Soma Textiles vs Union of India

Ravani J.

The petitioner company is engaged in the business of manufacturing textiles and it is running a textile mill in the name and style of M/s. Soma

Textiles. The petitioner company received two show cause notices dated November 2, 1972 and December 8, 1972. By these show cause

notices the petitioner was called upon to show cause as to why penalty should not be imposed upon the petitioner company on the ground that

cloth of sort Nos. 315 and 319 of running cloth was converted into rags and cleared by paying duty at the lower rate. The petitioner appeared

before the authority concerned and submitted its explanation. After hearing the petitioner the Collector of Central Excise, Baroda passed order

dated October 23, 1973 and held that the petitioner had deliberately cut the second cloth into rags with a view to evading payment of excise duty

leviable thereon in as much as rags were exempted from payment of duty at the material time. The Collector further held that the petitioners had

given incorrect marks as rags on cotton fabrics of Sort No. 319 showing that these cotton fabrics were damaged or sub-standard rags inspite of

the fact that these goods were obtained from running length of cotton fabrics known as ""piece of cotton fabrics"" as defined in Rule 96-A(i) of the

Central Excise Rules, 1944 and not from damaged or sub-standard cotton fabrics as defined in Rule 96-A(ii). He further held that the petitioner

had made incorrect entry of production manufacture and storage in the R.G. 1 Register in respect of cotton fabrics weighing 11247 k.g. equivalent

to 129340 sq. mt. or 115113.04 sq. mtrs. and removed the same from the factory premises as rags or damaged or sub-standard cotton fabrics

without payment of any though the goods were not cut pieces of damaged or sub-standard cotton fabrics. The Collector further held that the

charges levelled against the petitioner for contravention of the provisions of Rules 96-B, 96-C, 226, 53, 173F, 173G, 173-Q(a) and 173-Q(d) of

the Central Excise Rules, 1944 were proved. The Collector passed order imposing penalty of Rs. 2,000/- under the provisions of Rule 173-Q(ii)

of the Rules and further ordered confiscation of goods under seizure valued at Rs. 59,060.50 ps. However, the petitioner was given option to

redeem the goods on payment of fine of Rs. 5,000/- in lieu of confiscation within three months from the date of receipt of the order. The Collector

also ordered to confiscate the land, building, plant and machinery etc. belonging to the petitioner, but gave option to redeem the same on payment

of fine of Rs. 250/- in lieu of confiscation within three months from the date of receipt of the order. It is further ordered that the petitioners shall pay

duty at the appropriate leviable rate prevalent at the material time on the original piece of cotton fabrics measuring 18044.30 sq. mtrs. (20274.5 L.

mtrs.) equivalent to 1763 k.g. of Sort No. 319 fine Dyed Mercerised Cambric, under seizure, from which rags have been obtained in a manner

otherwise than as provided by law. The Collector also passed order directing the petitioner to pay duty at the appropriate rate prevalent at the

material time on the original pieces of cotton fabrics measuring 115113-04 sq. mtrs. (or 129340.5 L. mtrs.) (equivalent to Kg. 11247) of Sort No.

319 from which ''rags'' had been obtained in a manner otherwise than as provided by law.

The petitioner carried the matter in appeal before the Central Board of Excise & Customs. There also the petitioner lost. The order passed by

the Board of Central Excise & Customs dated January 8, 1975 is produced at Annexure ''E'' to the petition. However, the Board held that about

2% of the total production of fabrics of each of the two varieties (i.e. No. 319 & 315) be taken as genuine rags and it should be allowed free of

duty. Having regard to the facts and circumstances of the case, in respect of the entire Sort No. 319, the Board directed that the demand of duty

be reduced by 2% and in case of Sort No. 315, the Board directed that the demand for duty be reduced by 5%. Subject to the aforesaid

modifications, the Board rejected the appeal. It appears that the petitioner carried the matter in revision before the Central Government. There also

the petitioner has lost.

Legality and validity of the aforesaid orders have been challenged by the petitioner by filing this petition. The facts in brief may be stated :

The petitioner is a textile mill manufacturing textile goods liable to excise duty. On receipt of information that the petitioner company was

resorting to the deliberate cutting of Sort No. 319 of fine dyed mercerised Cambric in the rags, the officers of S.R.P. (Prev.) Group, Ahmedabad

visited the unit of the petitioner Mill Company on May 6, 1972. It was noticed that cloth of Sort No. 319 though manufactured since 1971, was

not at all packed as sound sub-standard or even fents, but the entire production was entered in the record as ''rags'' and was packed and cleared

as ''rags'' only. A visit to the B.S.R. showed that there was only one bale of rags of the above sort in balance which was got opened and the

contents were examined. The bale contained rages of Sort No. 319 of fine dyed Mercerised Cambric of uniform length of 70 cms. A huge stock

of the above Sort was also found in the stamping section. Some of these pieces were already marked a ''rags'' while the other were in the process

of being so marked. All pieces were cut to a uniform size of 70 cms. When the visit was made by the officers of the S.R.P. (Prev.), an employee of

the petitioner Mill Company, Shri Damani, was present. He was asked to explain as to why there was no packing of sound, sub-standard of fents

in Sort No. 319 and why the entire sort was cut into rags of a uniform size of 70 cms. Shri Damani could not render any plausible explanation

except that this was done because the cloth of Sort No. 319 was damaged and because of 70 cms. were easily marketable. The officer of the

Central Excise reasonably believed that there had been deliberate and unjustified cutting of sound cloth of the said Sort, into rags with a view to

evading payment of duty. Such attempts were also found in respect of the cloth manufactured as Sort No. 315. As stated hereinabove, the

appropriate officer of the excise department issued notice and the petitioner appeared therein and the petitioner carried the matter in revision upto

the Government of India and lost.

The learned counsel for the petitioner submits that as per the provisions of Rule 9 (as it then stood and as it applied to the proceedings) of the

Central Excise Rules, 1944, liability to pay excise duty arises only at the time of removal of the goods and not before. Even though it may be taken

as proved that the petitioner had stamped the goods in question as ''rags'' deliberately, then also the stage of accrual of liability to pay excise duty

had not reached. The liability to pay excise duty would arise only at the point of removal of the goods. Therefore, in his submission, as far as the

goods seized are concerned, the order passed by the respondent authorities should be quashed and set aside.

It is fairly conceded by the learned counsel for the petitioner that this point was not raised before the departmental authorities. This point is being

raised for the first time in this petition. Even so, we may examine the argument urged by the learned counsel for the petitioner. The records disclose

that from December 1971 onwards upto June 20, 1972 the malpratice of evading the excise duty was being practiced by the petitioner Company.

The search was made some time in the month of May, 1972. The previous conduct of the petitioner clearly shows that sound second cloth was

being converted into rags in order to evade payment of excise duty. Therefore, the respondent authorities were justified in drawing inference in

respect of the goods which were seize and which were marked as ''rags'' though the same were not rags. In above view of the matter, the

contention raised by the learned counsel for the petitioner cannot be accepted.

The learned counsel for the petitioner submits that what the petitioner removed from the factory premises were rags and not sound cloth. In the

factory premises sound cloth might have been converted into rags or damaged or sub-standard cloth. Therefore, in his submission, the product

which was being removed at the factory gate would be chargeable for excise duty and not which was lying in the factory premises. In support of

the aforesaid submission reliance is placed on Section 4 of the Central Excise and Salt Act, 1944, read with Rule 9 of the Central Excise Rules,

1944. The contention cannot be accepted for the simple reason that the excise duty is leviable on manufactured goods. Removal of articles so

manufactured at the factory gate is the point of time at which assessable value of the article is being determined and that is the point of which excise

duty is liable to be recovered. The event of manufacture of an article and the point at which the article is removed from the factory gate are

altogether two different things. In the case of Calico Mills v. Union of India reported in 24 (1) GLR page 1, Full Bench of this High Court has

observed in para 18 of the judgment as follows :-

Excise Duty is payable on manufacture (at the time of clearance since the rules so provide and yet it is linked to manufacture of the article), not to

its sale. Even if the manufacture does not sell the goods, he has to pay excise duty.

Excise duty is an indirect tax. The manufacturer passes on the burden of the same to the purchaser. As held by Supreme Court in the case of

R.C. Jall Vs. Union of India (UOI), , excise duty may be recovered at any convenient stage and not necessarily at the initial stage from the

manufacturer. In the case of R.C. Jall (supra), excise duty was sought to be recovered from the consignee, but it was linked to the manufacture of

the article in question. Therefore it retained the character of excise duty, and though it was sought to be recovered from the consignee it was

considered to be excise duty. In this view of the matter, what is to be seen is : what the petitioner has manufactured ? This is material. After

manufacturing particular articles if the petitioner again manipulates the articles and converts the same into different types of article with a view to

evade the excise duty, the petitioner is not absolved from paying the duty on the articles originally manufactured. It is even conceded by the learned

counsel for the petitioner that the petitioner had manufactured sound cloth and had not manufactured damaged, sub-standard cloth which can be

called rags. Therefore, once it is found that the petitioner manufactured sound cloth, the petitioner had become liable to pay duty on the product

manufactured by it. In the instant case it was a device adopted by the petitioner to convert sound cloth manufactured by it into rags by cutting the

same into pieces of shorter length. The petitioner knew that which was being removed out of the factory premises was not rags, but was sound

cloth having outward appearance of rags. Rags were not manufactured by the petitioner. Only with a view to evade payment of excise duty, a

device was adopted by the petitioner. Therefore the contention raised by the learned counsel for the petitioner by referring to the provisions of

Section 4 of ''the Act'' read with Rule 9 of the Rules has also no merits.

No other contention is raised.

There is no substance in the petition. Hence rejected. Rule discharged. Ad-interim relief granted earlier stands vacated.