P L D 1964 Supreme Court 113 (PLP)

HAMOODUR RAHMAN, J.‑The appellant, who is a dealer in betel‑nuts, carries on business in the name and style of Messrs Muhammad Asghar Muhammad Younus at Karachi. He claims that for the purposes of his business he purchased betel‑nuts, which are imported from East Pakistan as finished goods, from different firms at Karachi at a time when no excise duty was leviable on betel‑nuts. It appears that cured betel‑nuts were excisable goods under the Central Excises and Salt Act, 1944, but the Central Government by Notification dated the 15th July 1954, made in exercise of the powers conferred by sub‑rule (1) of rule 8 of the Central Excise Rules, 1944, exempted betel‑nuts from excise duty. This Notification was, however, subsequently cancelled by another Notification No. S. R. O. II‑(R), dated the 30th June 1960, which exempted from the whole of the duty betel‑nuts in possession of a wholesale dealer on 1st July 1960, if the quantity in possession did not exceed 20 lbs. After the withdrawal of the exemption wholesale merchants in Karachi were, between the 1st of July 1960, and the 10th of July 1960, required to declare the stocks in their possession. The appellant declared his stock on the 6th July 1960, and on the basis of the aforesaid declaration was assessed to duty amounting to Rs. 12,083‑2‑

0. He resisted the levy on the ground that since he was neither a manufacturer nor a producer of betel‑nuts, the stock in his possession was not leviable with any duty. It was also contended that since the appellant had not purchased the stock from any curer or manufacturer, the duty was not leviable. He was, nevertheless, threatened with penal action if he did not meet the demand for the tax. He thereupon moved the High Court in its writ jurisdiction challenging the validity of the duty on the ground that the Central Excise Authorities had not jurisdiction to demand or collect any excise duty in respect of the betel‑nuts in his possession. Before the High Court the Excise Authorities did not challenge the statement of the appellant that he was neither a manufacturer nor producer nor stocks of betel‑nuts in a ware house, but asserted that since the appellant admitted being in possession of large stocks of betel‑nuts on the 30th of June 1960, he was a "wholesale dealer" within the meaning of subsection (k) of section 2 of the Central Excises and Salt Act, 1944. The High Court also repelled the contention that the excise duty could only be levied on excisable goods whilst they were in the hands of the producer or manufacturer and not thereafter or when the goods had already become a part of the general stock of the market, and came to the conclusion that the excise duty was a tax on excisable goods wherever they might be and that the taxing authorities were fully empowered to realise the same from the appellant "in respect of their storage of these excisable goods" under sections 3 and 6 read with item 12 of the First Schedule and Part A of the Second Schedule to the said Act. The appellant obtained leave to appeal to this Court from the above decision of the High Court for the consideration of the question as to whether mere possession of excisable goods was by itself sufficient to render the possessor thereof liable to pay the duty in respect of the said goods. Learned counsel appearing in support of this appeal has argued that an excise duty is essentially in the nature of a tax on the production or manufacture only and, therefore, it cannot be levied at any later stage. Furthermore that, in any event, the appellant was not liable to pay such duty in respect of the stock of betel nuts in his possession, since he was neither a producer nor a manufacturer nor a curer nor a person who had purchased or acquired the said betel‑nuts from a curer or manufacturer thereof, nor a person who had stored the said betel‑nuts in any warehouse. Thus he did not come within the mischief of rule 7 of the rules framed under the Act of 1944. This argument is based mainly upon certain observations of the learned Judges of the Federal Court of India in a reference made by the then Governor‑General of India In the matter of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 (A I R 1939 F C 1). In this reference the validity of the above‑mentioned Provincial Act came to be questioned on the ground that the tax purported to be imposed was really in the nature of an excise duty in respect of which the Provincial Legislatures had no power to legislate, their competence being limited to levying taxes on the sale of goods and on advertise ments. It was in this connection that the nature of a duty of excise came to be investigated into by the Federal Court of India and it was observed that the expression "duty of excise", in its primary and fundamental sense, signifies a tax on goods produced or manufactured in the taxing country and intended for home consumption, as distinct from customs duties on articles imported into the country from outside, though it has now been extended to cover a large variety of other duties and taxes which would not strictly come within the dictionary meaning of that term, such as a dog tax, a vehicle tax, a hawker's license tax, tax for wine licenses and pawn broker's licenses. We, nevertheless, find it difficult to accept the further corollary that was sought to be drawn by the learned counsel from the primary connotation of the expression "duty of excise", namely, that the duty of excise must be a duty which has from its very nature to be imposed on home‑produced goods at some stage which has some connection with production and manufacture. In theory, we are unable to see why there should be any such limitation as to the stage at which a duty of excise is to be realized. It is obvious that the taxing authority will impose it at a stage at which it would be most convenient and most lucrative but that is a matter which does not, in our view, affect the essential nature of the tax. The excise duty which is an indirect tax must, in the ultimate resort, always fall on the consumer but as to the stage at which it is to be collected there can be no inflexible rule. If a Legislature is competent to make laws with respect to duties of excise, the question as to whether that power extends to imposing duties on home‑produced or home‑manufactured goods at any stage up to consumption must always be determined upon the true construction of the enactment itself. All that can be said is that subject to the provisions of the statute a duty of excise is a tax on goods produced or manufactured in the taxing country, and it ought normally not to be confused with a tax which is a turnover or sales tax. It was important in the reference referred to above to keep this distinction in mind, because, whilst excise duty was a Central subject the imposition of sales tax was within the exclusive competence of the Province. The Courts were, there fore, required in determining the validity of the tax sought to be imposed by the Central Provinces of India to look to the pith and substance of the tax in order to determine as to whether it fell within the ambit of the category of a sales tax which the Provincial Legislature could validly impose. In the case before us this distinction is not of such great importance, since at the time the impugned levy was sought to be made both excise duty and sales tax were Central subjects and could validly be legislated for by the Central Legislature. Nevertheless, since the two categories of taxes are described by different nomenclatures, it may still be possible to urge that, in the absence of any specific provision in the statute indicating the stage at which a duty of excise is to be collected, it will be natural to presume that a duty of excise having regard to its primary nature would be collected at some stage which has some relation with production or manufacture. It is, however, pertinent to point out that in the opinions delivered by the Federal Court of India in the case reported in A I R 1939 the learned Judges did not intend to lay down any legal principle but merely intended to "suggest a convenient dividing line between the two spheres of jurisdiction", namely, of the Central and Provincial Legislatures, as pointed out by Gwyer, C. J. himself in the subsequent case of The Province of Madras v. Messrs Boddu Paidanna & Sons (A I R 1942 F C 33). This view also finds support from a later decision of the Judicial Committee of the Privy Council in the case of Governor‑General‑in‑Council v. Province of Madras (A I R 1945 PC 98) where Lord Simonds in delivering the opinion of the Board pointed out that the two taxes, the one levied upon a manufacturer in respect of his goods, the other upon a vendor in respect of his sales, may in one sense overlap. "But in law there is no over‑lapping. The taxes are separate and distinct imposts. If in fact they overlap, that may b; because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration it is not of the essence of the duty of excise which is attracted by the manufacture itself". Having said this much, however, we must point out that even if it is conceded that a duty of excise may be levied at any stage between manufacture or production and the consump tion of the goods, it appears to us that the statute with which we are in the present case concerned contains within it some indica tion that such a wide latitude with regard to the stage at which collection is to be made has not been given to the authorities concerned under the Act of 1944. Section 2, subsection (d) defines "excisable goods" as meaning "goods specified in the First Schedule as being subject to a duty of excise and includes salt." Then section 3, which is the charging section, provides as follows: 3. (1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in the Provinces and the Capital of the Federation and a duty on salt manufactured in, or imported by land into, any part of the Provinces and the Capital of the Federation as, and at the rates, set forth in the First Schedule. (2) The Central Board of Revenue may, by Notification in the official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in the First Schedule as chargeable with duty ad valorem and may alter any tariff values for the time being in force. (3) Different tariff values may be fixed for different classes or descriptions of the same articles. (4) Notwithstanding anything contained in subsection (1) the Central Government may, in lieu of levying and collecting duties of excise on excisable goods under that subsection levy and collect, in such manner and as such rate, as may be prescribed duties of excise on the plant or machinery or a part thereof, manufacturing or producing excisable goods." Section 6 provides as follows :‑ "

6. The Central Board of Revenue may, by Notification in the Official Gazette, provide that, from such date as may be specified in the Notification, no person shall, except under the authority and in accordance with the terms and conditions of a licence granted under this Act, engage in‑ (a) the production or manufacture or any process of the production or manufacture of any specified excisable goods or of saltpetre or of any specified component parts or ingredients of such goods or of specified containers of such goods, or (b) the wholesale purchase of salt (whether on his own account or as a broker or commission agent) or the storage of any excisable goods specified in this behalf in Part A of the Second Schedule." It will thus be seen that section 3 maintains the distinction that the duty of excise is to be levied and collected in respect of goods, other than salt, which are produced or manufactured in the Provinces and the Capital of the Federation. Subsection (4) of this section also indicates that in lieu of levying and collecting such duties on excisable goods the Central Government may levy and collect the same on the plant or machinery or a part thereof, manufacturing or producing such excisable goods. Again, section 6 also appears to lend support to the contention that the liability to the duty was not intended to extend to any and every "wholesale dealer", in so far as no one, except with a licence, can either produce or manufacture or engage in any process of production or manufacture of any excisable goods or enter into wholesale purchase or sale (whether on his own account or as a broker or commission agent) or store any excisable commodity specified in Part A of the Second Schedule. Now Part A of the Second Schedule includes betel‑nuts but only when it is supplied "by a curer to a wholesale dealer, whether directly or through a broker or commission agent." It would thus be seen that if a person did not come within the category of a "wholesale dealer" who had purchased from a curer either directly or through a broker or commission agent, he would not come within the mischief of section

6. In the present case the appellant, as already pointed out, clearly stated that he was neither a curer nor a producer nor a manufacturer of such goods, nor had acquired such goods either from a curer or a manufacturer. He also denied that he had stored any betel‑nuts in any warehouse. The authorities did not controvert these allegations but merely stated that since he had admitted holding large stocks of betel‑nuts, he was a "wholesale dealer" within the definition of that term given in section 2(k). It is, however, not sufficient merely that he should be a wholesale dealer within that definition. In order to be made liable to the duty he must, under section 3 read with rule 7, also be a person who is engaged in wholesale purchase or sale of excisable goods specified in Part A of the Second Schedule appended to the Act. Under this Part the transactions covered are only transactions of a wholesale purchase from a curer either directly or through a broker or a commission agent and not any and every kind of wholesale transaction. The contention of the taxing authorities therefore, does not appear to be correct. In the affidavit in rejoinder the appellant further pointed out that his firm purchased stocks of the finished goods only from the common market stocks at Karachi from wholesale dealers. This again was left un-controverted. Hence there is nothing to show clearly that the betel‑nuts in the possession of the appellant were acquired x from a curer or manufacturer, nor was there anything to show that the goods were stored in any warehouse. It is clear, there fore, that the appellant did not come within the category of persons from whom the duty could be recovered under rule 7 of the Rules. The said rule 7 reads as follows :‑ "

7. Recovery of duty.‑Every person who produces, cures, purchases or acquires from a curer, or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty or duties due on such goods, at such time and place and to such persons as may be designated in, or under the authority of these rules, whether the payment of such duties is secured by bond or otherwise; provided that, in the case of un-manufactured products, the person purchasing or acquiring them from a curer shall assume the liability for the payment of duty ; and if any such person does not pay such duty or duties at such time and place and to such person as aforesaid, or upon written demand made by the proper officer, whether such demand is delivered personally or is left at his dwelling house, or at the premises where such duty or duties have been charged, every such person shall be liable to a penalty which may extend to five times the duty chargeable on the goods, and the goods in respect of which the demand is made shall be liable to confiscation." The High Court has unfortunately taken the view that it was "unnecessary to devote any time or space" in the examination of this particular argument advanced before it on behalf of the appellant, even though it was conceded by the learned Attorney General appearing on behalf of the taxing authorities that there was no specific rule by which any wholesale dealer in betel‑nuts had been made liable to pay the excise duty. It is patent that before a person can be made liable to the payment of a tax or a levy he must be shown clearly to fall within the category so made liable under the letter of the law. In the present case, as we have indicated above, the law did not intend to bring any and every wholesale dealer within its mischief. It was only a wholesale dealer who had, under rule 7 read with section 6 and Part A of the Second Schedule of the Act itself, acquired or purchased from a curer or manufacturer or stored the goods in a warehouse. The warehouse for the purposes of this rule means a warehouse licenced for the purpose by the taxing authorities. It is nobody's case that the goods were stored in any such ware house. It is clear, therefore, that the appellant, no matter what the true nature of the duty, was not liable to pay the same in respect of the betel‑nuts lying in his possession and the taxing authorities had illegally and without lawful authority demanded the duty from him. Possession simpliciter of betel‑nuts is no, sufficient, under the provisions of the Act of 1944 and the Rules framed there-under, to make a person possessing the same even in excess of the specified quantity, i.e., 20 lbs., liable to pay the excise duty in respect of the betel‑nuts possessed by him. For these reasons, we allow this appeal and direct the respondents herein to withdraw and/or cancel the demand certificate issued on the 17th of August 1960. Since this was a clear case of an arbitrary imposition being made upon a person who was patently not liable under the taxing statute, we also award to the appellant the costs of this appeal. K. B. A. Appeal accepted.