K.R. Sundarachary and Another vs The Assistant Collector of Central Excise

Srinivasan, J.—These are two petitions for the issue of writs of certiorari to quash the orders of the Assistant Collector of Central Excise

demanding payment of excise duty in respect of the power looms owned by the Petitioners and upon which they produce cotton fabrics.

The two Petitioners are brothers who were previously carrying on a partnership business under the name and style of K.R. Ramier and Sons.

They had installed twenty power looms. On account of differences between them, the partnership was terminated on the 27th July 1960.

Thereafter, they made an application to the Textile Commissioner seeking his permission to divide the looms to enable each, of them to operate ten

looms separately. Permission was granted on the 27th March 1961. Each of the Petitioners obtained a L-4 licence with effect from 1st May 1961.

During the period when the two brothers were operating the twenty looms as a partnership, they were paying duty of Rs. 1,080 and-an

additional duty of Rs. 648. When each of the brothers started operating on his own, the department assessed the excise duty payable by each at

Rs. 900 together with an additional excise duty of Rs. 600. The authorities purported to make this demand on the basis of a notification issued by

the Government in G.S.R. No. 373 dated 18th March 1961, as, amended by notification No. 81/1961, Central Excise, dated 1st April 1961. By

this notification, in the case of excise duty levied in accordance with the special procedure in respect of production of cotton fabrics in power loom

factories, a graded rate of excise duty is provided. The proviso to this notification states:

Where a person commences manufacture of the said fabrics for the first time after the 1st April 1961, by acquiring power looms from any other

person who is or has been a licensee of a power loom factory, the rate per shift per month per power loom shall be the next higher rate, if any.

While the graded rate of duty specifies a lower rate where not more than twenty-four power looms are employed, by reason of the proviso,

inasmuch as the Petitioners commenced production from the 1st May 1961 and had, according to the department, acquired looms from another

person, who had been a licensee, a higher rate of duty became payable. The Petitioners protested against the levy but the demand made by the

Superintendent of Central Excise was confirmed by the Assistant Collector of Central Excise.

The Petitioners attack the levy so made on the ground that persons, who started the business after the 1st April 1961, are being unlawfully

discriminated against by having to pay a higher rate of excise duty. Excise duty is leviable under the Central Excise and Salt Act, 1944. Excise duty

by its very nature is a duty levied on the manufacture of certain specified goods. There is no warrant for making the excise duty dependent upon

the date of the commencement of the manufacture and providing for a higher levy for those who commence a business after a particular date. It is

also contended that by imposing a higher rate on a person who happens to buy powerlooms from the previous licensee, a restraint upon the

fundamental right of a person to hold and dispose of property is created. It is again the contention of the Petitioners that the special procedures

evolved by rules 96(I) and (J) of the Central Excise Rules are only intended to avoid unnecessary clerical work both for the manufacturer and the

department in the matter of collection of excise duty. There is no warrant for levying a higher duty in the circumstances indicated by the proviso to

the notification extracted above.

On facts also, it is contended that though the Petitioners were operating as partners, they cannot be regarded as persons who commenced

manufacture of cotton fabrics for the first time on or after 1st April 1961, nor can it be said that they acquired the twenty looms from any other

person, for the twenty looms in question had always been owned by them jointly. It is claimed that the department''s inference that the proviso

applies to the instant case is erroneous in law.

The counter-affidavit filed on behalf of the Assistant Collector, Central Excise, does not deny the facts that led to the creation of two separate

mills having ten looms each. The department, however, contends that the powerlooms were previously owned by the partnership concern and that

the Petitioners acquired ten looms each from that partnership concern. It is further contended that there can be no denial of the fact that these

Petitioners commenced their manufacture in their individual capacity only after 1st April 1961. It is accordingly claimed by the department that the

conditions laid down in the notification are fulfilled and that the higher rate of duty is payable by the Petitioners by reason of the proviso. It is stated

that the purpose of the notification is to prohibit further fragmentation of existing mills and that the imposition of a higher rate of duty which seeks to

restrain such fragmentation. of existing mills is connected with the object of the Act and cannot be attacked as illegal or invalid.

The Central Excise Rules provide for a special procedure with regard to the levy and collection of excise duty in the case of manufacture of

cotton fabrics, rayon or artificial silk fabrics and silk fabrics produced on power looms. Rule 96(I) provides for an application to be made by the

manufacturer in this regard and if that application is granted by the Collector, the special mode of computation of the excise duty can be applied for

such period not less than six consecutive calendar months as may be fixed in the discretion of the Collector. The normal mode of levy is on the

basis of actual production at certain specified rates per square metre. This would obviously involve the maintenance of accounts and periodical

checks by the departmental officials. The special procedure obviates these difficulties. The department has apparently made a survey of the

average production in India per day per shift per power loom and on the basis of the estimated average production of any mill, computed on the

number of looms owned, number of shifts worked and other features, certain rates per shift per power loom have been fixed irrespective of the

quantity that might be actually produced. There have been such notifications issued from 1958 onwards. In all of these notifications, the impugned

proviso in some form or other was inserted by a notification, dated 26th November 1960. Originally this proviso stated:

Where any person commences manufacture of the said fabrics for the first time on or after the 1st December 1960, by acquiring power looms

from any other person who is or who has been a licensee of a power loom factory, the rate per shift per month shall be the next higher rate, if any.

When in 1961, a revised notification was issued altering the rates applicable, a similar proviso was inserted with suitable modifications in so far

as the date of commencement of the manufacture is concerned.

It certainly does appear somewhat strange that a person who starts his manufacture after the 1st April 1961, should suffer a higher rate of

excise duty as against a person who started the manufacture prior to that date. Equally, there is no reason why a manufacturer, who acquires

powerlooms from another person, who is or had been a licensee, should suffer a similar disadvantage. While a person who purchases new power

looms for the first time and starts manufacture after 1st April 1961, is liable to pay excise duty under the special procedure only on the basis of the

number of looms which he operates, a person who acquires powerlooms from another who had been a licensee has to pay at a higher rate. The

same result follows even when he buys the looms from other manufacturer who has closed down his business. What reasonable connection it has

with the object of the excise law, I for one am unable to see. The solitary sentence that is found in the counter-affidavit of the department is that the

purpose of the notification is the prohibition of further fragmentation. In what manner fragmentation is opposed to any of the principles underlying

the Act, has not been explained. If I may speculate, fragmentation is probably considered uneconomic. That may perhaps be grounded against his

insisting on a minimum number of looms under a single licence. But whether a mill is run on economic or uneconomic lines appears hardly to be a

matter which the taxing enactment is entitled to take note of. I must, however, mention that though in the grounds accompanying the petition, an

attack has been made upon the discriminatory nature of the operation of the proviso to the notification, learned Counsel for the Petitioners did not

argue the matter, nor were there any arguments advanced on behalf of the department seeking to establish that the discrimination, which certainly

exists, is on the basis of a reasonable classification. Beyond expressing my doubts as to the validity of the proviso, I do not propose to express any

decided conclusion.

The next question is whether the case of these Petitioners really comes within the scope of the proviso and whether the department is correct in

its interpretation of the proviso. Mr. S.K.L. Ratan, learned Counsel for the Petitioners, argues that though the two brothers ran the business in

partnership, a dissolution had been effected and the property belonged to them jointly. The previous licence that they had taken for the

manufacture of the cotton fabrics had been issued not in the name of the partnership firm but jointly in the names of the two brothers. It is

accordingly the contention that when the partnership was dissolved, there was no transfer of the assets from the one entity to another but only a

division of the assets jointly owned by the two brothers, and if that is so, so it is contended, the proviso cannot in terms apply.

The learned Additional Government Pleader argues on the other hand that there was undoubtedly a partnership. The partnership firm was a

distinct legal entity. An agreement was entered into between the two partners discontinuing the partnership and embodying the terms of the

dissolution. According to this agreement, out of the twenty power looms owned by the partnerships, ten looms were to be taken over by one

brother and ten by the other brother. The parties were also entitled under the agreement to take such other raw materials as may be required in

mutual consultation with each other. The agreement further provided that the Petitioner in Writ Petition No. 11 of 1962, could continue to

manufacture the cotton cloth under the old name and style of Kaveti Weaving Mitts and the other partner should carry on his business under

another name. It was stipulated that the agreement was to come into operation only on and from the date of grant of separate permission by the

Textile Commissioner and that until then the business was to continue in partnership. It is the contention of the learned Government Pleader that in

the light of these features, there was an acquisition of ten looms each from the partnership which previously owned the assets. I am not very much

impressed by this argument. Clearly according to the terms of the agreement, the business of manufacture was earned on by the two brothers in

partnership till 1st May 1961 when they obtained, the requisite permission from the Textile Commissioner The previous licensee was not the firm.

A copy of the form L-4 licence that had been granted previously has been filed and it shows that it was granted to the two individuals, no doubt, as

partners of Kaveti Weaving Mills. It was not expressed on its face to be, a licence in favour of the firm. Whether that would be the proper

inference to draw from this licence or not the more important question is whether, even assuming that it was the firm that owned the power looms

in question, there has been an acquisition by each of the Petitioners in the manner which brings them within the scope of the proviso The proviso

requires that they should have acquired the power looms from another person who is or has been a licensee of a power loom factory. The Central

Excise Act, and the rules do not define the expression person. Can the expression any other person in the context include a firm?

Reference may be made to Lakshminarayan v. C.I.T Nagpur (1956) 1 S.C.J. 164 In that case, Section 26-A of the income tax Act had to be

considered in relation to a partnership which was composed of firms. The question was whether firms can be regarded as persons who can enter

into partnerships. Their Lordships pointed out that the word persons occurring in Section 4 of the Partnership Act, contemplates only natural or

artificial persons, that is, legal persons. They observe that though mercantile usage had given a status to a firm and even the income tax Law treated

a firm as an. assessable entity and some systems of law gave a formal recognition to the separate personality of a firm apart from its members that

was not the true legal position. The general concept of a partnership established in both English Common Law and the Indian Law was held to be

that a firm is not an entity or a person in law, but merely an association of individuals a firm name is only the collective name of those individuals

who constitute the firm. They refused, therefore, to import the definition of the word person occurring in the General Clauses Act, 1897, into

Section 4 of tie Indian Partnership Act. To do so would in the opinion of their Lordships be repugnant to the subject of the Partnership Law as it

has been understood in this country. The conclusion was that a firm is not a person.

In Hajee Abdul Shukoor and Co. v. State of Madras (1955) 6 S.T.C. 352 it was decided that a transfer of property in goods by a member of

a firm to the firm is a sale within the meaning of the General Sales Tax Act. This decision cannot, however, be treated as an authority for saying that

a firm is a person. It only indicates that for certain purposes a firm could enter into contractual obligations.

If the firm is not a person and if the demand made by the department is founded on the contention that there was a transfer of ten looms from

the partnership to each of the Petitioners, then the proviso cannot in terms apply. There should be an acquisition of the power looms from any

other person who is or has been a licensee. The firm not being a person in the sense indicated, the above condition is not satisfied. On the other

hand, as has been urged by the learned Counsel for the Petitioners, it was not the firm that was the licensee, but the individual partners themselves.

The two brothers were no doubt described as partners of Kaveti Weaving Mills. But the previous licence was not in the name of Kaveti Weaving

Mills. That licence reads thus:

Messrs. K.R. Sankarachari and K.R. Sundarachari, partners of Kaveti Weaving Mills, Madurai, having undertaken to comply with the conditions

prescribed in the Central Excise Rules...are hereby authorized to manufacture power loom cotton fabrics during the year.

This to my mind is undoubtedly a licence only in favour of the two individuals. If, therefore, there was a division of the looms as between the

two persons who operated all the looms under a single licence, it cannot be regarded, notwithstanding the intrusion of a partnership, as an

acquisition by these persons from another entity. It should follow, therefore, that the application of the proviso to the instant case is not justified by

the facts. The orders disclose an error of law and are liable to be and are hereby quashed. There will, however, be no order as to costs.