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Sonodyne Television Company v. Collector Of Central Excise, Calcutta
Factual and Procedural Background
The petitioner-company manufactures television sets and sells them to wholesale dealers. At sale, the company recovered the invoice price; after delivery they raised separate bills for Comprehensive Maintenance Scheme (CMS) or maintenance charges from buyers. The Revenue treated these post-sale comprehensive maintenance charges as forming part of the assessable value for central excise duties.
Two show-cause notices were issued by the Assistant Collector of Central Excise on 31 August 1984 and 31 December 1984. The first demand covered 1-12-1979 to 31-12-1979 for Rs. 74,160/-, and the second covered 1-1-1980 to 31-5-1984 for Rs. 21,16,030.75. After adjudication the Collector confirmed both demands aggregating to Rs. 21,90,190.75 and imposed a penalty of Rs. 10,00,000 under Section 173Q.
The petitioner challenged the Collector's order before the Tribunal and, with the Memorandum of Appeal, filed an application under Section 35F of the Central Excises and Salt Act seeking dispensation of the statutory pre-deposit of the disputed amounts and a stay of recovery until disposal of the appeal.
Legal Issues Presented
- Whether the demands in the show-cause notices and confirmed by the Collector are barred by limitation (the petitioner contending notice(s) were issued after the statutory period of six months).
- Whether pre-deposit of the disputed amounts under Section 35F of the Central Excises and Salt Act should be dispensed with (wholly or partly) and, if so, on what conditions.
- Whether recovery of the disputed amounts should be stayed pending disposal of the appeal if the Tribunal dispenses with or modifies the pre-deposit requirement.
Arguments of the Parties
Petitioner-Company's Arguments (as presented by Dr. L.M. Singhvi)
- The demands were barred by limitation because notices were issued after expiry of the statutory six-month period.
- On 8 July 1982 the company had informed the Superintendent of Central Excise (in response to a verbal inquiry of 3 July 1982) about its pattern of sale and the CMS charges, showing absence of fraud or suppression; hence notices issued later reflected the department's neglect rather than concealment by the company.
- The same authority treated a similar company, M/s. Jyoti Electronics, differently by accepting exclusion of maintenance charges and dropping proceedings — indicating inconsistent application by the Revenue.
- Insisting on deposit of the differential duty and penalty would cause undue hardship: the company allegedly had small liquid assets and could not raise funds without crippling its operations and affecting employees; counsel offered an undertaking not to dispose of fixed assets during appeal.
- The cash-in-hand should constitute the liquid assets (the petitioner urged a narrow definition of liquidity limited to cash-in-hand).
- Reliance on Supreme Court authority (Assistant Collector of Central Excise, West Bengal v. Dunlop India Ltd.) and Allahabad High Court decision (U.P. Lamination v. Union of India and others) for the proposition that interim relief requires consideration of balance of convenience and irreparable injury, not merely a prima facie case.
Revenue's Arguments (as presented by Shri Jain, SDR)
- Applicants must show undue hardship to obtain interim relief from the deposit requirement.
- The company did not disclose collection of CMS charges in its price list; mention of CMS in a letter dated 8 July 1982 was in answer to an enquiry and does not negate wilful suppression or mis-statement alleged in the show-cause notices.
- Assessments made after 1982 were provisional; the show-cause notices were based on suppression and wilful mis-statement.
- The company's published financials indicate capacity to pay: according to the Director's Report for year ending 30-4-1984, net profit was Rs. 7.07 lakhs with transfers to general reserve of Rs. 4.40 lakhs and a dividend declared of 12.5%.
- Financial position details relied upon: current assets ~ Rs. 1.58 crores, reserves ~ Rs. 10.28 lakhs, accretion of assets during 1984 of Rs. 11.66 lakhs, and cash balance of Rs. 1.36 lakhs.
- Relied on Dunlop India Ltd. to argue that courts must be circumspect in granting interim orders that prevent collection of public revenue and that balance of convenience favors the Revenue.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Assistant Collector of Central Excise, West Bengal v. Dunlop India Ltd. (Supreme Court) | Emphasizes prudence, discretion and circumspection in granting interim relief; courts must consider irreparable injury and public interest in addition to prima facie case. | The court referred to the Dunlop principle to underscore that grant of interim relief affecting public revenue requires careful balancing of irreparable injury to parties against public interest and revenue; cited by both sides and considered in weighing balance of convenience. |
| U.P. Lamination v. Union of India and others (Allahabad High Court) | In taxation matters an interim order requires consideration not only of a prima facie case but also whether balance of convenience is in favour of petitioner; applies Dunlop reasoning. | The court noted and relied on the U.P. Lamination observation that balance of convenience must be considered when deciding on interim relief in taxation matters. |
| M/s. Spencers & Co. Ltd., Madras v. Collector of Central Excise (Supreme Court) — Application No. 332/84 in Appeal No. 693/84 | Interprets 'undue hardship' in proviso to Section 35F as including consideration of liquidity possessed by the assessee. | The Tribunal relied on this authority to support the proposition that liquidity (including assets convertible to cash) is a relevant factor in deciding whether pre-deposit may be waived or reduced. |
| Adjudication order of M/s. Jyoti Electronics (referenced) | Administrative/adjudicatory action in an identical factual matter where maintenance charges were excluded from assessable value and proceedings were dropped. | The petitioner relied on the Jyoti Electronics order to argue inconsistent treatment by the department; the Tribunal took note of this comparative adjudication as part of the factual matrix raised by the petitioner. |
Court's Reasoning and Analysis
The Tribunal proceeded by identifying the principal considerations relevant to an application under Section 35F: (a) whether there is a prima facie case on limitation and merits (the Tribunal regarded limitation as a mixed question of law and fact and declined to express a definitive opinion at this interlocutory stage), (b) whether the applicants would suffer undue hardship if pre-deposit were insisted upon, and (c) the interests of the Revenue and public interest in safeguarding collection of public dues.
On limitation the court recognized that the question is a mixed question of law and fact and that arguments on both sides should be considered at final hearing; it accordingly refrained from ruling on limitation for the purposes of the interim application but noted the contention as a relevant factor in deciding whether to grant interim relief.
The Tribunal gave particular attention to the liquidity of the petitioner-company as part of the "undue hardship" analysis. It rejected the petitioner's narrow contention that "liquid assets" mean only cash-in-hand, and supported a broader definition. To clarify the meaning of liquidity, the Court quoted dictionary definitions from Black’s Law Dictionary and Thomson’s Dictionary of Banking, observing that liquidity and liquid assets cover cash and assets that are readily convertible into cash (such as stock, sundry debtors, bills receivable, finished goods, etc.), and that the function of an asset in a business context can determine whether it is liquid or fixed. The Tribunal reasoned that restricting liquidity to cash-in-hand could allow manipulation of bank balances to evade deposit requirements.
The Tribunal then balanced the interests: it weighed the potential prejudice and "substantial mischief" to the petitioners if a stay were declined against the injury to the Revenue if pre-deposit were wholly or largely dispensed with. It observed that Section 35F embodies a general rule for pre-deposit but contains a proviso allowing dispensation wholly or partly with appropriate conditions while safeguarding revenue. Taking into account the liquidity analysis, the undisposed question of limitation, the company's financial statements as presented by the Revenue, and the overarching need to protect public revenue, the Tribunal concluded that full deposit of duty and penalty was not justified as a condition for maintaining the appeal.
Accordingly, the Tribunal exercised the discretion afforded by the proviso to Section 35F, requiring a partial deposit of the disputed duty (25% of the duty demand) within six weeks while waiving the pre-deposit of the penalty. It further ordered that, upon deposit of the specified duty amount, recovery of the remaining amounts would be stayed until disposal of the appeal.
Holding and Implications
Core Ruling: The Tribunal partly allowed the application under Section 35F and directed the petitioner-company to deposit 25% of the disputed duty amount within six weeks; the pre-deposit of the penalty amount was dispensed with. If the 25% deposit is made, the deposit of the balance of the duty amount and the penalty shall stand waived, and recovery of the other amounts shall be stayed until disposal of the appeal.
Implications:
- Direct effect on parties: The petitioner is required to make an immediate partial payment (25% of the disputed duty) as a condition to obtain the stay of recovery; the penalty pre-deposit is waived, and further recovery is stayed if the deposit condition is met.
- No definitive ruling on limitation or on the substantive merits was made at this interlocutory stage; those issues will be decided at final hearing.
- The Tribunal applied established principles (as reflected in Dunlop India, U.P. Lamination and Spencers) emphasizing that interim relief in taxation matters requires consideration of liquidity, balance of convenience and public interest; the order is a discretionary interlocutory disposition rather than an adjudication of substantive law or setting of a new precedent.
Disposition: The application was disposed of in the terms described above.
[Order per : F. S. Gill, President]. - The petitioner-company manufactures T.V. sets, which they sell to the wholesale dealers. At the time of sale to these dealers, they recover the invoice price, but after the delivery is effected, they raised bills for comprehensive maintenance charges from these buyers. Revenue considers that the comprehensive maintenance charges which had been excluded from the assessable value formed a part thereof.
2. Two show-cause notices were issued by the Assistant Collector of Central Excise on 31st August and 31st December 1984, alleging that the petitioner-company had wilfully mis-stated and suppressed facts for mis-declaring the price of T.V. sets manufactured by them and had thereby contravened the provisions of the Central Excises and Salt Act and also of the Rules made thereunder. The demand raised in the first show cause notice, which pertained to the period 1-12-1979 to 31-12-1979 was for Rs. 74,160/-, while the demand in the second show cause notice, which covered the period 1-1-1980 to 31-5-1984 was for Rs. 21,16,030.75. The petitioner-company filed their replies to these notices and also produced evidence against the demands raised against them. After appraising the whole evidence, the Collector of Central Excise confirmed both the demands, which, when added, come to Rs. 21,90,190.75. The penalty imposed under 173Q was Rs. 10 lakhs.
3. The petitioner-company has challenged the order of the Collector before this Tribunal and along with the Memorandum of Appeal, an application has been made under Section 35F of the Central Excises and Salt Act for dispensing with the pre-deposit of the disputed amounts. A further prayer has been made that the recovery of the said amounts be also stayed till the disposal of the appeal.
4. Dr. L.M. Singhvi, the learned Counsel, appearing on behalf of the petitioner-company, has contended that both the demands in the show-cause notices and later confirmed in the adjudication order, were barred by limitation, as notices had been issued after the expiry of the statutory period of six months. He has further pointed out that on 8th July, 1982, his client had sent letter to the superintendent of Central Excise, in answer to a verbal enquiry made on 3rd July, 1982 and therein the pattern of sale had been fully described. It will be pertinent to reproduce here the relevant portions of the letter :-
“ * * * *
For our T.V. sets which are very large in size (all models except Super Vu which sells at Rs. 1,800/- ex-factory), we also have Comprehensive Home Maintenance Scheme which is entirely optional. Under this scheme, we charge Rs. 300/- per year for 3 models, i.e. Videosonic Deluxe, Monochrome Deluxe and Coronation Deluxe and Rs. 400/- for Europe Deluxe.
A customer has a choice either to bring his T.V. set to our Service Department and get it repaired free of cost or to come under the Comprehensive Maintenance Scheme from any date after the purchase of the T.V. sets which entitles him to call our Technician to his residence also for repair and maintenance of T.V. sets, antenna, voltage stabiliser, etc. which forms part of a T.V. installation even though these are not products manufactured by us.
You may also kindly note that our Service Department is a separate establishment which is not connected with our factory."
5. The learned Counsel has submitted that the ground of limitation was urged before the lower authority but it was brushed aside without any cogent reason. Thus instead of applying the ordinary period of limitation of 6 months the extended period of limitation of 5 years was applied. He has further pleaded that there was no fraud or suppression of facts on the part of his clients as more than two years prior to the issue of the show-cause notices, the pattern of sale was intimated and it was clearly made known that maintenance charges were recovered after sale. Dr. Singhvi has further argued that in order to cover up their own neglect and dereliction of duty, the lower authorities had, without sufficient reason or cause applied the extended period of limitation.
6. He has further pointed out that different yardsticks have been applied by the same authority, issuing the notice, when an identical case of M/s. Jyoti Electronics was considered. (A copy of the adjudication order of this Company is at page 46 of the paper book). In the said case for collecting same kind of maintenance charges, no differential duty was demanded by adding these charges to the assessable value. On the other hand, the proceedings initiated against the said company were dropped and the exclusion of these maintenance charges was accepted.
7. Question of limitation is indubitably a mixed question of law and fact. The arguments of both the sides will be duly considered at the time of final hearing. We feel that it will cause prejudice to the parties if we express any opinion on this issue at this stage. We, however, take note of the contentious point for considering the interim relief.
8. Dr. Singhvi has further argued that it would cause undue hardship to his clients if the differential duty and the penalty amounts are directed to be deposited and has stressed for their waiver in the circumstances of the case. His main thrust is that the petitioners have very small liquid assets and that it will be well nigh impossible to raise funds for depositing the disputed amounts. The learned Counsel has further submitted that the cash-in-hand alone constitutes the liquid assets. We will presently see the force of this argument.
9. Dr. Singhvi has, however, admitted that the company had set up new unit of production and had also undertaken substantial expansion. He has further pointed out that the company enjoys a stock credit of Rs. 25 lakhs in the bank, which has been fully drawn, and that the deposit of the duty and penalty amounts would bring the functioning of the company to a grinding halt, which will obviously have serious repercussions on the employees. He has farther stated that the company is prepared to give an undertaking not to dispose of its fixed assets during the pendency of the appeal.
10. According to the learned Counsel, balance of convenience also swings in favour of his clients, as insisting on the deposit would cause irreparable loss to them. To support his contentions, the learned Counsel has relied on a decision of the Supreme Court, reported as (Assistant Collector of Central Excise, West Bengal v. Dunlop India Ltd.). In particular, he has referred us to paragraph 7, which is in these terms :-
“There can be and there are no hard and fast rules. But prudence, discretion and circumspection are called for. There are several other vital considerations apart from the existence of a prima facie case. There is the question of irreparable injury. There is the question of public interest.”
To support his submission further the learned Counsel has referred, us to a decision of the Allahabad High Court, reported as (U.P. Lamination v. Union of India and others). In this ruling the Supreme Court judgment given in Dunlop India case was also considered. Our attention has been specially drawn to the following observations made in U.P. Lamination case :-
“The only declaration of the law which can be said to be binding in respect of interim order is that it is not only the prima facie case on which an interim order should be granted in taxation matters, but the court must further consider if there was balance of convenience in favour of petitioner.”
To sum up Dr. Singhvi has submitted that the liquidity position of the company is far from sound and that it would hamper its working and growth if the amounts, which according to him are unjustified, arbitrary and exorbitant are required to be deposited. According to the learned Counsel, the balance of convenience is also in favour of his clients.
10A. On the other hand, Shri Jain, the learned SDR, has contended that the applicants have to show undue hardship in the deposit of the amounts before any interim relief can be granted. He pointed out that the applicants had not disclosed in their price list about the collection of the CMS charges in any manner. It was in answer to a query that on 8th July, 1982, there was a letter from the applicants wherein they had referred to the CMS charges and collection of Rs. 300/- per unit per year. The show-cause notices were issued on the basis of suppression of material facts and wilful mis-statement. According to him, the assessments subsequent to 1982 were provisional. The learned SDR also drew our attention to the balance sheet filed by the applicants and stated that according to the Director’s Report for the accounting year 30-4-1984, the company had earned a net profit of Rs. 7.07 lakhs, but had transferred Rs. 4.40 lakhs to the General Reserve. They had also declared a dividend of 12.5%. They had also not taken any loans from any other company, and were further considering the expansion of their activities, although one more unit had been started recently. The current assets of the company are to the tune of Rs. 1.58 crores and have also a reserve of about Rs. 10.28 lakhs. There had been accretion of assets during 1984 to the extent of Rs. 11.66 lakhs. They have a cash balance of Rs. 1.36 lakhs.
11. After stating all these facts, the learned SDR relied on the decision of the Supreme Court in the matter of Dunlop India Ltd., and stated that court must be circumspect in granting interim orders of far-reaching dimensions preventing collection of public revenue, even though a prima facie case may be made out. According to Shri Jain, the balance of convenience is in favour of the Revenue.
12. The question of balance of convenience will considerably depend on the liquidity position of the petitioner-company. Before proceeding further, we think it relevant to cite the following observations of the Supreme Court made in Application No. 332/84 in Appeal No. 693/84 (M/s. Spencers & Co. Ltd., Madras v. Collector of Central Excise):-
“We are in agreement with the contention of the counsel for the petitioner that the expression ‘undue hardship’ occurring in the proviso to Section 35Fof the Central Excises and Salt Act, 1944, would include consideration, inter alia, of the aspect of liquidity possessed by the assessee. We are not inclined to take the view that the impugned order gives any indication that aspect has been completely ignored as was contended by counsel. With these observations, the special leave petition is dismissed.”
13. According to Dr. Singhvi, the cash-in-hand only constitutes the liquid assets. This view is not accepted by the learned SDR as, according to him, the assets which can be converted into cash should also be considered as falling within the liquidity of any person.
14. To appreciate the contentions of both the sides, we first give below the dictionary meanings of the expressions ‘liquidity’ and ‘liquid assets’. In Black’s Law Dictionary (Fifth edition), the term ‘liquidity’ has been defined as under :-
“Liquidity : The status or condition of a person or a business in terms of his or its ability to convert assets into cash. In relationship to market, the capacity of the market in a particular security to withstand an amount of buying and selling at reasonable prices.”
In Thomson’s Dictionary of Banking, “liquid assets” have been described as under :-
“Liquid Assets. These, sometimes called floating assets, consist of cash and other assets continually undergoing conversion into cash, such as stock, sundry debtors, bills receivable. They are to be distinguished from fixed assets which are acquired for use in the business, such as premises, plant, and machinery. It is the function of an asset, not its nature, which determines into which category it goes, e.g. machinery is a fixed asset in a factory-it is what a business trades with in a business concerned with manufacture of machinery, it will be a liquid asset-it is what the business trades in.”
The expressions ‘liquidity’ or ‘liquid assets’ as understood in legal as well as in banking and commercial sense have been very clearly explained in the two definitions extracted above. In the light of these expositions, the meaning of the expression as put forward by Dr. Singhvi is very narrow. According to him liquidity or liquid assets means cash balance alone and exclude other assets, which can be converted into cash. If it be so, one can easily manipulate his bank balances to the minimum and thereby plead undue hardship. In our view, while considering the ambit of the two expressions it is necessary to take into account the cumulative effect of all the factors such as current assets, current liabilities, sundry debtors, finished goods, goods in transit, cash-in-hand, cash in bank, remittances in transit, etc. The liquidity of the applicants’ firm has, therefore, be determined on the basis of an overall consideration emanating from all these factors and not from an isolated ground of cash in hand.
15. We have also to take into account the balance of convenience before a stay is granted. The amount of substantial mischief, which would be caused to the applicants, if stay is declined, has to be weighed with the injury as would be caused to the Revenue if the same is granted. Section 35F of the Act embodies the general rule that the disputed amount be deposited before an appeal is heard. However, a proviso has been added to this section which is in the nature of an exception. According to the proviso, pre-deposit can be dispensed with wholly or partly with such conditions as are deemed proper in a given case, but while passing such an order the interests of revenue are required to be safeguarded. Thus, such case depends on its own merits. In the present case, the ground of limitation is a factor which cannot be last sight of and at the same time the assets of the petitioners are also not as bad as is depicted.
16. After considering all aspects of the matter, we do not think it would be proper to ask the petitioner-company to deposit the entire duty and penalty amounts. It will be quite reasonable to direct that 25% of the disputed duty amount be deposited within six weeks. We, however, find that it is a fit case where we should dispense with the pre-deposit of the penalty amount.
17. In the result, we partly allow this application and direct the petitioner-company to deposit 25% of the duty amount as indicated above. In case the same is done, the deposit of the balance of the duty amount and also the penalty amount shall stand waived. Further, if the said duty is deposited, the recovery of the other amounts shall stand stayed till the disposal of the appeal.
18. The application is disposed of in the above terms.
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