Orient Weaving Mills (P) Ltd. vs The Union Of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 28 February, 1962

Coram: B.P. Sinha, J.C. Shah, J.L. Kapur, J.R. Mudholkar, M. Hidayatullah

In the matter titled Orient Weaving Mills (P) Ltd. versus the Union of India, the Supreme Court of India heard arguments on 28 February 1962 before a bench consisting of Justices B. P. Sinha, J. C. Shah, J. L. Kapur, J. R. Mudholkar and M. Hidayatullah. The petition, filed under article 32 of the Constitution, sought to challenge the constitutional validity of certain provisions of the Central Excises and Salt Act of 1944, hereinafter referred to as the Act, when read together with rule 8 of the Central Excise Rules, 1944 (as amended in 1960), and the notifications made under those provisions. The petitioners were identified as the company known as Orient Weaving Mills Private Limited, throughout this text referred to as “the Company,” and a director of that company, who together raised the challenge. The respondents comprised the Union of India represented by the Secretary to the Government of India in the Ministry of Finance (Department of Revenue), the Secretary of the Central Board of Revenue, the Superintendent of Central Excise at Cuttack, the Collector of Central Excise at Calcutta, and the Board of Directors of Madhunagar Powerloom Weavers’ Co‑operative Society Limited, represented by its President, hereinafter called “the Society.” The petition alleged that specific statutory provisions and related notifications granted the Society a selective exemption from excise duty, a privilege that the petitioners contended was unconstitutional and arbitrary.

The factual background set out by the petition describes the Company as a corporation incorporated under the Indian Companies Act, 1913, with its registered head office situated at Nayabazar in Cuttack. The Company’s business consists of operating a weaving mill at the same location, a mill equipped with one hundred and sixty looms and employing roughly three hundred workers. The mill’s production capacity averages forty‑five lakh yards of cloth, equivalent to four and a half million yards, on a regular basis. The paid‑up capital of the Company is stated to be seven lakh ten thousand rupees, divided into seven thousand one hundred shares, each having a nominal value of one hundred rupees, and the company’s board comprises eight directors, one of whom represents the Government of Orissa. Production at the mill commenced on the first of October, 1955, and according to the petition, the enterprise has incurred continuous financial losses since its inception, attributing the losses to adverse economic conditions prevailing in the State of Orissa as well as to the burden of heavy taxation and duties imposed upon it. Despite these losses, the Company has made excise duty payments amounting to two lakh sixteen thousand six hundred and seventy rupees for the fiscal year 1958‑59, one lakh eighty‑two thousand five hundred and twenty‑nine rupees for the year 1959‑60, and two lakh fifteen thousand rupees for the year 1960‑61. The Act classifies “cotton fabrics” within its first schedule, thereby specifying the description of the goods and the rate of duty applicable under section 3 of the Act. The principal grievance articulated by the petitioners is that respondent number five, the Society, has been granted an exemption from the levy of excise duty, notwithstanding the fact that the Society operates a comparable operation on the same premises, employing one hundred looms and employing one hundred workmen. The Society’s authorized capital is listed as two lakh forty thousand rupees, divided into shares of one hundred rupees each, and it is described as a profit‑earning concern whose profits are disposed of in accordance with its bye‑law numbered thirty‑five. The petition further contends that the Society is similarly situated with the Company concerning the production, distribution, and marketing of its output, and that the weavers associated with the Society occupy a position comparable to that of the shareholders of the Company.

In the present matter the Court observed that, for all practical purposes, the petitioner company and the cooperative society were similarly situated with respect to the production, distribution and marketing of their respective outputs. It was further stated that the weavers who were members of the society occupied a position that was comparable to the shareholders of the company. The exemption that had been granted to the society was based on Central Government Notification No 74 of 1959, dated 31 July 1959, and on Notification No 70 of 1960, dated 30 April 1960, both issued by the Ministry of Finance, Government of India, Department of Revenue. The text of the first notification reads as follows: “Government of India, Ministry of Finance (Department of Revenue), New Delhi. 31 July 1959. G.S.R. In pursuance of sub‑rule (1) of rule 8 of the Central Excise Rules 1944 as in force in India and as applied to the State of Pondicherry, the Central Government hereby exempts cotton fabrics produced by any co‑operative society formed of owners of cotton power‑looms, which is registered or which may be registered on or before 31 March 1961 under any law relating to co‑operative societies, from the whole of the duty leviable thereon, subject to the following conditions: (a) that every member of the co‑operative society had been exempt from excise duty for the three years immediately preceding the date of his joining such society; (b) that the total number of cotton power‑looms owned by the co‑operative society is not more than four times the number of members forming such society; (c) that a certificate is produced by each member of the co‑operative society from the State Government concerned or such Officer as may be nominated by the State confirming that the number of cotton power‑looms in his ownership and actually operated by him does not exceed four and did not exceed four at any time during the three years immediately preceding his joining the society, and that he would have been exempt from excise duty even if he had not joined the co‑operative society; and (d) that the exemption shall be available (i) for a period ending on 31 July 1962 in respect of registered co‑operative societies which have commenced production prior to the date of this notification; and (ii) for a period of three years from the date of commencement of production in respect of co‑operative societies which have been registered but have not commenced production or which may be registered on or before 31 March 1961. (No 74/59) Signed, S. K. Bhattacharjee, Deputy Secretary to Government of India. F.N. 74/59/F. No. 13/59‑CXIII.” The second notification is quoted as: “Government of India, Ministry of Finance (Department of Revenue), New Delhi. 10 April 1960. Notification Central Excise GSR. In pursuance of sub‑rule (1) of rule 8 of the Central Excise Rules 1944 as in force in India and as applied to the State of Pondicherry and in supersession of the Notification of the Government of India Ministry of Finance (Department of Revenue) No 74/59‑Central Excise dated 31 July 1959, the Central Government hereby exempts cotton fabrics ….”

In this case, the Court recorded the terms of the exemption notification. It provided that cotton fabrics produced on powerlooms owned by any co‑operative society or owned by or allotted to the members of such a society, provided the society was registered or could be registered on or before 31 March 1961 under any law relating to co‑operative societies, would be exempt from the whole of the excise duty payable on them, subject to several conditions. Condition (a) required that every member of the co‑operative society who had been a manufacturer of cotton fabrics on powerlooms must have enjoyed exemption from excise duty for the three years immediately preceding his joining the society. Condition (b) limited the total number of cotton powerlooms owned by the co‑operative society, or owned by or allotted to its members, to not more than four times the number of members forming the society. Condition (c) demanded that each member produce a certificate issued by the concerned State Government or by an officer nominated by that Government, confirming that the member was a bona‑fide member of the society, that the number of cotton powerlooms owned or allotted to him and actually operated by him did not exceed four, and that the same limit had not been exceeded at any time during the three years immediately preceding his joining the society; the certificate also had to state that the member would have been exempt from excise duty had he not joined the co‑operative society. Condition (d) specified the period during which the exemption would be available. Sub‑condition (i) provided that the exemption would remain in force until 31 July 1962 for registered co‑operative societies that had commenced production before the date of the notification. Sub‑condition (ii) provided that the exemption would continue for a period of three years from the date the society commenced production in cases where the society had been registered but had not yet started production, or where the society might be registered on or before 31 March 1961.

The Court then noted that the Company had made a representation to the relevant authorities, but the representation had produced no result. The Company was required to pay excise duty on the cotton fabrics it produced, and its cost of production was higher than that of the co‑operative society by twelve and a half percent in 1958 and by ten percent in 1959. Consequently, the Company was at a disadvantage in the competitive market of Orissa. Because of the heavier taxation on fine cloth, the Company had ceased production of that quality and had limited its output to coarse and medium cloth. The Company feared that the exemption granted to the co‑operative society would adversely affect its business. The Company contended that rule eight of the Central Excise Rules, 1944, empowered the Government to exempt goods from duty without any guiding principle, and that such power was wholly or partially discriminatory against the petitioner. The Court recorded that the Government notifications exempting the society, and any similar societies that might be created in the future, had the effect of

In the petitioners’ submission, the exemption granted to the Society was alleged to violate the petitioners’ fundamental rights under Arts. 14 and 19(1)(f) and (g) of the Constitution. The petitioners further argued that the authority conferred on the Government by the Rules was unguided and uncontrolled, exceeding the permissible limits of a valid delegation of power and consequently rendering the exemption void. To test this claim, the petitioners filed a petition under Art. 226 of the Constitution in the High Court of Orissa, seeking a declaration that the statutory measures imposing excise duty on the petitioners’ piece‑goods were unconstitutional. The High Court, however, declined to grant any relief, holding that it lacked jurisdiction to issue any writ against the Union Government in New Delhi. On the basis of this refusal, the petitioners prayed that the levy of excise duty on the piece‑goods they produced be declared unconstitutional and that the respondents, identified as respondents 1‑4, be directed to treat the petitioners on the same footing as the Society by exempting them from excise duty. The petitioners also sought an appropriate writ or order to enforce their fundamental rights guaranteed under Arts. 14 and 19(1)(f) and (g) of the Constitution. The petitioners contended that the selective exemption created a class distinction that was not based on any intelligible differentia, thereby breaching the principle of equality before law. They maintained that the absence of any legislative guidelines for the exercise of the delegated power left the decision entirely at the discretion of the executive, contrary to constitutional requirements. Their relief sought not only a declaration but also a mandatory direction that the respondents extend the same exemption to the petitioners as enjoyed by the Society, thereby eliminating the alleged discriminatory burden.

The application was opposed by respondents 1‑4, and an affidavit sworn by an Under Secretary of the Ministry of Finance, Department of Revenue, Government of India, was filed in opposition. In that affidavit, the Union Government and the Revenue authorities asserted that the provisions of the Act, the Rules issued thereunder, and the notifications challenged by the petitioners did not infringe any constitutional provision. They argued that the exemption granted to the Society was based on the well‑recognised principle of providing self‑employment benefits to small producers and of encouraging cottage and small‑scale industries that employ a limited number of workers. According to the respondents, the Society was not the owner of the power looms; each individual weaver owned no more than four power looms, and the Society functioned on a cooperative basis for the benefit of those weavers. The weavers shared the profits earned from the sale of cloth produced on their own looms after payment for services rendered by the Society. Consequently, the respondents contended that it was inaccurate to describe the Society as operating a mill with an installed capacity of one hundred looms. They further maintained that the Society was not a profit‑earning concern, contrary to the petitioners’ characterization. Under the approved scheme, the Society purchased cloth produced by each weaver at a price that covered the cost of raw materials, the cost of services provided by the Society, the labour cost of the weaver, and a modest profit margin for the weaver. The Society then sold the piece‑goods on behalf of the weavers, charging handling fees that were paid by the buyer. Any savings realised from these handling charges were distributed to the weavers in the form of dividends.

In this case the Court observed that the handling charges collected by the Society were partly retained by the Society and the balance of those charges were distributed to the weavers in the form of a dividend. Unlike a private company, the Society did not own any of the looms; instead it functioned merely as a servant of the weaver‑owners, providing them with the services they required to market the cloth produced on their own looms. Accordingly, the Society was described as an organisation that assists each individual loom owner in both the production and the sale of the output of his loom, and that assistance is intended solely for the benefit of those individual owners. On the basis of this description, it was asserted that the exemption granted to goods produced in co‑operative societies – societies in which the weavers are the owner‑members and in which no individual member possesses more than four looms – was made under Notification No 70/60 dated 30 April 1960. That notification was issued pursuant to rule 8 of the Excise Act and was said to rely on a valid classification of the goods, thereby not contravening the constitutional provisions contained in Article 14 and Article 19(1)(f) and (g). The pleadings and the arguments presented before the Bar raised two principal questions for determination: first, whether the power to grant exemption that had been conferred on the Union Government infringes Articles 14 and 19(1)(f) and (g) of the Constitution because it is purportedly uncontrolled and unguided; and second, assuming that the power itself is not unconstitutional, whether the specific exemption granted by the referenced notifications exceeds the limits of authority granted by rule 8 of the Act.

Before analysing the constitutionality of the exemption or the scope of rule 8, the Court noted that it was necessary to examine the relevant statutory provisions of the Excise Act and the rules made thereunder. The Act was described as a statute that consolidates and amends the law relating to central duties of excise on goods manufactured or produced in certain parts of India, and also to the duty on salt. Section 2(d) of the Act defines “excisable goods” as those goods specified in the First Schedule as being subject to a duty of excise, and includes salt within that definition. The First Schedule sets out the description of the goods and the rates of duty that may be levied under Section 3, which is the charging provision. Section 3(1) provides that duties of excise shall be levied and collected, in a manner prescribed, on all excisable goods other than salt that are produced or manufactured in India, and on salt that is manufactured in or imported by land into any part of India, at the rates specified in the First Schedule. The provision further allows that different tariff values may be fixed for different classes or descriptions of the same articles. Item No 19 in the First Schedule is identified as “cotton fabrics” and is interpreted to include all varieties of fabrics made wholly or partly from cotton, with certain specified exemptions such as fabrics manufactured on handloom. Section 37 of the Act authorises the Union Government to make rules to give effect to the purposes of the Act, and sub‑section (2) of that provision empowers the Government to frame rules covering a variety of matters, including the power to exempt any goods wholly or partially from the duty imposed by the Act.

Section 37 of the Excise Act authorises the Government to make rules for various matters, and it specifically includes clause (xvii) which states that a rule may “exempt any goods from the whole or any part of the duty imposed by this Act.” In exercise of that power the Union Government has issued a set of rules, and for the purpose of the present case the Court examines Rule 8. Rule 8 reads: “Power to authorise exemption from duty in special cases: (1) The Central Government may, from time to time, by notification in the Official Gazette, exempt, subject to such conditions as may be specified in the notification, any excisable goods from the whole or any part of the duty leviable on such goods; (2) The Central Board of Revenue may by special order in each case exempt from the payment of duty, under circumstances of an exceptional nature, any excisable goods.” Pursuant to sub‑rule (1) of Rule 8, the Central Government issued the notifications that are the subject of this controversy. Section 38 of the Act requires that every rule and every notification made under the Act be published in the Official Gazette, and provides that once published the rule or notification “shall have effect as if enacted in this Act.” Consequently, the notifications and Rule 8 that are challenged have been incorporated into the statute and form part of the applicable excise law. The Court also notes that the petitioners have not questioned the constitutional validity of the Excise Act itself; their challenge is directed solely at Rule 8 and the specific notifications that exempt goods produced by co‑operative societies such as the fifth respondent from the payment of excise duty.

The petition therefore seeks a declaration that the levy of excise duty on the piece goods manufactured by the petitioners is unconstitutional, while simultaneously relying on the exemption granted to the fifth respondent. The Court observes that it is difficult to reconcile this first prayer with the factual basis of the petition, because to attack the constitutionality of the duty provisions of the Act is a different matter from contesting the validity of an exemption granted under Rule 8. Since the vires of the Act itself have not been questioned, the Court sees no necessity to address that broader issue. The petition principally argues two points: first, that Rule 8 suffers from an excessive delegation of authority to the Central Government to exempt any excisable goods wholly or partly; second, that even assuming the delegation is constitutionally valid, the specific notifications granting exemption to the goods of the fifth respondent were exercised invalidly. After consideration, the Court finds that neither contention possesses substantive merit. Accordingly, the Court concludes that the challenges to Rule 8 and to the notifications are unfounded.

Rule 8 formed an integral part of the statute in the same manner as section 37(2) clause (xvii). The judgment explained that the State always retained the authority to impose tax on selected classes of goods while leaving other classes untaxed. It emphasized that the legislature was the most suitable body to determine both the incidence of taxation and the appropriate rate of tax for the various categories of goods. The Act, according to the Court, expressly recognised and gave effect to the long‑standing principle that the incidence of tax on a particular kind of product must be highly flexible. Such flexibility was required to enable the tax structure to change over time and to vary according to the processes used in manufacturing and the differing agencies involved. The same principle was reflected in section 23 of the Sea Customs Act of 1878, which had been extended to excise duty by virtue of section 12 of the present Act. Section 12 authorised the Central Government to apply the provisions of the Sea Customs Act to the excise duty levied under this Act, and to make any modifications or alterations that it considered necessary or desirable in order to adapt the provisions to the circumstances then prevailing. The Court noted that it was a fundamental function of the State to raise revenue for the purposes of the State, and that this function included deciding what kinds of taxes should be levied and in what manner. The purpose of this revenue‑raising function was to fund public purposes. At the same time, the State was expected to raise the revenue needed for public purposes without unfairly compromising the legitimate interests of persons or groups that the State might deem deserving of special treatment for reasons it considered appropriate, thereby placing them in a special class. The Directive Principles of State Policy contained in Part IV of the Constitution were described as setting out the policies and objectives that the State should pursue in order to promote the welfare of the people. In the specific controversy before the Court, the provisions of Article 43 were highlighted as particularly relevant, especially the clause directing the State to “endeavour to promote cottage industries on an individual or co‑operative basis in rural areas.”

The Court also referred to an affidavit filed on behalf of respondents 1‑4, which stated that the exemption granted by the impugned notifications was primarily intended to protect small producers of cotton fabrics who owned no more than four power looms from the unreasonable competition of larger producers such as the petitioner company. Accordingly, the State had drawn a valid distinction between goods produced in large establishments and similar goods produced by small power‑loom weavers in the mofussil, who were generally described as being ignorant, illiterate, poor, and subject to handicaps that did not affect large establishments like the petitioner company. The Court further observed that the exemption was also available to individual weavers who operated not more than five looms on their own account. It was held that the fact that these weavers had organised themselves into a co‑operative to improve efficiency and to make use of State assistance should not be held against them. Consequently, the Court concluded that there

The Court noted that there is no basis for the claim that the authority to grant exemptions has been unduly delegated. It further considered the argument that if rule eight were upheld as valid and constitutional, the notifications would be defective because they allegedly exempt certain classes of persons rather than classes of goods from excise duty. The petitioners contended that the excise duty is imposed on “any goods” and that item twelve of the notification refers specifically to a variety of goods, namely cotton fabrics. According to that line of reasoning, any exemption should be granted with respect to a particular specified variety of cotton fabrics and not on the basis of the persons who produce those fabrics. The Court observed that this reasoning contains a flaw. While the duty is levied on the production of any goods, it is the persons who produce those goods who are liable to pay the duty. Accordingly, an exemption must also relate to the same category of goods that fall within the definition of excisable articles. The Court pointed out that respondent number five has been relieved of the obligation to pay excise duty on the goods manufactured by the weavers, but the exemption does not extend to personal taxes such as income tax. Therefore, the exemption necessarily concerns the same type of tax that would otherwise have been payable in the absence of the exemption. From the notifications under consideration, it is clear that the Government has exempted cotton fabrics produced on power‑looms owned by a cooperative society, and in the present case, by the members of that cooperative society. The Court found that no submission had been made indicating that the members of the cooperative society, respondent number five, failed to satisfy the conditions stipulated for the exemption. Consequently, the exemption granted falls within the terms of the notifications, which operate as if they were incorporated into the statute. The validity of the statute itself, as previously noted, has not been challenged. In view of these observations, the Court concluded that the petition lacks merit and consequently dismissed it, ordering the petitioners to bear costs awarded to the respondents. The petition was therefore dismissed.