Case: Messrs J. K. Cotton Spinning and Weaving Mills Limited and Another Vs. Union of India and Others

2. Appellant 1, J.K. Cotton Spinning & Weaving Mills Limited, has a composite mill wherein it manufactures fabrics of different types. In order to manufacture the said fabrics, yarn is obtained at an intermediate stage. The yarn so obtained is further processed in an integrated process in the said composite mill of appellant 1 for weaving the same into fabrics. The appellants do not dispute that the different kinds of fabrics which are manufactured in the mill are liable to payment of excise duty on their removal from the factory. They also do not dispute their liability in respect of yarn which is also removed from the factory. It is the contention of the appellants that no duty of excise can be levied and collected in respect of yarn which is obtained at an intermediate stage and, thereafter, subjected to an integrated process for the manufacture of different fabrics. Indeed, on a writ petition of the appellants, the Delhi High Court by its judgment dated October 16, 1980 held that yarn obtained and further processed within the factory for the manufacture of fabrics could not be subjected to duty of excise. It is the case of the appellants that in spite of the said decision of the Delhi High Court, the Central Board of Excise has wrongly issued a circular dated September 24, 1980 purporting to interpret Rules 9 and 49 of the Central Excise Rules, 1944 (hereinafter referred to as the Rules) and directing the subordinate excise authorities to levy and collect duty of excise in accordance therewith. In the said circular, the Board has directed the subordinate excise authorities that "use of goods in manufacture of another commodity even within the place/premises that have been specified in this behalf by the Central Excise Officers in terms of the powers conferred under Rule 9 of the Rules, will attract duty". As the said circular was being implemented to the prejudice of the appellants, they filed a writ petition before the Delhi High Court, inter alia, challenging the validity of the circular3. During the pendency of the writ petition in the Delhi High Court, the Central Government by a Notification No. 20/82-C.E. dated February 20, 1982 amended Rules 9 and 49 of the Rules. Section 51 of the Finance Act, 1982 provides that the amendments in Rules 9 and 49 of the Rules shall be deemed to have, and to have always had the effect on and from the date on which the Rules came into force i.e. February 28, 1944. After the said amendments of the Rules with retrospective effect, the appellants amended the writ petition and challenged the constitutional validity of Section 51 of the Finance Act, 1982 and to the amendments to Rules 9 and 49 of the Rules4. The High Court came to the conclusion that Section 51 and Rules 9 and 49 of the Rules, as amended, were valid. It has, however, been held that the retrospective effect given by Section 51 will be subject to the provisions of Sections 11-A and 11-B of the Central Excises and Salt Act, 1944 (hereinafter referred to as the Act). Further, it has been held that the yarn which is produced at an intermediate stage in the mill of the appellants and subjected to the integrated process of weaving the same into fabrics, will be liable to payment of excise duty in view of the amended provisions of Rules 9 and 49 of the Rules. But the sized yarn which is actually put into the integrated process will not again be subjected to payment of excised duty for, the unsized yarn, which is sized for the purpose, does not change the nature of the commodity as yarn. The writ petition was, accordingly, allowed in part. Hence this appeal by the appellants upon a certificate granted by the High Court

Reasoning: 32. Under Section 11-A(1) the excise authorities cannot recover duties not levied or not paid or short-levied or short-paid or erroneously refunded beyond the period of six months, the proviso to Section 11-A not being applicable in the present case. Thus although Section 51 of the Finance Act, 1982 has given retrospective effect to the amendments of Rules 9 and 49, yet it must be subject to the provision of Section 11-A of the Act. We are unable to accept the contention of the learned Attorney General that as Section 51 has made the amendments retrospective in operation since February 28, 1944, it should be held that it overrides the provision of Section 11-A. If the intention of the legislature was to nullify the effect of Section 11-A, in that case, the legislature would have specifically provided for the same. Section 51 does not contain any non-obstinate clause, nor does it refer to the provision of Section 11-A. In the circumstances, it is difficult to hold that Section 51 overrides the provision of Section 11-AIn our view Section 51 does not, in any manner, affect the provision of Section 11-A of the Act. In the absence of any specific provision overriding Section 11-A, it will be consistent with rules of harmonious construction to hold that Section 51 of the Finance Act, 1982 insofar as it gives retrospective effect to the amendments made to Rules 9 and 49 of the Rules, is subject to the provision of Section 11-AThe legislature is quite competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not really exist. It has been already noticed that the taxing event under Section 3 of the Act is the production or manufacture of goods and not removal. The explanations to Rules 9 and 49 contemplate the collection of duty levied on the production of a commodity at an intermediate stage of an integrated process of manufacture of another commodity by deeming such production or manufacture of the commodity at an intermediate stage to be removal from such place or premises of manufacture. The deeming provisions are quite consistent with Section 3 of the Act. As observed by the Federal Court in Boddu Paidanna case [AIR 1942 FC 33] there is in theory nothing to prevent the central legislature from imposing a duty of excise on a commodity as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed or destroyed or given away. It is for the convenience of the taxing authority that duty is collected at the time of removal of the commodity. There is, therefore, nothing unreasonable in the deeming provision and, as discussed above, it is quite in conformity with the provision of Section 3 of the Act. The contention that the amendments to Rules 9 and 49 are ultra vires clause (b) of sub-section (4) of Section 4 of the Act, is without substance and is overruled47. In the instant case, the appellants are liable to pay excise duty on the yarn which is obtained at an intermediate stage and, thereafter, further processed in an integrated process for weaving the same into fabrics. Although it has been alleged that the yarn is obtained at an intermediate stage of an integrated process of manufacture of fabrics, it appears to be not so. After the yarn is produced it is sized and, thereafter, subjected to a process of weaving the same into fabrics. Be that as it may, as we have held that the commodity which is obtained at an intermediate stage of an integrated process of manufacture of another commodity, is liable to the payment of excise duty, the yarn that is produced by the appellants is also liable to payment of excise duty. In our view, the High Court by the impugned judgment has rightly held that the appellants are not liable to pay any excise duty on the yarn after it is sized for the purpose of weaving the same into fabrics. No distinction can be made between unsized yarn and sized yarn, for the unsized yarn when converted into sized yarn does not lose its character as yarn