1. These writ petitions coming on for hearing on Monday 28th and Tuesday 29th day of February 1972 upon perusing the petitions and the affidavits filed in support thereof the order of the High Court dated 7-2-1967 and made herein and the relevant records on the file of the Respondents herein and comprised in the return of the Respondent herein to the Writs made by the High Court and upon hearing the arguments of Mr. K. K. Venugopal, advocate for the petitioner in both the petitions and of Mr. K. Parasaran, Central Government standing Counsel on behalf of the Respondent in both the petitions and having stood over for consideration till this day, the Court made the following order:-
2. One Murugan and Company, the petitioner in W.P. No. 265 of 1967 is a partnership firm carrying on the business of manufacture of French Polish at Pudukottai. It had the requisite licence for the same under the Madras Denatured Spirit (Methyl) Alcohol and varnish (French Polish) Rules 1959. In December 1964 the Superintendent of Central Excise Department asked the petitioner to take a licence under the Central Excise and Salt Act 1944, hereinafter referred to as the Act, on the ground that the French Polish manufactured is excisable falling under Tariff item No. 14 of Schedule I of the Act. Even though the petitioner felt that the French Polish it manufactures is not an excisable product, nevertheless, in order to avoid legal complications that may arise applied for and got a licence under the Act on December 10, 1964 for the manufacture of French Polish, of a quantity not exceeding 8,200 litres per annum and the said licence was renewed from year to year on payment of the appropriate renewal fee. On July 13, 1965, the Range officer, Pudukottai issued a memo to the petitioner directing it not to clear the manufactured goods without payment of duty under the Act, presumably on the ground that the French Polish manufactured by the petitioner will come under the term 'Varnish' falling under Item 14 of Schedule I. Immediately, on July 17, 1965 the petitioner represented to the Collector of Central Excise, the second respondent herein, that in so far as the quantity of he French polish it manufactures per annum is less than 50,000 litres, it is entitled to exemption from excise duty under notification No. J37/60. E dated October 1, 1960 which allows exemption from excise duty if the total quantity of varnish manufactured does not exceed 50 kilo litres per annum and that even its licensed capacity is less than the exempted limit under the said notification. That representation was sent to the Deputy Collector of Central Excise the first respondent herein, for necessary action, and the first respondent by his order dated October 19, 1965 rejected the petitioner's claim for exemption, holding that as one of the partner's of the petitioner firm had a proprietory interest in another concern Messrs. Thiruvadai and Company, manufacturing similar products at the same time, it is not entitled to the benefit of the exemption in view of clause (b) of the proviso in the said notification No. 137/60-CE dated October 1, 1960. Aggrieved against the said order of the first respondent dated October 19, 1965 the petitioner filed an appeal to the Collector of Central Excise, second respondent herein on October 25, 1965 and that appeal was, however rejected on May, 3, 1966, confirming the order of the first respondent. The petitioner thereafter filed a revision to the Central Government, the third respondent herein on June 20, 1966 under Section 36 of the Act which was also dismissed on January 20, 1967.
3. Even when the matter was pending before the first respondent a demand dated October 16, 1965 issued under Rule 10A of the Central Excise Rules, 1944, herein after referred to as the Rules directed the petitioner to pay a sum of Rs. 461.28 being the excise duty payable for the period, January to March 1965. After the order was passed by the first respondent on October 19, 1965 and when the appeal was pending, another demand dated November 17, 1965, again under rule 10A for a sum of Rs. 464.88 covering the period from 1-4-1965, to 31-10-1965 was issued. A third demand dated June 30, 1966 had been issued for a sum of Rs. 3,867.84 for the period from January 1963 to December 1964 again under Rule 10A. The petitioner has sought a writ of certiorari quashing the order passed by the third respondent dated January 20, 1967 confirming the orders passed by the first and second respondents.
4. In W.P. No. 266 of 1967, Thiruvade and Company, which also manufactures French Polish under a licence issued by the Central Excise Department, is the petitioner. The said firm was also denied the benefit of exemption under notification 137/60 dated October 1, 1960 as amended by notification 109/63 dated July 6, 1963 on the ground that one of its partners, Mr. Thiruvadi is also a partner in Murugan Company, which is also manufacturing French Polish at the same time, and on that basis demands for payment of duty under Rule 10A of the Rules calling upon the petitioner to pay Rs. 5,034.54 for the period July 6, 1963 to December 24, 1964 and further a sum of Rs. 2,806.20 for the period December 24, 1964 to June 26, 1964 had been issued by the Department. This writ petition has been filed to quash these demands. Therefore, both the writ petitions raise the question of validity of the demands issued against the respective petitioners.
5. The petitioners firstly contend that Rule 10A is ultra vires the Act, as there is no specific rule making power conferred under Section 37 of the Act for recovery of excise duty which has escaped levy at the time of clearance and that therefore, the demands issued under Rule 10A could not be legally enforced. In support of the said contention reliance is placed on a decision of Bench of this Court, in W.P. Nos. 1053 of 1968 : (1973)1MLJ99 etc. In that case the Bench, while considering the validity of Rule 12 of the Medicinal and Toilet Preparations (Excise-Duties) Rules, 1955 which is exactly similar to Rule 10A of the Central Excise Rules, held that the said Rule in so far as it seeks to extend the charging power under Section 3 of that Act was invalid and without jurisdiction, and the relevant observations are these.
'The next line of attack of the petitioner is that the main enactment being silent on the question of levy of duty on escaped turnover the Rules cannot provide for it:. In support of that contention the learned counsel relied upon Haji J.A. Kareem Said v. Deputy Commercial Tax officer, Mettupalayam 18 S.T.C. 370 to which one of us was a party. There it was held that Sub-rule (7) of Rule 5 of the Central Sales Tax (Madras) Rules 1957 providing for limitation and determination of escaped turnover by best judgment is in excess of the rule making power and the Sub-rule, as a whole, is therefore, invalid. Relying upon the aforesaid decision, it is contended that the Act in so far it does not provide for recovery of escaped assessment by providing residuary powers for recovery of sums due to Government but only provide for them in the Rules, the demand in pursuance of the Rules is unsustainable. The contention of the learned counsel is well founded'
6. Mr. Parasaran, the Learned Standing Counsel for the Central Government concedes that the ratio of that decision will apply with equal force to Rule 10A as well, and that therefore, in view of that decision he will not be able to sustain the demands under Rule 10A. But what is contended by him is that, though the demands issued cannot be sustained under Rule 10A, they could be sustained under Rule 9 (2). It is submitted, that on the facts of these cases, the demands could be straightaway brought under Rule 9 (2) as the goods have been cleared without payment of duty. It is urged that a mere reference to an inappropriated Rule in the demands will not make them invalid if the demands could be sustained under valid provision either in the statutes or in the Rules In J. K. Steel Ltd., v. Union of India AIR S.C. 1173 the Supreme Court observed :
'If the exercise of a power can be treated to a legitimate source, the fact that the same was purported to have been exercised under a different power does not vitiate the exercise of power in question. This is a well settled proposition of law'.
7. These observations were cited with approval in a recent decision of the Supreme Court in N. B. Sanjana v. E. S. and W. Mills : 1973ECR6(SC) . Mr. Parasaran is, therefore, well founded in his contention that if the respondents have power to issue demands either under Rule 10A or Rule 9(2) the fact that the demand refers specifically to a particular rule, which may not be applicable will not make the demand invalid.
8. Mr. K. K. Venugopal, learned counsel for the petitioners does not dispute the legal position that if the demands could be sustained under some valid source of power either in the statute or in the Rules a reference to wrong provision will not make the demands invalid. He however, contends that Rule 9(2) also suffers from the same legal infirmities as Rule 10(A) which has to be held to be ultra vires in view of the Bench decision referred to above, and that, in any event the goods in the case not having been removed either stealthily or clandestinely, Rule 9(2) will not come into play.
9. According to the learned counsel Rule 9(2) will come into play only in cases where the manufacturer or purchaser clears the goods clandestinely without the knowledge of the Excise authorities, thus incurring the penalty of not only the payment of duty but also a fine as well as the confiscation of the goods, and it will not apply to case where there is no clandestine removal. In support of that contention Mr. Venugopal refers to the decision of the Supreme Court in N.B. Sanjana v. E. S. and W. Mills : 1973ECR6(SC) . Therefore, the question is whether the demands could be sustained under Rule 9(2) of the Rules.
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10. It is not a dispute in these cases that the Officer who issued the demands in question is competent to make demands under Rules 9(2) as well. In N. B. Sanjana v. E. S. and W. Mills : 1973ECR6(SC) there was a demand made under Rule 10A. When those demands were challenged as being incompetent under Rule 10A the demand were sought to be sustained under Rule 9(2). While dealing with the question as to whether the demands could be justified under Rule 9(2) the Supreme Court expressed :
'Sub-rule (1) of Rule 9 provides for the time and the manner of payment of duty. In this case there is no controversy that whatever goods were cleared by the respondents, necessary applications had been made to the officer concerned and the latter had passed orders of assessment to nil duty. To attract Sub-rule (2) to Rule 9, the goods should have been removed in contravention of Sub-rule (1).
It is not the case of the appellants that the respondents have not complied with the provision of Sub-rule 1. We are of opinion that in order to attract Sub-rule 2, the goods should have been removed clandestinely and without assessment. In this case there is no such clandestine removal without assessment. That Sub-rule (2) is a penal provision is shown from the fact that apart from the duty payable the party is also made liable to a penalty and he also incurs the risk of the goods being confiscated.'
11. The above observations are relied on by the learned counsel for the petitioners in support of his contention that Rule 9(2) is only a penal provision and that cannot be invoked in a case where the Central Excise Authorities entertained a doubt as to whether the goods are excisable or not, and did not object to the clearance of the goods without payment of duty, and that, the mere non-levy at the time of the clearance will not attract Rule 9(2). In our view there is considerable force in this contention of the petitioners.
12. To attract Rule 9(2) the goods should have been removed in contravention of Sub-rule (1). Rule 9(1) read with Rules 47, 52 and 52(a) set down an elaborate procedure as to how the duty has to be paid at the time of clearance of the goods from the premises of the factory. In the petitioners' case the authorities have not fixed the time, place and the manner of payment of Excise duty as contemplated by Rule 9(1) and as such, there cannot be any contravention of that Rule: Thus Rule 9(2) can be applied only when the manufacturer clandestinely removes the goods from the place or premises specified in Rule 9(1) or from the store room or other place of storage approved by the Collector under Rule 47 without the use of a gate pass in the proper form countersigned by the officer under Rule 52(A). In the case of the petitioners, the authorities have not taken any steps under Rules 9 (1) and 47 to specify the time, place and the manner of payment of excise duty, so as to enable the petitioners to pay the duty under Rule 9(1) and, therefore, there cannot be any contravention of Rule 9(1) as contemplated in Rule 9(2). The mere non-payment of duty under a bona fide impression that the goods are not excisable cannot lead to a finding that the goods have been cleared from the factory contrary to Rule 9(1) especially when there has been no specification of the time, place and the manner when the duty is to be paid and of the proper form of application for permission to remove and of the proper officer who has to pass an order as provided in Rule 9(1). The contravention of Rule 9(1), contemplated in Rule 9(2) pre-supposes the existence of a specified machinery or procedure for payment of duty and tor the clearance of the goods prescribed by the Collector of Central Excise as contemplated under Rules 9(1), 47 and 52 and for the issue of a gate pass under Rule 52(a). Unless the manner, the time and place at which the duty is to be paid and the goods are to be cleared from the factory or to place of storage as contemplated in Rule 9(1) has been specified, the producer or manufacturer cannot be said to have contravened Rule 9(1). There mere clearance of the goods without payment of duty cannot attract Rule 9(2), for it contemplates the contravention of the existing directions issued by the Collector to pay the excise duty in a particular manner before the clearance of the goods. It is not in dispute that the goods manufactured by the petitioners were not brought to levy at any time before. The Excise authorities came to assess the goods only for the first time by the issue of these demands. It may be that if there are earlier directions by the Collector to the petitioners to pay excise duty at the time of the clearance after specifying the procedure contemplated in Rule 9(1) and if the petitioners have contravened such directions and cleared the goods from the factory without payment of duty, Section 9(2) may come into operation. But in cases where a particular manufacturer goes on producing certain article under the bonafide impression that the articles were not excisable goods and the departmental authorities also did not take any steps for bringing the goods under the excise levy as per Rule 9(1), the authorities cannot invoke Rule 9(2) on the ground that the goods have been cleared without payment of excise duty merely because they have taken a view that the goods are excisable long after the goods had been cleared from the factory. Rule 9(2) could, in our opinion, be invoked only in a case where the goods manufactured had been brought in for the Central Excise levy and the time, the place and the manner for payment of the excise duty and for clearance of the goods had already been fixed by the Collector and the petitioner cleared the goods contrary to the said procedure prescribed by the Excise authorities. We are, therefore of the view . that in these cases, where the goods are sought to be brought to excise levy for the first time by the issue of the demands after the goods had been cleared from the factory, the petitioners cannot be held to have contravened Rule 9(1) so as to enable the Excise authorities to invoke Rule 9(2).
13. In view of the finding that Rule 9(2) cannot be invoked to sustain the demands made in these cases, the further contention raised by the petitioners that rule 9(2) suffers from the same infirmities as Rule 10A and had, therefore, to be held ultra vires, need not be gone into. We are not, therefore, expressing any opinion in relation to that contention. Similarly, the other contentions raised by the petitioners that Rule 9(2) is violative of Articles 14 and 19 of the Constitution need not be considered at this stage.
14. Since the demands are quashed, it is unnecessary to go into the question as to the exact scope of the notifications Nos. 137/60 C.E. dated 1-10-1960 and 109/63 dated 5-7-1963 referred to above. The writ petitions are therefore, allowed and the demands in question quashed. There will, however, be no order as to costs.