N.B. Sanjana, Assistant Collector of
Central Excise, Bomba Vs. Elphinstone Spinning & Weaving Mills Co. Ltd.
 INSC 31 (22 January 1971)
CITATION: 1971 AIR 2039 1971 SCR (3) 506
CITATOR INFO :
R 1991 SC 456 (5)
Central Excise Rules, 1944, rr. 9, 10 and
'Levy', 'Short Levy' 'paid' in r. 10, meaning
Under r. 8 of the Central Excise Rules, 1944,
made under the Central Excise and Salt Act, 1944 the Central Government issued
a notification exempting cotton fabrics from excise duty. The respondents owned
a textile mill and factory.
They manufactured grey cloth whichwas removed
from the mill and kept in a godown and later removed to the factory for being
processed into leather cloth which was stored in another godown in the factory,
from where it was taken Out as finished product. The removal at each stage was
done after filling the prescribed forms and with the permission of the Excise
Inspector In charge. In each of the forms filled by the respondents upto July
30, 1960. the Excise Inspector had made an assessment showing the rate of duty
and the amount of total duty payable as 'nil'. Later, the excise authorities
thought the goods were not of the description exempted under the notification
and on November 3, 1961, two notices were issued calling upon the respondents
to make certain payments, one under r. 10A and the other under r. 9 of the
Rules. The respondents protested and filed a writ petition in the High Court.
The High Court held that the proper rule applicable was r. 10 but that as the
demand notices were not issued within 3 months .Is required by that rule, the
notices were illegal and void.
In appeal to this Court,
HELD : (1) Rule 10A cannot apply when a short
levy is made ,through error or misconstruction on the part of an officer as
such a case is specifically provided for by r. 10, because, r. 10A deals with
residuary powers and does not apply when specific provision for collection of
duty is provided or by other rules. [516 H; 517 A: 521 D] (2) The proper
provision under which action should have been taken, if at all, is r. 10. Under
r. 10, when duties or charges have been short levied through inadvertence,
error, collusion or Misconstruction on the part of an officer, the person
chargeable with the duty or charge shall pay the deficiency on written demand
being made within three month from the date on which the duty or charge was
paid. Though the words used are 'short-levied' and paid, in order to attract r.
10 it is not necessary that some amount of duty Should have been assessed and
that the said amount should also have been actually paid. It will apply even
duty later on assessed must be considered to be the duty originally
short-levied. 1519 F-G; 520 E-F; 521 D-E] (a) The expression 'levy' is not used
in the Act or the Rules as meaning actual collection, because, s. 3(1) of' the
Act use.,,, both the 'levied' and 'collected'. 1514 G-H] 507 (b) The expression
'paid' in r. 10 should not be read in a vacuum and it will not be right to
construe it literally as 'actually paid'. The word will have to be understood
and interpreted in the context in which it appears. If the literal construction
is accepted, then in a case where an assessee, in collusion, manages to have a
very petty amount of duty assessed, he can, if he paid the amount, effectively
plead limitation of three months, but, when no duty has been levied there
would, be no period of limitation, a result which would be anomalous.
Therefore, the proper interpretation to be placed on the expression 'paid' is
'sought to have been paid.' (c) This interpretation will not cause any
difficulty in calculating the period of three months. The Act and the Rules
provide very elaborately the stage and the time when the duty is to 'be paid
and that must be considered to be the stage or time when the duty 'ought to
have been paid', and the period of three months will be counted from that time.
[519 G-H] Gursahai Saigal v. C.I.T. Punjab,  3 S.C.R. 893 followed, Allen
v. Thorn Electrical Industries Ltd. (1968) 1 Q.B. 487, referred to.
(3) Rule 9 does not also apply to the facts
of the case.
Rule 9(1) provides for the time and manner of
payment of duty. To attract r. 9(2) the goods should have been removed in
contravention of sub-r. (1), that is, clandestinely and without assessment; but
in this case there is no such clandestine removal without assessment. Moreover,
(2) is a penal provision applicable where
there is evasion of payment of duty, since the party is also made liable to a
penalty and confiscation. [520 G-H; 521 A-C] J. K. Steel v. Union.  2
S.C.R. 481, followed.
Therefore, the demands having been made long
after the expiry of the period of three months referred to in r. 10, the
demands are not valid,
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1467 of 1967.
Appeal from the judgment and order dated July
1, 2, 1965 of the Bombay High Court in Appeal No. 69 of 1963.
V. A. Seyid Muhammad and S. P. Nayar, for the
C. K. Daphtary, Anil B. Diwan, Suresh A.
Shroff, Ravinder Narain and O. C. Mathur, for the respondent.
S. J. Sorabjee and O. C. Mathur, for the
The Judgment of the Court was delivered by
Vaidialingam, J This appeal by certificate is directed against the judgment and
order of the Division Bench of the Bombay High Court dated July 1/2, 1965
confirming the decision dated August 6/7, 1963 of the learned Single Judge in
Miscellaneous petition No. 20 of 1962 quashing the two notices of demand dated
November 3, 1961 issued by the second appellant as also the notice dated
December 2, 1961 issued by the first appellant for payment of the amount
covered by the said two notices.
The circumstances leading up to the filing of
the writ petition may be mentioned.', The respondents own a textile mill at 508
Elphinstone Road, Parel, Bombay where they manufacture, inter alia, grey cloth.
They also have a factory situated at Tulsi Pipe Lane Road, Bombay for
processing grey cloth into various other .goods like leather cloth, book
binding cloth and other coated fabrics. Under s. 3 of the Central Excise and
Salt Act, 1944 (hereinafter to be referred as the Act) duty is Imposed on all
,excisable goods produced or manufactured in India at the rates set forth in
the First Schedule to the Act. Item 19 of the First Schedule includes cotton
fabrics. Section 3 of the Act provides that excise duty is to be collected in
such manner as may be prescribed by rules made under the Act. On cotton fabrics
additional excise duty called handloom cess is also imposed under the
additional Duties of Excise (Goods of Special Importance) Act, 1957 and Khadi
and other Handloom Industries Development (Additional Excise Duty on Cloth)
Act, 1953, respectively. Under :S. 37 of the Act, the Central Government has
made rules called the Central Excise Rules, 1944 (hereinafter to be referred as
the ,Rules). Rule 8 gives power to the Central Government to exempt by
notification subject to such conditions as may be specified therein any
excisable goods from whole or any part of duty leviable on such goods.
Accordingly the Central Government issued a notification Ex. A dated January 5,
1957 exempting cotton fabrics mentioned therein wholly from excise duty.
hem No. 2, related to 'leather cloth and
inferior or imitation leather cloth ordinarily .Used in book binding'.
The exemption granted in respect of this item
and another item was withdrawn by the Central Government with effect from July
30, 1960 by notification Ex. D dated July 29, 1960.
There does not appear to have been any
controversy before the High Court that the two notices dated November 3, 1961
and the notice dated December 2, 1961 related only to goods falling under item
No. 2. of the notification Ex. A. The respondents between July 4, 1958 and July
30, 1960 manufactured grey cloth in the textile mill and sent some of those
items to their factory for being processed and manufactured into leather cloth
and imitation leather cloth.
During the material period the company used
to manufacture grey, cloth and used to store them in a bonded godown.
Periodically they used to send to the factory
such quantities of grey cloth as were required after filling in the necessary
forms prescribed by the rules and after obtaining the necessary permission in
the manner prescribed by the rules from the Excise Inspector In charge of the
textile mill. The respondents had, however, not obtained the requisite licence
and so they paid excise duty on grey-cloth manufactured in their mill during
the period July 4, 1958 and July 30, 1960 manufactured grey cloth in the
manufacturing leather cloth and imitation cloth. The respondents later on
obtained the necessary licence with the result that 509 they became entitled to
remove the grey-cloth manufactured at their textile mill to their factory
without paying excise duty on the grey-cloth at the time when the goods were
removed. The grey-cloth so removed after September 30, 1959 and before July 30,
1960 used to be kept in the bonded godown. Those goods were removed to the
factory after filling up the necessary forms and obtaining the permission of
the Excise Inspector In charge of the factory. The grey cloth after it was
processed and made into leather cloth or imitation leather cloth was again
stored in another bonded godown in the factory and they were removed by the
company as finished products after filling in for A.R.I. prescribed by the
rules. There is again no dispute that in each of these A.R.I. forms the company
had shown and made a declaration that the excise duty payable on the goods
governed by the forms was 'nil'. Under the heading 'Assessment Memorandum.' in
the said form the particulars regarding rate of duty and amount of total duty
payable on the goods referred to in the form had to be filled up and signed by
the Excise Inspector. There is no controversy that in each of the A.O.1. forms
filed by the respondents during the period July 4, 1958 and July 30, 1960, the
Excise Inspector Incharge, Leather Cloth Division has made an assessment in the
appropriate portion of those forms showing the rate of duty and the amount of
total duty payable as "nil' and has affixed his signature under such
Therefore, it will be seen that all the goods
removed by the, respondents during the said period were shown by them as not
liable to pay any excise duty and were also assessed by the Excise Inspector as
not liable to pay any duty.
Later on, the excise authorities appear to
have entertained some doubt whether the goods covered by these A.R.I. forms
were of the description exempted under item No. 2 of the notification Ex. A.
Some correspondence took place between the department and the respondents. On
November 3, 1961, the second appellant issued two notices marked Ex. G. The
first notice issued under rule 10A required the respondents to pay a sum of Rs.
1,07,146,39. In the particulars of demand it was stated that the amount
represented duty on leather cloth manufactured out of (i) non-duty paid cloth
and (ii) duty paid cloth cleared without payment of duty from October 1, 1959
to March 31, 1960.
The second notice of the same day issued
under rule 9 called upon the respondents to pay a sum of Rs. 1,502,24
representing the extra processing duty on leather cloth manufactured out of
duty paid cloth from July 4, 1958 to September 30, 1959.
These two notices were followed by the first
appellant by issuing a letter of demand dated December 2, 1961, Ex. H, calling
510 upon the respondents to pay up the amount as per the notice issued by the
second appellant. The respondents were advised that if they are aggrieved with
the decision they may go up in appeal to the Collector of Central Excise,
Bombay. The respondents sent a reply dated December 28, 1961 Ex. I, contesting
validity of the notices dated November 3, 1961 and December 2, 1961. They
objected to the demand on the ground that the notices were illegal and neither
rule 9 nor rule 10A gave power to the authorities to issue such notices. They
further contended that the demands were barred by time. The respondents also
addressed a letter on the same lines to the Central Board of Revenue.
As there was no favourable response from the
appellants they, filed the writ petition, out of which these proceedings arise,
in the High Court to quash Exhibits G and H.
The respondents contended before the High
Court that neither rule 9 nor rule 10A gave power to the appellants to issue
the demand notices. Their stand was that if at all it was rule 10 that applied
and as the demands have been made long after the period of three months
prescribed in the said rule, the notices were illegal and void.
On behalf of the appellants it was urged that
rule 10 has no application as that rule will apply only when duties and charges
have been 'short levied'. As initially no amount has been levied in this case,
rule 10 has no application.
According to the appellants the rule
applicable was rule 10A. Alternatively it was contended that if rule I OA did
not apply, the demands made by them were amply covered by rule 9(2).
The learned Single Judge accepted the
contention of the respondents and held that rule 10 applied and as the demand
notices had been issued long after the expiry of three months, Ex. G and H, the
notices, were illegal and void.
In this view the learned Single Judge quashed
the said notices. On appeal the Division Bench confirmed the order of the
learned Single Judge.
This is a convenient stage to refer to the
They are rules 7, 9, 10, 10A, 52 and 52A(1).
We have already referred to the fact that the rules have been made by the
Central Government under S. 37 of the Act. Those rules, referred to above, are
as follows :
"(7) Recovery of Duty :-Every person who
produces, cures, or manufactures any excisable goods, or who stores, such goods
in a warehouse, shall pay the duty or duties leviable on such goods, at such
time and place and to such person as may be designated, in or 511 under the
authority of these Rules whether the payment of such duty or duties is secured
by bond or otherwise.
(9) Time and manner of payment of duty:(1) No
excisable goods shall be removed from any place where they are produced, cured
or manufactured or any premises appurtenant thereto, which may be specified by
the Collector in this behalf, whether for consumption, export, or manufacture
of any other commodity in or outside such place, until the excise duty leviable
thereon has been paid at such place and in such manner as is prescribed in
these Rules or as the Collector may require and except on presentation of an
application in the proper form and on obtaining the permission of the proper
officer on the form;
Provided that such goods may be deposited
without payment of duty in a store-room or other place of storage approved by
the Collector under rule 27 or rule 47 or in a warehouse appointed or licensed
under rule 140 or may be exported under bond as provided in rule 13;
Provided further that such 'goods may be
removed on party payment of duty leviable thereon if the Central Government, by
notification in the Official Gazette, allow the goods to be so removed under
Provided also that the Collector may, if he
fit instead of requiring payment of duty in respect of each separate
consignment of goods removed from the place or premises specified in this
behalf, or from a store-room or warehouse duly approved, appointed or licensed
by him keep with any person dealing in such goods an account-current of the
duties payable thereon and such account shall be settled at internal, not
exceeding one month and the account-holder shall periodically make deposit
therein sufficient in the opinion of the Collector to cover the duty due on the
goods intended to be removed from the place of production, curing, manufacture
(2) If any excisable goods are, in
contravention of sub rule (i) deposited in, or removed from, any place specified
therein, the producer or manufacturer thereof shall pay the duty leviable on
such goods upon written demand made by the proper officer, whether such demand
is delivered personally to him, or is left at his dwelling house, and shall
also be liable to a penalty which 512 may extend to two thousand rupees, and
such goods shall be liable to confiscation.
(10) Recovery of duties or charges
short-levied, or erroneously refunded When duties or charges have been
short-levied through inadvertence, error, collusion or mis-construction on the
part of an officer, or through misstatement as to the quantity, description or
value of such goods on the part of the owner, or when any such duty or charge,
after having been levied, has been owing to any such cause, erroneously
refunded, the person chargeable with the duty or charge, so short-levied, or to
whom such refund has been erroneously made, shall pay the deficiency or pay the
amount paid to him in excess, as the case may be, on written demand by the
proper officer being made within three months from the date on which the duty
or charge was paid or adjusted in the owners account-current, if any, or from
the date of making the refund.
(10-A) Residuary powers for recovery of sums
due to Government Where these Rules do not make any specific provision for the
collection of any duty, or of any deficiency in duty if the duty has for any
reason been short levied, or of any other sum of any kind payable to the
Central Government under the Act or these Rules, such duty, deficiency in duty
or sum shall, on a written demand made by the proper officer, be paid to such
person and at such time and place, as the proper officer may specify.
(52) Clearance on payment duty When the
manufacturer desires to remove goods on payment of duty, either from the place
or a premise specified under rule 9 or from a store-room or other place of
storage approved by the Collector under rule 47, he shall make application in
triplicate (unless otherwise by rule or order required) to the proper officer in
the proper Form and shall deliver it to the officer at least twelve hours (or
such other period as may be elsewhere prescribed or as the Collector may in any
particular case require or allow) before it is intended to remove the goods.
The officer, shall, thereupon, assess the
amount of duty due on the goods and on production of evidence 513 that this sum
has been paid into the Treasury or paid in the account of the Collector in the
Reserve Bank of India or the State Bank of India, or has been despatched to the
Treasury by money-order shall allow the goods to be cleared.
52A-(1) Goods to be delivered on a Gatepass No
excisable goods shall be delivered from a factory except under a gatepass in
the proper Form or in such other form as the Collector may in any particular
case or class of cases prescribe signed by the owner of the factory and
countersigned by the proper officer.." Dr. Syed Mohammad, learned counsel
for the appellants urged that going by a plain reading of rule 10, it is clear
that the said rule will apply only to cases : (1) when an assessment has been
made that same amount is due as duty and(2) when the said amount so assessed
has been paid by the party concerned. In this case, he pointed out, there has
been, no doubt, an order of assessment passed when the goods were cleared by
the party, but that order of assessment was not one making the party liable to
pay any duty, on the other hand, it was an order of 'nil assessment' under
which the party was to pay no duty whatsoever. In consequence of such
assessment, no duty having been paid, it cannot be stated that there has been a
short levy for any of the reasons mentioned in rule 10. According to the
learned counsel rule 10 will apply only when there has been an assessment
making the party liable to pay some ,duty and that amount so assessed has also
been actually paid or adjusted by the party, as the case may be. When later on
it is found that the amount so levied and paid falls short of the correct
amount that ought to have been levied and paid by the ,party, rule 10 will
stand attracted. In this connection he placed very great reliance on the
concluding part of rule 10 where a period of three months by way of limitation
has been provided for calling upon the party to pay the deficiency and the period
of three months is to be calculated "from the date on which the duty or
charge was paid...... He stressed that the use of the expression
"paid" clearly indicates that some duty must have been actually paid
by a party on a particular date and if that were not so, it would be difficult
to calculate the period of three months within which a party can be called upon
to make good the deficiency. The council also urged that the word 'levy' in
rule 1 0 means actual collection and that short levy, therefore, denotes that
full duty has not been collected.
He also urged that rule 10A covers all cases
of short levy or non-levy for any reason whatsoever and the notices issued by
the appellants in this case are legal and valid. He finally urged that even if
it is held that rule 10A does not 514 apply , the notices could be sustained
under rule 9(2) in as much the respondents have removed the goods without
payment of duty in contravention of rule 9(1). The mere fact that one of the
notices issued on November 3, 1961 refers to rule 10A is not ,on that ground
invalid when the authorities have ample., power to issue, such notices under
Mr. Daphtary, learned Counsel for the
respondents and Mr. Sorabjee, learned counsel for an intervener, have both
contended that the notices issued by the appellants squarely come under rule 10
and as they have been issued beyond the period of three months, they have been
rightly held to be invalid and illegal. 'Though the words used in rule 10
"duty or charge so paid", reading the rule as a whole it is clear
that the rule does not contemplate that any amount should have been levied as a
duty and that the said amount should have been paid. 'Me word "paid"
has only been used to provide a starting point of limitation of three months.
Though the ordinary meaning of the expression
"paid" is that some amount should have been actually paid as such,
both the counsel pointed out, that the said word should be construed in the
context in which it appears. So read, it is pointed out that the proper
interpretation to be placed on the word "paid" is that it has been
used to denote the stage or time when the duty or ,charge ought to have been
paid. Such a reading will not do any violence to the language of rule
10. It is further pointed out that the
expression "short levied" in rule 10 will cover cases not only levy
of smaller amount that what is due but also of making the party not liable to
pay any duty. In one case the short-levy will 'be the difference of the amount
actually levied and the correct amount due; and in the other case the short
levy will be the entire amount of duty that is found to be actually due by a
party. Ile counsel further pointed out that rule 10A will apply only to those
,cases where no specific provision for collection of duty or any deficiency in
duty has been made by the rules and that will apply also to any other sum of.
any other kind payable to the Central
Government under the Act or the Rules. In this case, as the party admittedly
has been assessed to 'nil duty' by the officers concerned and allowed to remove
the goods, the specific provision for recovery of any short-levy is
specifically provided for by rule 10, which will exclude rule 10A. On these
grounds, both the ,counsel urged, that the High Court was right in holding that
rule 10 applies and that the notices having been issued beyond the period of
three months are illegal and invalid.
We are not inclined to accept the contention
of Dr. Syed Mohammad that the expression 'levy' in rule 10 means actual
collection of some amount. The charging provision section 3(i) specifically
says "There shall be levied and collected in such, a 515 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 show
that the expression "levy" has not been used in the Act or the Rules
as meaning actual collection. Dr. Syed. Mohammad is, no doubt, well founded in
his contention that if the appellants have power to issue notice either under
rule 10A or rule 9(2), the fact that the notice refers specifically to a
particular rule, which may not be applicable, will not make the notice invalid
on that ground as has be held by this Court in J. K. Steel Ltd. v. Union of
If the exercise of a power can be traced to a
legitimate source, the fact that the same was purported to have been exercised
under a different power does not vitiate the exercise, of the power in
question. This is a well settled proposition of law. In this connection reference
may usefully be made to the decisions of this Court in B. Balakotaiah v. The
Union of India and ors (2 ) and Afzal Ullah v. State of U.P.(3).
In this case, the officer who issued the two
notices is competent to make demands under both rules 9(2) and rule 10A. But in
order to sustain the validity of the demand either under rule 9(2) or rule
10-A, the appellants will have to go further and establish that the demands can
be justified under either of the rules.
Before we deal with the contentions of the
learned counsel we may state that rule 10-A was incorporated because of the
decision of the Nagpur High Court in Messrs Chhotabhai Jethabhai Patel v. Union
of India(4). The assessees in that case were a firm of tobacco merchants and
manufacturers of bi dis holding licence under the Central Excise Rules. On the
introduction in Parliament of Bill No. 13 of 1951 on February 28, 1951, the
assessees paid the requisite duty on tobacco stored by them under the declared
provision read with sections 3 and 4 of the Provincial Collection of Taxes Act,
1931. The assessees cleared tobacco from the warehouse between March 1, 1951
and April 28, 1951, after obtaining clearance certificates from the Range
Officer, Central Excise. The rate of duty payable on un-manufactured tobacco
was increased by the Finance Act of 1951. On June 4, 1951 a demand was made by
the Range Officer, Central Excise at the increased rate and the assessees
therein were asked to pay the said increase. The assessees challenged the
demand before the High Court under Art. 226 of the Constitution on various
grounds. The Nagpur High Court held that rule 10 did not apply and that the
demand was invalid.
(1)  2 S.C.R.481.
(3)  4 S.C.R. 991.
(2)  S.C.R 1052.
(4) I.L.R.  Nag., 156.
516 After the decision of the Nagpur High
Court, the Central Government by a notification dated December 8, 1951 amended
the Central Excise Rules, 1944 by the addition of a new rule 10-A. On the basis
of this rule in respect of the same assessees a further and fresh demand was
made for payment of duty as per' the Finance Act, 1951. The assessees
challenged the validity of the demand on the same ground as before. The Full
Bench of the Nagpur High Court rejected the assessees' contention and held that
rule 10A covers a case for increased levy on the basis of a change of law.
This decision was sought to be challenged
before this Court but without any success. In fact this Court in Chhotabhai
Jethabhai Patel and Co. v. The Union of India and another(1) specifically
rejected the assessees' claim regarding non applicability of rule 10A stating
that it had been specifically designed "for the enforcement of a demand
like the one arising in the circumstances of the case". The decision of
this Court is an illustration of certain types of cases to which rule 10-A will
This now takes us to the question of proper
interpretation to be placed on the expression "short-levied" and
"paid" in rule 10. Does the expression "short-levied" mean
that some amount should have been levied as duty as contended by Dr. Syed
Mohammad or will that expression cover even cases where the assessment is of
'nil duty', as contended by Mr. Daphtary. What is the meaning of the word
"paid" in rule 10 ? It is contended on behalf of the appellants that
it means "actually paid", whereas, according to the respondents', it
means "ought to have been paid". Taken literally, the word
"paid" does mean actually paid in cash. That means that a party or an
assessee must have paid some amount of duty whatever may be the quantum. If
this literal interpretation is placed on the expression "paid" in
rule it is needless to state that it will support in a large measure the
contention of Dr. Syed Mohmmad that rule 10 contemplates a short-levy in the
sense ,that the amount which falls short of the correct amount has been
assessed and actually paid. In our opinion, the expression "paid"
should not be read in a vacuum and it will not be right to construe the said
word literally, which means actually paid. That word will have to be understood
and interpretted in the context in which it appears in order to discover its
appropriate meaning. If this is appreciated and the context is considered it is
apparent that there is an ambiguity in the meaning of the word
"paid". It must be remembered that rule 10 deals with recovery of
duties or charges short levied or erroneously refunded. The expression
"paid" has been used to denote the starting point of limitation of
three months for the issue of a written demand. The Act and the (1) 
Supp.  S.C.R. 1.
517 Rules provide in great detail the stage
at which and the time when the excise duty is to be paid by a party. If the
literal construction that the amount should have been actually paid is
accepted, then in case like the present one on hand when no duty has been
levied, the Department will not be able to take any action under rule 10. Rule
10-A cannot apply when a short-levy is made. through error or misconstruction
on the part of an officer, as such a case is specifically provided by rule 10,
Therefore, in our opinion, the proper interpretation to be placed on the
expression "'paid" is "ought to have been paid". Such an
interpretation has been placed on the expression "paid" occuring in
certain otherenactments as in Gursahai Saigal v. Commissioner of Income-tax,
Punjab(") and in Allen v. Thorn Electrical Industries Ltd. (2 . In
Gursahai Saigal v. The Commissioner of Income-tax, Punjab(1), the question
arose asfollows : In certain assessment proceedings under the Indian Income-tax
Act, 1922, an assessee was charged with interest under subsection (8) of s. 18A
of that Act. Under that sub-section interest calculated in the manner laid down
in sub-section (6) of s. 18A was to be added to the tax assessed. Sub-section 3
of s. 18A dealt with cases of a person who has not been assessed before and he
was required to make his own estimate of the tax payable by him and pay
accordingly. Sub-section (3) of s. 18A was applicable to the assessee in that
case. However, he neither submitted any estimate nor did he pay any advance
tax. Under subsection' (6) of s. 18A it was provided :
"Where in any year an assessee has paid
tax under subsection (2) or sub-section (3) on the basis of his own estimate,
and the tax so paid is less than eighty Per cent of the tax determined on the
basis of regular assessment simple interest at the rate of six per cent per
annum from the 1st day of January in the financial year in' which the tax was
paid up to the date of the said regular assessment shall be payable by the
assessee upon the amount by which the tax so paid falls short of the said
eighty per cent." This sub-section is to apply to cases where tax has been
paid' by an assessee according to his own estimate but that estimate was on
regular assessment found to be deficient.
Further, interest has to be calculated from
1st January of the Financial Year in which tax mentioned therein was paid and
calculation has to be made on the short fall between the amount paid and
eighty. per cent of' the tax which was found payable on regular assessment.
Subsection (8) of s. 18A provided :
(1)  3 S.C.R. 893. (2) 1968 1 .Q.B.
518 .lm15 "where, on making the regular
assessment the Income-tax Officer finds that no payment of tax has been made in
accordance with the foregoing provisions of this section, interest calculated
in the manner laid down in sub-section (6) shall be added to the tax as
determined on the basis of the regular assessment." The assessee in that
case did not dispute that subsection(3) ,of s. 18A applied to him and that he
should have made an estimate and paid advance tax. He also admitted that he
never made an estimate nor did he pay any advance tax whatsoever. While
admitting that sub-section (8) of s.18-A applied to him, the assessee contended
before this Court that since he had not paid any tax at all, it is not possible
to calculate interest in the manner laid down in sub-section (6). According to
the assessee 'there was no 1st day of January of a financial year in which the
tax was paid and there was no question of a short fall between eighty per cent
of the tax payable on regular assessment and the ,amount paid because he. had
paid nothing. While rejecting the said contention this Court held :
"The proper way to deal with such a
provision is to give it an interpretation which, to use the words of the Privy
Council in Mahairam Kamjidas's (case) (1) makes the machinery workable utres
valeat potius quam pereat". We, therefore, think that we should read
sub-section (6) according to the provision of which interest has to be
calculated as provided in subsection (8) in a manner which makes it workable
and thereby prevent the clear intention of sub-section (8) being defeated. Now,
how is that best done? As we have earlier said sub-section (6) deals with a case
in which tax has been paid and therefore it says that interest would, be
calculated "from the 1st day of January in the financial year in which the
tax was paid". This obviously cannot literally be applied to a case where
no tax has been paid. If however the portion of subsection (6) which we have
quoted above is read as "from the 1st day of January in the financial year
in which the tax ought to have been paid", the provision becomes workable.
It would not be doing too much violence to the words used to read them in this
way. The tax ought to have been paid on one or other of the dates earlier
mentioned. The intention was that interest should be charged from January 1, of
the financial year in which the tax ought to have been paid. Those, 519 who paid
the tax but a smaller amount and those who did not pay tax at all would then be
put in the same position substantially which is obviously fair and was clearly
intended." Regarding the further contention that there was no short fall,
as no tax has been paid it was observed :
"With regard to the other question about
there being no shortfall between eighty per cent of the amount of tax found
payable on the regular assessment and the amount of tax paid in a case where no
tax was paid, it seems to us the position is much simpler. If no tax is paid,
the amount of such shortfall will naturally be the entire eighty per cent. We
also think that the case before us is very near to Allen's case.(1)" The
above decision establishes two propositions : (1) though the expression used
was "paid" it is open to read it as "ought to have been
paid" having regard to the context in which it appears and to make the
provision of law in which that expression appears workable; and (2) the short
fall will be the entire eighty per cent referred to subsection (6) of s. 18A.
Applying the above principles to the case on
hand, the expression "paid" in rule 10 can be reasonably read as
"ought to have been paid". Similarly even in cases where there has
been a nil assessment due to one or other of the circumstances mentioned in,
rule 10 and if subsequently it is found that duty is payable, then the entire
amount of duty should be considered to have been short-levied. The literal
meaning of the expression "paid" as actually paid in cash has again not
been adopted by the Court of Appeal in Allen v. Thorn Electrical Industries
Ltd.(2). Having regard to the context in which the said expression appeared in
the particular provision which came up for interpretation, the Court of Appeal
construed the expression to mean "contracted to be paid". Therefore,
the contention of Mr. Daphtary that the expression "Paid" should be
construed as "ought to have been paid" and even when no duty has been
assessed, the entire duty when subsequently assessed will be a short-levy,
which is also supported by the decision of this Court in Gursahai Saigal v.
Commissioner of Income-tax, Puniab (3) has to be accepted. It follows that in
order to attract rule 10, it is not necessary that some amount of' duty should
have been assessed and that the said amount should have also been actually
paid. That provision will apply even to cases where there has been a nil
assessment in which case the entire duty later on assessed must be considered
to be the duty (1) 22 T.C. 15, 16, 17.
(2)  1 Q.B. 487.
(3)  3 S.C. R. 893.
520 originally short-levied. There is also no
difficulty in calculating the period of three months. As pointed out above, the
Act and the Rules provide very elaborately the stage and the time when the duty
is to be paid and if that is so that must be considered to be the stage or time
when the duty ought to have been paid and if so the period of three months will
run from the time when the duty ought to have been paid.
Dr. Syed Mohammad referred us to certain
decisions of the High Courts where a demand has been sustained under rule 10 or
rule 10A. We have considered those decisions. In some of those decisions there
has been a short-levy due to the reasons mentioned in rule 10 and the demand
also has been issued within the period of three months and hence the notice had
been sustained under rule 10. In other cases, it was specifically held that the
demand covered by the notice issued under rule 10A has not been specifically
provided for by any other rule and the demand therefore, was valid.
These decisions, in our opinion, do not in
any manner advance the case of the appellants and we do not think it necessary
to deal with them individually.
We may point out that if the contention of
Dr. Syed Mohammad that in order to constitute short-Levy, some amount should
have been assessed as payable by way of duty so as to make rule 10 applicable,
is accented the result will be rather anamolous. For instance if due to
collusion (which means collusion between a party and an officer of the
Department) a sum of Rs. 2/is managed to be assessed by way of duty when really
more than thousand times that amount is payable anD if the smaller amount of
duty so assessed has been paid, the Department will have to take action within
three months for payment of the proper amount of duty. On the other hand, if
due to collusion again an order of nil assessment is passed, in which case no
duty would have been paid, according to the appellants rule 10A will apply. We
do not see any reason to distinguish the above two cases one' 'from the other.
Both are cases of collusion and if an assessee in collusion manages to have a
petty amount of duty assessed and paid he can effectively plead limitation of
three months under rule 10. Whereas in the same case of collusion where no duty
has been levied there will be no period of limitation. In our opinion, that
will not be a proper interpretation to be placed on rule 10A by us. By the
interpretation placed by us on rule 10, the position will be that an assessee
who has been assessed to a smaller amount as well as an assessee who has been
assessed to nil duty will all be put on a par and that is what is intended by
The above reasoning leads to the conclusion
that rule 10A ,does not apply to the case on hand. Then the question is whether
521 the demands could be justified under rule 9(2). Even here we find considerable,
difficulty in sustaining the notice under this rule. Sub-rule (1) of rule 9
provides for the time and the manner of payment of duty. In this case there is
no controversy that whenever goods were cleared by the respondents, necessary
applications had been made to the officer concerned and the latter had passed
orders of assessment to nil duty. To attract sub-rule 2 of rule 9, the goods
should have been removed in contravention of sub rule (1). It is not the case
of the appellants that the respondents have not complied with the provisions of
sub rule 1. We are of the opinion that in order to attract sub rule 2, the
goods should have been removed clandestinely and without assessment. In this
case there is no such clandestine removal without assessment. On the other
hand, goods had been removed with the express permission of the Excise
authorities and after order of assessment was made.
No doubt the duty payable under the
assessment order was nil. That, in our opinion, will not bring the case under
sub-rule (2). That sub-rule (2) is a penal provision is shown from the fact
that apart from the duty payable, the party is also made liable to a penalty
and he also incurs the risk of the goods being confiscated. That rule 9(2)
applies only to cases where there has been an evasion from payment of duty is
clear from the decision of this Court in J. K. Steel Ltd. v. Union of India(1).
Though on certain other aspects there was a difference of view amongst the
learned Judges, on this aspect the decision is unanimous.
There is absolutely no material placed before
us by the appellants which would justify the issue, of the notice under rule
To conclude rule 10A does not apply as the
specific provision for collection of duty to cases like the one before us is
specifically provided by rule 10 nor does rule 9(2) apply to the case on hand.
The proper provision under which action should have been taken if at all is
The demands having admittedly been made long
after the expiry of the period of three months, referred to in the said rule,
it follows that the demands were not valid. The High Court was justified in
striking down the notices dated November 3, 1961 Ex. G as well as the demand
dated December 2, 1961 under Et. H.
The appeal fails and is dismissed with costs.
V.P.S. Appeal dismissed.
(1)  2 S.C.R. 481.