ivil Appeal No 4080 of 1988
From the Judgment and Order dated 18388 of the Customs Excise and Gold Control Appellate Tribunal New Delhi in Appeal No EDSB120184 C V Lakshmikumaran NM Popli and VJ Francis for the Appellant
AK Ganguli K Swamy TVSN Chari and P Parmeswa ran for the Respondent
The appellants at all relevant times were manufacturing agarbaties dhoop sticks dhoop coil dhoop powder falling under Tariff Item No 68 of the erstwhile Central Excise Tariff
The relevant period involved in the present Civil Appeal is from the year 1979 to 1983 84
The appellants claimed exemption under notification No 5575 dated 1st March 1975
By the said notification the Central Govern ment had exempted goods of the description in the Schedule annexed to the notification and falling under Tariff Item 68 of the First Schedule to the Act from the whole of duty of excise leviable thereon
In the serial No 8 of the Schedule to the said notification Handicrafts  were listed
It is therefore clear that handicrafts  were fully exempt from payment of duty of excise according to the appellants
Under the notification No 11178 dated 9th May 1978 the appellants were exempted from 876 licensing control
That is the case of the appellants
The provision requiring a manufacturer to take out a licence is controlled by Rule 174 of the Central Excise Rules 1944
The relevant provision of Rule 174 at the relevant time provided inter alia as follows Rule 174
Persons requiring a licence Every manufacturer trader or person hereinafter mentioned shall be required to take out a licence and shall not conduct his business in regard to such goods otherwise than by the authority and subject to the terms and conditions of a licence granted by a duly authorised officer in the proper Form It is the case of the appellants that by this notifica tion all goods which were exempt from the whole of duty of excise leviable thereon unconditionally were exempted from the operation of Rule 174
The appellants were manufacturing dhoop sticks coil and powder which the appellants contended before the Tribunal were handicrafts under notification No 5575 and as such were exempt from licensing control under notification No 11178
It is therefore necessary at this stage in view of the contentions raised in this appeal to refer to the notifications
By first notification ie notification No 5575 in exercise of the powers conferred by sub rule 1 of rule 8 of the Central Excise Rules 1944 the Central Government had exempted goods of the description specified in the Schedule annexed thereto and falling under Item No 68 of the First Schedule to the Act from the whole of the duty of excise leviable thereon and as mentioned hereinbefore Item No 8 of the Schedule annexed to the notification included among the exempted goods Handi crafts 
The second notification ie notification No 11178 CE dated 9th May 1978 the Central Government ex empted from the operation of rule 174 of the said Rules inter alia all goods that are exempt from the whole of the duty of excise leviable thereon
unconditionally
The effect of this notification was that manufacture of such goods were exempt from the operation of rule 174 of the said Rules
As a result it was not necessary to take out a licence as enjoined by rule 174
The appellants had indicat ed the process of manufacture of dhoop sticks coil and powder before the Tribunal and the process was as follows 1
The various ingredientsraw materials like perfumes essential oils natural oils and other raw materials are first mixed in specif ic proportions by manual labour
877 2
These raw materials along with jigget and saw dust after serving by hand are mixed in a barrel with a stirrer with hand and made into a paste
This paste is kneaded in the kneading machine operated by power
This paste is put by hand in the extruder
The extruder extrudes the paste in the form of needles with the aid of power
As the paste is extruded from the extruder it is collected on a wooden tray which is of a particular size
As it is collected on the tray it is cut on both sides to the accurate size by hand
The thin long incense is then transferred by hand from the individual trays of long big tray by hand
After transferring it is properly arranged by hand in a consolidated manner on the long big tray
Another tray which has four slits called the cutting tray is placed on top of the long tray with the incense
After placing the cutting tray a hand roller cutter is rolled along the slits of the cutting trays to cut the incense to the re quired sizes
The extra length or width of the incense on the tray is then removed by hand
The cut incense is then transferred to a drying tray by hand
The incense is dried by stocking the trays in the drying yard
The dried incense is broken at the cut ends
The ten incense sticks are inserted into the packet
878 16
The incense packets are first punched with an eyelet
Then twelve packets are wrapped in a cellophone wrapper
 The revenue had issued trade notices indicating that agarbaties were handicrafts and were eligible to the exemp tion contained in the notification No 5575 dated 1st March 1975
Our attention was drawn by Shri V Lakshmi Kumaran appearing for the appellant to the trade notice issued on 10th October 1977 which read as follows PUNE TRADE NOTICE NO
2581977 NO 3TI 68 1977 DT
181077 Agarbaties are exempt under Notfn
5575 Attention of the trade is invited to this Collectorate Trade Notice No 1791975 No 4TI 681975 dated 41075 on the above subject
The issue has been reconsidered and it has been advised that Agarbaties are handicrafts and would be eligible to the exemption contained in the notification No 55 75 CE dated the 1st March 1975 as amend ed
 He also drew our attention to the certificate furnished by the Basic Chemicals Pharmaceuticals  Cosmetics Export Promotion Council which stated as follows This is to certify that Dhoop Sticks Incense Cubes and Cone Coils Joss Sticks are agar baties in different physical forms
The ingre dients as well as end use for Agarbaties Dhoop Sticks Incense cubes and Cone coils joss sticks are one and the same
Government of India has therefore categorised Dhoop Sticks Incense cubes and cone coils joss sticks as agarbaties and thus eligible for the same rate of export incentives
 It was contended before the Tribunal on behalf of the appellants that dhoop sticks had been recognised by the Indian Handicrafts Board as handicrafts and that these were nothing else but agarbaties
879 As indicated hereinbefore Basic Chemicals Pharmaceuticals and Cosmetics Export Promotion Council had also indicated that dhoop sticks incense cubes and cone coils joss sticks are agarbaties in different physical forms and that the end use of these and the ingredients used therein were one and the same and for that reason these had been made eligi ble for the benefit of export incentives as agarbaties
Learned counsel for the appellants submitted that in the report on the Marketing of Handicrafts under the title Survey of Indian Handicrafts sponsored by the All India Handicrafts Board which was brought out by Indian Coopera tive Union agarbaties were mentioned which according to counsel indicated that these were recognized as handi crafts
A letter was placed before the Tribunal which was issued by the Deputy Director All India Handicrafts Board functioning under the Ministry of Commerce Department of Export Production which had certified that the agarbaties were the products of the Indian Handicrafts Board Ministry of Commerce
Certain notifications were also drawn attention to of the Tribunal which indicated that agarbaties were handicrafts eligible for exemption under notification No 5575
It was therefore contended that dhoop sticks coil and powder were agarbaties and agarbaties were accepted as handicrafts by various authorities including the Central Government and mere use of power in the manufacture of these did not bar them from being called as handicrafts
It was further contended that in any event there was no warrant in invoking longer time limit of five years for raising the demand and if at all demand should be raised it should be for a period of six months reckoned from the date of six months prior to the issue of the show cause notice
In those circumstances it was submitted that the appellants should not be made liable beyond the period of six months from the date of issue of the show cause notice
The Tribunal howev er referred to the definition of the term handicrafts  given in the Concise Oxford Dictionary 7th Edition which stated as follows Manual skill manual art or trade or occupa tion man skilled in a handicraft Therefore in order to be handicrafts the Tribunal proceeded on the basis that it should be the result of manual skill
But the respondent before the Tribunal pleaded that the raw materials for the dhoop are kneaded with the aid of power and after kneading the same are extruded and the manual work that was done in the process was only in feeding of the raw materials by hand and later in the cut ting of the sticks to the desired length
The distinction between handicrafts and 880 those which are machine made would be clear from the defi nition adopted by UNCTAD
The same reads as follows Some good may
be produced partly by machine and partly by hand ie a dress made up by hand from machine made cloth perhaps with additional hand embroidery or other decora tions 
 in such cases a product should be regarded as hand made or handicrafts if the essential character of the product in its finished form is derived from the hand made  aspect of its production In the Import Policy of 1984 85 handicrafts and agar baties and dhoop figured under a Heading apart from handi crafts and stated that dhoop and agarbaties had been listed under traditional item in Appendix 17 at Serial No V under Group Heading Toiletry and Perfumery while the handicrafts had been given separately in that Policy and this envisaged the handicraft to be manufactured by hand
General Note I against the entry Handicrafts  in the Policy Book stated as follows Articles which are classifiable elsewhere in this policy will be deemed to be Handicrafts  falling in this group only if such articles besides being made by hand have some artistic or decorative value they may or may not possess functional utility value in addition
Artistic or decorative value of the article exported need not necessarily come out of any art work engraving or decoration done on the article but the very form shape or design of the article could also be artistic and sugges tive of the fact that the article is primarily meant for decorative and not for utility purposes
 After analysing the findings and the trade notices and relying on the decision oil this Court in MS Company Private Limited vs Union of India SC the Tribunal in the light of the definition of handicrafts in the Encyclopaedia Britannica came to the conclusion that in the manufacture of a product skill of the worker and the use of hand are two pre requisites for a product to qualify as a handicraft
In the Encyclopaedia Britannica handicraft has been defined as follows Occupation of making by hand usable products graced with visual appeal
Handicrafts encom pass activities that 881 require a broad range of skills and equipment including needle work lace making weaving printed textile decoration basketry pot tery ornamental metal working jewelling leather working wood working glassblowing and the making of stained glass
 It was found by the Tribunal that raw materials were mixed by hand and the first essential procedure in the manufacture of dhoop etc is kneading of the raw materials and the next essential stage is the formation of the dhoop into sticks or coils
Both these processes were carried out by the aid of power
Only cutting of the sticks to the desired length was stated to be by hand
It was not the case of the appellant that the formation of the dhoop sticks or coils etc there had been use of the skill of the human hand to give the dhoop its essential character
But the Tribunal found that it was difficult to accept that these were handicrafts merely because some authorities have chosen to treat agarbaties as handicrafts
Therefore the Tribunal agreed with the Collector that these were not handicrafts
In that view of the matter the Tribunal upheld the order of the Collector on this point and held that these were dutia ble
In view of the evidence examined by the Tribunal and in the light of the well settled principle and the background of the definition of handicrafts it appears to us that the Tribunal was right in coming to the conclusion that only a very small portion of required work was done by hand
The main part of the manufacture of agarbaties etc
was done with the aid of power
It was the machine that produced predominantly the end product
In that view of the matter we are of the opinion that the Tribunal was right in holding that agarbaties were not handicrafts
In coming to the aforesaid conclusion the tribunal had considered all rele vant materials and records and applied the correct princi ples of law
These findings of the tribunal on this aspect are unassailable
In the premises when the appeal was filed and came up before this Court for hearing on 2nd March 1989 on examination of these materials this Court was satisfied that this contention of the appellant cannot be accepted and agarbaties were not handicrafts
It was howev er further held by the Tribunal that the revenue was enti tled to levy tax for a period of five years prior to the issue of show cause notice and not six months pursuant to rule 92 of the Central Excise Rules
The relevant portion of rule 92 provides as follows 2 If any excisable goods are in contraven tion of subrule 1 deposited in or removed from any place specified therein the produc er or manufacturer thereof shall pay 882 the duty leviable on such goods upon written demand made within the period specified in section 11A of the Act by the proper officer whether such demand is delivered personally to him or is left at his dwelling house and shall also be liable to a penalty which may extend to two thousand rupees and such goods shall be liable to confiscation
 It may be mentioned that rule 91 of the said Rules stipulated that no excisable goods shall be removed from any place where they are produced except in the manner provided in the rules
Therefore the question that arises in this appeal is whether section 11 A of the Act applies or not
The relevant provisions of section 11 A are as follows 11 A Recovery of duties not levied or not paid or shortlevied or short paid or errone ously refunded
1 When any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded a Central Excise Officer may within six months from the relevant date serve notice on the person chargeable with the duty which has not been levied or paid or which has been short levied or short paid or to whom the refund has erroneously been made requiring him to show cause why he should not pay the amount specified in the notice Provided that where any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded by reason of fraud collusion or any wilful misstatement or suppression of facts or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty by such person or his agent the provisions of this sub section shall have effect as if the words Central Excise Officer the words Collector of Central Excise and for the words six months the words five years were substi tuted
Explanation
Where the service of the notice is stayed by an order of a Court the period of such stay shall be excluded in computing the aforesaid period of six months or five years as the case may be Shri V Lakshmi Kumaran learned counsel for the appel lant drew our attention to the observations of this Court in Collector of 883 Central Excise Hyderabad vs Ms Chemphar Drugs and Lini ments Hyderabad 1989 2 SCC 127 where at page 131 of the report this Court observed that in order to sustain an order of the Tribunal beyond a period of six months and up to a period of 5 years in view of the proviso to sub section 1 of section 11 A of the Act it had to be established that the duty of excise had not been levied or paid or short levied or short paid or erroneously refunded by reasons of either fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Act or Rules made thereunder with intent to evade payment of duty
It was observed by this Court that some thing positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or delib erate withholding of information when the manufacturer knew otherwise is required before it is saddled with any liabil ity beyond the period of six months had to be established
Whether in a particular set of facts and circumstances there was any fraud or collusion or wilful misstatement or sup pression or contravention of any provision of any Act is a question of fact depending upon the facts and circumstances of a particular case
The Tribunal however had held con trary to the contention of the appellants
The Tribunal noted that dhoop sticks are different products from agar baties even though they belonged to the same category and the Tribunal was of the view that these were to be treated differently
Therefore the clarification given in the context of the agarbaties could not be applicable to dhoop sticks etc and the Tribunal came to the conclusion that inasmuch as the appellant had manufactured the goods without informing the Central Excise authorities and had been remov ing these without payment of duty these would have to be taken to attract the mischief of the provision of rule 92 and the longer period of limitation was available
But the Tribunal reduced the penalty
Counsel for the appellants contended before us that in view of the trade notices which were referred to by the Tribunal there is scope for believ ing that agarbaties were entitled to exemption and if that is so then there is enough scope for believing that there was no need of taking out a licence under rule 174 of the said Rules and also that there was no need of paying duty at the time of removal of dhoop sticks etc
Counsel further submitted that in any event apart from the fact that no licence had been taken and for which no licence was required because the whole duty was exempt in view of notification No 11178 referred to hereinbefore and in view of the fact that there was scope for believing that it was exempt under Schedule annexed to the first notification ie 5575 being handicrafts the appellants could not be held to be guilty of the fact that excise duty had not been paid or short levied or short paid or erron 884 eously refunded because of either any fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Act or Rules made thereunder
These ingredients postulate a positive act
Failure to pay duty or take out a licence is not necessarily due to fraud or collu sion or wilful misstatement or suppression of facts or contravention of any provision of the Act
Suppression of facts is not failure to disclose the legal consequences of a certain provision
Shri Ganguly appearing for the revenue contended before us that the appellants should have taken out a licence under rule 174 of the said Rules because all the goods were not handicrafts and as such were not exempted under notification No 5575 and therefore the appellants were obliged to take out a licence
The failure to take out the licence and thereafter to take the goods out of the factory gate without payment of duty was itself sufficient according to Shri Ganguly to infer that the appellants came within the mischief of section 11 A of the Act
We are unable to accept this position canvassed on behalf of the revenue
As mentioned hereinbefore mere failure or negli gence on the part of the producer or manufacturer either not to take out a licence in case where there was scope for doubt as to whether licence was required to be taken out or where there was scope for doubt whether goods were dutiable or not would not attract section 11 A of the Act
In the facts and circumstances of this case there were materials as indicated to suggest that there was scope for confusion and the appellants believing that the goods came within the purview of the concept of handicrafts and as such were exempt
If there was scope for such a belief or opinion then failure either to take out a licence or to pay duty on that belief when there was no contrary evidence that the producer or the manufacturer knew that these were excisable or required to be licenced would not attract the penal provisions of section 11 A of the Act
If the facts are otherwise then the position would be different
It is true that the Tribunal has come to a conclusion that there was failure in terms of section 11 A of the Act
Section 35 L of the Act inter alia provides that an appeal shall lie to this Court from any order passed by the Appellate Tribunal relating among other things to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment
Therefore in this appeal we have to examine the correctness of the decision of the Tribunal
For the reasons indicated above the tribunal was in error in applying the provisions of section 11 A of the Act
There were no materials from which it could be inferred or established that the duty of excise had not been levied or paid or short levied or short paid or erroneously refunded by reason of fraud collusion or any wilful misstatement or suppression of facts or 885 contravention of any of the provisions of the Act or of the rules made thereunder
The Tribunal in the appellate order has however reduced the penalty to Rs5000 and had also upheld the order of the confiscation of the goods
In view of the fact that the claim of the revenue is not sustainable beyond a period of six months on the ground that these dhoop sticks etc
were not handicrafts entitled to exemption we set aside the order of the tribunal and remand the matter to the tribunal to modify the demand by confining it to the period of six months prior to issue of show cause notice and pass consequential orders in the appeal on the question of penalty and confiscation
The appeal is allowed to the extent indicated above and the matter is therefore remand ed to the tribunal with the aforesaid directions
This appeal is disposed of accordingly
RSS Appeal allowed


Summary:
D executed a document in favour of M hypothecating an eight annas share in a village for the purpose of discharging a debt of Rs 29496 payable by him to Al
In respect of this property there was a pre existing think in favour of j for a period of 9 years under which D took Rs 2205 as peshgi money without interest and the annual rent was fixed at RS
2205
The document provided that i interest at 12 per cent
per month was payable on the sum Of Rs 29496  ii luring the subsistence of the thika M would receive the rent from j and appropriate Rs 1769 12 o towards interest and pay Rs 435 4 o as rent to D  iii after the expiry of the thika M would take physical possession of the land and appropriate the produce towards interest and Pay Rs 435 4 o as rent to D iv on the expiry of the thika M would repay the peshgi amount of Rs 2205 to j and this sum was added to principal amount due  v on the expiry of 15 years or after the extended period D would repay the entire principal amount vi and the property was given as security for the amount payable by D
The respondents who are successors of D instituted a suit for redemption on the basis that the transaction was a usufructuary mortgage for rendition of accounts and for recovery of surplus profits
The appellant successor of M contended that the suit for redemption was not maintainable as the transaction was not a mortgage but a lease and that even if it was a mortgage there was no statutory liability to render accounts as the document provided that the receipts were to be taken in lieu of interest and the case was governed by section 77 Transfer of Property Act  Held that the transaction was a mortgage and not a lease
The guiding rule of construction is that the intention of the parties must be looked into and that once there is debt with security of land for its redemption the arrangement is a mortgage by whatever name it is called
Held further that there was a contract between the mort gagor and the mortgagee within the meaning Of section 77 Transfer of Property Act to the effect that the receipts from the mortgaged property be taken in lieu of interest and consequently the mortgagee was not liable to render accounts
The stipulation 1086 in the document for payment of Rs 435 4 0 to the mortgagor was a personal obligation of the mortgagee and he had a right to take the entire receipts from the land in lieu of interest
Though the rate of interest is stated as per cent
per month it was mentioned to enable the parties to approximately fix the amount to be appropriated by the mortgagee from and out of the rent received from the thikadar
The mere fact of the mention of the rate of interest could not make section 77 inapplicable in view of the clearly expressed intention of the parties
Pandit Bachchu Lal vs Chaudhri Syed Mohammad Mah 1033  referred to