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Ambuja Synthetics Mills v. Union Of India
Factual and Procedural Background
This group of petitions raises a common question and was disposed of by a common judgment. The petitions challenge the constitutional validity of Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944 (as substituted by Notification No. 18/99-CE (NT.) dated 28.2.1999). The specific provision in dispute prescribes imposition of a penalty equal to the amount of duty outstanding from an independent processor of textile fabrics if such person fails to pay the amount of duty or any part thereof by the specified date. The Court set out the text of Rule 96ZQ (procedural provisions applicable to independent processors of specified textile fabrics), identified sub-rules (including the advance payment obligation under sub-rule (3), interest at 36% per annum under clause (i) of sub-rule (5), and penalty under clause (ii) of sub-rule (5)), and noted that the petitions challenge the validity of the penalty provision as being ultra vires the Constitution.
Legal Issues Presented
- Whether Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944 — which prescribes a penalty equal to the amount of duty outstanding (or Rs. 5,000, whichever is greater) for independent processors who fail to pay duty by the specified date — is constitutionally valid or ultra vires the Constitution.
- Whether the language of the Rule (in particular the use of words such as "he shall be liable to") mandates imposition of the full penalty without discretion, or whether the assessing authority retains discretion (including the ability to impose less than the maximum penalty or to consider mitigating circumstances).
Arguments of the Parties
Petitioners' Arguments
- The petitioners contended that Rule 96ZQ(5)(ii) is ultra vires the Constitution (i.e., constitutionally invalid) insofar as it prescribes a penalty equal to the duty outstanding.
- Counsel for petitioners relied on the decision in Hindustan Steel Ltd. v. State of Orissa (AIR 1970 SC 253), submitting that a penalty cannot be imposed merely on account of failure.
Revenue's Arguments
- The Revenue submitted that there is a source of power in the statute for the Rule, and therefore the contention that there is no source cannot be accepted.
- The Revenue argued that the phrase "he shall be liable to" in sub-rule (5) means that the penalty must be imposed as specified in clause (ii) of sub-rule (5), and the assessing officer has correctly imposed the penalty accordingly.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| State of Madhya Pradesh v. Bharat Heavy Electricals, 1998 (99) ELT 33 (SC) | The Apex Court addressed a challenge to a heavy penalty provision and held that certain statutory words (e.g., "shall be presumed") should be read as creating a rebuttable presumption; the penalty provision was to be understood as stating a maximum and the assessing authority retained discretion to impose a lesser penalty based on facts and circumstances. | The court applied the analogy from this decision to Rule 96ZQ(5)(ii), concluding it is difficult to sustain the contention that the Rule is ultra vires and indicating that the Rule should be read to permit discretion (i.e., penalty as a maximum and the possibility of lesser imposition or rebuttal of any presumption). |
| Sodhi Transport and Anr. v. State of U.P. etc., 1986 (1) SCR 939 | The decision was cited for the proposition that the words "shall presume" are used in Indian jurisprudence to convey a rebuttable presumption, referring to Section 4 of the Indian Evidence Act and long judicial usage. | The court relied upon the reasoning in Sodhi Transport to support the view that statutory presumptions should be read as rebuttable; this supports construing analogous language so as to permit the affected person to rebut the presumption and for the authority to exercise discretion. |
| Hindustan Steel Ltd. v. State of Orissa, AIR 1970 SC 253 (ECRC 321 (SC)) | Authority for the proposition that a penalty should not be automatically imposed merely because of a failure, with relevant observations (noted in paragraph 7 of that decision) that restrain automatic penal consequences for mere failures. | The petitioners were permitted to rely on this decision before the assessing authority; the Court expressly left it open for petitioners to present the Hindustan Steel ratio to the authority when the authority reconsiders the imposition of penalty. The Court did not itself decide the applicability of retrospective effect in this matter. |
Court's Reasoning and Analysis
The Court first examined the plain text of Rule 96ZQ and identified the consequences of non-payment by the specified date: (i) liability to pay outstanding duty with interest at 36% per annum (clause (i) of sub-rule (5)), and (ii) liability to pay a penalty equal to the outstanding amount of duty or Rs. 5,000, whichever is greater (clause (ii) of sub-rule (5)). The Court noted the differing purposes of clause (i) and clause (ii): the interest provision operates as a compensatory measure for loss to revenue, while the penalty provision is intended to have a deterrent effect on taxpayers.
The Court observed that clause (ii) itself contains no guidelines indicating whether the stated amount is a minimum or maximum, nor does it contain internal guidance on the exercise of discretion. The Revenue's argument — that the phrase "he shall be liable to" compels imposition of the penalty as specified — was considered.
The Court relied on precedent, in particular State of Madhya Pradesh v. Bharat Heavy Electricals, and the reasoning in Sodhi Transport about statutory presumptions being rebuttable, to conclude that analogous statutory language should be read to permit rebuttal and discretion. The Apex Court in the cited precedent had held that a presumption placed by statute should be construed as rebuttable and that penalty provisions could be read as stipulating the maximum amount, with the assessing authority possessing discretion to levy a lesser penalty depending on facts and circumstances.
Applying that analogy, the Court found it difficult to accept the petitioners' submission that Rule 96ZQ(5)(ii) is ultra vires on the ground that it mandates an unreviewable, mandatory penalty. The Court directed that the Rule be read in the manner indicated by the precedents — allowing the authority to consider mitigating circumstances, rebuttable contentions, and to exercise discretion in imposing penalty (i.e., treating the stated amount as a maximum where appropriate).
The Court also recognized petitioners' reliance on Hindustan Steel (that a penalty cannot be imposed merely on account of failure) and expressly allowed petitioners to bring that judgment to the attention of the assessing authority. The Court did not decide other ancillary issues (for example, retrospective effect of the Notification) and left those matters open for the authority to consider.
Holding and Implications
Holding: The petitions are allowed to the limited extent that the imposition of penalty under Rule 96ZQ(5)(ii) must be reconsidered by the assessing officer in the light of the Court's analysis and the cited Supreme Court authorities.
Direct consequences (as stated in the opinion):
- The Court directed the assessing officer (the authority which passed the Order-in-Original) to reconsider the matters insofar as the penalty is concerned, applying the approach indicated in the judgment (i.e., permitting rebuttal and exercising discretion as informed by precedent).
- The order imposing duty and the recovery of interest were expressly not disturbed by the Court.
- The petitions were allowed only to the extent stated above; the Rule was ordered to be read in the manner indicated by the Court. The Court made the rule absolute in these petitions and ordered no costs.
Broader implications:
- The Court applied existing Supreme Court guidance to interpret Rule 96ZQ(5)(ii) in a manner that preserves the assessing authority's discretion and recognizes the possibility of rebuttal of statutory presumptions. The Court did not, however, announce a new legal principle beyond applying and following the cited precedents.
- If any broader or additional legal consequences arise (for example, regarding retrospective effect of the Notification), those issues were not decided and were left open for consideration by the assessing authority.
Disposition: The petitions are allowed to the extent of directing reconsideration of penalty; the orders relating to duty and interest remain intact; Rule made absolute as to these petitions; no order as to costs.
1. This group of petitions raises a common question and therefore, all these matters are being disposed of by this common judgment.
2. The constitutional validity of Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944 (hereinafter referred to as "the Rules, 1944"), as substituted by M.F. (D.R.) Notification No. 18/99-CE (NT.) dated 28.2.1999, prescribing imposition of penalty equal to an amount of duty outstanding from an independent processor of textile fabrics in case such person fails to pay the amount of duty or any part thereof by the specified date, is challenged, on the ground that the aforesaid Rule, is ultra vires the Constitution.
3. Rule 96ZQ of Rules, 1944, reads as under:
"96ZQ. Procedure to be followed by the independent processor of textile fabrics-
(1) An independent processor of textile fabrics falling under heading Nos. 52.07. 52.08, 52.09, 54.06, 54,07, 55.11, 55.12, 55.13 and 55.14 of the Schedule to Central Excise Tariff Act, 1985 (5 of 1986), shall debit an amount of duty of Rs. 1.5 lacs per chamber per month or Rs. 2 lacs per chamber per month, as the case may be, on the annual capacity of production as determined under the Hot Air Stenter Independent Textile Processors Annual Capacity Determination Rules, 1998.
(2) The Amount of duty payable under Sub-rule (1) shall be debited by the independent processor in the account current maintained by him under Sub-rule (1) of Rule 173G of the Central Excise Rules, 1944, (3) The amount of duty payable under Sub-rule (1) shall be paid, in advance by the 5th of each calendar month:
Provided that the amount of duty payable for the period from 16th December, 1998 to 31st December, 1998 shall be deposited on or before the 31st day of December, 1998.
(4) The independent processor shall continue to maintain records and file returns pertaining to production, clearance, manufacturing, storage, delivery or disposal of goods, Including the materials received for or consumed In, the manufacture, of excisable goods or other goods, the goods and materials In stock with him and the duty paid by him as prescribed under the Central Excise Rules, 1944 and the notifications issued thereunder, (5) If an independent processor fails lo pay the amount of duty by the date specified in Sub-rule (3) he shall be liable to:--
(i) pay the outstanding amount of duty alongwith interest at the rate of thirty six percent per annum calculated for the outstanding period on the outstanding amount, and
(ii) a penalty equal to an amount of duty outstanding from him at the end of such month or rupees five thousand, whichever is greater, (6) If an independent processor removes the processed textile fabrics referred to in Sub-rule (1) without complying with the requirements of that sub-rule or Sub-rule (2) or Sub-rule (3) then all such goods shall be liable to confiscation and the independent processor shall be liable to a penalty equal to an amount not exceeding three times the value of such goods, or rupees five thousand, whichever is greater.
(7) Where an independent processor does not produce or manufacture the processed fabrics specified in Sub-rule (1) during any continuous period of not less than seven days and wishes to claim abatement under sub-section (3) of Section 3A of the Central Excise Act, 1944 (1 of 1944) the abatement will be allowed by an order passed by the Commissioner of Central Excise of such amount as may be specified in such order, subject to the fulfilment of the following conditions namely: --
a. ..............
b................
c. ...,,,..,,,,,."
4. A plain reading of the aforesaid Rule points out that if an independent processor fails to pay the amount of duty by the date specified In Sub-rule (3) then he is liable to pay the outstanding amount of duty and the interest as indicated in Clause (I) of Sub-rule (5) and also liable to pay a penalty as indicated in Clause (ii) of Sub-rule (5) of the Rule 962Q of the said Rules.
5. We are not concerned with other sub-rules or sub-clauses of this Rule and therefore, we are not discussing the same. On reading Clause (I) of Sub-rule (5) of Rule 96ZQ, it appears that 36% interest per annum is imposed as compensatory measure as the Revenue suffers losses on account of non-payment of revenue. At the same time, with a view to see that there is deterrent effect on the tax payers, it is also thought fit to Impose penalty so that the amount which the Revenue is entitled to collect is paid by an assessee in time and the Government is not required to face any hardship. If the amount is not paid, it becomes difficult for the Government to run the administration. The Government obviously will not be in a position to fulfil its promises and therefore, considering the constitutional mandate, it becomes bounden duty of the tax payers to pay taxes in time. Therefore, this provision is to be invoked when revenue is not paid by an assessee in time. The aforesaid two clauses operate in different fields and it is known that compensatory measures as well as measure for deterrent effect can be provided and we find no difficulty in arriving at a conclusion that it is not possible to provide compensatory measure as well as the measures which would deter the assessees. What is important in the instant case in our view is that there is source of power and therefore the contention raised by the assessee that there is no source cannot be accepted.
6. What is important in the present case is that Clause (ii) of Sub-rule (5) of Rule 96ZQ of the Rules, provides for penalty. However, in the body of this clause, no guideline are provided to impose penalty nor is there anything to indicate that the amount mentioned therein is the minimum or maximum and, therefore, the contention raised on behalf of the Revenue is that as per the language found in Clause (ii) of Sub-rule (5) penalty is required to be imposed and, therefore, the assessing officer has rightly imposed penalty.
7. The Apex Court had an occasion to examine similar situation in the case of State of Madhya Pradesh v. Bharat Heavy Electricals 1998 (99) ELT 33 (SC). The main ground on which challenge was based on behalf of the respondents before the High Court in that case was that the heavy levy of penalty of ten times the amount of tax was confiscatory in nature and was ultra vires the provisions of the Act and was also violative of Articles 14 and 19 of the Constitution. It was also contended by the respondents that the presumption contained in Sub-section (5) of Section 7 of the Act which was regarded as not being rebuttable, was ultra vires as it did not give any discretion to the assessing authority to reduce or waive the penalty on the ground of absence of mala fide or any trivial or technical defect. In paragraph 10 of the judgment, the Apex Court pointed out as under:
",...In our opinion It could not be the intention of the Legislature that an accidental omission or non-furnishing of the statement for a good and valid reason must necessarily lead to the presumption that the registered dealer had the intention of facilitating the evasion of entry tax,"
8. Before us, the learned counsel appearing for the Revenue submitted that in view of the mandate as indicated in Sub-rule (5) of Rule 96ZQ, the words contained therein, namely, "he shall be liable to" must mean that the penalty must be imposed as indicated in Sub-Clause (ii) of Sub-rule (5) of Rule 96ZQ. It is required to be noted that in the case of State of Madhya Pradesh v. Bharat Heavy Electricals (supra), the Apex Court considered as to whether the words "shall be presumed" occurring in Section 28B were rebuttable or not. The Apex Court referred to the decision rendered in the case of Sodhi Transport and Anr. etc. etc. v. State of U.P. and Anr. etc. etc. 1986 (1) SCR 939, wherein the Apex Court referred to Section 4 of the Indian Evidence Act and observed at page 953 as under:
"...These words, i.e., "shall presume" are being used in Indian judicial lore for over a century to convey that they lay down a rebuttable presumption in respect of matters with reference to which they are used and we should expect that the U.P. Legislature also has used them in the same sense in which Indian Courts have understood them over a long period and not as laying down a rule of conclusive proof. In fact these presumptions are not peculiar to the Indian Evidence Act. They are generally used whenever facts are to be ascertained by a judicial process."
9. In our view, there is no reason as to why same analogy should not be applied in the instant case also. The Apex Court in the above decision has also pointed out that the Section should be read as containing a rebuttable presumption and clarifying the position, the Apex Court observed in paragraph 11 as under:
".. ..This would mean that it will be open to the registered dealer to satisfy the authorities concerned that the non-submission of the statement under Sub-sections (1) and (2) of Section 7 was not with the intention to facilitate the evasion of the entry tax. In other words, Sub-section (5) of Section 7 places the burden of proof on the registered dealer to show that the non-submission of the statement under Sub-sections (1) and (2) of Section 7 was not with a view to facilitate the evasion of entry tax."
The Apex Court pointed out that,
"if a registered dealer is unable to satisfy the authorities in this regard then, in the absence of satisfaction, the presumption is that non-submission of statement has facilitated the evasion of entry tax". It is in view of this that the Apex Court held that the Section does not suffer from any vice and the Section is required to be construed to mean that the presumption contained therein is rebuttable and secondly, the penalty stipulated therein is only the maximum amount which would be levied and the assessing authority has the discretion to levy lesser amount depending upon the facts and circumstances of each case. Construing Section 7(5) in this manner, the Apex Court pointed out that the decision of the High Court that Section 7(5) is ultra vires cannot be sustained. Applying this analogy in the instant case also, it is difficult to accept the contention raised by the petitioner that the said Rule is ultra vires. However, at the same time, the authority concerned is required to read the Rule in the manner indicated above.
10. Mr. Joshi, learned counsel appearing for petitioners in some of these petitions submitted that in view of the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State Of Orissa†., AIR 1970 SC 253: ECRC 321 (SC), penalty cannot be imposed merely on account of failure. He has relied upon observations made in paragraph 7 of this decision. In this regard, we make it clear that it will be open for the petitioners to point out this judgment to the authority concerned. It is also to be noted that we have not examined the aspect whether any retrospective effect can be given or not to the Notification in question and it will be open for the authority to consider this aspect also.
11. In view of the aforesaid discussion, we direct the assessing officer, i.e. the authority which passed the Order-in-Original, to reconsider the matters in so far as the penalty is concerned, in the aforesaid background. It goes without saying that the order imposing duty and recovery of interest etc. is not being disturbed by this Court. The petitions are allowed to the aforesaid extent only. Rule is made absolute accordingly in all these petitioner. No order as to costs.
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