R.C. Jall vs Union Of India (Uoi)

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 February, 1962

Coram: B.P. Sinha, J.R. Mudholkar, K. Subba Rao, N. Rajgopala Ayyangar

In this case, the Court recorded that the matter concerned the appeals by certificates filed on 27 February 1962 by two defendants against the judgment and decree of the High Court of Madhya Pradesh, Jabalpur, which had been rendered in Civil Suit No 1 of 1957. The suit had been instituted by the Union of India, acting on behalf of the Central and Western Railways Administrations, seeking recovery of a coal cess amounting to Rs 81‑4‑0 together with costs. The judgment was delivered by a bench comprising B P Sinha, J R Mudholkar, K Subba Rao and N Rajgopala Ayyangar, and the opinion was authored by Justice K Subba Rao.

The Court then set out the material facts. Under Ordinance No 39 of 1944 the Central Government had been authorised to levy a cess on all coal and coke dispatched from collieries in British India, the rate of which could not exceed Rs 1‑4‑0 per ton. Pursuant to section 5 of that Ordinance the Government framed rules, and rule 3 provided that when such coal or coke was dispatched by rail the excise duty imposed under the Ordinance would be collected by the Railway Administration in the form of a surcharge on freight, the duty being recoverable either from the consignor or the consignee as appropriate.

According to the factual matrix, on 1 January 1947, 1 February 1947 and on the period 7‑9 February 1947 the second defendant, identified as the Amalgamated Coalfields, dispatched three separate consignments of coal by rail to the first defendant. The consignments travelled from Junner‑Deo to Indore, and the freight for each consignment was payable at the destination station, namely Indore. The first defendant duly paid the freight charges and took delivery of the coal; however, by mistake the surcharge representing the coal cess was not collected from the first defendant at the time of delivery.

Section 55(5) of the Indian Railways Act allowed the Railway Administration to recover any freight or balance left unpaid by instituting a suit. Consequently, on 15 April 1953 the Union of India, representing the Central and Western Railways Administrations, filed Civil Suit No 126 of 1953 before the Civil Judge, II Class, at Chhindwara, seeking recovery of the unpaid cess. The High Court subsequently withdrew the suit from the lower court and retained it for trial on its own docket, assigning it the number Civil Suit No 1 of 1957, on the ground that significant questions of interpretation of the Government of India Act, 1935 and the Constitution were involved.

The defendants, among other points, contended that the levy was illegal and that the suit was barred by limitation. The High Court examined the limitation issue and held that the suit was filed within the period prescribed by Article 149 of the Limitation Act. It also concluded that the defendants were liable to pay the cess and accordingly decreed the suit in favour of the Union of India. Following this decree, the first defendant entered a civil appeal against the judgment.

The first defendant together with the second defendant lodged Civil Appeal No 184 of 1959 challenging the decree that had been passed against them. At the beginning of the hearing the Court noted two matters that had not been included in the formal statement of case but were raised by counsel for the appellant in Civil Appeal No 183 of 1959. The matters advanced by counsel were: first, that the coal cess should be characterised as a fee rather than as a tax or duty; and second, that the first defendant, being the consignee, was a non‑resident and consequently an Ordinance that did not have extra‑territorial operation could not be applied to him. The Court observed that these contentions were absent from the statement of case as required by Order XVIII, rule 2 of the Supreme Court Rules, which obliges each party to file its case within the prescribed time, and by rule 3, which mandates that Part II of the statement set out the legal propositions supporting the party’s contentions. The purpose of a statement of case, the Court explained, is not only to inform the Court of the questions that will be raised, but also to enable the opposite side to know in advance the arguments it must meet and to prepare its own case accordingly. The Court further emphasized that the Schedule of Fees assigns a proper fee to junior and senior advocates for preparing a complete statement, indicating the importance attached to thorough preparation. Unfortunately, the Court observed that the parties had not taken sufficient care in preparing their statements as contemplated by the Rules. For the Rules to achieve their intended purpose, counsel must read the brief carefully, identify the questions that will arise, and express those questions clearly in the statement. Any failure to perform this basic duty cannot be ignored. Consequently, the Court declared that it ordinarily will not permit counsel, at the stage of hearing an appeal, to introduce questions that were not disclosed in the statement of case. The Court found no exceptional circumstances in the present matter that would justify departing from this established practice, and therefore it refused to allow the appellant to raise the two newly‑proposed questions before it.

The Court then turned to the first substantive question, namely whether the suit seeking recovery of the coal cess was barred by limitation. The cess was payable at the time of delivery of three consignments, which occurred on 9 January 1947, 8 February 1947 and 18 February 1947 respectively. The suit was instituted on 24 April 1953, more than six years after the date on which the amount became payable. The appellant argued that the suit was therefore barred under Section 120 of the Limitation Act. The High Court, however, held that the suit was filed within the period prescribed by Article 149 read together with Article 50 of the Limitation Act. Article 149 provides that a suit by or on behalf of the Central Government or any State may be instituted within sixty years from the date the cause of action arises, while Article 50 classifies a suit for the hire of animals, vehicles, boats, house‑hold furniture and similar items within the same sixty‑year period. The High Court concluded that the suit was of the character contemplated by Article 50 and consequently the Central Government could lodge the suit within sixty years from the date the freight became payable. Counsel for the appellant disputed this view, contending that a private person could not file a suit of the kind filed by the Central Government for recovery of a statutory cess, and therefore Article 149 did not apply to the Government. The Court noted these submissions for consideration in its further analysis.

In the schedule of the Limitation Act the Court set out the relevant articles that determine when the limitation period begins to run for the suit in question. Article 149 provides that any suit brought by or on behalf of the Central Government or any State Government, except a suit against a private person before the Supreme Court in the exercise of its original jurisdiction, is subject to a limitation period of sixty years. Article 50 deals with suits for the recovery of hire of animals, vehicles, boats or household furniture and provides that such a suit must be commenced within three years from the time the hire becomes payable. Article 120 is a residual provision that applies to any suit for which no specific period of limitation is prescribed elsewhere in the schedule; it stipulates a limitation period of six years measured from the moment the right to sue accrues.

The High Court had held that the present suit fell within the class of suits described in Article 50 and consequently allowed the Central Government to sue within a period of sixty years from the date on which the freight became payable. Counsel for the appellant argued that a private individual could not maintain a suit of the same character as the suit filed by the Central Government for the recovery of a statutory cess. Accordingly, he contended that Article 149 did not apply to the Government and that the suit should be governed solely by Article 120, which limits the period to six years from the date the right to sue arises. The Court found that, although the contention raised by counsel seemed plausible at first sight, it lacked merit. The Court explained that the argument confused the issue of whether the suit is maintainable with the question of which limitation period applies. For a suit that falls under Article 149, the statute expressly prescribes a limitation period of sixty years, and the period begins to run in the same manner as it would against a comparable suit filed by a private person. The provision does not suggest that such a suit must be maintainable only by a private party; rather, it assumes that the suit is maintainable and refers to the appropriate article of the Limitation Act merely to determine the starting point of the limitation period. The limitation statute presumes the existence of a cause of action and does not create one. If a private party were to file a suit to recover a statutory duty, the applicable article would not be Article 50, because that article relates to the recovery of hire of animals, vehicles, boats or household furniture and is not suitable for a claim for a statutory cess. No other specific article addresses such a suit, so the residual Article 120 would apply, giving a six‑year period measured from when the right to sue accrues. However, when the suit is filed by the Central Government, the sixty‑year period prescribed in Article 149 must be calculated from the moment the right to sue accrues, which in this case occurred when the defendants refused to pay the cess upon demand.

In the matter before the Court, the right to sue arose at the moment when the defendants refused to pay the cess that had been demanded from them. The learned counsel relied on three earlier decisions – Kirpa Sanker v. Janki Prasad (A.I.R. 1942 Pat. 87.), Secretary of State for India v. Guru Prasad Dhur ((1893) I.L.R. 20 Cal. 51.), and Inderchand v. Secretary of State for India and Government of India v. Taylor ((1955) 27 I.T.R. 356.) – to support his claim that the suit was barred by limitation. The Court observed that none of those cases involved a suit instituted by the Government seeking recovery of an amount payable to it, and consequently they did not bear on the issue presented. Applying the residuary provision of the Limitation Act, the Court held that the period of limitation began to run when the right to sue accrued, namely when the defendants’ refusal to pay the cess occurred. Given that the suit was filed well within the sixty‑year limitation period, the Court concluded that the suit was clearly timely and could not be dismissed as being barred by limitation.

The next submission concerned the validity of the levy itself. Counsel argued that Ordinance 39 of 1944 was a temporary measure and that it had been repealed by Ordinance 6 of 1947. He further submitted that the saving clause, which applied section 6 of the General Clauses Act, 1897 to the repealed Ordinance, ceased to have effect when the repealing Ordinance expired on 1 January 1947. According to this view, there was no law in force when the Constitution came into operation to sustain the cess, and therefore the duty could neither be levied nor recovered after the Constitution’s commencement because there was no longer any legal authority under article 265 of the Constitution. To assess this contention, the Court examined the relevant statutory material. Ordinance 39 of 1944, in its Section 2, provided that “With effect from such date as the Central Government may, notification in the Official Gazette, appoint in this behalf, there shall be levied and collected as a cess for the purposes of this Ordinance, on all coal and coke despatched from collieries in British India a duty of excise at such rate, not exceeding one rupee and four annas per ton, as may from time to time be fixed by the Central Government by notification in the Official Gazette.” The Repealing Ordinance, namely Ordinance 6 of 1947, in its Section 2 declared that “The Coal Production Fund Ordinance, 1944, shall be repealed, and for the avoidance of doubts it is hereby declared that the provisions of Section 6 of the General Clauses Act, 1897 (X of 1897) shall apply in respect of such repeal.” Section 6 of the General Clauses Act, 1897 states that when an enactment is repealed, “unless a different intention appears, the repeal shall not … (c) affect any right, privilege, obligation of liability acquired, accrued or incurred under any enactment so ….” Moreover, Section 30 of the same Act defines the term “Central Act” to include any Ordinance promulgated by the Governor‑General. Finally, article 372 of the Constitution provides that, notwithstanding its repeal of certain enactments, all laws in force in the territory of India immediately before the Constitution’s commencement continue to remain in force until altered, repealed or amended by a competent authority. The Court therefore required a detailed reading of these provisions to determine whether the cess could lawfully be imposed and recovered after the Constitution came into effect.

In the clause dealing with repeal, sub‑clause (e) expressly provides that the repeal shall not affect any legal proceedings or any remedy relating to any right, privilege, obligation, liability, penalty, forfeiture or punishment, and that such legal proceedings or remedies may be instituted, continued or enforced as if the repealing Act or Regulation had never been passed. Section 30 of the same Act further stipulates that whenever the expression “Central Act” occurs, it shall be deemed to include any Ordinance made and promulgated by the Governor‑General. Article 372 of the Constitution of India, in paragraph (i), declares that notwithstanding the repeal by the Constitution of the enactments referred to in Article 395, and subject to the other provisions of the Constitution, all laws that were in force in the territory of India immediately before the commencement of the Constitution shall continue to remain in force thereuntil they are altered, repealed or amended by a competent legislature or other competent authority. On 26 August 1944, the Governor‑General of India, exercising the powers vested in him under section 72 of the Ninth Schedule to the Government of India Act, 1935, read with the India & Burma (Emergency Provisions) Act, 1940, promulgated the Coal Production Fund Ordinance 1944 (Ordinance 39 of 1944) to create a fund for financing activities aimed at improving the production, marketing and distribution of coal and coke. The Court, in Hansraj Moolji v. State of Bombay ((1957) S.C.R. 634), observed that the removal of the words “for the space of not more than six months from its promulgation” from section 72 of the Ninth Schedule of the Government of India Act, 1935, by section 1(3) of the India & Burma (Emergency Provisions) Act, 1940, had the effect of treating Ordinances issued between 27 June 1940 and 1 April 1946 as if they were Acts of the Indian Legislature, without any limitation on their duration, and consequently they would remain in force until formally repealed. Accordingly, the Court held that the Ordinance promulgated on 26 August 1944 was a permanent ordinance that would continue in operation until it was expressly repealed. A subsequent repealing ordinance was issued on 26 April 1947, and its repeal took effect on 1 May 1947. That repealing ordinance expressly declared that the provisions of section 6 of the General Clauses Act, 1897 (X of 1897) would apply to the repeal. Although section 6 read together with section 30 of the General Clauses Act might have produced the same effect, the legislature chose to state the applicability of section 6 expressly, ex abundanti cautela, to eliminate any possible controversy. Under section 6 of the General Clauses Act, as relevant to the present matter, the repeal did not affect the railway’s right to recover freight nor the defendants’ liability to pay that freight, nor did it affect the remedy available in respect of that right and liability. Consequently, Ordinance 39 of 1944 and the rules made thereunder continued to be effective concerning the right, liability, and the remedies that had accrued or been incurred before the repeal of the ordinance.

The Court observed that the Ordinance of 1944 and the rules made under it must be regarded as continuing to apply to the right and liability that had accrued or been incurred before the Ordinance was repealed, together with the remedies that were available under those provisions. The Court then noted that the life of the repealing Ordinance had come to an end on 1 November 1947. It considered the question of what effect the expiry of the repealing Ordinance would have on the liability that persisted after the repeal with respect to transactions that had taken place in the past. The Court explained that the repealing Ordinance was a temporary measure and that it ceased to operate only after it had fulfilled the purpose for which it was promulgated. Because the repealing Ordinance had, while it was in force, extended the operation of the original Ordinance – which was a permanent enactment – to cover past transactions, the Court held that the termination of the temporary Ordinance could not affect the law to the extent that it was saved by the saving clause. The Court further stated that decisions dealing with the repeal of a temporary Ordinance that contains a saving clause were not applicable in the present circumstance, because in those cases the repealed Ordinance, insofar as it was kept alive, could not enjoy a longer period of effect than the repealed and repealing Ordinances themselves. Consequently, the Court concluded that the repealed Ordinance, insofar as it was saved, continued to possess legal force under Article 372 of the Constitution until such time as it was altered, repealed or amended by a competent legislature. Accordingly, the Court ruled that it could not be said that the coal cess had been levied or collected without authority of law.

The Court then turned to the argument that an excise duty could not lawfully be imposed on the consignee, who had not been involved in the manufacture or production of coal. The Court observed that this contention mixed up the incidence of the tax with the mechanism prescribed for its collection. The nature of excise duty, the Court noted, had been examined by the Federal Court and the Privy Council in the reference “In re the Central Provinces and Berar Act No XIV of 1938” (1939 F.C.R. 18, 40, 41, 107). In that decision, Chief Justice Gwyer defined excise duty as a tax on articles that are produced or manufactured within the taxing country and intended for domestic consumption. The Court further explained that, when the Government of India argued that an excise duty could be imposed on home‑produced goods at any point from production to consumption, the learned Chief Justice warned that such a view conflated the nature of excise duties with the scope of the federal legislative power to impose them. After citing Blackstone and Stephen’s Commentaries, the Chief Justice remarked that, in practice, excise duties are normally collected from the producer or manufacturer. However, the Chief Justice added that there is no theoretical reason why an excise duty could not be levied on the retail sale of an article if the relevant statute so provides, subject always to the legislative competence of the taxing authority. The Court therefore held that the stage at which the duty is collected does not alter the essential character of the tax as an excise, which remains a duty on home‑produced or home‑manufactured goods.

The Court explained that, provided the taxing authority possessed the legislative competence to impose the tax, the duty on goods produced within the country would be levied at whatever point the authority considered most convenient and most profitable, without altering the essential character of the tax. It emphasized that the method of collection was a matter of administrative machinery and did not change the nature of the duty. The Court further observed that the ultimate burden of an excise duty, which is a typical indirect tax, always fell on the consumer, who paid the tax at the time of consumption or expenditure, and that the duty remained an excise duty—defined as a tax on home‑produced or home‑manufactured goods—regardless of the stage at which it was collected. 17. Justice Jayakar added that this view was appropriate, stating that if the proper import of an “excise duty” is that it is a tax on consumption, there is no reason why the State could not exercise the power to levy and collect it at any stage before consumption, that is, from the moment the commodity is produced or manufactured up to the moment it reaches the consumer. 18. The Federal Court, in The Province of Madras v. Boddu Paidanna and Sons ((1942) F.C.R. 90, 101.), while addressing a question arising under the Madras General Sales Tax Act, 1939, reiterated the scope of an excise duty. The learned Chief Justice observed that, in theory, nothing prevented the Central Legislature from imposing an excise duty on a commodity as soon as it came into existence, irrespective of whether the commodity was later sold, consumed, destroyed, or given away. He explained that a taxing authority would normally refrain from imposing such a duty at the moment of creation because it is administratively more convenient, as reflected in most Indian Excise Acts, to collect the duty when the commodity leaves the factory for the first time. Moreover, the duty is intended to be an indirect duty that the manufacturer or producer can pass on to the ultimate consumer; this pass‑through would be impossible if the commodity were, for example, destroyed in the factory. Accordingly, the fact of manufacture itself attracted the duty, even though collection might occur later. 19. The Judicial Committee, in Governor‑General in Council v. Province of Madras ((1945) L.R. 72 I.A. 91, 103.), endorsed the Federal Court’s perspective on excise duties. Lord Simonds, speaking for the Board, referred to an exhaustive discussion of the subject contained in the Federal Court’s judgment in In re the Central Provinces and Berar Act No. XIV of 1935 ((1939) F.C.R. 18.). Consistent with that decision, the Board affirmed that an excise duty is primarily a duty levied on a manufacturer or producer in respect of the commodity that has been manufactured or produced. It is characterized as a tax on goods rather than a tax on sales or on the proceeds of sale.

In reviewing the authorities, the Court noted that the reasoning and conclusions of the Federal Court in the Boddu Paidanna case ((1942) F.C.R. 90, 101) were not fully accepted. The Court turned to the decision of that case, which had received Lord Simonds’s approval, to illustrate the distinction between an excise tax and a sales tax. Lord Simonds observed that the two levies are fundamentally different: one is imposed on a manufacturer with respect to the goods he produces, while the other is imposed on a vendor in relation to his sales. He acknowledged that, in practice, the two taxes may appear to overlap, but he emphasized that, legally, there is no overlap because they are separate and distinct imposts. He explained that any apparent overlap arises only because the taxing authority sometimes finds it convenient to collect the excise duty at the moment the excisable article first leaves the factory or workshop for sale. According to Lord Simonds, such a method of collection is merely an administrative convenience; it does not alter the essential nature of excise, which is attracted by the act of manufacture itself.

With due respect, the Court accepted the principles articulated in the three cited decisions regarding the levy of excise duty and the mechanisms for its collection. It affirmed that excise duty is primarily a charge on the production or manufacture of goods that are produced or manufactured within the country. The duty is indirect, because the manufacturer or producer ultimately passes it on to the consumer, so that the final incidence of the tax always falls upon the consumer. Subject, of course, to the legislative competence of the taxing authority, the duty may be imposed at any convenient stage, provided that its character as a levy on manufacture or production is preserved. The manner in which the tax is collected does not affect its essential nature; it concerns only the administrative machinery employed for convenience. Whether, in a particular case, the tax ceases to be an excise duty, and whether the rational connection between the duty and the person on whom it is imposed disappears, must be determined by a fair construction of the relevant statutory provisions. Applying this approach to the present matter, the Court examined the Ordinance and found that the duty imposed there is, in substance, an excise duty with a clear rational connection to the person liable to pay it. Section 2 of Ordinance 39 of 1944 expressly defines the tax as an excise duty on the manufacture or production of coal or coke. Section 5(2) of the same Ordinance expressly empowers the Central Government to make rules, inter alia, prescribing the manner in which the duties imposed by the Ordinance shall be collected and identifying the persons liable to pay the duty. Accordingly, Rule 3 of the Rules framed by the Central Government provides the specific procedure for the collection of the duty.

The Court explained that under the rule concerned, the excise duty imposed on coal production was to be collected by the Railway Administration through a surcharge on freight. The duty was to be recovered from the consignor when freight charges were prepaid at the time the coal was consigned, and from the consignee when freight charges were collected at the destination of the consignment. The Court observed that this method of collection constituted a reasonable machinery. Because the duty is an indirect tax ultimately borne by the consumer, the Court held that there is a rational connection between the tax and the consignee. It noted that collection from the consignor is the most convenient stage, since it occurs at the first moment the coal leaves the consignor’s possession. The Court further stated that the possibility of the consignee paying under rule 3(b) does not alter the essence of the tax, because if the consignor had paid the freight, that amount would have been passed on to the consignee, and the consignee would simply be paying the same liability. The Court affirmed that the Central Government possessed the legal competence to devise an appropriate collection mechanism without disturbing the substance of the tax or breaking the rational link between the tax and the liable person. Accordingly, the Court held that the collection machinery created by the Rules satisfied the required conditions, and therefore the enforceability of the tax at the destination in the hands of the consignee could not be legitimately questioned.

The Court then turned to the argument raised by Mr Sastri that the purpose of the Ordinance had been fulfilled, and consequently the Central Government could no longer levy or collect the tax. The Court clarified that the purpose of the Ordinance was to create a fund for financing activities aimed at improving the production, marketing, and distribution of coal. Section 3 of the repealing Ordinance provided that any unexpended balance remaining in the Coal Production Fund would be applied to purposes connected with the coal industry as directed by the Central Government. The Court observed that the validity of the Ordinance itself had not been challenged. Consequently, because Section 3 expressly authorises the Central Government to continue applying the fund to coal‑industry‑related purposes, the purpose of the Ordinance had not been exhausted. On this basis, the Court concluded that the contention that the Ordinance’s purpose was completed and that the tax could no longer be levied had no merit.

Finally, the Court considered the last contention raised by the appellant in Civil Appeal No 184 of 1959. The High Court had held the appellant liable for the payment of the cess on the ground that he had entered into a contract with the Railway Administration for the carriage of the goods, and that the freight collection was in respect of his goods. The appellant argued that the consignments were on a free‑on‑road (F.O.R.) basis and that, under the statutory rules, only the consignee was liable to pay the cess, rendering the High Court’s decree erroneous. The Court reiterated that, according to rule 3 of the Coal Production Fund Rules, 1944, the Railway Administration is empowered to recover the cess by way of a surcharge on freight either from the consignor when freight is prepaid at the time of consignment, or from the consignee when freight is collected at the destination. Because, in the present case, freight charges were not prepaid at the time of consignment, rule 3(a) did not apply, leaving rule 3(b) as the only operative provision, thereby making the consignee the party from whom the Railway Administration could lawfully seek recovery of the cess.

The decree against the appellant had been issued on the premise that he possessed the principal contractual relationship for the carriage of his goods and therefore bore a contractual duty to pay the required amount. The appellant’s counsel argued that the shipments were on a free on road basis and asserted that, according to the statutory provisions, liability for the cess rested exclusively with the consignee. Consequently, the counsel maintained that the High Court erred in granting a decree against the appellant. The Court reiterated that, under rule three of the Coal Production Fund Rules of 1944, the Railway Administration was authorized solely to collect the cess as a surcharge on freight either from the consignor when freight charges were prepaid at the time of consignment, or from the consignee when freight charges were collected at the destination of the consignment. In the present matter, freight charges had not been prepaid; accordingly, rule three(a) did not apply. The only operative provision was rule three(b), which required the consignee to bear the cess. The rule, therefore, did not empower the Railway Administration to demand the tax from the consignor in the circumstances of this case.

The Solicitor General, appearing for the respondent, sought to uphold the High Court’s decree by invoking rule six, which provides that “Refunds and Recoveries – (1) Where the amount of excise duty due under these rules has not been collected either wholly or in part or where the amount collected is in excess of the amount due, the Railway Administration shall deal with the undercharges or overcharges, as the case may be, on the same principles as apply to undercharges and overcharges in regard to Railway freight charges.” The Court observed that, while rule six permits the Railway Administration to recover a shortfall arising from an undercharge, it does not transfer liability from the consignee to the consignor if the consignee fails to pay. The provision does not expand statutory liability beyond the persons designated as liable under the freight‑charge principles. Accordingly, the rule was to be interpreted as allowing recovery only from those persons who, under the statute, were already liable to pay.

In the final analysis, the Court dismissed Civil Appeal No. 183 of 1959 and ordered the first respondent to bear the costs of that appeal. Conversely, the Court allowed Civil Appeal No. 184 of 1959 and directed that the costs of that appeal be payable by the first respondent. The dismissals and allowances were thus recorded respectively as: Civil Appeal 183 of 1959 dismissed; Civil Appeal 184 of 1959 allowed.