On 16-12-1977 and 17-12-1977 a stock-taking of the non-duty paid tobacco in the warehouse of appellant-factory at Bangalore was conducted under Rule 223A of the Central Excise Rules, 1944. According to the relevant stock registers the total quantity that ought to have been in the warehouse was 1,10,59,381.45 Kgs. The actual stock was verified to be 1,09,98,808.45 Kgs. disclosing a shortage of 60,573 Kgs.
A show cause notice was issued to the appellants. The appellants, however, sought time for reply which was not granted. The company did not file any reply. But his order No. 4/78 dated 21-3-1978 the Collector of Central Excise, Bangalore found that the company failed to account for the unmanufactured tobacco stored by them; "the inference is inescapable that a quantity of 60,573 Kgs. of tobacco has been removed by the company from their bonded warehouses (godowns) in contravention of Rule 9(1) of CER 1944 read with Rule 173N". He demanded duty of Rs. 3,15,767.95 under Rule 223-A. Having thus invoked the provisions of Rule 223-A, he did not pursue the demand under Rule 9(2). He felt that a deterrent penalty was called for in this case and imposed a penalty of Rs. 5 lakhs under Rule 173Q(1). The company filed an appeal against this order with the Central Board of Excise & Customs which found as follows in its order referred to supra:- "As far as the argument that Rules 223A, 9(1) and 173Q cannot be invoked simultaneously, the Board is of the view that the warehouse of the appellants were attached to the cigarette factory and as such provisions of Chapter VIIA of Central Excise Rules would be applicable on them. The duty has been demanded under Rule 223A which provides for the same in respect of any shortage noticed in the course of annual stock-taking in a warehouse. Since there is contravention of both Rules 223A and 173Q(b) as the excisable goods stored in the warehouse were not accounted for and since in such situations where there is a conflict between the provisions of Chapter VIIA and other rules, the provisions of Chapter VIIA would have preponderance, the imposition of penalty under Rule 173Q is in order." Having thus upheld the demand for duty as well as the liability for penalty, the Board reduced the quantum of penalty to Rs. 3 lakhs. It is against this order the appellants filed a revision application to the Government of India which stands transferred to the Tribunal in terms of Section 35P of the Act.
2. Before us the learned advocate for the appellants explained that the warehouse of the appellants storing non-duty paid tobacco consists of 26 godowns and covers an area of 2,32,740 sq. metres. Since July 1977 the clerks of the leaf godown were on strike, followed by 'go-slow'.
Thus the appellants were handicapped to some extent. The company's factory at Bangalore alone pays a duty of Rs. 72 lakhs per day (200 crores approximately a year) and would not stop to removal of bonded goods without payment of duty in a surreptitious manner. The observed shortage is of the order of 0.54% (approximately) of the actual stock according to the books. Such a minor variation which could be due to innumerable causes including error in accounting at the time of removal, could not be held against the party for purposes of imposition of a huge amount as penalty.
3. On a point of law the learned advocate submitted that action under Rules 223A and 173Q cannot be invoked simultaneously. Rule 173Q does not cover a situation relating to verification of stock which was actually carried out in the factory. The provision relating to stock-taking is contained solely in Rule 223A. In terms of this Rule the penalty leviable, if at all, is only Rs. 2,000/-. Continuing, the advocate submitted that the Collector had drawn an inference of removal with a charge of violation of Rule 173Q(1)(a) and (b); he has drawn an inference of unauthorised removal merely because the shortage was discovered ; no actual proof of removal was available; the Board in appreciating this part has given up the charge under Rule 173Q(1)(a) when they observed: "Since there was contravention of both Rules 223A and 173Q(b) as the excisable goods stored in the warehouse were not accounted for since in such situations where there is a conflict between the provisions of Chapter VIIA and other Rules, the provisions of Chapter VIIA would have preponderance, the imposition of penalty under Rule 173Q is in order." This would show that the Board has upheld the penalty only in terms of Rule 173Q(1)(b) and this is the order of the Board against which the present appeal is before the Tribunal for consideration. By implication the Board has not agreed with the Collector regarding the inference of removal of goods without payment of duty referred to in Rule 173Q(1)(a). Rule 173Q(1)(b) deals with a situation where "a licensee of a warehouse does not account for any excisable goods...stored by him...". Rule 223A refers to deficiency discovered in a warehouse being accounted for to the satisfaction of the proper officer. There is no provision in Chapter VIIA for stock-taking. Stock-taking is dealt with only under Rule 223A; a harmonious interpretation of these two rules would show that the accounting referred to in Rule 173Q(1)(b) is in respect of any excess goods that may be found in a warehouse and not of shortages therein.
4. Dealing with the quantum of penalty learned advocate referred to the decision of the Supreme Court in the case of Hindustan Steel Ltd. v.State of Orissa - 1978 (2) ELT (J159) SC - wherein His Lordship Acting Chief Justice Shri J.C. Shah, speaking for the Bench observed, "An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances." He pleaded that in the present case the liability of the appellant to account for a very small percentage of the tobacco stored is not covered by any contumacious or dishonest conduct on the part of the appellant; the penalty should therefore be set aside.
5. (i) The learned Senior Departmental Representative referred to the unpublished Judgment of the Gauhati High Court in Civil Rule No. 262/73 in the case of Langharajan Tea Estate v. Central Board of Excise & Customs and Others; in that judgment His Lordship Justice Shri S.Rangarajan speaking for the Bench observed, "There is no question in this case of the burden not being on the Department to show that the above-said quantity of green leaves had been brought inside the factory and also put into manufacturing process resulting in manufactured tea. But when it is seen from the admitted facts that in the accounts of the petitioner company, the said (large) quantity of plucked green leaves had not been brought into the company's accounts pertaining to the manufacture, the onus shifted on the petitioner company to show that the same had not been brought into the factory and put into the manufacturing process as it should have been. The Petitioner has utterly failed to show that in spite of the said quantity having been admittedly plucked, it was not still brought into the factory, but that it was, for instance, dealt with in a manner not connected with the manufacturing process.
This was a fact within the peculiar knowledge of the petitioner.
Except to say that the Mohurer had not disclosed the same in order to show a better ratio, no other explanation was even attempted. The explanation given by the Mohurer itself, while it does not militate against the inference which has been drawn, only strengthens it, because it shows that the relevant accounts had been manipulated to show a better ratio. Thus the Department seems to have discharged the burden of proof, bearing in mind the gravity of the issue." Following the principle adopted in the case of tea, he urged that in the present case removal of tobacco without payment of duty could be inferred according to the normal interpretation of the rules as referred to by His Lordship. He also referred to the decision of this Tribunal in the case of Appollo Tyres v. Collector of Central Excise, Cochin - ED (MAS) No. 400/83 (Cegat) dated 24-5-1983 - where a penalty of Rs. 2000/- was upheld under Rule 173Q of the CER for a shortage in the number of tyres in the bonded store-room.
(ii) The learned Senior Departmental Representative also claimed that the Board has not modified or given up the finding of the Collector as to the violation of Rule 173Q(1)(a). A reference to Rule 173Q in the order of the Board is only by way of illustration.
(iii) He maintained that the quantum of penalty is not large. Under Rule 173Q the maximum penalty leviable is three times of the value of the goods involved. According to the Collector the value of the goods ranges from Rs. 3,14,767.95.
6. In reply the learned advocate for the appellant stated that the case dealt with by the Gauhati High Court is not in pari materia with the facts of the present case; that case dealt with green tea plucked in an Estate and there was some difference between the green leaf account and the plucking account. Here no particular accounts have been shown to clash.
7. We have given careful consideration to the point urged. Turning to the legal points raised we note that Rule 223A no doubt provides for stocktaking in a bonded warehouse. It also provides for certain liabilities by way of payment of duty involved on the shortages found and a penalty up to Rs. 2,000/-. That there was a shortage of 60,573 Kgs. of tobacco at the time of stock-taking is not disputed. While this rule formed part of the Central Excise Rules, at the time of their notification of the Rules in 1944 itself, Rule 173Q was incorporated; when Chapter VILA was introduced with the coming into force of what was described as the Self Removal Procedure. A set of special rules were notified for the determination of the amount of duty by the assessees themselves, payment thereof by or credit in a personal ledger account, removal of the goods under party's own gate pass without countersignature by the officers of the department, submission of monthly returns regarding production and clearance, and assessment by the proper officer on the basis of the monthly returns. That Chapter also provided for certain modification of the rules contained in other chapters. Noting there may be a conflict between the provisions of Chapter VILA and others, Rule 173A(1) specifically provided that where there is a conflict between the provisions of this Chapter and the provisions contained in other Chapter...the provisions of this Chapter (Chapter VILA) shall prevail. The plea on behalf of the appellants is that there is no conflict for resolution and Rules 223A and 173Q deal with different situations; the former being in respect of shortages and the latter in respect of excess goods found in a warehouse. We are afraid that this differentiation does not exist. While Rule 223A confines itself to shortages found at the time of stock-taking in a warehouse, Rule 173Q(1)(b) is of larger coverage. According to it, "if the licencee of a warehouse...does not account for any excisable goods ...stored by him...the licencee...shall be liable to a penalty." Accounting for goods stored in a warehouse does not necessarily limit itself to accounting of an excess. It could deal with accounting for a shortage also when goods are received in the warehouse. They are entered in the relevant registers and stored in the warehouse. The licensee has to account for what is stored as exhibited by the books of accounts. In this view we consider that Rule 173Q would cover both excesses and shortages. To the extent that shortages are covered by both Rules 223A and 173Q - though a shortage may be discovered by way of annual stock-taking referred to in Rule 223A or any other manner say a surprise challenge or check including an annual stock-taking under Rule 173Q - when read with the provisions of Rule 173A(1), Rule 173Q would prevail. We therefore consider that in the present case the provisions of Rule 173Q(1) - in particular (1)(b) - is available to the department. The order of the Collector makes a finding in respect of Rule 173Q ; the show cause notice referred to violation of Rules 173Q(1)(a) and (b). By implication we should take it that the penalty imposed by the Collector is for violation of Rule 173Q(1) Sub-clauses (a) and (b). A reading of the order of the Board does give the impression that the charge of illicit removal has been given up. In confirming the penalty under Rule 173Q the Board has made a specific reference to 173Q(b)[173Q(1)(b)?] in contradiction to Rule 223A. We therefore take it that the charge of unauthorised removal at this stage is not pursued and hence a penalty in terms of Rule 173Q(1)(a) no longer exists. In view of this finding we do not deal with the reference to the decision of the Gauhati High Court regarding the manner of appreciation of evidence in cases of this type.
8. The appellants are not disputing the demand for payment of duty in this case but urge that the penalty should be set aside. We note that in terms of the broad guidelines laid down by the Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa, penalty is not to be imposed merely because it is lawful to do so. However there is force in the contention on behalf of Revenue that a company of the type such as I.T.C. ought to be more careful about its accounting, particularly when S.R.P. procedure is dependent wholly on a proper and detailed maintenance of accounts (in passing we note that at present cigarette factories are under Physical Control). The tobacco in the warehouse was leaf tobacco for the making of cigarettes. There is no actual evidence or removal of tobacco for use elsewhere; the nearest factory is miles away. No evidence regarding manufacture of excess cigarettes has been brought out. Having regard to all the circumstances of the case, we think that the ends of justice will be met if the penalty is fixed at Rs. 60,000/- (Rupees sixty thousand only) and consequential benefit allowed. Ordered accordingly.