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

Case Number: Petition No. 110 of 1961

Decision Date: 28 February 1962

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

In the matter titled Orient Weaving Mills (P) Ltd versus The Union of India, the Supreme Court of India delivered its judgment on 28 February 1962. The opinion was authored by Justice Bhuvneshwar P. Sinha and the bench comprised Justices J. L. Kapur, M. Hidayatullah, J. C. Shah and J. R. Mudholkar. The petitioner in the case was Orient Weaving Mills (P) Ltd and the respondent was the Union of India. The judgment is reported in the 1963 All India Reporter at page 98, the 1962 Supplement to the Supreme Court Reports (Series 3) at page 481, and cited in various law reports including R 1963 SC 104, R 1986 SC 1541, and RF 1989 SC 644. The substantive issue concerned the Central Excise—Power of the Central Government to grant exemption—under the Central Excises and Salt Act of 1944, specifically section 37(2) clause (xvii), and the Central Excise Rules of 1944, rule 8(1), read in conjunction with Articles 14, 19(1)(f), 19(1)(g) and 43 of the Constitution of India.

Rule 8(1) of the Central Excise Rules, 1944, was framed by the Central Government exercising the authority conferred upon it by section 37(2) clause (xvii) of the Central Excises and Salt Act, 1944. The rule authorised the Government, by way of a notification in the Official Gazette, to exempt any excisable goods, wholly or partially, from the duty leviable thereon, subject to conditions stipulated in the notification. Pursuant to this rule, two separate notifications were issued that exempted cotton fabrics manufactured on power looms owned by co‑operative societies from the applicable central excise duty, provided that certain conditions were fulfilled. Under section 38 of the Act, the rule and the notifications, once published in the Official Gazette, acquired the same force as if they had been enacted directly by the Act.

The petitioners, fearing loss of business due to competition from the fifth respondent, a co‑operative society, challenged the validity of the rule and the notifications on two principal grounds. First, they argued that the power to grant exemptions vested in the Union Government contravened the constitutional guarantees of equality and freedom of occupation contained in Articles 14, 19(1)(f) and 19(1)(g). Second, assuming that the constitutional challenge did not succeed, they contended that the exemptions granted by the notifications exceeded the authority conferred by rule 8(1). The Court held that both contentions were without merit. It observed that rule 8 formed an integral part of the Act, just as section 37(2) clause (xvii) did, and that the State retained full discretion to levy taxes on certain classes of goods while exempting others. The Court explained that the classification drawn between goods produced in large establishments and similar goods produced by small power‑loom weavers in co‑operative societies was a permissible classification under the Constitution, especially in light of the directive principle embodied in Article 43. Consequently, there was no excess delegation of legislative power to the executive, and the contention that exemption could be granted only with respect to a particular variety of cotton fabric, and not to the persons producing them, was dismissed as untenable.

The tax in question was imposed on a specific category of goods described as a particular variety of “cotton fabrics,” and it was not directed at any individual or entity that produced those fabrics. Accordingly, the liability to pay the tax arose from the act of producing the goods, but the actual payment was required to be made by the persons who carried out the production. Because the exemption that had been granted was conditioned on the same description of goods, the Court held that the exemption fell squarely within the scope of the notifications that authorized it. The judgment set out the original jurisdiction as Petition No. 110 of 1961, filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. Counsel for the petitioners were A. V. Viswanatha Sastri and R. Gopalakrishnan, while the respondents were represented by counsel comprising K. N. Rajagopal Sastri, P. K. Chatterjee and P. D. Menon. The judgment was delivered on 28 February 1962 by Chief Justice Sinha. By means of this petition the petitioners challenged the constitutional validity of certain provisions of the Central Excises and Salt Act of 1944, hereinafter referred to as the Act, together with Rule 8 of the Central Excise Rules, 1944 (as amended in 1960) and the notifications issued under those provisions. The first petitioner is Orient Weaving Mills Private Limited, which the Court will refer to as “the Company,” and the second petitioner is a director of that Company. The respondents include the Union of India represented by the Secretary to the Government of India, Ministry of Finance (Department of Revenue), New Delhi; the Secretary of the Central Board of Revenue, New Delhi; the Superintendent of Central Excise, Cuttack; the Collector of Central Excise, Calcutta; and the Board of Directors of Madhunagar Powerloom Weavers’ Cooperative Society Ltd., represented by its President, which the Court will call “the Society.” The petition is based on several factual allegations. The Company was incorporated under the Indian Companies Act, 1913, with its head office situated in Nayabazar, Cuttack. The Company operates a weaving mill at the same location, employing approximately three hundred workers and operating one hundred sixty looms. Its annual output averages about forty‑five lakh yards of cloth, that is, four and a half million yards. The Company’s paid‑up capital amounts to Rs 7,10,600, divided into seven thousand one hundred shares of Rs 100 each, and it is managed by eight directors, one of whom represents the Government of Orissa. Production commenced on 1 October 1955, and the Company has continuously suffered losses since that date, which it attributes to adverse conditions in the State of Orissa and to the burden of heavy taxation and duties. Despite the losses, the Company has paid excise duty in the amounts of Rs 2,16,670 for the financial year 1958‑59, Rs 1,82,529 for 1959‑60, and Rs 2,15,500 for 1960‑61. “Cotton fabrics” appear in the first schedule of the Act, which lists the description of goods and the duty rates applicable under Section 3 of the Act. The principal grievance of the petitioners is that the Society, identified as respondent number 5, has been granted an exemption from excise duty even though the Society has installed one hundred looms on the same premises and employs one hundred workers, a situation the petitioners argue is comparable to that of the Company.

The Society that was the subject of the petition had an authorised capital of two lakh forty thousand rupees, divided into shares each worth one hundred rupees. According to the petition, the Society was a profit‑earning enterprise, and its profits were distributed in accordance with its bye‑law. It was further asserted that, for all practical purposes, the Society was situated in the same manner as the petitioner company with respect to the production, distribution and marketing of their respective outputs. The petition also alleged that the weavers employed by the Society occupied a position comparable to that of the shareholders of the petitioner company, thereby implying a similarity in their economic interests and standing.

The exemption from excise duty that the Society enjoyed was said to have been granted under Central Government Notification No. 74 of 1959 dated 31 July 1959 and Notification No. 70 of 1960 dated 30 April 1960, both issued by the Ministry of Finance, Department of Revenue, Government of India. The text of the notifications read as follows: “Government of India, Ministry of Finance (Department of Revenue), New Delhi, 31 July 1959. Pursuant to rule 8 of the Central Excise Rules 1944 as in force throughout 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, provided that such society is registered or 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) every member of the co‑operative society must have been exempt from excise duty for the three years immediately preceding his joining the society; (b) the total number of cotton power‑looms owned by the co‑operative society must not exceed four times the number of its members; (c) each member must produce a certificate from the concerned State Government or an officer nominated by that State confirming that the number of cotton power‑looms in his ownership and actually operated by him 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 had he not joined the co‑operative society; and (d) the exemption shall be available (i) for a period ending on 31 July 1962 in respect of registered co‑operative societies that had commenced production prior to the date of the notification, and (ii) for a period of three years from the date of commencement of production for co‑operative societies that were registered but had not yet commenced production, or that may be registered on or before 31 March 1961.” The notification bore the signature of S.K. Bhattacharjee, Deputy‑Secretary to the Government of India. A subsequent notification dated 10 April 1960, also issued by the Ministry of Finance (Department of Revenue), reiterated the exemption in accordance with sub‑rule (1) of rule 8 of the Central Excise Rules 1944 as then in force.

In this case, the Court noted that a notification issued for the State of Pondicherry superseded the earlier Government of India Ministry of Finance (Department of Revenue) Notification No 74/59 dated 31 July 1959. The new notification exempted from the whole amount of excise duty any cotton fabric that was produced on power looms owned by a cooperative society, or owned or allotted to the members of such a society, provided that the society was registered or might be registered on or before 31 March 1961 under any law relating to cooperative societies. The exemption was conditional. First, every member of the cooperative society who had been a manufacturer of cotton fabrics on power looms had to have enjoyed exemption from excise duty for the three years immediately preceding the date on which he joined the society. Second, the total number of cotton power looms owned by the cooperative society, or owned or allotted to its members, could not exceed four times the number of members forming the society. Third, each member had to obtain a certificate from the State Government concerned or from an officer authorized to act as a bona‑fide member of the society, confirming that the number of cotton power looms owned or allotted to him and actually operated by him did not exceed four and had not exceeded four at any time during the three years immediately preceding his joining, and that he would have been exempt from excise duty even if he had not joined the cooperative society. Fourth, the exemption was to be available for a period ending on 31 July 1962 for those registered cooperative societies that had commenced production before the date of the notification, and for a period of three years from the date of commencement of production for societies that had been registered but had not yet started production, or that might be registered on or before 31 March 1961. After the notification was issued, the Company submitted a representation to the relevant authorities, but the representation achieved no result. The Company explained that it was required to pay excise duty on the cotton fabrics it produced, and that its cost of production was higher than that of the cooperative society by 12.5 percent in 1958 and by 10 percent in 1959. Consequently, the Company claimed that it was placed at a competitive disadvantage in the market of Orissa. Because of the higher taxation on fine cloth, the Company disclosed that it had abandoned the production of fine quality cloth and had restricted its output to coarse and medium‑weight cloth. The Company feared that the exemption granted to the cooperative society would adversely affect its business. It further contended that Rule 8 of the Central Excise Rules, 1944, which empowered the Government to exempt any goods wholly or partially from duty, gave the Government unguided and unchecked authority, and that such power was discriminatory against the petitioner.

In the present petition the respondents argued that the Government notifications granting exemption to the Society and to any similar societies that might be created in the future are discriminatory against the petitioner and consequently infringe the petitioner’s fundamental rights guaranteed by Articles 14 and 19(1)(f) and (g) of the Constitution. The petitioner further contended that the authority conferred on the Government by the cited Rules is neither guided nor controlled, that it exceeds the permissible limits of a valid delegation of power, and therefore must be held void as illegal. The petitioner approached the High Court of Orissa invoking Article 226 of the Constitution in order to challenge the constitutional validity of the Government’s measures, but the Court declined to grant any relief, holding that it lacked jurisdiction to issue a writ against the Union Government located in New Delhi. Consequently the petitioner prayed for three orders: first, a declaration that the levy of excise duty on the piece‑goods manufactured by the petitioner is unconstitutional; second, a direction that respondents 1‑4 should treat the petitioner on the same footing as the Society and exempt it from the payment of excise duty; and third, an appropriate writ or order to enforce the petitioner’s fundamental rights under Articles 14 and 19(1)(f) and (g). The application filed by the petitioner was opposed on behalf of respondents 1‑4, and an affidavit sworn by an Under‑Secretary of the Ministry of Finance, Department of Revenue, Government of India, was submitted in opposition. The Union Government and the Revenue side submitted that the provisions of the Excise Act, the Rules made thereunder, and the notifications challenged by the petitioner do not contravene any constitutional provision, and that the exemption granted to the Society is based upon a well‑recognised policy 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 does not own any power looms; each individual weaver owns not more than four power looms, and the Society operates on a cooperative basis solely for the benefit of those weavers, who share the profits earned from selling the cloth produced on their own looms after accounting for services rendered by the Society. Therefore it is inaccurate to describe the Society as running a mill with an installed capacity of one‑hundred looms. The respondents further asserted that the Society, contrary to the petitioner’s claim, is not a profit‑earning concern. Under the approved scheme, the Society purchases the cloth produced by each weaver at a price that covers the cost of raw materials, the cost of services provided by the Society, the labour cost incurred by the weaver, and a modest profit margin for the weaver, after which the Society undertakes the sale of the purchased cloth.

The Society sold the piece‑goods produced by each weaver without taking any profit for itself. The only charge it imposed was a handling fee that the buyer paid. When the Society was able to reduce the amount of handling charges it collected, the resulting savings were shared with the weaver as a dividend. Unlike a private company, the Society did not own any of the looms. It functioned merely as a servant of the loom‑owners, providing services that the owners needed in order to market their output. Consequently, the Society was described as an organization that merely assists each individual loom‑owner in producing and selling the goods generated by his or her looms, and that assistance is for the exclusive benefit of those owners. On this basis, it was argued that the exemption granted to the goods produced by the cooperative society—where the members are weavers each possessing no more than four looms—was made pursuant to Notification No. 70/60 dated 30 April 1960, issued under rule 8 of the Excise Act. The argument further claimed that the classification relied upon in the notification was valid and that the exemption did not violate Articles 14 and 19(1)(f) & (g) of the Constitution.

The pleadings and the arguments presented at the Bar raised two principal questions for determination. First, whether the power to grant exemption, as exercised by the Union Government, infringes Articles 14 and 19(1)(f) & (g) of the Constitution because it is allegedly uncontrolled and unguided. Second, assuming that the exemption power is not unconstitutional, whether the exemption granted by the referenced notifications exceeds the authority conferred by rule 8. Before addressing the constitutional validity of the law or the notification issued under the Act read with rule 8, it was necessary to examine the relevant provisions of the Act and the Rules. The Excise Act consolidates and amends the law relating to central duties of excise on goods manufactured or produced in certain parts of India, and to salt. Under section 2(d), “excisable goods” means “goods specified in the First Schedule as being subject to a duty of excise and includes salt”. The First Schedule lists the descriptions of goods and the rates of duty levied under section 3, which is the charging provision. Section 3(1) states: “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 India and a duty on salt manufactured in, or imported by land into, any part of India, as, and at the rates, set forth in the First Schedule.” Section 3 further provides that different tariff values may be fixed for different classes or descriptions of the same article. Item No. 19 in the First Schedule is “cotton fabrics”, which covers all varieties of fabrics made wholly or partly from cotton, subject to certain specified exemptions, including fabrics manufactured on handloom, followed by the detailed description of the various kinds of cotton fabrics.

Section 37 empowers the Union Government to make rules that give effect to the purposes of the Excise Act. Sub‑section (2) of that section authorises the Government to frame rules covering a number of matters, including clause (xvii), which expressly allows the exemption of any goods, either wholly or partially, from the duty imposed by the Act. In accordance with this rule‑making authority, the Union Government has issued a set of rules. For the present dispute, it is necessary to reproduce Rule 8, which reads as follows: “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 the authority conferred on the Central Government by sub‑paragraph (1) of Rule 8, the Central Government issued the notifications referred to above, granting exemption to certain goods produced by cooperative societies such as the fifth respondent. Section 38 of the Act requires that all rules and notifications issued by the Central Government be published in the Official Gazette, whereby they acquire the same force as if they were enacted by the Act itself. Consequently, the notifications and Rule 8 that are being challenged have been incorporated into the Excise Act and have become part of the statutory framework governing the tax.

The petitioners have not questioned the constitutional validity of the Excise Act itself; their challenge is directed specifically at Rule 8 and the notifications that exempt the tools manufactured by the cooperative societies, including the fifth respondent, from excise duty. Because the petition does not attack the Act’s power to levy duty, it is difficult to accept the petitioners’ first prayer, which seeks a declaration that the levy of excise duty on the piece goods produced by the petitioners is unconstitutional. It is one matter to contest the constitutionality of the provisions that authorise the levy of excise duty on the petitioners, but it is another matter entirely to complain about the exemption granted to the goods of the fifth respondent. Since the vires of the Act itself have not been challenged, the Court need not consider that aspect of a controversy that was not raised in the petition. The petition is essentially predicated on two contentions: first, that Rule 8 suffers from an excessive delegation of power to the Central Government to exempt either wholly or partially any excisable goods; and second, that even assuming the delegation is constitutionally permissible, the power has been improperly exercised in so far as the notifications granting exemption to the fifth respondent’s goods have been issued.

The Court observed that the respondents’ two contentions lacked any substantive merit. It held that Rule 8 formed an integral part of the statute, comparable to section 37(2) clause (xvii). The Court explained that the State possessed the authority to tax certain categories of goods while exempting others, and that the legislature was best placed to determine both the scope of taxation and the appropriate rates for different classes of goods. The Act, according to the Court, embodied the long‑standing principle that taxation incidence required considerable flexibility, allowing adjustments over time and varying according to the processes and agencies involved in producing goods. This principle, the Court noted, had also been recognised in section 23 of the Sea Customs Act (VIII of 1878) and extended to excise duty by virtue of section 12 of the Act, which empowered the Central Government to adopt provisions of the Sea Customs Act for excise purposes, making any modifications or alterations it deemed necessary to suit prevailing circumstances.

Accordingly, the Court stated that it was within the State’s function to raise revenue for public purposes, to decide what taxes should be levied and in what manner, and to balance revenue collection with the legitimate interests of persons or groups deserving special treatment. The Directive Principles of the Constitution, contained in Part IV, set out policies aimed at promoting the welfare of the people; in particular, article 43 directs the State to “endeavour to promote cottage industries on an individual or co‑operative basis in rural areas.” The Court accepted the affidavit filed on behalf of respondents 1‑4, which explained that the exemption granted by the impugned notifications sought primarily to protect small producers of cotton fabrics who owned no more than four power looms from undue competition by large manufacturers such as the petitioner company. By making this classification, the State distinguished between goods produced in large establishments and similar goods produced by small power‑loom weavers in the countryside, who were often illiterate, poor and faced handicaps not experienced by larger firms. The Court also noted that the exemption extended to individual weavers operating up to five looms on their own account, and that forming a co‑operative to improve efficiency did not defeat the purpose of the protective classification.

The Court observed that the assistance provided by the State to the cooperative weavers should not be treated as a disadvantage against them. Consequently, the Court held that no valid basis existed for the claim that the legislation had excessively delegated the power to grant exemptions. The next argument advanced was that, assuming Rule 8 to be valid and constitutional, the notifications would be invalid. The basis of that contention was that the notifications appeared to exempt certain classes of persons instead of classes of goods from excise duty. It was argued that excise duty is imposed on any goods, and item twelve specifically referred to the commodity known as cotton fabrics. According to that argument, any exemption should relate to a specified variety of cotton fabrics rather than to the individuals who produce those fabrics. The Court found a fallacy in this reasoning, noting that while the tax is levied on the production of goods, it is the producers who are liable to pay it. Similarly, the exemption must be interpreted as referring to the same category of goods that fall within the definition of excisable articles. Respondent number five was granted exemption from excise duty on the products manufactured by the weavers, but not from personal taxes such as income tax. Consequently, the exemption necessarily relates to the same type of tax that would otherwise have been payable in the absence of the exemption. The notifications, as examined, clearly show that the Government exempted cotton fabrics produced on power looms owned by a cooperative society, and in this case, by the members of that society. No submission was made before the Court indicating that the members of the cooperative, respondent five, had failed to satisfy the conditions stipulated for receiving the exemption. Therefore, the exemption granted to respondent five falls squarely within the scope of the notifications, which operate as though they were incorporated into the statute itself. The validity of the statute itself was not challenged, and consequently the petition lacks any substantive merit. Accordingly, the Court ordered the dismissal of the petition, directing that costs be awarded to the respondents who answered the petition. The petition was therefore dismissed.