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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.

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   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-

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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

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           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

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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

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’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