Case: S.L. Kirloskar & Others Vs. Union of India & Others

M.L. PENDSE, J.The short question which falls for determination in this petition filed under Article 226 of the Constitution of India is whether Directors and Officers of a Public Limited Company can be made liable for levy of penalty under Rule 9(2) and Rule 173Q(1) of the Central Excise Rules, 1944. Only few facts are required to be stated to appreciate the grievance of the petitioners.The petitioners are Directors/Executives of Kirloskar Brothers Limited which is a Public Limited Company registered under the Companies Act. The Company is engaged in manufacturing activities and, inter alia, manufactures Hermetic Compressors which are liable for payment of excise duty under Central Excise and Salt Act, 1944. On January 15, 1986, the Collector of Central Excise and Customs, Pune served show cause notice upon the Company and the petitioners to explain why penalty should not be imposed under Rule 9(2) and Rule 173Q(1) of the Central Excise Rules. The notice, inter alia, recites that the Company had contravened the provisions of Rule 173(C)(1) of the Rules by suppressing and failing to declare in the price list full particulars of the value realised in respect of clearance of Hermetic Compressors manufactured and cleared during January 1, 1981 and ending with November 30, 1985. The notice further recites that the Company and the Directors and Executives have contravened the provisions of Rule 173F read with Rule 9(1), Rule 173G(2) of the Central Excise Rules, 1944 by clearing excisable goods without correctly determining and paying the duty liability thereon. The notice further recites that the Company and all Directors and employees mentioned in the show cause notice are called upon to explain to the Collector of Central Excise, Pune, why penalty should not be imposed and as to why Central Excise duty amounting to Rs. 5,43,52,819.14 should not be recovered from the Company. The petition is filed by the Directors and the Executives to challenge the service of show cause notice.2.Shri Andhyarujina, learned Counsel appearing on behalf of the petitioners, submitted that the Collector of Central Excise had no jurisdiction to serve show cause notice upon the petitioners as the petitioners are neither manufacturers nor producers of excisable goods cleared from the factory between January 1, 1981 and November 30, 1985. The learned Counsel urged that the notice is issued on the assumption that the Directors and the Executives of the Public Limited Company are the manufacturers and are liable to payment of excise duty under section 3 of the Central Excise Act. The submission is correct and deserves acceptance . Section 3 of the Central Excise Act is a charging section and provides that there shall be levied and collected duties of excise on all excisable goods at the rates, set forth in the Schedule to the Central Excise Tariff Act, 1985. The expression `manufacture is defined under section 2(f) of the Act and includes any process, incidental or ancillary to the completion of a manufactured product. The word `manufacture, provides section 2(f) of the Act, shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in the production or manufacture on his own account. Rule 7 in Chapter III of the Central Excise Rules provides that every person who produces, or manufactures any excisable goods, shall pay the duty leviable on such goods. Rule 9(2) then prescribes that if any excisable goods are in contravention of sub-rule (1), removed from any place specified therein, then the producer or manufacturer thereof shall pay the duty leviable on such goods upon written demand made by the proper officer, and shall also be liable to penalty. Rule 173Q provides for levy of penalty on manufacturer or producer and sub-rule (2) provides for the mode of levy and rate of penalty. Referring to these relevant provisions, Shri Andhyarujina submitted that the liability for payment of penalty is that of the manufacturer or the producer and the manufacturer of the excisable goods in the present case was Public Limited Company. The learned Counsel urged that neither the provisions of the Act, nor the rules anywhere prescribe for levy of penalty upon the Directors and the Executives of the Company. The submission is correct and deserves acceptance. The expression `manufacturer as defined under the Act makes the Company liable for payment of excise duty and the Company being a legal entity, the liability of the Company cannot be foisted on the Directors of the Company. Under the Companies Act, the affairs of the Company and the ultimate control of the Company lies with the Board of Directors and neither the Board of Directors, nor the individual Director is liable to discharge the liabilities of the Company unless the Statute so specifically provides. The reliance by Shri Andhyarujina in this connection on the decision of the Division Bench of this Court reported in 1984 Maharashtra Law Journal 117, (Suresh Tulsidas Kilachand and others v. Collector of Bombay and others), is appropriate.Shri Desai, learned Counsel appearing on behalf of the Department, submitted that though the Company is legal entity, the functions of the Company are performed in accordance with the desire of the Board of Directors and the Executives and, therefore, the Board of Directors and the Executives are liable for payment of penalty. The submission is only required to be stated to be rejected. It is impossible to accept the claim that the penal liability can be enforced against a person in absence of specific provision under the Statute. Shri Desai then referred to the provisions of Rule 209A. The submission cannot be accepted for more than one reason. In the first instance, Rule 209A was enacted with effect from April 14, 1986. Being a rule for levy of penalty, the rule cannot be construed with retrospective effect. The show cause notice, in the present case, is in respect of evasion of excise duty for the period between January 1, 1981 and November 30, 1985. Rule 209A which came on the Statute for the first time in April 1986 cannot be attracted to make Directors and Executives liable. Secondly, the rule makes any person who is in any way concerned in removing excisable goods, with the knowledge that the goods are liable for confiscation, answerable. It is not the claim of the Department in the show cause notice that any of the Directors and Executives were in any way concerned in removing the excisable goods with the knowledge that the same are liable for confiscation. In our judgment, Rule 209A has no application whatsoever to the facts of the present case and the show cause notice served on the petitioners cannot be sustained.3.Shri Desai then submitted that even assuming that the Collector of Central Excise lacked jurisdiction to serve show cause notice on the petitioners, still this Court should refrain from exercising jurisdiction under Article 226 of the Constitution and striking down the show cause notice. It was urged by the learned Counsel that the petitioners should be driven to appear before the Collector and advance their contentions and the Collector would be entitled to adjudicate whether the petitioners are liable. It is impossible to accede to the submission. This Court is bound to entertain the petition when the grievance is that the show cause notice is issued by the Collector without any jurisdiction whatsoever. An identical contention was raised before the Division Bench of this Court to which one of us (Pendse, J.) was a party, and turned down in the decision reported in 1991(52) Excise Law Times 500 (Tata Engineering and Locomotive Company Ltd. v. Union of India). It was held that the claim of the Department that the proceedings commenced with the service of show cause notice should be permitted to continue cannot be accepted when the show cause notice was issued without any jurisdiction and the show cause notice could not be sustained by reference to any of the provisions of law. In our judgment, the petitioners are entitled to relief.

Decision reasoning: 1[ds]The expression `manufacturer as defined under the Act makes the Company liable for payment of excise duty and the Company being a legal entity, the liability of the Company cannot be foisted on the Directors of the Company. Under the Companies Act, the affairs of the Company and the ultimate control of the Company lies with the Board of Directors and neither the Board of Directors, nor the individual Director is liable to discharge the liabilities of the Company unless the Statute so specifically provides. Thereliance by Shri Andhyarujina in this connection on the decision of the Division Bench of this Court reported in 1984 Maharashtra Law Journal 117, (Suresh Tulsidas Kilachand and others v. Collector of Bombay and others), isthe first instance, Rule 209A was enacted with effect from April 14, 1986. Being a rule for levy of penalty, the rule cannot be construed with retrospective effect. The show cause notice, in the present case, is in respect of evasion of excise duty for the period between January 1, 1981 and November 30, 1985. Rule 209A which came on the Statute for the first time in April 1986 cannot be attracted to make Directors and Executives liable. Secondly, the rule makes any person who is in any way concerned in removing excisable goods, with the knowledge that the goods are liable for confiscation, answerable. It is not the claim of the Department in the show cause notice that any of the Directors and Executives were in any way concerned in removing the excisable goods with the knowledge that the same are liable for confiscation. In our judgment, Rule 209A has no application whatsoever to the facts of the present case and the show cause notice served on the petitioners cannot be sustained.This Court is bound to entertain the petition when the grievance is that the show cause notice is issued by the Collector without any jurisdiction whatsoever. An identical contention was raised before the Division Bench of this Court to which one of us (Pendse, J.) was a party, and turned down in the decision reported in 1991(52) Excise Law Times 500 (Tata Engineering and Locomotive Company Ltd. v. Union of India). It was held that the claim of the Department that the proceedings commenced with the service of show cause notice should be permitted to continue cannot be accepted when the show cause notice was issued without any jurisdiction and the show cause notice could not be sustained by reference to any of the provisions of law. In our judgment, the petitioners are entitled to relief.