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Union Of India And Others v. State Of Mysore .
Factual and Procedural Background
The Inspector of Central Excise issued a demand notice dated 21 July 1962 requiring the State of Mysore to pay Rs 2,465.91 as excise duty on flats, squares and rods held in the State’s Implements Factory. The demand relied on Item 26-AA, newly inserted in the First Schedule to the Central Excises and Salt Act, 1944 by the Finance Act, 1962. The Central Excise Department asserted that the duty became payable because the pre-existing stock of iron and steel products was subsequently forged into agricultural implements (mamties, pick-axes, sledge hammers, shovels and ploughs).
The State challenged the demand before the Assistant Collector, who rejected the challenge; the Collector of Central Excise dismissed the State’s appeal; and the Central Government, in revision, upheld the demand. The State of Mysore then invoked Article 226 of the Constitution before the High Court of Mysore, seeking to quash the demand notice and the appellate and revisional orders. On 4/5 September 1967, the High Court allowed the writ and set aside all impugned orders. The Union of India obtained special leave and appealed to the Supreme Court.
Legal Issues Presented
- Whether, under Section 3(1) read with Item 26-AA of the First Schedule to the Central Excises and Salt Act, 1944, excise duty could be levied on rods and bars that were not manufactured in the State’s Implements Factory but were transformed there into non-excisable agricultural implements.
- Whether the writ petition filed by the State of Mysore in the High Court was barred by Article 131 of the Constitution as a dispute “between the Government of India and a State.”
Arguments of the Parties
Union of India (Appellant)
- The rods and bars held on 24 April 1962 were “pre-excise stock”; once they were subjected to further processing (forging/extrusion) into agricultural implements they attracted duty under Item 26-AA until the entire pre-excise stock had been converted and cleared.
- The writ petition was not maintainable under Article 226 because the controversy constituted an inter-governmental dispute falling exclusively within the Supreme Court’s original jurisdiction under Article 131.
State of Mysore (Respondent)
This information was not available in the provided opinion.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court confined its analysis to Section 3 of the Act, which authorises duty only on excisable goods “produced or manufactured in India.” Sub-section (1-A) applies the same standard to goods manufactured by or on behalf of Government.
The Court found, on the Central Excise Department’s own admission, that the rods and bars were not produced or manufactured in the State’s Implements Factory; they were merely in stock and later forged into agricultural implements. Therefore, the foundational requirement for levy under Section 3 was missing.
Further, agricultural implements themselves were not enumerated in the First Schedule and were intentionally excluded from excise coverage because they constitute basic tools of livelihood for a large section of the populace. Consequently, neither the finished implements nor the pre-existing rods and bars could lawfully attract duty solely because the implements were manufactured after Item 26-AA came into force.
On the jurisdictional objection, the Court observed that no substantive dispute existed between the Union and the State in the constitutional sense; the Union was impleaded only as the authority that dismissed the statutory revision. Hence Article 131 was inapplicable, and the High Court rightly entertained the writ.
Holding and Implications
Appeal Dismissed with Costs.
The Supreme Court affirmed the High Court’s order quashing the demand notice and the related appellate and revisional orders. The immediate consequence is that the State of Mysore owes no excise duty on the questioned stock or on the agricultural implements manufactured from it. The judgment reiterates that excise duty under Section 3 attaches only to goods actually produced or manufactured in the assessee’s premises and that Article 131 is not triggered merely because both tiers of government are parties to litigation. No broader precedent was explicitly articulated beyond these clarifications.
P.N Shinghal, J.— This appeal by Special Leave is directed against the judgment of the High Court of Mysore dated September 4/5, 1967. The High Court was moved by the State of Mysore under Article 226 of the Constitution for quashing the demand notice dated July 21, 1962 issued by the Inspector of Central Excise for the payment of Rs 2465.91 as excise duty on the products despatched by the State's Implements Factory. The Demand was made with reference to the newly inserted Item 26-AA in the First Schedule to the Central Excises and Salt Act, 1944, hereinafter referred to as “the Act”. That item was added to the schedule by the Finance Act of 1962, and it was claimed by the Central Excise Department that, on the date of the amendment, the State Government was in possession of some stock of iron and steel products, namely, flats, squares and rods in its factory, which had been obtained from their manufacturers when they were not excisable articles. The precise claim of the excise authorities was that the duty became payable on those articles by virtue of the newly inserted Item 26-AA because the aforesaid stock of iron and steel products was used for the manufacture of agricultural implements like “mamties”, pickaxes, sledge hammers, shovels and ploughs. The Assistant Collector of Central Excise explained in his letter dated June 19, 1962, that the agricultural implements which were manufactured in the State's Implements Factory fell within the purview of Item 26-AA as they were forged or extruded during the process of manufacturing the agricultural implements. It was contended that the demand was justified because the aforesaid iron and steel products, out of which the agricultural implements were manufactured, had not borne any excise duty at all. An appeal was preferred to the Collector of Central Excise against the demand, but without success. A revision was taken to the Central Government under the provisions of the Act, but it was also dismissed. That was why the State Government applied to the High Court for quashing the demand and for setting aside the appellate order of the Collector and the revisional order of the Central Government.
2. The Central Government traversed the claim of the State Government on the ground that as the rods and bars, which were held in stock by the State's Implements Factory, were “pre-excise stock”, and as they were put to further process by forging them into shovels, spades and other agricultural implements, they became liable to duty until the “pre-excise stock” held by the factory on April 24, 1962 was utilised and converted into forged implements and was cleared from the factory. It was also urged that the petition was not maintainable in the High Court as it raised a dispute between the Government of India and the State Government within the meaning of Article 131 of the Constitution.
3. The High Court rejected both the contentions of the Central Government and quashed the impugned demand notice and the appellate and the revisional orders. That is why the Union of India has preferred the present appeal.
4. It is not in controversy that the claim for the levy of excise duty was based on sub-sections (1) and (1-A) of Section 3 of the Act which read as follows:
“3. (1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the First Schedule.
(1-A) The provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India by, or on behalf of, Government, as they apply in respect of goods which are not produced or manufactured by Government.”
It is therefore quite clear, and is not in dispute before us, that the claim for the levy of excise duty in question could be justified only if it could be shown that excisable goods (other than salt) were produced or manufactured in the Implements Factory of the State Government. It was however admitted in the counter-affidavit of the Senior Superintendent of Central Excise as follows:
“In the case of the petitioner, since the rods and bars held in stock by the Implements Factory were pre-excise stock and since those rods and bars were put to further process by forging the same into shovels, spades and other agricultural implements etc., they became liable to duty and therefore, duty was demanded on such forged articles during the period that is till such quantities of the bars and rods as were in stock with the factory on April 24, 1962 were utilised and converted into forged implements and cleared from the factory.”
This makes it quite clear that the rods and bars in question were not “produced or manufactured” in the State Government's Implements Factory. They could not therefore be subjected to the levy of excise duty. It is true that the rods and bars were utilised for the manufacture of agricultural implements like shovels and spades, but those agricultural implements were not of the description specified in Item 26-AA of the First Schedule with reference to Section 3 of the Act.
5. It is admitted by Mr Raman that agricultural implements were not included in the First Schedule to the Act and were not excisable articles. This appears to be so because they are the basic tools of trade by which a vast majority of the citizens of the country earn their livelihood. There could therefore be no question of levying any excise duty on shovels and spades or other agricultural instruments manufactured by the Implements Factory of the State Government and, as has been shown, the rods and bars which formed the pre-excise stock of the factory had not been manufactured by the Implements Factory. Section 3 of the Act could not therefore be invoked to levy excise duty merely on the ground that the “pre-excise stock” of rods and bars was utilised for the purpose of manufacturing agricultural instruments. There is therefore nothing wrong with the view which has prevailed with the High Court in this respect.
6. Mr Raman tried to argue that the High Court erred in not applying Article 131 of the Constitution to the controversy even though the writ petition was barred thereunder as it fell exclusively within the jurisdiction of this Court under Article 131 of the Constitution as a dispute between the Government of India and the State of Mysore. The argument is however futile because there is nothing on the record to show that there was any such dispute between the Central and the State Governments. As the High Court has pointed out, the Union of India was made a party to the writ petition merely because it had dismissed the revision application of the State Government.
7. There is thus no merit in this appeal and it is dismissed with costs.
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