petition being Writ Petition No. 2245 of 1982 in the Delhi High Court sometime in July 1982. The Delhi High Court had granted interim order in favour of the Company in that, petition, but ultimately vacated the same by order dated October 6, 1982. The Collector of Customs issued demand notice dated December 9, 1982 and gave reminder dated December 31, 1982 and called upon the respondent-Company to make the payment of the amount of customs duty, which had fallen due. The amount involved was Rs. 10,03,012.44P ten lakhs, three thousand and twelve and forty four paise (the figures are given by the-Counsel for the petitioners at the Bar and the same are not controverted by the other side).

3. After the receipt of the aforesaid notice the respondent-Company filed a suit being Regular Civil Suit No. 135 of 1983 on January 31, 1983 in the Court of Civil Judge (SD), Surat. The respondent-Company prayed for an injunction restraining the Union of India from recovering the aforesaid amount covered by the respective demand notices. The respondent-Company also prayed for declaration to the effect that the demand notices were not legal and valid. On the same day, i.e. January 31, 1983, the learned Civil Judge granted an ex parte injunction order in restraining the Union of India from enforcing the demand notices. In effect the recovery of an amount of little over Rs, 10/- lakhs was stayed. The order was served upon the, Department probably on the same day. The Union of India, appeared in the suit and filed written statement as well as reply to application Exh. 5. In para 2(c) of the petition, the dates on which the case has been adjourned without hearing application Exh. 5 are mentioned and they are as follows:

4-3-1983; 18-3-1983, 28-3-1983; 30-3-1983; 2-4-1983; 30-4-1983.

Thereafter there was summer vacation in courts and the case was adjourned to June 24, 1983. On June 24, 1983 also no hearing took place. Therefore, feeling aggrieved by the ex parte order and inaction on the part of the lower court for not proceeding further with the matter, the Union of India has moved this Court by filing the present petition on July 19,1983. The petition came up for hearing before a Division Bench consisting of P.D ' Desai, Actg. C.J. and G.T. Nanavati, J. However, the Division Bench thought that the matter was of Single Judge and the same be posted for orders before the Single Judge. That is how the matter has come up for hearing before me.

4. The petitioners contend that the Civil Court has no jurisdiction to entertain the suit in which recovery of customs duty is challenged. It is contended that in respect of the duty liability an exhaustive machinery of appeals, revisions and references have been provided for in the Customs Act. The duty liability is the creation of the Special Act and not a common law liability. Therefore, the civil court can have jurisdiction only if the question is not covered by the Special Act. It is also contended that the respondent Company -has no prima facie case for interim injunction. The contention is that as per the legislative policy reflected in Sections 129E and 131 of the Customs Act, 1969, as amended by Finance Act No. 2 of 1980, a party is required to deposit or to pay the duty in question as the case may be, notwithstanding the fact that an appeal or a reference has been made and the same is pending. In above view of the matter, it is contended that there is no prima facie case in favour of the respondent Company and the balance of convenience is in favour of the petitioners-original defendants and the ex parte injunction order passed by the lower court being without jurisdiction, should be quashed and set aside.

5. On the basis of the principles laid down by the Supreme Court in the case of Union of India v. Narasimhalu, reported in (1969) 2 SCC 658, it is argued that the Customs Act creates a new liability other than common law liability and it provides complete machinery for obtaining redress against erroneous exercise of power and hence jurisdiction of civil court is barred, Therefore it is submitted that the suit is not maintainable and the interim relief granted is also without jurisdiction, The aforesaid decision of the Supreme Court has been relied upon by me in the case of Asst. Collector -of Customs v. Kasam, Mamad, reported in 1983-(2) 24 Guj LR 865: (1984 Tax LR 24241, . Therein, after referring to a passage from the Supreme Court decision and after referring to the facts of that case, it is observed by me as follows : (At P. 2426 at Tax LR)

'.... It is clear that the Customs Act is a complete Code in itself and it creates a new liability and it provides for complete machinery for obtaining redress against erroneous exercise of jurisdiction. Therefore jurisdiction of the civil court is by implication barred, save and except in the cases referred to by the Supreme Court in paragraph 9 of the aforesaid judgment. Pragraph 9 reads as follows:

'We, however. Deem it necessary to observe that the civil courts have jurisdiction to examine cases in which the Customs Authority has not complied with the provisions of the statute or the officer of customs has not acted in conformity with the fundamental principles of judicial procedure or the authority has acted in violation of the fundamental principles of judicial procedure or he has made an order which is not within his competence or the statute which imposes liability is unconstitutional, or where the order is alleged, to be mala fide. A civil suit will lie for obtaining appropriate relief in these cases.'

From what is stated hereinabove, it should be clear that the principles regarding the maintainability of the suit in such matters have been clearly laid down by the Supreme Court. Unless the case falls in the excepted category of cases as observed by the Supreme Court, the civil court will not have jurisdiction to entertain suit in such matters. However, it is not necessary to give any direction on this point at this stage. The suit is pending before the trial court. It will be open to the parties to take up this contention before the trial court.

6. Counsel for the petitioners next argued, that in taxation matters, there is likely to be conflict between the social interest on the one hand and the individual interest on the other; such conflicting interests should be resolved by striking a balance so that the society at large does not suffer. Relying upon the decision of the Supreme Court in the case of Punjab Engineering College, Chandigarh v. Sanjay Gulati, reported in AIR 1983 SC 580. It was argued that 'law's delays' should not be permitted to enrich the manufacturers, traders or importers at the cost of the society at large. The aforesaid case pertained to admission into an educational institution. After referring to the tendency of people to get admission by means, fair or foul, the Supreme Court has observed as follows:

'This has virtually come to mean that one must get into an educational institution by means, fair or foul : once you are in, no one will put you out. Law's delays work their wonders in such diverse fashions.'

7. The counsel for the petitioners argues that in matters pertaining to taxation, the 'law's delays' help the intermediaries, i.e. traders, manufacturers land importers. Once they obtain interim orders from court, on account of usual delays in disposal of matters, including interlocutory order applications, the traders and manufacturers retain the amount of tax collected by them for a number of years.

8. In this sphere how 'law's delays' work wonders for the rich and powerful may be seen.

(a) In the instant case, the respondent Company first approached the Delhi High Court in July 1982 and obtained orders against recovery of amount of tax. The order of in of junction was recalled (that is to say 'vacated' by the Delhi High Court on October 6, 1982. In December 1982, the Departmental Authorities issued notice for payment of the amount of tax. The respondent-Company obtained ex parte injunction order on January 31, 1983 and since then utilises the amount of little over Rs. 10/- lakhs. Be it realised that the trial court did not even impose conditions of payment of interest or that of furnishing security or bank guarantee. Thus the respondent-Company is utilising the public money for its private gains since in July 1982. At any rate, on account of the order passed by the Trial court, which is the subject matter of this petition, the respondent-company utilises the amount of little over Rs. 10/- lakhs for the last eight months without even incurring liability of paying interest on the said amount, Calculating the interest at the current rate of interest of 20% on commercial advances made by banks, the amount of interest on Rs. 10/lakhs would come to about Rs. 16,500 per month. Multiplying the same by 8, the amount would come to Rs. 1,32,000/-. Thus there is net gain of the aforesaid amount of rupees one lakh and thrity two thousand by way of interest to the respondent-company. What an enormous loss to the society? All this happended on account of inexplicable delay caused in disposing of Ex. 5 application by the trial court.

(b) Be it realised that when the taxing authority decides to levy or collect taxes, the authority expresses the common will of the people. In democracy a person can be in power only so long as he has the mandate of the people. A person in power has obligation towards the people, that is to say, to abide by the mandate of the people. When such persons decide to tax the people, a strong presumption would arise that the decision is taken to achieve the objects enshrined in the Constitution and in the national plans. The moment the Taxing Authority is restrained from collecting the amount of tax, the mandate given by the people which has been articulated by the Taxing Authority by taking decision to impose and levy the tax is frustrated . Something which is against the basic canons of democracy happens and that too at an interim stage, when the validity or otherwise of the action taken by the taxing Authority is yet to be determined. 'Law's delays' prolong such period, sometimes even up to 3 to 5 years. Thus the mandate of the people is frustrated.

(c) The manufacturer or trader retains the amount of tax collected with him. The manufacturer or trader thus gets credit without necessary checks by the appropriate credit institutions, i.e. bank or other financial institutions. He retains the amount of the public and spends the same for his private gains. Two-fold results follows:

(i) The social interest which may have been desired to be served, cannot be served. The mandate given by the people under the Constitution to the Taxing Authority is frustrated.

(ii) People's money finds its way in the hands of private persons and the same is being utilised for private gains.

Again the result which is sought to be prevented by the Constitution follows. The Constitution mandates that the concentration of wealth in few hands should be prevented and the State should strive to see that there is minimization of inequality in income and status. Yet this is what happens when the amount of tax is retained by the manufacturer or trader. Concentration of wealth is perpetuated, not prevented, in equality in income and status is accentuated and not reduced.

(d) Retention of the amount of tax collected by the intermediary (manufacturer or trader as the case may be) adds to his liquid funds. It raises the liquidity of such manufacturer or trader which in turn helps him, either to hoard the commodity in question or to utilise the same in any other manner he likes, so that he reaps maximum rate of profit. This in turn is likely to result in rise in price of the commodity in question. The ultimate result is that the taxation which is aimed at mopping up the liquidity from the economy, results into adding up the liquid funds of private manufacturers and traders, which gives push to inflation, the most invidious and inequitable form of taxation as far as the people with fixed income are concerned. Here also something which is never desired or aimed at happens. Why? Because the matters in which injunction orders are granted at an interim stage cannot be heard and decided finally and then 'law's delays' take care to work their wonders in diverse fashion.

9. Counsel for the petitioner posed a question - Have the Big Business and Industrial Houses not developed a 'vested interest' in the system which perpetuates 'law's delay'? He further argues: are the courts not required to look at the consequences of the interim orders that may be passed ex parte (or even bi-parte) in civil suits? Are the courts not required to look at the socio-economic consequences of their orders? In the instant case, it has got to be observed that the trial court has remained totally oblivious of its socio-economic obligations and has not even taken into consideration the statutory duty (see Civil Procedure Code Order 39 Rules 3A) to dispose of interlocutory applications within a period of thirty days. Be it realised that on account of inaction and delay in such fiscal matters the poor and downtrodden section of the society has to suffer most. The counsel for the petitioner rhetorically asks - will the people continue to respect judicial institutions if the courts refuse to take into consideration the socio-economic consequences of their orders?

10. In this context reference may be made to the decision of the Supreme Court in the case of S. P. Gupta, v. Union of India, reported in AIR11982 SC 149. In para 62 of the decision, P. N. Bhagwati, J. has observed as follows:

'It is elementary that law does not operate in vacuum. It is not an antique to be taken down, dusted, admired and put back on the shelf but rather it is a powerful instrument fashioned by society for the purpose of adjusting conflicts and tensions, which arise by reason of clash between conflicting interests. It is therefore intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. It is here that the Judge is called upon to perform a creative function. He has to inject flesh and blood in the dry skeleton provided by the legislature and by a process of dynamic interpretation, invest it with a meaning which will harmonise the law with the prevailing concepts and values and make it an effective instrument for delivery of justice.'

On the aforesaid basis it has to be deduced that the court should be aware of the socio-economic circumstances of the country and the changes that are taking place. Further, it is clear that the interpretation and implementation of the law should be in accord with the requirement of the fast changing society, which is undergoing rapid socio- economic transformation.

11. Thus while deciding 'prima facie' case and 'balance of convenience' at the interim stage, the following considerations should weigh with the courts :

1. Why the tax is being imposed and collected? Is the collection of revenue, only to run the administrative machinery of taxing authority or it has some other socio-economic purposes also? When and how the amount collected by way of tax is required to be spent? Can the collection and spending thereof be postponed? If yes, what will be the effect of the same?

2. Who bears the burden of tax? Is he, who has moved the court to bear the burden of tax, or is it to be borne by the numerous unidentifiable consumers in the society?

3. If one who has moved the court is not going to suffer the burden of tax, can he claim that he may be permitted to collect the tax from the people (society) but the society (taxing authority) be restrained from collecting the same amount of tax from him?

12. Modern State is mainly a service corporation (See Sukhdev Singh v. Bharatram (1979) 1 SCC 421 : (AIR 1975 SC 1331) at P. 449). in modern State, the amount of tax is collected by the State not only for the purpose of raising revenue to run the administrative machinery of the State but the taxes are collected mainly with a view to meet with the socio-economic development needs of the country. The amount so collected is required to be spent immediately. Normally in all types of indirect taxes, the burden of tax is not borne by the person who initially pays the tax. The burden of tax is borne by the innumerable unidentifiable consumers in the society. Generally, a person who moves the court is not likely to suffer the burden of tax. In above view of the matter, once it is recognised that the court is under an obligation to keep in mind the socio-economic needs of the society and should be aware of its own, obligation towards society, the problem of balancing the social interest and individual interest would become very easy to be resolved.

13. If the aforesaid considerations are properly understood and grasped, it should be clear that in such matters ordinarily at the interim stage the Taxing Authority should not be restrained from collecting the tax. In all such matters, ultimately the social interests must prevail over the private interests. Then why the private interests should prevail with the protection of court's order at the interim stage? Moreover, if the injunction order is not passed as prayed for by the plaintiff, there will be no loss or injury to the plaintiff, i.e. manufacturer trader or importer as the case may be. On the other hand, incalculable loss will be caused to the society. The socioeconomic development needs will not be met with and even the administrative machinery of the State will be adversely affected. An irreparable damage will be caused to many projects and public utility. Therefore, in such matters grant of stay should be an exception and not a rule. At the interim stage of institution of the suit, the only consideration should be to ensure that no prejudice is occasioned to the taxpayers in case they ultimately succeed at the conclusion of the proceedings. The said object can be achieved by requiring the Taxing Authority to give an undertaking to refund or adjust against future dues of tax or the part thereof in the event of entire collection of tax or part thereof being ultimately held to be invalid by the court.

14. Ordered accordingly.