PETITIONER:
UNION OF INDIA AND ORS.
Vs.
RESPONDENT:
M/S. WOOD PAPERS LTD. AND ANR.
DATE OF JUDGMENT24/04/1990
BENCH:
SAHAI, R.M. (J)
BENCH:
SAHAI, R.M. (J)
SHETTY, K.J. (J)
CITATION:
1991 AIR 2049 1990 SCR (2) 659
1990 SCC (4) 256 JT 1991 (1) 151
1990 SCALE (1)61
CITATOR INFO :
F 1992 SC 152 (12)
ACT:
Central Excise and Salt Act, 1944/Central Excise Rules:
Section 4, Schedule I item 17/Rule 8 and Notification No.
163 of 1965--Exemption to all sorts of paper by 'any factory
commencing production'---Claim for exemption on capacity as
it existed in 1967--Whether permissible?
HEADNOTE:
The Respondent Company which was established in 1942
went into production in 1944 manufacturing Straw Boards and
Mill boards only uptil the year 1964. In 1965 it expanded
its activities by manufacturing duplex board. In the follow-
ing year it started manufacturing packing and wrapping paper
on experimental basis and on commercial basis after 1967.
Sometime in 1971 the Company wrote to the Assistant Collec-
tor of Central Excise enquiring as to whether it would be
entitled to exemption from duty under Notification No.
163/1965 both in respect of production attributable to its
installed capacity as in 1967 as well as in respect of
production attributable to its expanded capacity. The As-
sistant Collector passed an Order holding the company was
entitled to concession under column 5 of the Table of the
Notification No. 163 of 1965 in respect of production at-
tributable to its enlarged capacity namely, the third ma-
chine and rejected its claim for exemption on production
attributable to its capacity as it existed in 1967. Dissat-
isfied the company preferred appeal to the Appellate Collec-
tor who maintained the order of the Assistant Collector.
The Respondent-Company thereupon moved the High Court by
a writ petition under Article 226 of the Constitution of
India. In allowing the writ Petition the High Court held
that on a plain literal construction it is obvious that the
commencement of production must refer not to the production
of excisable goods--paper in general failing under item 17.
but to production of those specified exempted categories of
paper in column 2 of the aforesaid notification. Hence this
appeal by the Union of India.
Allowing the appeal and dismissing the Writ Petition of
the Company. this Court.
HELD: When the question is whether a subject falls in
the Notification or in the exemption clause then it being in
nature of exception is to be construed strictly and against
the subject but once ambiguity or doubt about applicability
is removed and the subject falls in the notification then
full play should be given to it and it calls for a wider and
liberal construction. [663D-E]
A close reading of both parts of the Notification together
leaves no
660
room for doubt that it was intended to be exhaustive grant-
ing exemption to all factories producing packing and wrap-
ping paper whether existing or commencing production from
1st March. 1964 to the former to the extent of enlarged
capacity and to latter to the full extent. [663G-H]
As the Respondent Company did not fall in the first
clause of the notification there was no question of giving
the clause a liberal construction and hold that production
of goods by the Respondent mentioned in the Notification
were entitled to the benefit.
Production of packing and wrapping paper by Respondent
was entitled to exemption only to the extent it was at-
tributable to enlarged capacity and not to the existing
capacity. [665F; 664F]
Hansraj Goverdhan v. H.H. Dave, Asstt. Collector, Cen-
tral Excise & Customs, Surat and Others, [1969] 2 S.C.R.
2.52; Commissioner of Inome-tax v. Madho Prasad, [1989] 4
S.C.C. 541; Tara Oil Mills Co. Ltd. v. Collector of Central
Excise, A.I.R. 1989 SC 644 referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 539 of
1976.
From the Judgment and Order dated 26.8.1975 of the
Gujarat High Court in Spl. Civil Application No. 1627 of
1972.
Soli J. Sorabjee, Attorney General, A. Subba Rao, C.V.S.
Rao, P. Parmeswaran and Ms. Nisha Bache for the Appellants.
S.K. Dhingra for the Respondents.
The Judgment of the Court was delivered by
R.M. SAHAI, J. By this appeal Union Government has
challenged correctness of construction by High Court of
Gujarat of notification No. 163 of 1965 issued under Rule 8
framed under Central Excise and Salt Act allowing exemption
to all sorts of papers by “any factory commencing produc-
tion” to refer “not to the production of excisable
goods–paper in general failing under Item 17, but to pro-
duction of these specified exempted categories of paper in
Column 2 of this notification” and canvasses for acceptance
of the construction put on it by the Collector, Central
Excise “that the factory must have commenced production on
or after that date and not that the production of these
items must have been commenced after the date”.
M/s. Arvind Boards & Paper Products Limited, Antalia,
Bilimora, Gujarat State, was established in 1942. From 1944
when it went into production till 1964 it manufactured only
straw boards and mill boards. It expanded its activities in
1965 and commenced manufacture of duplex board. The packing
and wrapping paper was manufactured
661
on experimental basis in 1966 and on commercial basis after
1967. In December, 1971 the company wrote a letter to the
Assistant Collector of Central Excise inquiring as to wheth-
er the company would be entitled to exemption under notifi-
cation No. 163/65 both in respect of the production at-
tributable to its installed capacity as in 1967 as well as
in respect of the production attributable to its expanded
capacity. In 1972 it was informed that it would be entitled
to concession under Column 5 of the Table of the notifica-
tion in respect of the production attributable to the en-
larged capacity, namely, the third machine only. Consequent-
ly the claim of the petitioners for exemption on capacity as
it existed in 1967 was not accepted. The order was main-
tained in appeal as well. The Appellate Collector held:
“I do not agree with the appellant’s contention that the
Assistant Collector erred in holding that “any factory which
commenced production” related to any factory manufacturing
paper falling under Item 17 of the said schedule irrespec-
tive of the varieties manufactured thereof. The exemption
contained in the aforesaid Notification No. 163/65 as amend-
ed is in respect of the goods. Said exemption is conditional
i.e. it is applicable to paper produced in a factory which
commenced production on or after a specific date. Therefore,
the condition is that the factory must have commenced pro-
duction on or after that date and not that the production of
these items must have been commenced after that date.”
The High Court did not agree with the construction of the
Notification made by the Collector (Appeal) and held:
“That is why the whole controversy has arisen as regards
these key words “commencement of production”. On a plain
literal construction, bearing in mind the context of the
exemption, where only certain specified categories of paper
which is excisable item as specified in Column 2 had been
exempted, it is obvious that the commencement of production
must refer not to the production of excisable goods–paper
in general falling under item 17, but to production of these
specified exempted categories of paper in Col. 2 of this
notification. Any other interpretation would make the speci-
fication of various kinds of paper in Column 2 which alone
attracted exemption redundant and would make even this
condition in Cols. 3, 4 and 5 unworkable.”
Excise duty was leviable under the Act on manufacture
and clearance of paper under Item 17 of Schedule 1 to the
Act. It reads as
662
“MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL
17. PAPER, all sorts (including pasteboard, millboard.
straw-board and cardboard), in or in relation to the manu-
facture of which any process is ordinarily carried on with
the aid of power’.
XXX XXX XXX
(3) Printing and writing paper, packing and wrapping paper,
straw board and pulp board, including grey board, corrugated
board, duplex and triplex boards, other sorts ….. 35
paise per kg.”
In 1965 the Central Government issued notification exempting
papers of all sorts, from so much of the excise duty levi-
able thereon under the said item read within notification
for the time being in force issued by the Central Government
in relation to the duty so leviable, as is specified in the
corresponding entry in Columns 3, 4, 5(a), 5(b) & 5(c) of
the Table as the case may be:
TABLE
S. Des- Any factory Any factory Any factory commen-
cription which comm- which comm- production for the
enced pro- enced pro- time on or after the
duction duction on 1st March, 1964, or
before the or after the any factory existing
1st April, 1st April, immediately, before
1961. 1961 but the 1st March 1964
before the whose production
1st March capacity has been
1964. enlarged and brought
into operation on or
after the extent
such production is
attributable to the
enlarge capacity.
-------------------
During the During During the
first 12 the period
months of second subsequent
the com- 12 mon- to the first
mencement mence- 24 months
of produc- ment of of the com-
duction. produc- mencement
of produc-
tion.
663
———————————————————
1 2 3 4 5(a) 5(b) 5(c)
———————————————————
Entitlement of exemption depends on construction of the
expression “any factory commencing production” used in the
Table extracted above. Literally exemption is freedom from
liability, tax or duty. Fiscally it may assume varying
shapes, specially in a growing economy. For instance tax
holiday to new units, concessional rate of tax to goods or
persons for limited period or with the specific objective
etc. That is why its construction, unlike charging provi-
sion, has to be tested on different touchstone. Infact an
exemption provision is like an exception and on normal
principle of construction or interpretation of statutes it
is construed strictly either because of legislative inten-
tion or on economic justification of inequitable burden or
progressive approach of fiscal provisions intended to aug-
ment state revenue. But once exception or exemption becomes
applicable no rule or principle requires it to be construed
strictly. Truly, speaking liberal and strict construction of
an exemption provision are to be invoked at different stages
of interpreting it. When the question is whether a subject
falls in the notification or in the exemption clause then it
being in nature of exception is to be construed strictly and
against the subject but once ambiguity or doubt about ap-
plicability is lifted and the subject fails in the notifica-
tion then full play should be given to it and it calls for a
wider and liberal construction. Therefore, the first exer-
cise that has to be undertaken is if the production of
packing and wrapping material in the factory as it existed
prior to 1964 is covered in the notification.
From the table extracted above it is clear that it is in
two parts and exemption is allowable in the first part to
the factory commencing production on or after 31st March,
1964, and in the second part to the existing factory to
extent of enlarged capacity. If the first part is read in
isolation it is susceptible of construction as was adopted
by the High Court. But the notification has to be read in
its entirety and constured as a whole. Once that is done
cloud of uncertainty disappears. A close reading of both the
parts together leaves no room for doubt that it was intended
to be exhaustive granting exemption to all factories produc-
ing packing and wrapping paper whether existing or commenc-
ing production from 1st March, 1964. To the former to the
extent of enlarged capacity and to latter to full extent.
The ambiguity arose because of absence of words new before
‘factory’ or goods after the word ‘production’ in the first
clause. To harmonise it the High Court added the words
‘goods’. But what was lost sight of that the words ‘commenc-
ing’ in the first part and ‘existing’ in the second part had
to be read in juxtaposition. That is all those factories
which were existing from before
664
were entitled to exemption on production of goods to the
extent of enlarged capacity. This enlargement could be as a
result of installation of additional machinery. The word
‘capacity must necessarily relate to capacity of factory and
not to goods. For instance a factory with capacity of say 1
lakh kg. of paper but producing only 75 thousand kg. achiev-
ing maximum after 1964 could not be covered in the clause as
the production cannot be held to be due to enlarged capaci-
ty. That could be only if the capacity to produce goods
increased due to installation of additional machinery. If
this be true and correct, as it appears to be, then the
first part presents no difficulty. The expression ‘commenc-
ing production’ has to be read as commencing production of
goods by a factory which was not existing and has started
production on or after 1st March, 1864. Any other construc-
tion shall result in discrimination. A factory like respond-
ent existing from 1942 producing straw board and mill board
shall be entitled to exemption on production of wrapping and
packing paper on construction of the expression ‘commencing
production’ by the High Court even though it switched over
from straw board and mill board to packing and wrapping
paper after the relevant date whereas another unit existing
and producing wrapping and packing paper itself from before
1st March, 1964 could not be entitled to exemption except to
the extent of enlarged capacity. That is if an existing unit
would have installed a new machinery it would have been
entitled to exemption of production only to that extent
whereas any unit producing goods other than the exempted
goods would become entitled to exemption in respect of
entire production. That could not have been the intention. A
construction which results in inequitable results and is
incongruous, has to be avoided. Therefore, production of
packing and wrapping paper by respondent was entitled to
exemption only to the extent it was attributable to enlarged
capacity and not to the existing capacity.
Hansraj Goverdhan v.H.H. Dave, Asstt. Collector, Central
Excise & Customs, Surat and Others, [1969] 2 SCR 252 relied
on behalf of respondent demonstrates mis-conception about
interpreting an exemption provision. It was a case where
goods of third persons were manufactured by cooperative
society. But once initial hurdle was crossed and it was held
that goods had been produced by cooperative society it was
found squarely covered in the notification and the Court
extended it to goods manufactured by third persons and
repelled the submission that object of granting exemption
was to encourage formation of cooperative societies and it
should be confined to goods manufactured by its members and
not others. Similarly in Commissioner of Income Tax v. Madho
Prasad, [1989] 4 SCC 541 the provision
665
allowing exemption to ‘such part of the income in respect of
which the said tax is payable. under the head ‘property’ as
is equal to the amount of rent payable for a year’, was
construed liberally and it was held that the expression
‘equal to the amount of rent payable for a year’ did not
‘warrant the inference that the benefit of exemption’ could
‘be claimed only once’ because the amount of rent which was
sought to be deducted in more than one years was found
squarely to fall in Item 36 of notification. It was again a
case of interpreting an exemption notification at later
stage. Recently in Tata Oil Mills Co. Ltd. v. Collector of
Central Excise, [1989] 4 SCC 541, exemption was to soap made
from indigenous rice bran oil as against edible oil. The
assessee was engaged in manufacture of soap from rice bran
fatty acid which was extracted from rice bran oil, in
assesses factory. It was found rice bran oil as such could
not be used unless it was converted into fatty acid.
Therefore the assessee was covered in the notification. Once
the ambiguity or about manufacture of soap from rice bran
fatty acid was removed the Bench proceeded to construe the
word “indigenous” in the notification liberally. In
Collector of Central Excise v. Parle Exports (P) Ltd., AIR
1989 644 this Court while accepting that exemption clause
should be construed liberally applied rigorous test for
determining if expensive items like Gold Spot base or Limca
base or Thums Up base were covered in the expression food
products and food preparations used in item No. 68 of First
Schedule of Central Excise and Salt Act and held ‘that it
should not be in consonance with spirit and the reason of
law to give exemption for non-alchoholic beverage basis
under the notification in question.’ Rationale or Ratio is
same. Do not extend or widen the ambit at stage of
applicability. But once that hurdle is crossed construe it
liberally. Since the respondent did not fall in the first
clause of the notification there was no question of giving
the clause a liberal construction and hold that production
of goods by respondent mentioned in the notification were
entitled to benefit.
In the result this appeal succeeds and is allowed. The
order of the High Court is set aside and the Writ Petition
is dismissed with costs.
R.N.J. Appeal
allowed.
666