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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7823 OF 2014

M/s. Bhuwalka Steel Industries Ltd.  & Another    ... Appellants

           Versus

Union of India & Others         ... Respondents

WITH

CIVIL APPEAL NO.7825 OF 2014

CIVIL APPEAL NO.7824 OF 2014

J U D G M E N T

Chelameswar, J.

1. These three appeals are factually interconnected and also raise a

common question of law.

2. The appellants in Civil Appeal No.7823/2014 M/s. Bhuwalka Steel

Industries Ltd. originally owned three (3) industrial units (Hot Re-rolling

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Steel  Mills)  located in  the  State  of  Karnataka.   Subsequently,  two of

those  units  came to  be  acquired  by  the  appellants  in  the  other  two

appeals in this batch.   Further details  of  the acquisition may not be

relevant for the purpose of this judgment.   

3. The production activity carried on by the three industrial units of

these  appellants  is  subject  to  levy  of  excise  duty  under  the  Central

Excise & Salt Act, 1944 (hereafter ‘THE ACT’).  Section 31 of THE ACT is

the basic charging section.  

4. However,  by  the  Finance  Act,  1997,  Section  3A2 came  to  be

introduced in THE ACT.   

“Section 3A. Determination of annual capacity of production of the factory for levy of Excise duty.— (1) Notwithstanding anything contained in Section 3, where the Central Government, having regard to the nature of the process of manufacture or production of excisable goods of  any specified description,  the extent  of  evasion of  duty in regard to such goods or such other factors as may be relevant, is of the opinion that it is necessary to safeguard the interest of revenue, specify, by notification in the Official Gazette, such goods as notified

1 Section 3 insofar as it is relevant for the purpose of this judgment read at the relevant point of time:

“Section 3. Duties specified in the First Schedule and the Second Schedule to the Central Ex- cise Tariff Act, 1985 to be levied.- (1) There shall be levied and collected in such manner as may be prescribed, -

(a) a duty of excise on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985;”

2  Ins. By Act 18 of 2008, sec. 79 (w.e.f. 10-5-2008).   Earlier section 3A was inserted by Act 81 of 1956.  sec. 2 (w.e.f. 22-12-1956) and was omitted by Act 58 of 1960, sec. 2 and Sch. I (w.e.f. 26-12-1960) and was again inserted by Act 26 of 1997, sec. 81 (w.e.f. 14-5-1997) and was amended by Act 10 of 2000, sec. 93 (w.e.f. 1-4-2000) and was again omitted by Act 14 of 2001, sec. 121 (w.e.f. 11-5-2001).

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goods and there shall be levied and collected duty of excise on such goods in accordance with the provisions of this section.

(2) Where  a  notification  is  issued  under  sub-section  (1),  the Central Government may, by rules, provide for determination of the annual capacity of production, or such factor or factors relevant to the annual capacity of production of the factory in which such goods are produced, by the Commissioner of Central Excise and such annual capacity of production shall be deemed to be the annual production of such goods by such factory:

Provided  that  where  a  factory  producing  notified  goods  is  in operation only during a part of the year, the production thereof shall be  calculated  on  proportionate  basis  of  the  annual  capacity  of production.

(3) The duty  of  excise on notified  goods shall  be  levied,  at such  rate  as  the  Central  Government  may  by  notification  in  the Official  Gazette  specify,  and  collected  in  such  manner  as  may  be prescribed:

Provided that, where a factory producing notified goods did not produce the notified goods during any continuous period of not less than seven days,  duty calculated on a proportionate basis shall  be abated in respect of such period if the manufacturer of such goods fulfils such conditions as may be prescribed.

(4) Where an assessee claims that the  actual production of notified goods in his factory is lower than the production determined under sub-section (2), the Commissioner of Central Excise shall, after giving an opportunity to the assessee to produce evidence in support of his claim, determine the  actual production and redetermine the amount of duty payable by the assessee with reference to such actual production at the rate specified in sub-section (3).

(5) Where the Commissioner of Central Excise determines the actual production under sub-section (4), the amount of duty already paid, if any, shall be adjusted against the duty so redetermined and if the duty already paid falls short of,  or is in excess of,  the duty so redetermined, the assessee shall pay the deficiency or be entitled to a refund, as the case may be.

(6) The  provisions  of  this  section  shall  not  apply  to  goods produced or manufactured,—

(i) in  a  free-trade  zone and brought  to  any other  place in India; or

(ii) by a hundred per cent  export-oriented undertaking and

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allowed to be sold in India. Explanation 1. – For the removal of doubts, it is hereby clarified

that for the purposes of Section 3 of the Customs Tariff Act, 1975 (51 of  1975),  the duty  of  excise leviable  on the notified goods shall  be deemed to be the duty of  excise leviable  on such goods under  the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), read with any notification for the time being in force.

Explanation 2. – For the purposes of this section the expressions “free trade zone” and “hundred per cent export-oriented undertaking” shall have the meanings assigned to them in section 3.”

[emphasis supplied]

Section 3A authorised the identification of a certain class of goods and

levy  and  collection  of  excise  duty  on  such  goods  otherwise  than  in

accordance with the scheme of levy and collection contemplated under

Section 3 of  THE ACT.   It  appears from the language of  Section 3A,

Parliament believed that manufacturers of certain classes of goods are

evading payment of excise duty.  It authorised the Government of India

to  identify  the  goods,  the  manufacturers  of  which  are  resorting  to

evasion of  excise  duty.   Section 3A(1)  stipulated  that  such identified

goods  are  to  be  notified  in  the  Official  Gazette  (hereafter  “NOTIFIED

GOODS”).   Section  3A(3)  as  it  stood  at  the  relevant  point  of  time

stipulated  that  the  Central  Government  may  by  a  notification  in  the

official gazette specify the rate of duty to be levied on NOTIFIED GOODS

and the method and manner of the collection thereof.  

In other words, notwithstanding the prescription of the rates of duty

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pursuant to Section 3 and the procedure for  the assessment of  duty

liability and the mode of collection of such assessed duty, Government of

India is authorised under Section 3A to prescribe different rates of duty

and  different  modes  of  assessment  and  collection  of  duty  on  the

NOTIFIED GOODS.

Under sub-section (2), the Government of India was authorised to

make rules providing for either the determination of the “annual capacity

of production” (hereafter ACP) or ‘the factors relevant to the ACP’ of the

factory in which NOTIFIED GOODS are produced. The determination of

the ACP is required to be made by the “Commissioner of Central Excise”.  It

further  declared  that  a  factory  where  ACP  is  determined  shall  be

presumed  to  annually  produce  the  NOTIFIED  GOODS  equivalent  in

quantum to its ACP.

Sub-section (4) stipulates that in a case where an assessee “claims

that the  actual production of his factory is lower than” the ACP, the

assessee is entitled to seek the determination of the actual production

of  the  NOTIFIED  GOODS  in  “his  factory”  by  adducing  appropriate

evidence.  Upon such claim being made, the Commissioner of Central

Excise is required to determine the actual production of the assessee’s

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factory  and  also  “redetermine  the  amount  of  duty  payable  by  the

assessee with reference to such actual production”.   

5. Admittedly,  the  goods manufactured by the  three  appellants  fall

under  the  same  class  and  described  under  the  Excise  Tariff  Act  as

“non-alloy steel hot re-rolled products” and they were NOTIFIED GOODS

at the relevant point of time.     

6. In  exercise  of  the  powers  conferred  under  Section 3A(2)  of  THE

ACT, a set of Rules came to be framed by the Government of India w.r.t.

the goods manufactured by the appellants before us known as the Hot

Re-Rolling  Steel  Mills  Annual  Capacity  Determination  Rules,  1997

(hereafter  “RULES  of  1997”)  under  a  notification  dated  1.8.1997.

Initially,  the  said notification contained four  Rules for  “determining  the

annual  capacity  of  production  of  a  factory”  with  the  aid  of  “hot-Re-Rolling

Mill”.   

7. A  month  later,  on  30.8.1997,  Rule  5  which  is  the  bone  of

contention in the present case came to be inserted in the said rules:

“5. In  case,  the  annual  capacity  determined  by  the  formula  in sub-rule  (3)  of  rule  3  in  respect  of  a  mill,  is  less  than the  actual production of  the mill  during the financial year 1996-97, then the annual  capacity so determined shall  be deemed to be equal  to the actual production of the mill during the financial year 1996-97.”

[emphasis supplied]

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The true meaning and purport of the rule shall be examined later.   

8. It  is  also necessary to take note  of  the fact  that  a set  of  Rules

known as Central Excise Rules, 1944 were framed by the Government of

India in exercise of the power conferred under various provisions of the

Central Excise Act,  1944.  Rule 96ZP of the said rules prescribes an

elaborate procedure to be followed by the manufacturers of ‘Non-Alloy

Steel Hot Re-rolled products” falling  under various heads of the Excise

Tariff  Act, 1985.  The said Rule occurs in Chapter XI of the Rules of

1944.  Chapter XI was inserted in the Rules w.e.f. 01.08.1997.

 9. Section 3A(3) authorised the Central Government to specify the rate

at  which the central  excise duty is  leviable  on NOTIFIED GOODS by

notification.   Obviously,  it  is  in  exercise  of  the  power  under  Section

3A(3), Rule 96ZP was made prescribing a fixed rate of duty per metric

tonne on the goods manufactured by the appellant. It provides for the

levy of excise duty at different rates on the goods falling under the same

description  at  Rs.400/-  and  Rs.300/-  per  metric  tonne  respectively

under  Rule  96ZP(1)  and  (3)  depending  upon  the  assessee’s  choice

regarding the time of the payment of duty.  Rule 96ZP seeks to levy the

excise duty at a concessional rate of Rs.300/- per metric tonne.

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10. Rule 96ZP prescribes a levy not on the basis of the value of the

specified goods but on the quantum of production.  It further authorises

the  levy and collection of  duty at  different  rates depending upon the

mode of  payment of  the duty chosen by the manufacturer.   In other

words,  Rule  96ZP creates  two classes  of  manufacturers  of  the  goods

falling  within  the  sweep  of  the  Rule,  though  both  the  classes  of

manufacturers produce goods of the same description.  One class who

choose to pay the duty on monthly basis (falling under sub-rule (3)) and

the other class paying duty in a manner otherwise specified under the

various other sub-rules of Rule 96ZP.   

11. Undisputedly,  Rule  96ZP  is  applicable  to  the  products  of  the

appellants herein.  It is sufficient for our purpose to note that under

Rule 96ZP(1)3, the manufacturer of the goods falling under the ambit of

Rule  96ZP  is  required  to  debit  an  amount  calculated  at  the  rate  of

Rs.400/- per metric tonne on the “non-alloy steel hot re-rolled products”

at  the  time  of  the  clearance  of  the  goods  from  his  factory.   Under

paragraphs I and II of Rule 96ZP(1), the manner of payment of the duty

3  Rule  96ZP(1)   A  manufacturer  of  non-alloy  steel  hot  re-rolled  products  falling  under sub-heading Nos. …………… of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), shall  debit  an amount  calculated at  the rate of  Rs.  400/-  per  metric  tonne at  the time of clearance of ….products ….from his factory ….subject to the condition that the total amount of duty liability shall be calculated and paid in the following manner :-

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so debited is stipulated.  For example, for the period commencing from

1st September, 1997 to 31st March, 1998, a manufacturer is required to

pay by 31st March 1998 a total amount calculated at the rate of Rs.400/-

per metric tonne on the ACP of his factory. The full details of the other

paragraphs of sub-rule (1) may not be necessary for the purpose of this

judgment.  

12. Under sub-Rule (3)4, a manufacturer is given an option to pay the

duty  in  12 equal  monthly  instalments.  It  further  stipulates  that  if  a

manufacturer chooses to pay the duty on monthly basis, the same shall

be calculated at the rate of Rs.300/- per metric tonne multiplied by the

ACP of the factory.  Each instalment is payable on or before the 10 th of

each succeeding month. In other words, sub-rule (3) provides for the levy

of a concessional rate of excise duty on manufacturers who are willing to

opt  for  a  scheme of  making the  payment  of  tax  on a  monthly  basis

instead of postponing the payment till the end of the year as prescribed

under sub-rule (1). However, sub-rule (3) also imposes a limitation on

4  Rule 96ZP(3)   Notwithstanding anything contained elsewhere in these rules, a manufacturer may, in the beginning of each month from 1st day of September, 1997 to the 31st day of March, 1998 or any other financial year, as the case may be, and latest by the tenth of each month, pay a sum equivalent to one-twelfth of the amount calculated at the rate of Rs.300/- multiplied by the annual capacity in metric tonnes, as determined under sub-rule (3) of rule 3 of the Hot Re-rolling Mills Annual Capacity Determination Rules, 1997, and the amount so paid shall be deemed to be full and final discharge of his duty liability for the period from the 1st day of September, 1997 to the 31st day of March, 1998, or any other financial year, as the case may be, subject to the condition that the manufacturer shall not avail of the benefit, if any, under the proviso to sub-section (3) or under sub-section (4) of the section 3A of the Central Excise Act, 1944 (1 of 1944).

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those manufacturers who opt for the benefit of a reduced rate of duty by

disabling them from availing the benefit of the procedure contemplated

in  sub-section (4)  of  Section 3A of  THE ACT –  that  is  disputing  the

correctness of the determination of the ACP of the factory made under

the RULES of 1997.  

13. It is in this background of the provisions of law, these appeals are

required to be decided.

14. In  all  these  appeals,  the  ACP  of  the  concerned  factories  was

determined by different orders.  Obviously the ACP so determined was

less than the  actual  production of  each one of  the  factories  for  the

financial year 1996-97.  Therefore, the ACP was “deemed” to be the same

as the actual production for the financial year 1996-1997 in view of the

mandate contained under Rule 5 of the RULES of 1997.

15. Aggrieved by the determination of the ACP each of the appellants

pursued multiple legal proceedings:

1. They appealed to the CESTAT;

2. They invoked the authority of the Commissioner of

Central Excise under sub-section (4) of Section 3A; and

3. Simultaneously,  they  filed  writ  petitions

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challenging the validity of the abovementioned Rule 5 in

the Karnataka High Court.     

16. The writ  petitions  came to  be  dismissed by the  judgment  dated

07.12.2005 of the learned Single Judge of the Karnataka High Court.

Aggrieved,  the  appellants  herein  carried  the  matter  by  way  of  an

intra-court appeal to a Division Bench of the Karnataka High Court. By

the  judgment  under  appeal,  a  Division Bench of  the Karnataka High

Court dismissed the appeals.  Hence these appeals.  

17. The validity of  Rule  5 of  the RULES of  1997 is  challenged both

before the High Court and before us on two grounds:

1. That  the  Rule  is  ultra  vires  the  authority  conferred under Section 3A of THE ACT; and

2. That  the  Rule  is  violative  of  Article  14  of  the Constitution of India.

Because the Rule creates two classes of manufacturers:-

(i) whose ACP is determined to be more than their  actual production in the financial year 1996-97.

(ii) Whose ACP is determined to be less than their  actual production for the financial year 1996-97; and

imposes  an  irrational  tax  burden  on  the  2nd of  the abovementioned two classes of manufacturers falling within the ambit of the RULES of 1997.

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18. We shall first deal with the submission that Rule 5 of the RULES of

1997 is ultra vires Section 3A of THE ACT.

It is argued that Rule 5 creates a fiction when it stipulates:  

“… the annual capacity so determined shall be deemed to be equal to the actual production of the mill during the financial year 1996-97.”

[emphasis supplied]

19. According to the appellants, Section 3A(2) of THE ACT itself creates

a fiction for the purpose of determining the ACP while authorizing the

Government  of  India  to  make  rules  for  the  determination  of  ACP.

Therefore, the RULES cannot prescribe a further fiction. The appellants

placed heavy reliance for this proposition on a judgment of this Court

reported in  Agricultural  Market  Committee  v.  Shalimar Chemical

Works Ltd., (1997) 5 SCC 516.  

20. On the  other  hand,  it  is  argued by  the  respondent  that  Rule  5

though textually appears to be creating a fiction, in substance, it only

stipulates a factor relevant for determination of ACP and, therefore, is

clearly intra vires.  

21. To determine the issue,  it  is  required to examine the scheme of

Section 3A of THE ACT, the relevant Rules framed thereunder and the

mischief which Parliament sought to control while enacting Section 3A.

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In the context, we must keep in mind the general scheme of THE ACT.  

22. Section 3 of THE ACT, as it existed at the relevant point of time

authorised the levy and collection of a duty of excise on all excisable

goods which are produced or manufactured in India.   The expression

“excisable  goods”  is  defined  under  Section 2(d)  of  THE ACT.   At  the

relevant point of time, it read as follows:

“Section  2(d).  “excisable  goods”  means  goods  specified  in  the  First Schedule  and the  Second Schedule  to  the  Central  Excise  Tariff  Act, 1985 (5 of 1986) as being subject to a duty of excise and includes salt;”

The rates of duty for the various classes of goods are stipulated from

time to time under the Central Excise Tariff Act, 1985.  Section 4 of THE

ACT stipulated the method and manner of determination of the value of

the goods for the purpose of the determination of the duty liability of the

manufacturers who manufacture or produce goods which are chargeable

to duty w.r.t. their value.   

23. Determination of  the  quantum of  the goods manufactured is  an

essential  exercise  for  collecting  the  excise  duty,  because  the  taxable

event  for  levy  and  collection  of  excise  duty  is  the  manufacture  or

production  of  goods.  Therefore,  the  need  to  determine  the  actual

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quantum of  the  goods  manufactured.   The  Act  and  the  Rules  made

thereunder  prescribe  different  methods  for  the  determination  of  the

quantum of production/manufacture of excisable goods undertaken by

any  person  (manufacturer)  for  the  purpose  of  determining  the  tax

liability of such a person.  

24. Parliament from time to time took notice of the fact that some of the

manufacturers/producers  of  excisable  goods  are  evading  duty  by

suppressing  the  information  of  the  quantum  of  actual

production/manufacture  of  goods  undertaken  by  them.   Therefore,

Section 3A was introduced which authorised a different mode of levy,

assessment and collection of excise duty on NOTIFIED GOODS.  Under

the Scheme of  Section 3A, the need to constantly monitor the actual

quantum of NOTIFIED GOODS produced/manufactured is obviated by

declaring that the ACP of factory is deemed to be the annual production

of the factory for the purpose of levy and collection of excise duty.   

25. RULES of 1997 prescribed the procedure by which the ACP is to be

determined.  Rule  3  prescribed  a  formula  based  on  various  factors

mentioned therein  for  the  determination of  the  ACP.   The  appellants

have  no  grievance  regarding  the  procedure  stipulated  for  the

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determination of the ACP.  Their only grievance is against Rule 5 which

mandates  that  the  ACP  determined  in  accordance  with  Rule  3  be

discarded in the circumstances mentioned under Rule 5.  

26. The appellant submitted that Section 3A(2) creates a legal fiction by

declaring  that  the  annual  production of  factory  in  which  NOTIFIED

GOODS are produced is the same as that of the ACP of that factory.

Rule 5 creates a further fiction which is not either authorised by Section

3A  or  permissible  for  a  non-sovereign  law  making  body  making

subordinate  legislation  in  exercise  of  the  delegated  power  conferred

under a statute.   We must make it  clear that the appellants did not

challenge the constitutionality of Section 3A(2).

27. The  appellants  placed  heavy  reliance  on paragraph  28  of

Agricultural Market Committee.

“28.    The Government to whom the power to make rules was given under Section 33 and the committee to whom power to make bye-laws was given  under  Section  34  widened  the  scope  of  “presumption”  by providing  further  that  if  a  notified  agricultural  produce  is  weighed, measured or counted within the notified area, it shall be deemed to have been sold or purchased in that area. The creation of legal fiction is thus beyond the legislative policy.  Such legal fiction could be created only by the  legislature  and not  by  a  delegate  in  exercise  of  the  rule-making power. We are,  therefore,  in full  agreement with the High Court that Rule  74(2)  and  Bye-law 24(5)  are  beyond the  scope  of  the  Act  and, therefore, ultra vires. The reliance placed by the assessing authority as also by the appellate and revisional authority on these provisions was wholly misplaced and they are not justified in holding, merely on the basis of weighment of “copra” within the notified area committee that

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the transaction of sale took place in that market area.”

28.  The argument of the appellants with respect to Rule 5 appears to be

two-fold: (i) a legal fiction (deeming provision) can only be created by

legislation but not by subordinate legislation; and (ii) even otherwise a

fiction created by the subordinate legislation cannot be in contravention

of the provisions of the parent enactment5.

29. We  are  in  total  agreement  with  the  principle  laid  down by  this

Court in paragraph 28 of Agricultural Market Committee.

30. However,  the  question  in  this  case  is  –  whether  Section  3A(2)

and/or  Rule  5  really  create  fictions.   To  understand  the  same,  the

5   Rule 5 was challenged on the following grounds: - (Written Submissions of the appellant)

A .   Section 3A (2) deems the annual production capacity as the actual production and the manufacturer has to pay duty on the annual production capacity without reference to actual production. But Rule 5 introduces a further deeming that the 1996-97 production shall be deemed to be actual production if the 1996-97 production is higher than the production capacity determined as per rule 3. A subordinate legislation cannot introduce a deeming provision and that too contrary to the deeming provision in the plenary legislation.  The statutory presumption under Section 3A is of a limited character and being a fiscal legislation has to be strictly construed in the sense that any factory which is not contemplated by the Act cannot be taken into consideration to raise a presumption for levy of excise duty.   Being a delegated legislation the delegate which has been authorised to make subsidiary rules has to work within the scope of the Act or the policy laid thereunder.  The delegate under the grab of making rules cannot legislate on the field covered by the Act and has to restrict itself to the mode of implementation of the Act”.  The creation of the legal fiction under Rule 5 is beyond scope of the legislative policy to levy excise duty on certain notified goods on the capacity of production determined under the formula specified in rule 3.  Such legal fiction can be created only by a legislature and not by a delegate in exercise of rule making power.  Also Section 3A (2) only authorises the Central government to make rules providing for determination of the annual capacity of production or such factor relevant to the annual capacity of production. The section 3A(2) does not authorize the Central government to create further legal fiction on the annual capacity of production which is exclusively within the domain of the legislature.   Thus the legal fiction created in rule 5 that in case the annual capacity determined by the formula in sub rule 3 of rule 3 in respect of a mill, is less than the actual production of the mill during the financial year 1996-97, then the annual capacity so determined shall be deemed to be equal to the actual production of the mill during the financial year 1996-97 is beyond the scope of the delegate and is therefore liable to be declared ultra vires, arbitrary violative of article 14, unconstitutional and bad in law.

Reference may be made to (1997) 5 SCC 516

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context  and  purpose  of  Section  3A  and  Rule  5  is  required  to  be

examined.  The Scheme and purpose of Section 3A is already examined

at para 20.  Rule 5 stipulated that if the ACP determined in accordance

with the preceding four Rules is less than the  actual production of a

particular  assessee  for  the  financial  year  1996-1997,  the  authority

determining the ACP is required to abandon the figure of ACP arrived at

by employing the procedure contained in Rules 1 to 4 and adopt the

actual  production achieved  by  the  assessee  for  the  financial  year

1996-976 to be the ACP of that assessee.        

31. The words “shall be deemed to be” occurring in both Section 3A(2)

and Rule 5 appear to create a fiction.  But in our opinion, on a true and

proper construction (as rightly argued by the respondent) they do not

create a legal fiction.  In Consolidated Coffee Ltd. & Another v. Coffee

Board, Bangalore, (1980) 3 SCC 358, it was held: (page 371, para 11)

“…  the word “deemed”  is  used a great  deal  in modern legislation in different senses and it  is not that a deeming provision is every time made for the purpose of creating a fiction.  A deeming provision might be made to include what is obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that  would  not  otherwise  prevail,  but  in  each  case  it  would  be  a question  as  to  with  what  object  the  legislature  has  made  such  a deeming provision. In St. Aubyn v. Attorney-General, 1952 AC 15, 53 : (1951) 2 All ER 473, 498, Lord Radcliffe observed thus:

6  The relevance of the financial year 1996-97 in the context of the RULES is that the RULES are made and brought into force  with  effect  from the  1st of  August,  1997.   The  financial  year  1996-1997  is  the  financial  year  immediately preceding the making of the RULES of 1997.

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“The  word  “deemed”  is  used  a  great  deal  in  modern legislation.  Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail.  Sometimes it is used to put  beyond  doubt  a  particular  construction  that  might otherwise  be  uncertain.  Sometimes  it  is  used  to  give  a comprehensive  description that  includes  what  is  obvious, what  is  uncertain  and  what  is,  in  the  ordinary  sense, impossible.”

In our opinion, Section 3A(2) only embodies a rule of  evidence which

command the department to presume certain facts. Such presumptions

are not unknown to law.  Section 1147 of the Indian Evidence Act, 1872

enacts  a  rule  of  evidence  which  requires  a  court  to  presume  the

existence of any fact which the Court thinks likely to have happened

regard  being  had  to  common  course  of  natural  events  etc.   The

presumption created under Rule 5 is  similar to the one contained in

illustration (d)8 to Section 114 of the Evidence Act.   

32. There  is  a  clear  distinction  in  law  between  a  legal  fiction  and

presumption9.  “A distinction commonly taken between the fiction and

the  legal  presumption  runs  something  as  follows:  A  fiction  assumes

7  Section 114. Court may presume existence of certain acts:- The court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.

8  Illustration (d) – That a thing or state of things which has been shown to be in existence within a period shorter than that within which such things or state of things usually cease to exist, is still in existence.

9

Nandlal  Wasudeo Badwaik   v. Lata  Nandlal  Badwaik  & Another,  (2014)  2  SCC 576.  “We must  understand  the distinction between a legal fiction and the presumption of a fact.  Legal fiction assumes existence of a fact which may not  really  exist.   However,  a  presumption  of  a  fact  depends  on  satisfaction  of  certain  circumstances.   Those circumstances logically would lead to the fact sought to be presumed.  Section 112 of the Evidence Act does not create a legal fiction but provides for presumption.”   (Para 18)

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something  which  is  known  to  be  false;  a  presumption  (whether

conclusive  or  rebuttable)  assumes  something  which  may  possibly  be

true.  This distinction is regarded as being reinforced, as it were, in the

case  of  the  rebuttable  presumption  because  such  a  presumption

assumes  a  fact  which  probably  is  true.”10 “Presumptions  are  closely

related to legal fictions … but they operate differently”11. “Fictions always

conflict  with  reality,  whereas  presumptions  may  prove  to  be  true”12.

Legal  fictions create  an artificial  state of  affairs by a mandate of  the

legislature.  

“…  an assumption of fact deliberately, lawfully and irrebuttably made contrary to the facts proven or probable ……. with the object of bringing a particular legal rule into operation … the assumption being permitted by law …”

They compel  everybody concerned including the  courts  to  believe the

existence of an artificial state of facts contrary to the real state of facts.

When a fiction is created by law, it is not open to anybody to plead or

argue that the artificial state of facts created by law is not true, barring

the  only  possible  course  if  at  all  available  is  to  question  the

constitutionality  of  the  fiction.   It  is  settled  law  that  only  sovereign

legislative  bodies  can  create  legal  fictions  but  not  a  subordinate  law 10  Fullet, L.L., Legal Fictions, Illinois Law Review (Vol. XXV No.4, December 1930) 11   Del Mar, Maksymilian, Legal Fictions and Legal Change,  International Journal of Law in Context (2013)  12 Vermeer-Künzli, Annemarieke,  As If: The Legal Fiction in Diplomatic Protection,  European Journal of International Law (2007)

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making body.  

33. Whereas presumptions are rules of  evidence  for  determining the

existence  or  otherwise  of  certain  facts  in  issue  in  a  litigation.

“Presumptions13 were inferences which the judges were directed to draw from certain

states  of  facts  in  certain  cases,  and  these  presumptions  were  allowed  a  certain

amount  of  weight  in  the  scale  of  proof;  such  a  presumption and such  evidence

amounted to full proof, such another to half full, and so on.”14  Nothing is brought

to our notice to say that a non-sovereign law making body can not make

a  rule  of  evidence  containing  a  presumption.  In  our  opinion,

Agricultural Market Committee is not an authority for the proposition

that a presumption cannot be created by subordinate legislation.  

34. Rules  of  evidence  are  the  principles  of  law which command the

courts  or  other  bodies  whose  duty  is  to  determine  the  existence  or

otherwise of certain facts.  The Anglo saxon legal system recognises that

13  Presumptions are of four kinds according to English law. 1. Conclusive presumptions.  These are rare, but when they occur they provide that certain modes of proof  

shall not be liable to contradiction. 2. Presumptions which affect the ordinary rule as to the burden of proof that he who affirms must prove.  He

who affirms that a man is dead must usually prove it, but if he shows that the man has not been heard of for seven years, he shifts the burden of proof on his adversary.

3. There are certain presumptions which, though liable to be rebutted, are regarded by English law as being something more than mere maxims, though it is by no means easy to say how much more.  An instance of such a presumption is to be found in the rule that recent possession of stolen goods unexplained raises a presumption that the possessor is either the thief or a receiver.  

4. Bare presumptions of fact, which are nothing but arguments to which the Court attaches whatever value it pleases.  

14  Stephen, James Fitzjames,  The Indian Evidence Act With An Introduction on the Principles of Judicial Evidence, (Calcutta, Thacker, Spink & Co.) Chapter IV p. 132

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facts could be established either by direct or circumstantial  evidence.

Presuming certain facts, if they are so commanded by law has always

been recognised by our legal system to be one of the accepted processes

for those bodies charged with the duty of collecting evidence.  Therefore,

law  making  bodies  make  provisions  incorporating  presumptions

wherever  they  believe  it  appropriate.   But  such  practices  have  well

recognised qualifications and limitation.  Section 114 of the Evidence Act

embodies some of the basic principles of the law of presumptions and

the limitations thereon. Technically, the Evidence Act may or may not be

applicable  to  every  body  charged  with  the  responsibility  of  collecting

evidence.    But the principles underlying the provisions do constitute

valuable guides. They are based on sound principles of jurisprudence

deduced  from  the  observation  of  human  conduct,  natural  course  of

events and logic etc.    

35. Presumptions  are  of  two  kinds,  rebuttable  and  irrebuttable.

Normally any presumption is rebuttable unless the legislature creates an

irrebuttable  presumption.   It  is  a  different  question  –  whether  an

irrebuttable  presumption  could  be  created  by  a  non-sovereign

law-making body? That question has not been argued before us and,

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therefore, we do not examine that proposition.

36. Under the scheme of THE ACT, the actual quantum of production

of  an  industry  (manufacturer)  is  one  of  the  essential  factors  for

determining the tax liability of the manufacturer.   Both Section 3A(2)

and Rule 5 deal with the procedure for the determination of the quantum

of production of a factory producing NOTIFIED GOODS.  To determine

the exact quantum of goods produced by any manufacturer, there are

various possible ways:

1. Constant manual observation or account keeping is the most  basic  process  by  which  the  quantum  of  goods manufactured could be determined;

2. Adoption  of  a  statistical  measure  for  establishing  the quantum of goods:  

The  statistical  method  could  be  based  on  the consumption factors of either the raw material required for  the  production  of  the  goods  or  the  quantum  of electrical  or  other  energy  utilized  by  the  industry  for manufacturing the goods etc.; and  

3. By drawing an appropriate presumption having regard to the technical data relating to the machinery employed by the manufacturer etc.  

37. Section 3A of THE ACT authorises the Government to make rules

for determining the ACP of the manufacturers.  It further declares that

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the ACP so determined “shall be deemed to be the annual production of

such goods by such factory”.  In other words, sub-section (2) commands

that a factory whose ACP is determined in accordance with the rules

made thereunder  must be believed to  produce the  same quantum of

goods equal to the ACP for every succeeding year.   The question is –

whether such a declaration creates a legal fiction or only a presumption

(rule of evidence)?

38. We have already noticed that by definition a “fiction always conflicts

with the  reality  whereas  presumption may be proved to  be true”.   It

therefore follows that there is no possibility of a fiction being rebutted by

evidence.  The belief  flowing from Section 3A(2) regarding the  annual

production of a manufacturer could be rebutted by adducing evidence.

Section  3A(4)  provides  for  such  rebuttal.   Therefore,  in  our  opinion,

Section 3A(2) embodies only a rule of evidence (presumption) but does

not create a legal fiction.  The language employed by the draftsman is

likely to mislead to a conclusion that a fiction is created.  But on a true

and  proper  construction  of  the  entire  Section  3A  the  only  possible

conclusion is that Section 3A(2) embodies only a presumption (rule of

evidence).

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39. Under  the  Scheme  of  the  RULES OF  1997,  the  first  four  rules

stipulated the procedure for determining the ACP of the manufacturers

of the class to which the appellants belong, by adopting the third of the

abovementioned three procedures (mentioned in para 36 supra).   The

lawmaker was conscious of the fact that the actual quantum of goods

that can be manufactured in a factory does not solely depend on the ACP

of the factory.  It depends upon a number of other variable factors too.

For example, though the machinery employed by a manufacturer has the

technical capacity to produce a certain quantum (maximum production)

of goods, in a given interval of time, the manufacturer may not always

achieve  the  maximum  production  because  of  the  non-availability  of

either  the  requisite  energy  to  operate  the  factory  or  finance  or

raw-material etc.  The first four rules of  the RULE OF 1997 create a

scheme of  evidence  by  which a  presumption (based on the  technical

specification  of  the  manufacturers’  machinery)  of  the  possibility  of  a

certain quantum of production is to be made.  However, the lawmaker

visualized that in certain cases such a process may lead to a conclusion

that the ACP of a manufacturer is less than the actual production that

was achieved by employing the same machinery at an earlier point of

time  -  a  conclusion  inconsistent  with  the  established  factual  data.

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Therefore, it is stipulated under Rule 5 that in such circumstances the

ACP of  the  factory  must  be  “deemed to  be”  equivalent  to  the  actual

production achieved in the financial year prior to the coming into force

the RULES OF 1997. Rule 5 recognises the possibility  of  an error in

arriving  at  the  ACP  by  applying  the  formula  contained  in  Rule  3.

Because the formula itself is based on certain assumptions. Therefore,

Rule 5 provides that the determination of the ACP made in accordance

with the procedure contained in Rule 3 is liable for correction in some

cases, in the circumstances indicated therein.    

40. But  the  benefit  of  Section  3A(4)  i.e.  the  right  to  rebut  the

presumption regarding the annual production is denied to a sub-class

of manufacturers falling under Rule 96ZP(3)) who are also a part of a

larger class falling under the Scheme of Rule 96ZP of the Central Excise

Rules, 1944.  

41. But for the declaration of sub-rule (3) of Rule 96ZP, an assessee

whose ACP is determined in accordance with the Rule 3 of the RULES of

1997 would be entitled under sub-section (4) of Section 3A of THE ACT,

to seek the determination of his actual production and the tax liability

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thereon.  

42. The determination of the ACP is a one time affair.  It appears from

the factors indicated in the Rule 3 that the ACP would remain unaltered

so  long  as  there  is  no  change  in  the  machinery  employed  and  the

‘number of utilized hours” of the machinery remains constant.  But the

“number of utilized hours” could vary from time to time depending upon

various  factors,  such  as,  the  availability  of  electric  power,  capital  or

labour etc.  Such variations could result in a situation that the  actual

production of the factory for any given interval of time is less than the

ACP.  Therefore, it is declared under Section 3A(4) that an assessee is

entitled to seek determination of the actual production of his factory if

it is less than the ACP.

43. In our opinion, such an opportunity provided under Section 3A(4) is

a recurring opportunity available to the assessee from time to time.  We

reach this conclusion in view of the language of  sub-section (4) more

particularly “the Commissioner of Central Excise shall … determine the amount of

duty payable by the assessee with reference to such actual production at the rate

specified under Section 3”.  Obviously, the determination of amount of duty

payable by the assessee is not a one time affair.  Such a determination is

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to be made periodically.   Therefore, the opportunity of placing evidence

for the establishment of actual production for a period relevant for the

assessment must be available to the assessee from time to time.

44. Whether such a statutory right is  in any way curtailed by Rule

96ZP(3) of the Rules of 1944 is required to be examined.  Rule 96ZP(3)

is  relevant  in  the  context  of  the  assessment  of  duty  for  those

assessees who choose to opt for the payment of the excise duty on a

monthly basis.  The duty payable by such assessees would be Rs.300

x ACP in metric tonnes.  Rule 96ZP(3) stipulates that an assessee

seeking to avail  the scheme (concessional rate of  duty) under Rule

96ZP(3) is required to make application in the prescribed format.  The

Rule is silent about the point of time at which such an application is

required to  be  made.   But  sub-rule  (3)  stipulates  the  time within

which the duty is required to be paid, i.e., in the “beginning of each

month” and “latest by the tenth of each month”.  

45.  Whether an assessee who chooses once to pay duty in terms of

Rule 96ZP(3) can be compelled to pay duty calculated in accordance

with the said rule for all times to come without any regard to the actual

production? is a question which requires examination.   

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46. It is possible that in a given case an assessee choosing at a given

point of time to make payment of duty on monthly basis calculated in

terms of sub-rule (3)  but a few months later (for that matter even a

month  later),  for  various  legitimate  reasons,  production  may  fall

considerably below the ACP (of the assessees factory).  It is possible, in

some cases there can be total cessation of the manufacturing activity for

reasons beyond the control of the assessee.  If the option exercised by

an assessee under Rule 96ZP(3) is held to be good for eternity it would

not only lead to illogical consequences but also to an unconstitutional

collection of taxes without there being a taxable event.  We do not see

anything in Rule which prevents the assessee from opting out of the

Scheme of Rule 96ZP(3).  

47. After  availing  the  scheme  for  a  month  by  paying  the  duty  in

advance,  if  the assessee ends up in a situation of  not being able to

produce the quantum of goods equivalent to 1/12 of his ACP, we see no

reason  which  compels  the  assessee  to  continue  the  availment  of

concessional  rate  of  duty  (for  the  next  month)  on  a  quantum  of

production which he is unable to achieve.  In our opinion the assessee

must have an option to make the payment of duty in accordance with

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Rule 96ZP(1) at a higher rate but on the actual production. For those

assessees who chose to pay the duty at higher rate in accordance with

sub-rule (1) the benefit of section 3A(4) is available. The rule does not

bar it.  However the question remains how frequently the assessee is

entitled to exercise such an option; whether it is annual or monthly is a

matter which requires a further examination.

48. It is argued by the learned counsel for the respondent in view of the

two  judgments  of  this  Court  reported  in  Commissioner  of  Central

Excise  & Customs v.  Venus  Castings  (P)  Ltd., (2000)  4  SCC 206,

Union of India & Others v. Supreme Steels and General Mills &

Others, (2001) 9 SCC 645, the question regarding the vires of sub-rule

(3) of Rule 96ZP of the Central Excise Rules, 1944 is no more res-integra.

It  is  also  submitted  by  the  respondent  that  this  Court  has  already

declared that the assessee who makes a choice once to avail the scheme

under sub-rule (3) cannot go back on his choice15.  

49. In  both  the  abovementioned  cases,  this  Court  was  dealing  with

15 Union of India & Others v. Supreme Steels and General Mills & Others, (2001) 9 SCC 645, “Para 3.  .. The manufacturer cannot opt twice during one financial year first choosing to pay in accordance with

sub-rule 3 of Rule 96ZO and thereafter to switch over to actual production basis under Section 3A(4) of the Act, in case it is less than the duty payable under sub-rule 3 of Rule 96ZO.  The said sub rule is quite clear that the option under it is available subject to the condition that once having opted for it, benefit if any under sub-s. (4) of Section 3A of the Central Excise Act, 1944 shall not be available. …”  

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Rule 96ZO(3) of the Central Excise Rules, 1944.  Neither the  vires of

Rule 96ZP(3) nor its interpretation actually fell for consideration of this

Court  in  either  of  the  abovementioned  cases.   However,  in  Venus

Castings, at para 9, a reference was made to Rule 96ZP and this Court

observed that “Rules 96ZO and 96ZP provide for procedure to be followed by the

manufacturer  of  ingots  and billets  and hot  re-rolled  products  respectively.   The

scheme envisaged under these provisions is identical”.  

50. With utmost respect to the learned Judges, we find it difficult to

accept the finding that the scheme of both the Rules is identical.  There

are broad similarities between the Rules but they are not identical and

we shall point out and deal with the difference later.  

51. In Venus Castings, this Court held that both the abovementioned

Rules contain scheme of “two alternative procedures to be adopted at the option

of the assessee” and concluded that “the manufacturers, if they have availed the

procedure  under  Rule  96ZO(3)  at  their  option,  cannot  claim  the  benefit  of

determination  of  production  capacity  under  Section  3A(4)  of  the  Act  which  is

specifically excluded”.   

“11. … What can be seen is that the charge under the Section is clearly on production of  the goods but the measure of  tax is  dependent  on either actual production of goods or on some other basis.  The incidence of tax is, therefore, on the production of goods.  It cannot be said that collection of tax based on the annual furnace capacity is not relatable to the production of goods and does not carry the purpose of the Act.  In

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holding whether a relevant rule to be ultra vires it becomes necessary to take  into  consideration  the  purpose  of  the  enactment  as  a  whole, starting from the preamble to the last provision thereto. If  the entire enactment is read as a whole indicates the purpose and that purpose is carried out by the rules, the same cannot be stated to be ultra vires of the provisions of the enactment.  Therefore, it is made clear that  the manufacturers,  if  they have availed of  the procedure under Rule 96ZO(3) at their option, cannot claim the benefit of determination of  production  capacity  under  Section  3A(4)  of  the  Act  which  is specifically excluded.”

Two things are required to be noticed from the above.  This Court made

references to Rule 96ZP in the earlier paragraphs of the judgment but

when it came to the conclusion, it only dealt with Rule 96ZO(3) but not

Rule 96ZP(3). Secondly, Section 3A(4) of THE ACT does not deal with the

determination of the production capacity of the factory.  It only deals

with  the  right  of  the  assessee  to  establish  that  notwithstanding  the

determination of the ACP, the  actual production achieved is less than

the ACP determined.  The Court concluded “that if the entire enactment is

read as a whole indicates the purpose and that purpose is carried out by the Rules,

the same cannot be stated to be ultra vires of the provisions of the enactment.”

52. With respect, we are of the opinion that such a statement of law

has  no  basis  either  in  precedent  or  on  any  settled  principles  of

interpretation of statutes.  On the other hand, it is in conflict with a long

settled line of authorities that subordinate legislation which is in conflict

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with the parent enactment is unsustainable16.

53. The decision in Supreme Steels was rendered by a Bench of three

learned  Judges.   The  vires of  Rule  96ZO  was  directly  in  issue  in

Supreme Steels17.  This Court in Venus Castings noted18 that “in these

proceedings the validity of the provisions of the Rules is not in challenge but only

their interpretation and application have to be examined”.  However, the learned

Judges  in  Supreme  Steels opined  that  the  controversy  was  finally

settled by the judgment of this Court in Venus Castings.   

54. Apart  from  the  various  problems  noticed  by  us  in  the

abovementioned  two  judgments,  there  are  marked  differences  in  the

language employed under Rule 96ZP(3) and the scheme appears to be

different from the one adopted under the scheme of Rule 96ZO(3).

55. Rule 96ZO deals with levy, assessment and collection of excise duty

16  Hukam Chand Etc. v. Union of India & Others, AIR 1972 SC 2427 : (1972) 2 SCC 601,     Para 8  …….The underlying principle is that unlike Sovereign Legislature which has power to enact laws with

retrospective operation, authority vested with the power of making subordinate legislation has to act within the limits of its power and cannot transgress the same.   The initial difference between subordinate legislation and the statute laws lies in the fact that a subordinate law making body is bound by the terms of its delegated or derived authority and that court of law, as a general rule, will not give effect to the rules, thus made, unless satisfied that all the conditions precedent to the validity of the rules have been fulfilled (see Craies on Statute Law, p. 297, Sixth Edition).

Also See: Godde Venkateswara Rao v. Government of Andhra Pradesh & Others, AIR 1966 SC 828, para 10 17

Vires of Rule 96ZO of the Central Excise Rules has also been challenged on the ground that it is inconsistent with the provisions of the Act. - Para 1

18  In para 7

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on the manufacture of non-alloy steel ingots and billets.  Duty on such

goods is payable at the rate of Rs.750/- per metric tonne.   Sub-rule (3)

prescribes levy and collection of a lump sum of Rs.5 lakhs per month in

cases of those manufacturers who have a total furnace capacity of three

metric  tonnes installed in their  factories.  However,  such a scheme is

available at the option of the assessee. In other words, a manufacturer

has a choice to make a lump sum payment of Rs.5 lakhs, irrespective of

his  actual  production for  that  month,  in two instalments instead of

paying the duty at the rate of Rs.750/- per metric tonne of the actual

production of the manufacturer.  Whether the capacity of three metric

tonnes in the said sub-rule is the capacity of the factory per day or per

month or per annum is not very clear from the language of the Rule.

The expression does not appear to be defined under the Rules.

56. Coming to Rule 96ZP(3), it also provides an option to the assessee

falling under the Rule to pay the duty at the concessional rate of Rs.300

per metric tonne contrary to the liability of the assessees who do not opt

to avail the procedure under sub-rule (3) to pay Rs.400 per metric tonne.

But  both the  classes  of  assessees are  required to  pay the  total  duty

calculated on the ACP of the factory.  While those who choose to pay the

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lower rate of tax under sub-rule (3) pay the tax every month and those

who do not opt to avail the scheme under sub-rule (3) are required to

pay tax long after duty actually falls due as indicated under sub-rule (1)

and (2).

57. The only similarity between Rules 96ZO(3) and 96ZP(3) is that both

the Rules seek to eliminate the benefit of the procedure under Section

3A(4) of THE ACT in cases of those assessees who choose to opt for levy

and collection of excise duty in accordance with the sub-rules (3) which

are  exceptions  to  the  general  Rules  of  levy  and  collection  of  duties

provided under Rules 96ZO and 96ZP.

58. Therefore,  we  find  it  difficult  to  accept  the  submission  of  the

respondent that the issue is covered by the judgments of this Court in

Venus Castings and Supreme Steels.  In our opinion, for the reasons

mentioned above, these two judgments require a further examination.

Apart from that, these judgments did not deal with vires of Rule 96ZP(3).

However, in view of the fact that Supreme Steels is a decision rendered

by a Bench of three learned Judges, we deem it appropriate that the

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question of law be settled by a Bench of an appropriate strength.  We,

therefore, direct the Registry to place the matter before Hon’ble the Chief

Justice of India for further orders.

….....................................J.            (J. CHELAMESWAR)

……. ………….....................J.                    (ABHAY MANOHAR SAPRE)

New Delhi March 24, 2017

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