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Assistant Collector Of Central Excise And Customs v. J.C. Shah

Supreme Court Of India

Sep 2, 1962

Judgment

Subsequent
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Factual and Procedural Background

The respondents in the three consolidated appeals are engaged in the manufacture of art silk fabrics. Each respondent owns or is associated with factories equipped with powerlooms. They claimed exemption from excise duty under Item 12A(v) of the First Schedule to the Central Excises and Salt Act, 1944, as inserted by the Finance Act, 1954. Item 12A imposes duty on rayon or artificial silk fabrics but grants exemption when the fabrics are “produced or manufactured in one or more factories by or on behalf of the same person in which less than 25 powerlooms in all are installed.”

The Excise authorities rejected the exemption claim, aggregated the number of powerlooms in factories in which each respondent had a proprietary or partnership interest, and issued demand notices for duty. The respondents filed writ petitions under Articles 226 and 227 of the Constitution before the Bombay High Court. The High Court quashed the demand notices, holding that the respondents were entitled to the exemption. The Union of India and Excise officials obtained special leave and brought the present appeals before the Supreme Court.

Legal Issues Presented

Whether, for purposes of Item 12A(v), powerlooms situated in factories owned by partnerships in which an individual is a partner must be aggregated with powerlooms in the individual’s own factory so that the exemption applies only when the combined total is fewer than 25.
Correspondingly, whether the factories operated by a partnership and those operated by an individual partner can be treated as being operated “by or on behalf of the same person.”

Arguments of the Parties

Appellants’ Arguments

Because excise duty is imposed on the manufacture of the goods rather than on the manufacturer personally, the phrase “same person” should be construed broadly to include a partnership and its individual partners; hence powerlooms in all factories in which a person has any interest must be totaled.
Each partner acts as an agent for the other partners; therefore, production by a partnership is production “by or on behalf of” each partner individually.
Where two factories have common partners and together possess more than 24 powerlooms, excise duty may be assessed on both partnerships collectively.

Respondents’ Arguments

Item 12A(v) requires that the exempted production be attributable to the “same person,” and a partnership is a distinct “person” under law, separate from its individual partners.
Consequently, only the powerlooms installed in a respondent’s own factory should be counted; powerlooms in factories owned by partnerships in which the respondent is merely a partner should not be aggregated.
The High Court therefore rightly quashed the demand notices as exceeding statutory authority.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Supreme Court treated the matter purely as one of statutory construction. It observed that while Section 3(42) of the General Clauses Act, 1897, defines “person” to include “any…body of individuals, whether incorporated or not,” the decisive question was whether a partnership could be equated to the individual partner for purposes of Item 12A(v).

The Court reasoned as follows:

The text of Item 12A(v) contemplates production in factories “by or on behalf of the same person.” The respondent Shah personally owns a factory with nine powerlooms. Two separate partnerships—each a distinct “person” in law—own factories with 24 and 19 powerlooms respectively. Production in those factories is not production “by or on behalf of” Shah in his individual capacity.
Although each partner is an agent of the partnership, that agency principle does not transform the partnership into the same legal person as each partner for purposes of the exemption clause.
A liberal construction, as urged by the appellants, would permit duty to be imposed multiple times on the same goods—once for each partner—which is illogical and inconsistent with the scheme of the Act.
If Parliament had intended that powerlooms in all factories in which a person holds any proprietary interest be aggregated, clearer wording would have been employed; indeed, subsequent legislative amendments have now clarified the position, indicating the earlier text did not cover the present situation.

Accordingly, the Court endorsed the Bombay High Court’s interpretation and found the respondents entitled to the exemption.

Holding and Implications

The appeals are dismissed with costs.

Immediate Effect: The demand notices issued to the respondents are quashed, and no excise duty is payable on the impugned production for the period in question.

Broader Implications: The decision confirms that, under the pre-amended Item 12A(v), partnerships and their individual partners are distinct “persons” for determining the exemption threshold of 25 powerlooms. The Court notes that later legislative amendments have addressed the issue, so the ruling primarily settles disputes limited to the earlier statutory language without creating a new, wide-ranging precedent.

Show all summary ...

P.B. GAJENDRAGADKAR, C.J.

(1) THE short question of law which arises in these three appeals is whether the respondents in the three respective appeals who carry on business in the manufacture of art silk fabrics, are entitled to claim exemption from the excise duty under item 12A(v) which was inserted in First Schedule to the central Excises and Salt Act, 1944 (No. 1 of 1944) by the Finance Act, 1954 (No. 17 of 1954). Item 12A prescribes for the payment of duty on rayon or artificial silk fabrics including all varieties of fabrics manufactured either wholly or partly from the product commercially known as rayon or artificial silk; it, however, grants exemption from the said duty in respect of articles covered by clauses (i) to (v) thereof. Clause (v) deals with cases of rayon or artificial silk fabrics produced or manufactured in one or more factories by or on behalf of the same person in which less than 25 powerlooms in all are installed. The respondents in the three appeals claimed that the artificial silk fabrics which they produced or manufactured were produced or manufactured in factories owned by them in which less than 25 powerlooms are installed. This plea has been rejected by the tax authorities and notices were issued against them calling upon them to pay the duty at the rate prescribed by item 12A. The validity of the notices thus issued against them was challenged by the respondents by their Writ Petition filed in the Bombay High court under Articles 226 and 227 of the Constitution. The writ petition filed by J.C. Shah who is the respondent in Civil No. 394 of 1962, first came to be considered and decided by the said High court, and the said High court allowed his writ petition and directed that the order passed by the Assistant Collector of Excise and Customs holding that the respondent was liable to pay the duty in question should be quashed. The High court has also quashed the notice of demand issued against the respondent on the 30/10/1957. The amount sought to be recovered from the respondent is Rs. 10,954.80 nP. The two other Writ Petition filed by the respondents in Civil Nos. 395 and 396/1962 were dealt with in accordance with the view taken by the High court in the writ petition filed by J.C. Shah. In the result, the three Writ Petition filed respectively by the three respondents were allowed and notices of demand served on them were quashed. It is against these three orders that the Assistant Collector of central Excise tod Customs at Surat and the Inspector, central Excise Sector III of the rele- vant Range as well as the Union of India have brought these appeals to this court by special leave. That is how the only question which arises in all the three appeals is whether the respondents' claim for exemption from payment of duty under item 12A(v) is justified or not. The answer to this question depends on a fair and reasonable construction of the relevant clause.

(2) IT is common ground before us that the facts in the three appeals are substantially similar and the decision in C.A. No. 394/1962 will govern the decision of the two other appeals. We would, therefore, confine ourselves to the facts in relation to this appeal. The respondent Shah carries on business in the manufacture of art silk fabrics. He is the owner of nine powerlooms on which art silk fabrics are manufactured in the premises of Artex Silk Mills at Surat. He is also a partner in the firm known as Saurashtra Mills at Surendra- nagar, which manufactures the same fabrics on 24 looms. In this firm, there are 12 partners and the respondent's share is two annas. The respondent is a partner in another firm Sunlight Textile Mills which owns 19 powerlooms at Bhandup and produces silk fabrics on them. In this last partnership the res- pondent has eight annas share. His contention is that on a fair and reasonable construction of item 12A(v)it should be held that the silk fabrics which are produced by him are produced in factory in which less than 25 powerlooms in all are installed. On the other hand, the appellants' contention is that in considering the question as to whether in the factories where artificial silk fabrics are produced by or on behalf of the respondent, it will be necessary to add up the powerlooms in all the three factories. According to the appellants, the fact that the respondent owns only one factory in which nine powerlooms are working would not be decisive, because since he is a partner in two other firms which own 24 and 19 powerlooms respectively, these powerlooms must be added to the powerlooms that are working in the factory owned by the respondent alone, and that inevitably takes his case outside the exemption prescribed by item 12A(v).

(3) THE question which these contentions raise is one of construction. Item 12A(v) refers to cases where artificial silk fabrics are produced or manu- factured in one or more factories by or on behalf of the same person in which less than 25 powerlooms in all are installed. Can it be said that the power- looms which work in the two partnership in which the respondent is a partner are worked by or on behalf of the same person, viz., the respondent. It is quite true that under the law of partnership each partner is an, agent of the other partners, but when clause refers to the same person, does it take in cases like the present where a person is working a factory of his own and has joined other partners in working other factories belonging to the said partnership ? Under section 3 (42) of the General Clauses Act, 1897 (No. 10 of 1897), a person shall include any company or association or body of individuals, whether incorporat- ed or not; and so, it may be conceded that a partnership is a person within the meaning of item 12A(v). But are the two partnerships of which the respondent is a partner the same person as the respondent ? In other words, is the test that the production of artificial silk fabrics must be attributable to the same person, satisfied in a case like the present ? The Bombay High court has answered this question in the negative and in our opinion, the view taken by the High court is right. The contention of the appellants that every partner of a firm is in law the same person as the firm within the meaning of item 12A(v) seems to us plainly inconsistent with the content of the said item and the object intended to be served by it in granting exemption to cases covered by it.

(4) IT has been urged by Mr. Prem on behalf of the appellants that the duty is levied not against the individual who produces the artificial silk fabrics, but against the artificial silk fabrics themselves, and since it is the production of the fabrics which in the subject matter of the duty, the expression "same person" should be liberally construed to include cases like the present. This argument appears to us to be misconceived. If a partnership consists of 10 persons on Mr. Prem's argument the articles produced by the factory belonging to such a partnership may become the subject-matter of duty in respect of each one of the partners. In fact, in Civil No. 395/1962 that is what the taxing authorities have purported to do. In the partnership M/s. Arun Textiles with which the said appeal is concerned, there were two partners who were also partners in M/s. M. Kantilal & Co. and notices have been served on both the partnerships in respect of the artificial silk fabrics manufactured in factories belonging to the partnership. The view taken by the taxing authorities was that both the art silk factories, namely, Arun Textiles and M. Kantilal & Co. of Surat which had common partners and had an aggregate potential loomage of more than 24 powerlooms and were producing rayon or art silk fabrics in both these factories, are treated as a collective entity for the central Excise purposes for the period in question.

(5) APART from this consideration, however, on a plain construction of the relevant clause, the context seems to require that the words, "the same person" cannot receive the liberal construction for which the appellants contend. The respondent Shah owns a factory in which there are 9 powerlooms. He is a partner in two other factories in which there are 24 and 19 powerlooms res- pectively; but the production of artificial silk fabrics attributable to these two factories cannot be said to be production or manufacture by or on behalf of the same person. The production in the first factory is by or on behalf of the respondent himself, while the production or manufacture in the other two factories is by or on behalf of two separate partnership of which the respondent happens to be one partner. We, therefore, feel no difficulty in holding that for the purpose of item 12A(v) the three persons cannot be said to be the same person as claimed by the appellants. If it was the intention of the legislature to exclude cases like the present from the purview of the exemption clause, then it must be held that the legislature has failed to use appropriate words to carry out that intention. We were told that for subsequent years, the relevant item in the Schedule has been suitably modified and the present question is, therefore, not likely to arise in future.

(6) THE result, is, the appeals fail and are dismissed with costs.

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