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Gokak Patel Volkart Limited v. Collector Of Central Excise, Belgaum .
Factual and Procedural Background
The appellant, a manufacturer, had challenged the levy of excise duty on fabric in the High Court of Karnataka. On 4 June 1976, the High Court granted an interim order staying the collection of excise duty on fabric while directing the appellant to continue paying duty on yarn and to maintain accounts in square metres. The writ petition was finally dismissed on 16 February 1981, with liberty to the appellant to raise all contentions in reply to any show-cause notices.
Subsequently, on 20 May 1982, the Assistant Collector issued Show Cause Notice No. 913 demanding duty for two periods: (i) 20 June 1976 – 28 February 1981 (covered by the interim stay) and (ii) 1 April 1975 – 18 August 1975 (already subject to an earlier notice of 29 January 1976). The notice was issued well beyond the six-month limitation period in Section 11-A(1) of the Central Excises and Salt Act, 1944. The Revenue sought to justify the delay by invoking the Explanation to Section 11-A, which excludes from limitation any period during which “service of the notice is stayed by an order of a court.”
Legal Issues Presented
- Whether the interim stay granted by the High Court, which only restrained collection of duty, triggered the Explanation to Section 11-A so as to extend the six-month limitation period for issuing a show-cause notice.
- Whether the demand raised without first issuing a valid show-cause notice complied with the mandatory procedure under Section 11-A(1) & (2) and the principles of natural justice.
Arguments of the Parties
Revenue’s Arguments
- The delay in issuing the show-cause notice should be condoned because the High Court’s stay on collection of duty amounted to a “stay of service of notice,” thereby invoking the Explanation to Section 11-A.
Appellant’s Arguments
- The High Court’s order stayed only the collection of duty, not the issuance or service of a show-cause notice; therefore, the Explanation to Section 11-A did not apply and the notice was time-barred.
- No proper show-cause notice was served for the relevant period; instead, an outright demand was issued, violating Section 11-A(1) & (2) and the rules of natural justice.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sirajul Haq Khan v. Sunni Central Board of Waqf, 1959 SCR 1287; AIR 1959 SC 198 | Section 15 Limitation Act: only a court order that expressly stays institution of proceedings can suspend limitation. | Used to analogise that only a stay expressly restraining service of notice can extend limitation under Section 11-A; a stay of collection is insufficient. |
| N.B. Sanjana, Asst. Collector v. Elphinstone Spinning & Weaving Mills Co. Ltd., (1971) 1 SCC 337 | Clarified distinction between “levy” and “collection” of excise duty; levy is distinct from actual collection. | Cited to emphasise that the High Court’s order affected only collection, not levy or procedural steps such as service of notice. |
Court's Reasoning and Analysis
The Supreme Court held that the Explanation to Section 11-A applies only when a court order specifically “stays the service of the notice.” Drawing on Sirajul Haq Khan and Section 15 of the Limitation Act, the Court noted that the Karnataka High Court’s interim order merely suspended collection of duty, a stage subsequent to levy. It did not restrain the Department from issuing a show-cause notice.
Further, the statutory scheme of Section 11-A(1) requires a notice to show cause, and sub-section (2) obliges the authority to consider the assessee’s representation before determining liability. Skipping the notice and issuing an outright demand contravened both the statute and the principles of natural justice. Therefore, the demand for the period 19 August 1975 – 23 February 1981 was illegal.
Holding and Implications
The appeal was allowed and the impugned demand for duty from 19 August 1975 to 23 February 1981 was set aside. Any tax already collected for this period must be refunded, and no order as to costs was made. The decision reaffirms that (1) limitation under Section 11-A can be extended only when service of notice is explicitly stayed, and (2) issuance of a valid show-cause notice is a mandatory precondition to any demand under the Act. No broader precedent was created beyond clarifying the limited scope of the Explanation.
Ranganath Misra, J.— The fate of this appeal under Section 35(1) of the Central Excises and Salt Act, 1944, depends upon the meaning and scope of the Explanation appearing in Section 11-A of the Act.
2. The High Court of Karnataka by its order dated June 4, 1976 in Writ Petition No. 2632 of 1976 gave the following direction:
“Pending disposal of the aforesaid writ petition, it is ordered by this Court that collection of excise duty as a fabric be and the same is hereby stayed. It is further ordered that the petitioner shall however continue to pay excise duty as yarn and shall further maintain an account in square meters for future clearance.”
The said writ petition was ultimately dismissed by the High Court on February 16, 1981. The operative part of the court's final order ran thus:
“For the reasons aforesaid, we make the following order:
(i) Rule discharged;
(ii) We decline to interfere at this stage leaving open to the petitioner to urge all the contentions in reply to the show cause notices.”
3. On May 20, 1982, a notice to show cause was issued to the appellant by the Assistant Collector, being Notice No. 913, and with this the Collector sought to raise a demand for the period from June 20, 1976 to February 28, 1981 apart from for the period between April 1, 1975 to August 18, 1975 in respect of which an earlier show cause notice dated January 29, 1976 had already been issued.
4. It is not disputed by the revenue that the appropriate period of limitation to apply to the facts of the case is six months as provided in Section 11-A of the Act and that the notice issued on May 20, 1982 was beyond that period. Reliance was placed on the Explanation for obtaining extension of that period. The Explanation reads thus:
“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.”
The provision in the Explanation incorporates a well known principle of law. Section 15 of the Limitation Act of 1908 (also of Section 15 of the Limitation Act of 1963) incorporates the same principle. This Court in Sirajul Haq Khan v. Sunni Central Board of Waqf 1959 SCR 1287, AIR 1959 SC 198 dealt with the effect of an order of injunction in the matter of computation of limitation. At p. 1302 of the Reports, Gajendragadkar, J., as he then was, spoke for the court thus:
“It is plain that, for excluding the time under this section, it must be shown that the institution of the suit in question had been stayed by an injunction or order; in other words, the section requires an order or an injunction which stays the institution of the suit. And so in cases falling under Section 15, the party instituting the suit would by such institution be in contempt of court.... But, in our opinion, there would be no justification for extending the application of Section 15 on the ground that the institution of the subsequent suit would be inconsistent with the spirit or substance of the order passed in the previous litigation.”
In the instant case, the order of stay passed by the Karnataka High Court had only stayed the collection of the excise duty, which is a stage following levy under the scheme of the Act. Obviously there was no interim direction of the High Court in the matter of issue of notice for the purpose of levy of duty. The relevant portion of Section 11-A provided:
“11-A (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:
(2) The Assistant Collector of Central Excise shall, after considering the representation, if any, made by the person on whom notice is served under sub-section (1), determine the amount of duty of excise due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined.”
Reference to Section 3 of the Act which contains the charging provision clearly shows that levy and collection are two distinct and separate steps. This Court in N.B Sanjana, Asstt. Collector of Central Excise v. Elphinstone Spinning & Weaving Mills Co. Ltd. (1971) 1 SCC 337, AIR 1971 SC 2039, (1971) 3 SCR 506 at p. 514 stated:
“The charging provision Section 3(i) specifically says ‘There shall be levied and collected in such a manner as may be prescribed the duty of excise....’ It is to be noted that sub-section (i) uses both the expressions ‘levied and collected’ and that clearly shows that the expression ‘levy’ has not been used in the Act or the Rules as meaning actual collection.”
5. The High Court having directed stay of collection had, therefore, not given any interim direction in the matter of issue of notice or levy of the duty. The Explanation in clear terms refers to stay of service of notice. The order of the High Court did not at all refer to service of notice. Therefore, there is force in the submission of the appellant that the benefit of the Explanation is not available in the facts of the case.
6. No notice seems to have been issued in this case in regard to the period in question. Instead thereof an outright demand had been served. The provisions of Section 11-A(1) and (2) make it clear that the statutory scheme is that in the situations covered by the sub-section (1), a notice of show cause has to be issued and sub-section (2) requires that the cause shown by way of representation has to be considered by the prescribed authority and then only the amount has to be determined. The scheme is in consonance with the Rules of natural justice. An opportunity to be heard is intended to be afforded to the person who is likely to be prejudiced when the order is made, before making the order thereof. Notice is thus a condition precedent to a demand under sub-section (2). In the instant case, compliance with this statutory requirement has not been made, and, therefore, the demand is in contravention of the statutory provision. Certain other authorities have been cited at the hearing by counsel for both sides. Reference to them, we consider, is not necessary.
7. The appeal has to be allowed and the demand raised for the period August 19, 1975 to February 23, 1981 has to be set aside. There shall be no order for costs. The tax paid, if any, shall be refunded to the appellant.
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