KRISHNA PROCESSORS & 1 v. UNION OF INDIA

Judgment

1. Since common facts and questions of law are involved in all these petitions the same were taken up for hearing together and are decided by this common judgment.

2. In Special Civil Application No.1984 of 2002, the petitioners have challenged the constitutional validity of rule 96ZQ(5)(ii) of the Central Excise Rules, 1944 (hereinafter referred to as 'the Rules') prescribing imposition of penalty equal to the amount of duty outstanding from an independent processor of textile fabrics in case such person fails to pay the amount of duty or any part thereof by the specified date, on the ground that the said rule is ultra vires the Constitution of India. The petitioners have also challenged the order-in- original dated 1st January, 2002 passed by the Deputy Commissioner, Central Excise, Division – II, Ahmedabad – I insofar as the same imposes penalty under rule 96ZQ(5)(ii) of the rules.

3. In Special Civil Application No.3637 of 2004, the petitioner has challenged the order-in-original No.41-45/D/2003 dated 31st December, 2003 passed by the Deputy Commissioner of Central Excise, confirming total demand of SCA/1984/2002 JUDGMENT Rs.12,45,370/- under rule 96ZP(3) of the Central Excise Rules, 1944 and imposing equal amount of penalty as well as interest at the appropriate rate on the confirmed amount under rule 96ZP(3) of the Rules.

4. In Special Civil Application No.6779 of 2003, the petitioners have challenged Order-in-Original No.SRT-VI/Adj- 778/2001-0A dated 30th October, 2001 passed by the Deputy Commissioner of Central Excise & Customs insofar as imposition of penalty equal to the amount of duty amounting to Rs.6,00,000/- (rupees six lakhs) under rules 96ZQ(5)(ii) read with rule 173Q (1) of the Rules on the petitioners is concerned.

5. Thus all the three petitions challenge levy of penalty equal to the amount of duty under rules 96ZQ(5)(ii)/96ZP(3) of the Rules, whereas the petitioners in Special Civil Application No.1984 of 2002 have also challenged the constitutional validity of rule 96ZQ(5)(ii) of the Rules. FACTS:

6. Special Civil Application No.1984 of 2002: The petitioner firm is engaged in the activity of processing textile fabrics. The fabrics are covered under the Schedule to the Central Excise Tariff Act, 1985 and are, therefore, exigible to levy of central excise. The Central Government enacted section 3A of the Central Excise Act, 1944 (hereinafter referred to as 'the Act') under which power was conferred upon the Central Government to charge excise duty on the basis of capacity of production in respect of notified SCA/1984/2002 JUDGMENT goods. With effect from 6th December, 1998, the textile fabrics produced by the petitioner company were notified for the purpose of section 3A of the Act and accordingly, the excise duty on such notified textile fabrics became leviable and recoverable on the basis of the production capacity of manufacturers of textile fabrics. The Central Government issued various notifications and framed rules for determination of annual production capacity of the manufacturers of notified goods for implementing the scheme of section 3A, popularly known as Compounded Levy Scheme. Vide notification dated 10th December, 1998 Part E.XIA which bears the heading “Processed Textile Fabrics” came to be inserted in the Rules. Rule 96ZQ of the Rules which falls under the said part provided for the procedure to be followed by an independent processor of textile fabrics. The production capacity and duty liability of the petitioner's factory came to be determined in accordance with the provisions of the Hot Air Stenter Independent Textile Processors Annual Capacity Determination Rules, 1998 (hereinafter referred to as 'the Determination Rules') which came to be communicated by a letter dated 25th September, 2000 (Annexure 'B' to the petition).

6.1 Under the provisions of sub-rule (3) of rule 96ZQ of the Rules, 50% of the amount of duty on the annual capacity of production as determined under the Hot Air Stenter Independent Textile Processors Annual Capacity Determination Rules, 1998 payable for a calendar month under sub-rule (1) thereof was required to be paid by the 15th of the month and the remaining amount was required to be paid by the end of that month. It appears that the petitioner in respect of the first fortnight of July, 2000 for which the due date specified was 15 th SCA/1984/2002 JUDGMENT July, 2000 made payment of Rs.5 lakhs on 19th July, 2000, after a delay of about four days. In respect of the second fortnight of September, 2000, for which the due date specified, was 30 th September, 2000, duty of Rs. 9 lakhs came to be paid on 3rd October, 2000. A show-cause notice dated 4th October, 2001 came to be issued to the petitioner firm for violation of the provisions of rule 96ZQ(3) read with rule 173G of the Rules calling upon the petitioners to show cause as to why penalty of Rs.14 lakhs should not be imposed upon them under rule 96ZQ(5)(ii) and interest at the rate of 24% per annum calculated for the outstanding period on the outstanding amount as per rule 96ZQ(5)(ii) of the Rules should not be recovered. The petitioner firm submitted its reply dated 8th November, 2001 explaining that they were supposed to pay 50% of their excise liability by 15th July, 2000 but by the 13th of that month, there was a heavy downpour of water which lasted for nearly twenty four hours which was well published in the newspapers and known to all. The water caused heavy logging at almost all places and their factory was also flooded as water entered the premises and their machineries and electric motors were under 1.5 feet water. It took four days for them to clear the debris of rainwater and their production also was affected for four days. During the said period, their bankers also did not operate their business due to lack of staff who also suffered due to water-logging. So the operation of the bank started on 18th July, 2000 and they deposited the amount on the same day and challan was passed on 19th July, 2000. It was the case of the petitioners that it was not their intention to make the payment late. In respect of September, 2000, it was the case of the petitioners that they had deposited the amount of Rs.9 lakhs on 29th September, 2000 and challan was also SCA/1984/2002 JUDGMENT deposited. But, 30th September was half-year closing and it was closed for public transactions and the next working day was 3 rd October, 2000. 1st October was a Sunday and 2nd October was a public holiday on account of Gandhi Jayanti. So the bankers put 3rd October, 2000 on TR-6 challan. The petitioners, accordingly, requested the Deputy Commissioner not to impose any penalty as per rule 96ZQ(5) of the Rules and interest of 24 per cent as it was not their intention to make the payment late and it was only under unavoidable circumstances.

6.2 By the impugned order dated 9th November, 2001/1st January, 2002, interest of Rs.1315/- for the period of four days on the outstanding amount of Rs.5 lakhs and Rs.1775/- for the period of three days on the outstanding amount of Rs.9 lakhs as also a penalty of Rs.9 lakhs in terms of the provisions of rule 96ZQ(5)(ii) came to be imposed on the petitioners which is subject matter of challenge in the present petition. The petitioners have also challenged the validity of rule 96ZQ(5)(ii) of the Rules as being ultra vires the provisions of the Constitution and the Act.

6.3 By a judgment and order dated 24th June, 2002, this court observed that in Special Civil Application No.164/2002 and cognate matters, the court had held that although the provisions of clause (ii) of sub-rule (5) of rule 96ZQ of the Rules were not declared as ultra vires, the authority was required to be directed to read the rule in a reasonable manner, i.e. to say, the penalty stipulated therein is only the maximum amount which can be levied and the assessing authority has the discretion to levy lesser amount depending upon the facts and circumstances of each case. The court, accordingly, allowed SCA/1984/2002 JUDGMENT the petition by quashing and setting aside the impugned order- in-original insofar as the same imposed penalty under rule 96ZQ(5)(ii) of the Rules and remanded the matter to the authorities. It was further observed that the remaining portions of the impugned order are not interfered with, for the simple reason that the petitioners have preferred appeals for challenging the other portions of the order levying duty and interest. The respondents herein carried the aforesaid judgment and order passed by this court in appeal before the Supreme Court. The Supreme Court in the case of Union of India and others vs. M/s. Krishna Processors and another held that in view of the decision of the Union of India vs. Dharmendra Textile Processors, 2008 (231) ELT 3 (S.C.), rule 96ZQ is mandatory. The court held that the consequence of the said judgment in Dharmendra Textile Processors is that the challenge to the vires of rule 96ZQ(5)(ii) in the original writ petition before the High Courts stands revived. The Supreme Court, accordingly, remitted the entire

batch of civil appeals to the respective High Courts for deciding the question of vires of the above sub-rule. The court also granted liberty to the assessees to amend the writ petitions/appeals, if so advised. Further liberty was granted to both sides to complete their pleadings at the earliest before the High Court(s). This is how the matter stands revived and has come up for hearing before this court.

7. Special Civil Application No.3637 of 2004:

7.1 The facts of the case as appearing in the petition are that the petitioner is a partnership firm, inter alia, engaged in the business of manufacturing of steel products like round bars, SCA/1984/2002 JUDGMENT etc. falling under Chapter 72 of the Schedule to the Central Excise Tariff Act, 1985. Section 3 of the Central Excise Act, 1944 provides for levy and collection of dues of excise on all excisable goods which are produced or manufactured in India. However, with effect from 14th May, 1997, the Union Government framed section 3A under which the power to charge excise duty on the basis of capacity of production in respect of goods notified under the said section 3A has been conferred on the Central Government. Section 3A of the Act also confers powers on the Central Government to issue notifications and also the rules for various matters arising under section 3A so as to charge excise duty on the basis of the capacity of production in respect of the notified goods. The Central Government promulgated rule 96ZP(3a) of the Central Excise Act, 1944, thereby providing for the procedure to be followed by the manufacturers of steel re-rolling products like the goods manufactured by the petitioners herein. Rule 96ZP and various other Rules including Hot Re-Rolling Steel Mills Annual Capacity Determination Rules, 1997 are framed by the Central Government in exercise of the powers conferred by it under section 3A read with section 37 of the Act.

7.2 The Central Government issued notifications in connection with Steel Rolling Mills under section 3A of the Act, thereby providing for levy and collection of excise duty on the steel rolling mills on the basis of their Annual Production Capacity (APC). It appears that being aggrieved and dissatisfied with the action of the Government, some of the Steel Rolling Mills Owners challenged the validity of section 3A of the Act as well as those notifications including denial of Modvat benefit before the Delhi High Court, which came to be SCA/1984/2002 JUDGMENT admitted by an order dated 28th December, 1997, whereby the interim relief was also granted in favour of those petitioners. Against the said decision of the Delhi High Court, the Union of India preferred appeal before the Supreme Court. Considering the fact that the matter involved great public importance and affected interest of manufacturers throughout the country, by an order dated 3rd March, 1998, the Supreme Court transferred all the petitions before it. In the said matters, the Supreme Court passed an interim order dated 21st April, 1998 in Civil Appeals No.52 to 63 of 1998 in the following terms:- “While the matters are pending in this court, the Union Government shall not take any penal or coercive measures under the notification No.07/98 – Central Excise (NT) dated March 10, 1998. It will be open to the manufacturers to submit application on the basis of the actual production and, if any such application is submitted the same shall be duly considered by the competent authority in accordance with the rules.”

7.3 During the pendency of the above referred proceedings, the petitioners were also following the procedure prescribed under rule 96ZP of the Rules because there was no option for the manufacturers like the petitioners but to discharge duty liabilities under the Compounded Levy Scheme. The Annual Production Capacity of the petitioners' factory was fixed on the basis of the parameters of factory at 3260 MTs for the period from 1st April, 1998 to 21st July, 1998, and at 2373 MTs for the period form 1st August, 1998 to 31st March, 1999 vide letter dated 27th October, 1998. SCA/1984/2002 JUDGMENT

7.4 Since the above referred APC was much higher than the annual production of the petitioners' factory, the petitioners were paying duty only on the basis of the actual production and not in accordance with the above APC which was much higher and much in disproportion, to the actual production capacity as well as actual production of the factory. The petitioners, in fact, also closed down the factory with effect from 5th May, 1998, and an intimation in that regard was also submitted by the petitioners on 27th July, 1998. It appears that the Gujarat Electricity Board had also disconnected power supply of the petitioners' unit with effect from 24th June, 1998 because the petitioners failed to pay electricity charges to the GEB. The petitioners also formally informed the Superintendent of Central Excise vide letter dated 1st February, 1999 that the registration was being surrendered as there was no production in the factory from May 1998, the GEB had disconnected power supply from June 1998 and there was no alternative source of power like DG set with the petitioners using which any production could be made in the factory.

7.5 It appears that the Range Superintendent did not accept the petitioners' request for surrendering/cancelling registration on the ground that there were pending show cause notices against the petitioners. A certain correspondence was exchanged between the parties in this regard wherein the Superintendent refused to cancel registration whereas the petitioners were insisting on surrendering and cancelling registration on execution of an undertaking for paying up any duty liability that may arise in future. In view of the above referred facts and undisputed closure of the factory from 5 th May, 1998, the petitioners were also not liable to pay any SCA/1984/2002 JUDGMENT compounded levy amount for the period from May 1998 onwards. According to the petitioners, even for the period prior thereto, the petitioners were not legally obliged to pay any duties on the basis of the APC when the actual production capacity and the actual production were much lower than the APC. It appears that five show cause notices covering the period from 1st September, 1997 to 31st March, 2000 were issued to the petitioners proposing to recover various amounts of compounded levy on the ground that the petitioners had not discharged duty liability in accordance with the APC and duty liability as determined by the Department.

7.6 In response to the show cause notices, the petitioners filed reply to the effect that the issue of the validity of Compounded Levy Scheme was pending before the Supreme Court and therefore, adjudication be kept in abeyance. The petitioners also challenged the compounded levy scheme and recovery being proposed thereunder before this Court by way of a writ petition being Special Civil Application No.11931 of

2000. During the pendency of these show cause notices, the Supreme Court decided the controversy about section 3A of the Act and the Compounded Levy thereunder in a group of cases between the Union of India vs. Supreme Steels and General Mills and others, 2001 (47) RLT 129 (SC). In the said decision, the Supreme Court directed that the assessment shall be made for the whole time of one year, namely, the financial year on the basis of actual production according to the compounded levy provision in all matters not yet closed and still pending before the concerned authorities.

7.7 The petition filed by the petitioners before this Court SCA/1984/2002 JUDGMENT also came up for hearing with a group of similar petitions on 11th December, 2002 and came to be disposed of by a common order on the ground that section 3A of the Act was deleted and hence, the petitions had become infructuous. The Court, however, granted liberty to all the petitioners, including the petitioners herein, to agitate the contentions if any cause of action pursuant to the proceedings already initiated under section 3A before its deletion accrued.

7.8 By the impugned order, the Deputy Commissioner confirmed all the five show cause notices and also imposed penalty of equal amount of the compounded levy amounts as demanded by the said show cause notices on the ground that the petitioners had not paid duties in accordance with the APC fixed by the Government, giving rise to the present petition.

8. Special Civil Application No.6779 of 2003:

8.1 The petitioner firm is engaged in the manufacture of manmade fabrics (processed) falling under Sub-heading No.5406 of the Central Excise Tariff Act, 1985. The textile fabrics produced by the petitioner firm were notified for the purpose of Section 3A of the Act, on 16th December, 1998 and accordingly, the Excise duty on such notified textile fabrics became leviable and recoverable on the basis of the production capacity of manufacturers/processors of textile fabrics. The Competent Authority fixed the Annual Production Capacity of the petitioner company at Rs.1.5 lakhs per chamber per month and accordingly, the petitioner company was duly discharging its duty liability on regular basis. For the month of May, 1999 the petitioner company was required to pay an amount of Rs.6 SCA/1984/2002 JUDGMENT lakhs towards compounded levy as per the Annual Production Capacity determined by the competent authority. Therefore, on 13th May, 1999, the petitioner company as usual advised it's Bankers, namely – Prime Bank Limited, Surat to divert an amount of Rs.6 lakhs to the Government Account. The local Bank lodged cheque in the clearing on 15th May, 1999 and the credit was confirmed on 18th May, 1999, since intervening days were holidays for the Bank. Thus, though the instruction was given by the petitioners to Prime Bank Limited on 13th May, 1999 for diverting the funds, cheque was presented for clearance through Bank of Baroda on 15th May, 1999. Since it had come to the knowledge of the petitioners that the amount of Rs.6 lakhs was credited by Bank of Baroda in the Govt. account only on 18th May, 1999, the petitioners by way of abundant caution also paid interest amount of Rs.1800/- and intimated the same to the Department.

8.2 Despite this, the Superintendent of Central Excise, Range-I, Division-VI issued a Show Cause Notice bearing F.No.AR-III/SCN-96ZQ/Rita/99 dated 29th November, 1999 calling upon the petitioner company to show cause as to why penalty equal to the duty of Rs.6,00,000/- should not be imposed under Rule 96ZQ(5)(ii) of the Rules. The petitioners filed a detailed reply on 29th December, 2000 explaining the position and informing the Deputy Commissioner – respondent No.2 herein that the petitioners have already instructed their Bankers – Prime Co-operative Bank Ltd. on 13th May, 1999 itself for diverting the funds and the cheque was presented for clearance on 15th May, 1999 and that the amount was duly credited by the petitioners bankers in the Government account on 18th May, 1999 because of the intervening holidays. In SCA/1984/2002 JUDGMENT order to substantiate their case, the petitioners also submitted copy of letter dated 17th December, 1999 received by the petitioners from Bank of Baroda, the contents of which were self-explanatory. The respondent No.2 however, passed an Order-in-Original No.SRT-VI/ADJ-78/2001-OA dated 30th October, 2001, thereby confirming payment of interest under Rule 96ZQ(5)(i) of the Rules and imposing penalty of Rs.6,00,000/- under Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944. Being aggrieved, the petitioner has filed the present petition challenging the aforesaid order passed by the adjudicating authority.

9. During the pendency of Special Civil Applications No.3637 of 2004 and 6779 of 2003, the petitioners therein had filed applications seeking to amend the memorandum of petitions by inserting paragraph 5A, whereby the petitioners have challenged the impugned orders on the ground that rules 96ZO, 96ZP and 96ZQ were omitted by Notification No.6/2001- C.E.(NT) dated 1st March, 2001. Vide clause (7) of this notification, these Rules were omitted without any saving clause. Section 3A of the Act was also omitted vide section 121 of the Finance Act, 2001 which has received the assent of the President on 11th May, 2001 and thus, section 3A of the Act stands omitted with effect from 11th May, 2001 without any saving clause. All proceedings which were pending as on 1st March, 2001 and/or 11th May, 2001 as regards the rules 96ZO, 96ZP and 96ZQ would, therefore, automatically lapse in the absence of any saving clause for continuing the proceedings already initiated under these rules framed under section 3A of the Act and hence, no orders could have been passed against the petitioners under these provisions, if the action against the SCA/1984/2002 JUDGMENT petitioners were not finally concluded at the time of omission of these provisions. SUBMISSIONS:

10. Mr. Paresh Dave, learned advocate for the petitioners invited attention to the provisions of the Act and more particularly to section 3 thereof to submit that section 3 is the charging section which provides for levy and collection of duty in the manner specified therein. Section 3A came to be inserted in the Act with effect from 14th May, 1997. The said section provides that notwithstanding anything contained in section 3, where the Central Government having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such factors as may be relevant, is of the opinion that it is necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified goods and there shall be levied and collected duty of excise on such goods in accordance with the provisions of this section. In exercise of powers under section 3A of the Act, the Central Government issued notification notifying the Hot Air Stenter Independent Textile Processor Annual Capacity Determination Rules, 1998. The goods manufactured by the petitioners came to be notified as goods on which duty was to be levied and collected as prescribed under section 3A of the Act. Thus by a legal fiction, section 3A became the charging event in respect of goods notified under sub-section (2) of section 3A of the Act. The Central Government also inserted rule 96ZQ in the Rules which lays down the procedure to be followed by an independent SCA/1984/2002 JUDGMENT processor of textile fabrics and which provided for the manner in which duty was to be determined as well as paid as well as the amount of penalty and interest in case of default in payment of duty, etc. Similarly the Central Government had promulgated rule 96ZP under section 3A of the Act thereby providing for the procedure to be followed by the manufacturers of steel re-rolling products like the goods manufactured by the petitioners. Rule 96ZP and various other rules including the Hot- Re-Rolling Steel Mills Annual Capacity Determination Rules, 1997 are framed by the Central Government in exercise of powers conferred upon it vide section 3A read with section 37 of the said Act.

10.1 It was submitted that rules 96ZO, 96ZP and 96ZQ were omitted vide clause 7 of Notification No.6/2001-CE(NT) dated 1st March, 2001 without any saving clause. Section 3A of the Act was also omitted vide section 121 of the Finance Act, 2001 which was given assent by the Hon'ble President on 11 th May, 2001, and thus section 3A of the Act also stands omitted with effect from 11th May, 2001 without any saving clause.

10.2 It was submitted that in view of the omission of the aforesaid provisions, all the proceedings which were pending as on 1st March, 2001 and on 11th May, 2001 under rules 96ZO, 96ZP and 96ZQ would, therefore, automatically lapse in the absence of any saving clause for continuing proceedings already initiated under these rules framed under section 3A of the Act, and hence, no orders could have been passed against the petitioners under these provisions, if the actions against the petitioners were not finally concluded at the time of omission of these provisions. It was pointed out that in the case SCA/1984/2002 JUDGMENT of the petitioners in Special Civil Application No.1984 of 2002, the show cause notice proposing to impose penalty and recover interest was issued on 4th October, 2001, that is, after the relevant provisions were omitted, and therefore, the very initiation of proceedings that culminated into the impugned order dated 9th November, 2001 issued on 1st January, 2002 was a nullity. Insofar as Special Civil Application No.3637 of 2004 is concerned, the show cause notice came to be issued on 28th October, 1999, however, the impugned order came to be passed on 31st December, 2003 after the aforesaid provisions came to be omitted, and hence continuance of the proceedings after the said provisions came to be omitted was without any authority of law. Similarly in the case of the petitioners in Special Civil Application No.6779 of 2003, the show cause notice came to be issued on 20th November, 1999, but the impugned order came to be passed on 30th October, 2001 after the aforesaid provisions came to be omitted and as such was without authority of law. In support of his submission, the learned advocate placed reliance upon the decision of this court in the case of Amit Processors Pvt. Ltd. vs. Union of India and others, 1985 (21) E.L.T. 24 (Guj) wherein this court while considering as to whether rule 10 and 10A of the Central Excise Rules which came to be omitted without any saving clause, held that the court was concerned with omission of a rule and not a Central Act or Regulation and, therefore, looking to the decision of the Supreme Court in the case of M/s. Rayala Corporation (P) Ltd. vs. Director of Enforcement, AIR 1970 SC 494, it is clear that section 6 of the General Clauses Act cannot be pressed into service. When section 6 of the General Clauses Act cannot be pressed into service and when there is no saving clause in the notification by which rule SCA/1984/2002 JUDGMENT 10 was omitted, it is clear that no action could have been taken in pursuance of the said notice which was issued under rule 10 as it then existed. The court further held that an action under rule 10 consists of two parts; one is the initiation of proceedings and the second is the conclusion of the proceedings. But before the proceedings came to be concluded, the power to conclude those proceedings disappeared from the scene. The court, therefore, rejected the argument that once action is initiated, it can be said to be taken under rule 10. Reliance was also placed upon the decision of this court in the case of Mehendra Mills Ltd. vs. Union of India, 1988 (36) E.L.T. 563 (Guj.) for a similar proposition of law.

10.3 It was contended that section 6 of the General Clauses Act is applicable only when any enactment is repealed. In case of Rayala Corporation (P) Ltd., and another vs. Director of Enforcement (supra), the Supreme Court has held that section 6 of the General Clauses Act applies to repeals and not to omissions. In case of Kolhapur Canesugar Works Ltd. vs. Union of India, 2000 (2) SCC 536 also, the Supreme Court has held that section 6 of the General Clauses Act was not applicable in case of omission of an enactment and it was applicable only in case of repeal of an enactment.

10.4 It was argued that insofar as rules 96ZO, 96ZP and 96ZQ of the Rules are concerned, the proceedings initiated thereunder are not saved by virtue of section 6 of the General Clauses Act or by section 38A of the Central Excise Act because these provisions regarding continuation of pending proceedings do not apply in case of “omission” of a rule. It was, accordingly, SCA/1984/2002 JUDGMENT contended that there is no saving clause provided by the legislature while omitting these rules. Similarly, section 6 of the General Clauses Act or section 38A of the Act, are not applicable in case of “omission” of section 3A also, inasmuch as this is a case of “omission” and not that of “repeal”. Accordingly, proceedings pending against the petitioners under the above rules and section 3A of the Act have lapsed and therefore, the orders passed against the petitioners under such provisions, which stood omitted without any saving clause, are wholly illegal.

10.5 It was further submitted that when section 3A of the Act was omitted on 11th May, 2001 by virtue of section 121 of the Finance Act, 2001, all the provisions like the rules made thereunder and the action initiated under such rules also stood lapsed. Reference was made to the decision of the Supreme Court in Air India vs. Union of India, (1995) 4 SCC 734, wherein it has been held that if subordinate legislation is to survive the repeal of its parent statute, the repealing statute must say so in so many words and by mentioning the title of the subordinate legislation. It was held that that when the parent provision is omitted, all the provisions like rules and regulations made thereunder, would also not survive. The learned counsel pointed out that no such provision for survival or continuation of proceedings initiated under rules 96ZO, 96ZP and 96ZQ is made while omitting section 3A of the Act which is the parent provision for these rules. Under the circumstances, no penalty could be imposed and no interest could be charged in case of the petitioners, because the case against the petitioners had not been brought to finality before omission of the above provisions. SCA/1984/2002 JUDGMENT

10.6 The next contention raised by the learned advocate for the petitioners was that it is a settled legal position that penalty cannot be imposed merely because it is lawful to do so, because liability to pay penalty does not arise merely upon proof of default in compliance with a particular provision. Penalty would not ordinarily be imposed unless the party obliged, either acted deliberately or in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Reliance was placed upon a decision of the Supreme Court in the case of Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 for the proposition that even if a minimum penalty is prescribed, the authority competent to impose penalty would be justified in refusing to impose penalty when there was a technical or venial breach of the provisions of the Act. It was submitted that rule 96ZQ(5)(ii) of the Rules does not leave any such discretion to the adjudicating authority, and in fact this provision takes away the discretion of the adjudicating authority and makes it obligatory on the part of the adjudicating authority to impose a penalty equal to an amount of duty outstanding from the assessee at the end of a particular month. According to the learned advocate the rule which thus, takes away discretion of an adjudicating authority and makes it obligatory on adjudicating authority to impose penalty even in the absence of any dishonest or contumacious conduct on the part of the assessee, is therefore illegal and in violation of Article 14 of the Constitution of India.

10.7 It was next submitted that rule 96ZQ(5)(i) of the Rules provides for recovery of interest on the outstanding SCA/1984/2002 JUDGMENT amount and thus, in case of default on the part of an assessee, the revenue is duly compensated by virtue of operation of this provision. Interest which is compensatory in character thus, takes care of the interest of the revenue in case an assessee commits default in making payment of the compounded levy amount within the specified period. However, penalty which is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of a particular statute is thus penal in character. However, penalty under rule 96ZQ(5)(ii) of the Rules would be imposable on the assessee regardless of the facts and circumstances of such a case and thus, penalty which is penal in character is provided under this rule even without any action on the part of the assessee inviting any penal consequences. In view of the provisions of rule 96ZQ(5)(i) which are compensatory in nature, rule 96ZQ(5)(ii) becomes onerous and wholly unjustified. It was, accordingly, urged that this provision of rule 96ZQ(5)(ii) which thus provides for penalty without there being any action on the part of an assessee justifying taking of any action penal in character, is therefore wholly illegal and in violation of Article 14 of the Constitution of India.

10.8 Next it was contended that there is a basic inconsistency in rule 96ZQ(5)(ii) which shows the unreasonableness and arbitrariness underlying this provision. Rule 96ZQ(3) provides for payment of 50% of the amount by the fifteenth day of the month and the remaining amount by the end of the month. In case there is a default in paying the first instalment by the 15th day of the month, no penalty under rule 96ZQ(5)(ii) is leviable, and only interest under rule 96ZQ(5)(i) is recovered as a compensatory measure. However, SCA/1984/2002 JUDGMENT in case of default in payment of the second instalment, not only compensatory measure of interest, but penalty would also be attracted. Even if the default in the payment of the first instalment is of a larger period, no penalty would be imposed if the payment of the first instalment was made by the end of the month, which would mean the delay of at least two weeks for the payment of the first instalment. However, in case of default of even a single day in making payment of the second instalment, penalty of equal amount would be imposed under rule 96ZQ(5)(ii) of the Rules. It is thus clear that the impugned provision works unreasonably and arbitrarily even within itself and is therefore liable to be struck down as unconstitutional and illegal. Further the gross arbitrariness of this provision becomes amply clear by virtue of the fact that not only the circumstances leading to delayed payment, but even the period of delay also becomes irrelevant for imposing penalty under this provision. If there was a delay of one day in making payment of the second instalment of compounded levy amount or there was a delay of a substantial period in making payment of the second instalment, the amount of penalty would be the same, that is, an amount equal to the duty outstanding. Thus, this rule does not even require consideration about the period of delay or the gravity of default on the part of the concerned assessee and proposes to treat all such assessees equally. It was contended that an assessee paying the second instalment after one day of the specified date and an assessee paying such amount after hundred days of the specified date cannot be treated equally, because of the simple fact that the latter case would show deliberate defiance on the part of the concerned assessee. However, the rule treats unequals as equals thereby violating Article 14 of the Constitution of India. SCA/1984/2002 JUDGMENT It was, accordingly, urged that rule 96ZQ(5)(ii) of the Rules therefore deserves to be struck down as being violative of Article 14 of the Constitution of India.

10.9 Mr. Dave further submitted that rule 96ZQ(5)(ii) of the Rules is discriminatory in nature and therefore, it fails on the touchstone of Article 14 of the Constitution of India. It was submitted that the provisions of the Act are applicable to all the goods produced or manufactured in India. All the manufacturers of excisable goods are therefore governed by the provisions of the Act, but except the manufacturers of specified textile products, no other manufacturer of any other excisable goods is governed by a provision like rule 96ZQ(5)(ii) of the Rules. Even the manufacturers of similar textile products, including fabrics, which are not specified under section 3A of the Act are not governed by rule 96ZQ(5)(ii) and are therefore, not liable for any like penalty under the Rules. It was submitted that there is no reasonable classification between manufacturers of specified textile products and manufacturers of other excisable goods and therefore, the impugned rule which subjects only the manufacturers like the petitioners to discriminatory treatment is wholly unconstitutional and liable to be struck down. Reliance was placed upon the decision of the Supreme Court in the case of State of Kerala vs. Haji K. Kutty Naha, (1969) 1 SCR 645, as well as in the case of Special Courts Bill, 1978, In re, (1979) 1 SCC 380, wherein the court had laid down propositions applicable to cases arising under Article 14 of the Constitution. It was, inter alia, laid down that the principle underlying the guarantee of Article 14 is not that the same rules or law should be applicable to all persons within the SCA/1984/2002 JUDGMENT Indian Territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced should be treated alike both in privileges conferred and liabilities imposed. Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another, if as regards the subject matter of the legislation their position is substantially the same.

10.10 The learned advocate further submitted that other manufacturers who were not governed under section 3A of the Act and were thus, not subjected to Compounded Levy Scheme have been discharging their duty liabilities under section 3 of the Act, read with the procedure prescribed under rule 49 of the Rules. Such manufacturers are also given similar facility of payment of duty for the clearances made during the first fortnight of the month by the 20th day of that month and for the clearances made during the second fortnight of the month, by the 5th day of the succeeding month, except in cases of the clearances made during the second fortnight of March of each financial year. Under rule 49 of the Rules, which provides similar facility to other manufacturers it is also provided that a manufacturer failing to pay the amount of duty by the due date shall be liable for interest at the rate of 24% per annum on the outstanding amount. However, no penalty at all is provided under rule 49 in case of default in payment by such manufacturers. Thus, manufacturers of goods specified under section 3A of the Act were subjected to harsh treatment of unreasonable penalty under rule 96ZQ(5(ii) compared to the other manufacturers of excisable goods. It was, accordingly, submitted that the provisions of rule 96ZQ5(ii) of the Rules SCA/1984/2002 JUDGMENT which mete out discriminatory treatment to the manufacturers like the petitioners is wholly unconstitutional and liable to be struck down.

10.11 Mr. Dave further submitted that rule 96ZQ(5)(ii) is also violative of Article 19(1)(g) of the Constitution of India, as it imposes unreasonable restriction on the fundamental rights of the petitioners in conducting their business because if the petitioners have to pay substantial amount as penalty only because of a very minor delay in making payment of the duty, such a provision violates the petitioners' fundamental right of conducting business without unreasonable restrictions. As has happened in various cases, the manufacturers would be liable for an astronomical amount of penalty only because of a minor delay of three/four days, which amounts to unreasonable restriction on the petitioners' right to conduct business. The liability of penalty under the impugned rule is undoubtedly onerous and therefore it deserves to be struck down as violative of Article 19(1)(g) of the Constitution of India. In support of his submissions, the learned advocate placed reliance upon the decision of the Punjab & Haryana High Court in the case of Bansal Alloys & Metals Pvt. Ltd. vs. Union of India, 2010 (260) E.L.T. 343 (P&H) wherein the court has struck down rules 96ZO, 96ZP and 96ZQ to the extent the same permit minimum penalty for delay in payment without any discretion and without having regard to extent and circumstances for delay as ultra vires the Act and the Constitution. It was submitted that the said decision would be squarely applicable to the facts of the present case and that the provision of rule 5(ii) of rule 96ZQ of the rules is required to be struck down as being unconstitutional. SCA/1984/2002 JUDGMENT

10.12 Reliance was also placed upon a decision of the Karnataka High court rendered on 02nd January, 2009 in Writ Petitions No.9689 of 2006 and other cognate matters in the case of Philips Electronics India Ltd. vs. State of Karnataka, (MANU/KA/0005/2009). The decision of the Supreme Court in the case of State of Maharashtra vs. Kamal S. Durgule, (1985) 1 SCC 234, was also relied upon wherein the court held that classification requires division into classes which are marked by common characteristics. Such division has to be founded upon a rational basis and it must be directed at sub-serving the purposes of the statute. Reliance was also placed upon the decision of the Supreme Court in the case of New Manek Chowk Spinning & Weaving Mills vs. Ahmedabad Municipality, (1967) 2 SCR 679, and more particularly paragraphs 12 and 13 thereof.

10.13 The decision of the Supreme Court in the case of K.T. Moopil Nair vs. State of Kerala, (1961) 3 SCR 77, was cited for the proposition that Article 265 imposes a limitation on the taxing power of the State insofar as it provides that the State shall not levy or collect a tax, except by authority of law, i.e. to say, a tax cannot be levied or collected by a mere executive fiat. It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the legislature imposing a tax and authorising the collection thereof and secondly, the tax must be subject to the conditions laid down in Article 13 of the Constitution. One of the conditions envisaged by Article 13(2) is that the Legislature shall not make any law which takes away or SCA/1984/2002 JUDGMENT abridges the equality clause in Article 14. Referring to the provisions of rule 37 of the Rules, it was submitted that the said rule does not empower the Central Government to levy penalty or interest on late payment of duty. It was submitted that levy of penalty being in the nature of a tax, unless expressly empowered, the Central Government could not have framed the rule levying penalty in exercise of powers under section 37 of the Act.

10.14 Reliance was placed upon the decision of the Supreme Court in the case of Khemka and Co. (Agencies) (P) Ltd. vs. State of Maharashtra, (1975) 2 SCC 22 for the proposition that penalty is not merely sanction. It is not merely adjunct to assessment. It is not merely consequential to assessment. It is not merely machinery. Penalty is in addition to tax and is a liability under the Act. Reliance was placed upon the decision of the Supreme Court in the case of Collector of Central Excise, Ahmedabad vs. Orient Fabrics (P) Ltd., (2004) 1 SCC 597, wherein the court affirmed the decision of the Delhi High Court in the case of Pioneer Silk Mills Ltd. wherein it was held that when penalty is additional tax, constitutional mandate requires a clear authority of law for imposition thereof.

10.15 Referring to section 38A of the Act, which came to be inserted in the statute book by section 131 of Act 14 of 2001 with effect from 28th February, 1944, it was submitted that the said section applies only in respect of rules, notifications or orders and does not apply to any section. According to the learned advocate section 3A is the mother provision under which the other rules came to be framed. SCA/1984/2002 JUDGMENT Section 3A came to be omitted in 2001 and is not saved by section 38A of the Act. Moreover, section 38A speaks of a rule being amended, repealed, superseded and rescinded and does not speak of omission and as such, would not be applicable to the omission of rule 96ZQ of the Rules. Reliance was placed upon the decision of the Supreme Court in the case of General Finance Co. and another vs. Assistant Commissioner of