Judgment:
1. On 23-11-1981 Central Excise Officers intercepted a lorry and found that corrugated containers were being transported by the same but without proper Central Excise documents therefore. An internal gate pass of the appellants M/s. Shree Packaging Corporation was alone available. The factory of the appellants was visited and further investigation taken up. Statements of various persons were recorded.
Following the same show cause notice dated 19-5-1982 was issued. The notice was mainly on the basis that the appellants were manufacturers of corrugated board containers and that in order to avoid liability for payment of duty and to falsely claim exemption they had created another firm under the name Shree Mahesh Containers but that the said Shree Mahesh Containers existed in name only. The show cause notice further mentioned that the 2747 containers seized on 23-11-1981 as well as 4266 fully manufactured containers which were found in the factory but without entry in the RG-1 register were liable to confiscation and duty demanded thereon. In respect of a shortage of 263 containers it was alleged that they have also been cleared without payment of duty and duty was payable thereon also. The appellants were called upon to show cause why confiscation as above-mentioned be not ordered and duty should not be demanded on all past clearances inclusive of that shown in the name of Shree Mahesh Containers and why penalty should not be levied. The show cause notice related to the seizure of the vehicle and liability for confiscation thereof also. But since under the order of the Collector no such action was finally taken, the same is not now relevant. The appellants replied denying that Shree Mahesh Containers had been created as a bogus firm for the purpose of evasion of Excise duty. In respect of containers seized from the lorry they admitted that the same had not been cleared under - proper gate pass. They claimed that there was no intention to evade duty and this would be apparent from the fact that an internal gate pass had been issued and that the same was intended to be entered in the register properly later on. In respect of the goods seized from the factory they claimed that the seizure was not proper and that RG-1 stage had not been reached and action therefore was not proper. Regarding the 263 containers found short they stated that they were old containers which were eaten away by white ants and therefore were not available. They claimed that Shree Mahesh Containers was a properly constituted legal entity manufacturing on its own behalf and the manufacture and clearances by the said firm was not liable to be clubbed with the manufacture and clearance of the appellants. On adjudication the Collector under his order dated 16-11-1983 held all the charges established. He directed that all the clearances made in the name of Shree Mahesh Containers shall be accounted as clearances of Shree Packaging Corporation and in consequence confirmed the demand for past clearances as mentioned in the show cause notice. He held that the 4266 containers seized from the factory were in a fully manufactured condition and as they had not been entered in RG-1 register they were liable for confiscation. He ordered confiscation of the 2747 containers seized from the lorry. He rejected the defence in respect of 263 containers found short. He held therefore that duty was payable thereon. After ordering confiscation of the 7013 containers as mentioned above he fixed the redemption fine therefore at Rs. 7,000/- and ordered it to be adjusted out of the cash security furnished earlier. He ordered duty to be recovered thereon if not already paid. He further levied a penalty of Rs. 1 lakh on the appellant. The duty demand in respect of the past clearances was quantified under the order at Rs. 3,64,805.28. It is against the said order that the present appeal has been filed.
2. We have heard Shri B.B. Gujral, Advocate for the appellants and Shri Vineet Kumar for the Department.
3. The main question to be decided in the appeal is whether the partnership firm by the name Shree Mahesh Containers (to be referred to as SMC in short for convenience hereafter) was a bogus firm brought into existence by the partners of the appellant firm Shree Packaging Corporation (to be referred to as SPC in short for convenience hereafter) for the purpose of evasion of Excise duty by claiming benefits under the small scale industries notifications. The case for the department is that all manufacturing activities were by the appellant firm only though some part thereof was purported to be carried out in the name of SMC and therefore all clearances by SMC was also to be accounted as clearances by SPC only. The Collector has given various reasons in his order to support such a conclusion. Shri Vineet Kumar supported these reasons as proper and correctly arrived at while Shri Gujral contested all these reasons as unsound.
4. The first reason mentioned by the Collector in his order is that though SMC is claimed to occupy a portion distinct from SPC for its alleged manufacturing operations the said separate space is a part of the area disclosed by SPC in obtaining its licence. The Collector observes that after having thus included this portion also in their approved plan submitted to the Central Excise Authorities, SPC subsequently purported to part with a portion of the same in favour of SMC but that the same was neither communicated to the authorities in order to obtain their approval nor was any change sought for in the approved plan. Shri Gujral comments that this reasoning is incorrect since the portion now in the occupation of SMC (bearing Municipal No.2-3-720/1) was not even in the possession of the lessor when the leese was effected to SPC and approved plan was submitted by SPC to the Excise authorities and that the lessor himself obtained possession of this portion subsequently only in 1971. In this connection he refers us to the proceedings taken through the Civil Court for taking delivery of this portion, the decree for possession (in OS No. 187 of 68 on the file of the first Assistant Judge, Hyderabad at Secunderabad) being dated 15-10-1971. Shri Gujral therefore contends that while this portion now in the possession of SMC may have been wrongly shown in the approved plan submitted by SPC earlier, the said portion was never in the occupation of SPC since the same was taken possession by the lessor himself long subsequent thereto, in fact after the said decree in 1971, and therefore, SPC were never in possession 01 this portion. In view of the decree of Court under which alone the lessor himself could have obtained possession of this portion the contention of Shri Gujral is correct. Hence this reason accepted by the Collector is not properly made out.
5. The Collector then points out that the inspection disclosed that all raw-materials for both firms (for the manufacture of corrugated Board and thereafter containers) were being received and stored in a common place and could not be visually distinguished and separated. He, therefore, concluded that though there were in name two separate firms they were really one. In assessing this conclusion it should be kept in mind that the partners of SMC were the wives of two of the partners in SPC along-with wives of two of the employees in SPC. The Manager in one firm was working as Accountant in the other firm. The explanation for the appellants is that while in many instances storage was common, the receipts as well as the utilisation were being separately accounted for with reference to each firm and therefore at any particular point of time the stock held by each firm could be separately identified with reference to the raw-materials received as well as the completed products. It is not part of the case of the Department that such separate account was not being maintained by the two firms. As earlier mentioned, the proprietors of the two firms were closely connected and the two firms were functioning in practically adjacent premises. If they are able to establish that even materials commonly stored could be properly identified and separated with reference to the separate accounts kept therefore, it would not be proper to draw a conclusion, merely on the grounds of storage in a common place, that the two firms were in reality one.
6. The Collector then observes that the work force for the two firms was common. He refers to the fact that Shri Sriniwas Loya was an Accountant in SPC as also Manager in SMC. He also comments that at the time of inspection some workers of SMC were actually found working on the machines of SPC. This aspect is explained by the appellants by pointing out that on that date SPC, at the specific request of SMC, was manufacturing not merely boards on behalf of SMC but complete containers also. This is said to be for the reason that there was some labour problem in SMC and therefore they could not carryout the operations of manufacture of containers on their own machines, though there were urgent orders to be carried out. That such an explanation is not an invention is seen from the fact that even at the time of inspection records had been seized which coroborated this version. On 16-11-1981 SMC had sent a letter to SPC mentioning that they were having some labour trouble. They were requesting SPC to convert their boards into boxes. SPC had replied the same day that they would be willing to do so charging 30 P per box for the said work and that the necessary particulars for excise purpose, will have to be furnished by SMC to SPC. On 18-11-1981 SMC had written to SPC giving such details and also sending therewith their SMC stamp to be put on the boxes.
These three records had been seized at the time of inspection. It would, therefore, be clear that the contention now put forward is not a belated invention to explain the work in progress at the time of inspection but that the explanation offered by the appellants is acceptable.
7. The Collector further points out that even in the conversion of these boards into boxes the initial processes are common and that it is only at the final stage that the stamp of SMC is put on the boxes and that such stamping was only to create a false identity. Shri Gujral comments that after all both firms were engaged in the manufacture of the same type of goods and therefore the fact that until the stamp of either firm is put on the boxes the manufactured boxes would present the same appearance would not be a reason to disbelieve the case of the appellants. We see force behind this submission.
8. So far as the employment of Shri Loya under both firms simultaneously it is nothing uncommon in the context that the two firms were functioning in adjacent premises and that the owners of the two firms were closely related. In the circumstances this common employment of Shri Loya would not be a ground to conclude that the two firms were in reality one.
9. The Collector relies upon this close relationship between the owners of the two firms to conclude that SMC is only a mirage created by SPC for evasion of duties only. There is nothing in law to prevent close relations of partners of one firm forming themselves into a separate and distinct partnership even for the purpose of carrying on the same type of business. Unless there is some proof that the finances of the second firm flowed out of the first firm and that the profits, or at least part thereof, flowed back to the first firm it would not be open, merely on the basis of surmises and conjectures, to conclude that the two firms were not distinct. Shri Gujral urges that there is no such proof, of either common funding or financial flow back, in the case before us. We find that the Collector has not even referred to any such common funding or financial flow back in his order. Shri Gujral points out that even in respect of sale or hire of the machinery of SPC to SMC they have been properly paid and accounted for and entered in the accounts of SMC. This aspect is also not challenged by the Department or by the Collector in his order. In the absence of such facts we agree with the appellants that the conclusion of the Collector that SMC was only a fictitious creation of SPC, based on his finding regarding the close relationship between the partners of the two firms, is not acceptable. It has also to be noted that the partners to SMC have separate income tax assessment and their investment in SMC as well as advances from SMC are reflected in their income tax accounts and assessments. That would also show that the functioning of SMC as an independent unit was not a mere make believe affair.
10. The Collector has referred in his order to several instances as to how orders were being placed, or received, indiscriminately without reference to which firm is to either receive the goods or execute the order. He concludes therefrom that the two firms were not really distinct but that all manufacture and clearances were by SPC only, though some were accounted in the name of SMC. He refers to 4 or 5 instances in this connection. The first reference is to an order for raw-materials with Singhavee Commercial Corporation on 8-7-1980. He points out that the consignee's name was originally SPC but it has been altered to SMC at the time of receipt of the goods. He further points out that M/s. Singhavee Commercial Corporation has stated that they made the correction to oblige SPC but did not carry out any alteration in the gate pass. The Collector, therefore, concludes that though SPC has placed the order, the same had been diverted to SMC, which would establish the common control of the raw-materials. As Shri Gujral points out the Department has really not investigated whether in respect of such a purchase the payment was made by SMC or by SPC. Both SPC and SMC were engaged in the manufacture of Boards and the requirement of raw-materials for both would be of the same material. In the circumstances, even if material ordered for by SPC has been diverted to SMC it would be no evidence of common interest if payment was subsequently made by SMC only. Unfortunately, this aspect has not been investigated by the department.
11. The second instance relates to raw-materials received from M/s.
Masanato Containers. Here also goods were consigned in the name of SPC but corrections are said to have been made to make it appear as if the consignment was despatched to SMC. It is pointed out that the acknowledgement for receipt of the goods is by SPC. But the appellants have produced the kraft paper account maintained by SMC (page 140 of the paper book) which shows that the paper had been received and entered in the stock of SMC. Therefore, the fact that the receipt (in the letter of Masanato Containers) is purported to be signed on behalf of SPC would not support the conclusion of the Collector.
12. The third instance relates to a purchase order by Hyderabad Engineering Industries. The Collector points out that the order originally favoured SPC but that this has been subsequently scored out and the name of SMC entered. But here again it does not appear whether any enquiry was made as to whether the supply was by SMC and to whom payment was made and whether the said payment was accounted in the registers of SMC.13. The next instance relates to a letter from M/s. Adhesive Chemicals addressed to SMC. It is pointed out that the post-script refers to "your Shree Packaging letter dated 23-11-1981 is with us. The undersigned tried to contact you by phone to get full details but phone was not alright. I will contact you to over-come the problems". The Collector comments that the problem obviously was that the supplier wanted to know which of the two Companies they have to show in their documents. This conclusion does not appear to flow from the wording in the post-script.
14. The last instance referred to by the Collector relates to a Bill raised by M/s. Amzel Cartons in favour of SMC. The Collector comments that the order is noted (in the bill) to have been placed by phone by Shri Vijay Kumar, Works Manager of SPC but an attempt has been made to score out the name of Shri Vijay Kumar from the Bill. A photo copy of that order is available at page 136 of the paper book. We are unable to find any attempted scoring out of the name of Vijay Kumar.
15. It, therefore, appears to us that the instances mentioned by the Collector, as discussed above, would not suffice to support the conclusion of the Collector that these instances establish that SMC and SPC were a single concern, though two different names have been given by creating a fictitious firm. In his order the Collector further refers to the electricity consumption in SMC and on that basis also draws a conclusion that the alleged manufacture by SMC cannot be true.
The show cause notice itself does not proceed on the basis of such a fact in making the charge that there was no real manufacture by SMC but that the manufacture was by SPC only. Further the conclusion of the Collector on the basis of electricity consumption only would not appear to be a proper basis for drawing any inference. The manufacture was of containers with 3 ply, 5 ply and 7 ply boards. Manufacture of such different types of containers would entail not the same quantum of electricity for a similar number. In the circumstances the conclusion of the Collector, merely based on the quantum of electricity consumption, to disbelieve the assertion of quantum of manufacture of containers does not appear to be proper.
16. Therefore, in view of the above discussion we are satisfied that the conclusion of the Collector that SMC was not a separate and distinct entity, carrying on manufacturing operations for itself, but was only a shadow figure created by SPC for the sole object of evasion of Excise duties, by taking advantage of the notifications granting exemption to small scale industries, cannot be accepted. We are therefore of further opinion that the clearances of SMC cannot be held to be clearances by SPC or even on behalf of SPC. We, therefore, hold that the Collector was in error in treating the clearances of SMC also as clearances of SPC for the purpose of levy of duty or denial of exemptions claimed. In his order the Collector has directed that all clearances of SMC, inclusive of manufacture of M/s. Regal Manufacturing Co. on behalf of SMC, should be clubbed with the figures of clearances of SPC. He had raised the demand for past clearances on that basis and had confirmed the same in his order. We are, therefore, of the view that the confirmation of the demand of duty on that basis in respect of the past clearances cannot be up-held. In view of this conclusion it is not necessary to consider the further argument that the demand was to a large extent barred by limitation.
17. Under his order the Collector has directed confiscation of a total of 7013 containers, made up and 4266 containers found in a fully manufactured condition but not accounted for in the records and a quantity of 2747 containers seized in the lorry. In respect of 2747 containers the appellants themselves do not dispute that no duty had been paid thereon before clearance from the factory and that the same had not been entered in the register also. Hence the confiscation thereof was entirely justified. In respect of the other quantity of 4266 containers also they had been seized in a fully manufactured condition but without entry in the record. Therefore, confiscation thereof was also proper. Duty had also been rightly demanded on this total quantity of 7013 containers. The redemption fine of Rs. 7,000/- imposed with reference to this quantity does not appear to be excessive.
18. Shri Gujral contends that in any event the penalty of Rupees one lakh levied on the appellant was unjustified and excessive. We have held that the charge of evasion of duty by creation of a fictitious entity has not been made out. Taking that circumstance into consideration as also the other consideration that in respect of the quantities of fully manufactured containers mentioned above there had been violation of the relevant rules, we hold that a reduction in the penalty is called for. The demand for duty on 263 containers unaccounted is also confirmed since the explanation that the same had been eaten away by white ants is not acceptable. The penalty is reduced to Rs. 20,000/- (Rupees twenty thousand) only. The appeal is disposed of in the above terms.