While considering a matter of judgment under the Central Excise Act, the author is also discussing a back-ground about company. This is for the reason that it may be case that the background of company might have caused some sort of prejudices in mind of authorities ecasue the deeds of company have not been honest and fair. In fact the counsels of company admit that they had given wrong information in audited accounts to project a rosy picture of company having technology of developing equipments in houe.

In this write-up we are concerned with an engineering and manufacturing company which was earlier known as M/s. Usha Rectifier Corpn. (I) Ltd which was later on renamed as Usha India Ltd. The company was promoted by Vinay Rai Group. It also came to public for subscription of its shares and convertible debentures by filing a prospectus, and then company had also issued right shares atpremium. There was big advertising hype at those times of issue of shares by the company and its issues of securities offered at substantial premium were oversubscribed many times. Company also paid dividends for few years. At that time the company was considered as a blue chip company of future. The slogan used in public and right issue of securities was ‘BRING HOME LAKSHMI”.

Now the whereabouts of company are also not perfectly known. Company has not sent annual reports for last more than about fifteen years.

Half hearted learning from great Dhirubhai Ambani:

The conduct of the promoters like Vinay Rai of Usha, and many other promoters clearly shows that they have learnt and applied teachings and guidance of great Dhirubhai Ambani in piecemeal manner. They learnt only to raise money from public and public financial institution and then forgot the capital providers. They did not learn and implement lessons about servicing the capital providers and participating with them in growth. In fact many have in a manner looted public money by showing rosy pictures of companies and raising money from public. Number of such companies outnumber companies who have continued serving capital provider in an effective manner.

False statements:

Now when we read relevant judgments in case of the company, we find that the company had made false statements in its accounts and also in its prospectus because prospectus was made on the basis of accounts. This is evident from the following submission made by the counsel of company before court CEGAT:

“ …. that Note 6 of Schedule 'Q' was given only with a view to impress share holders of the company to justify the use of raw material, stores and spares, salary and other benefit to Research and Development staff to project rosy picture of the company.

In regard to the same submission, were placed before the Supreme Court, though in some different manner. The Supreme Court has noted as follows:

“The aforesaid position is further corroborated by the Director's report appearing at page no. 2 of the Annual Report for the year ending December, 1988, wherein it was mentioned that during the year the company developed a large number of testing equipments on its own for using the same for the testing of semi- conductors. Once the appellant has themselves made admission in their own balance sheet, which was not rebutted and was further substantiated in the Director's report, the appellant now cannot turn around and make submissions which are contrary to their own admissions”.

Necessary facts of the case:

From the order of the Tribunal we can find the facts of the case as follows:

The demand of Central Excise duty was confirmed against the Appellants on the basis of particulars mentioned in Schedule 'Q' - Notes of balance sheet and profit and loss account for the year ending 1987. Srl. No. 6 of the said Schedule reads as under :-

"Addition to plant and machinery includes testing equipments worth Rs. 31.26 lakhs fabricated in the company by capitalisation of following expenditure :-

(i) Raw material Rs. 26.31 lakhs,

(ii) Stores and spares Rs. 0.02 lakh, and

(iii) Salary/wages and other benefits........Rs. 4.93 lakhs (On the basis of estimated time spent)"

The Tribunal thus found that it is apparent from above note that the Appellants had fabricated plant and machinery including testing equipment worth Rs. 31.26 lakhs.

No record of such fabrication was kept by company

Any duty was also not paid by them for this manufacture.

Tribunal found no force in the submissions of the company that such mention was made in the balance sheet to present a rosy picture of the company to the share holders.

Tribunal also did not find merit in submission that the equipment did not reach the finished stage and they were destroyed ( - should be dismantled)

Tribunal found that the note on balance sheet, profit and loss account specifically mentions about the fabrication and capitalisation and thus belies the submissions made by the Appellants.

Tribunal found that the Collector (Appeals) in the impugned order has rightly given his findings that the balance sheet is a very important documents for a company and each of the figure and statements incorporated therein is open to criticism and analysis.

On consideration of the provisions of the Companies Act tribunal noted that

A limited company has to lay a balance sheet and profit and loss account at every general meeting of the company as provided under Section 210 of the Company's Act which provides that every balance sheet of company shall give true and fair view of the state of affairs of the company.
Section 215 of the Companies Act also provides that every balance sheet and every profit and Loss account of company shall be signed on behalf of Board of Directors by its Managing Agent, Secretary and Treasurer, Manager or Secretary, if any and not less than by two Directors of the company, one of whom shall be the Managing Director, where there is one.
Moreover balance sheet and the profit and loss account shall be annexed to directors report and auditor's report shall also be attached .
Therefore, Tribunal agreed with the findings of the Collector (Appeals) that it is impossible to accept the plea that the appellants just cooked up some explanation in order to give a rosy picture to the share holders.
The Chartered Accountant had verified all the essential facts and figures and the recorded entries before satisfying themselves about the correctness of the statement, facts, figures and explanation given.
Per author: it was admitted position that the accounts referred to herein were approved by all concerned that is the Board of Directors of Company, audited by auditors and approved by shareholders of company in the general meeting.
It has not been rebutted by the Appellants that neither they had taken L-4 licence nor they had disclosed manufacture of goods in question to the Department nor they had filed any classification list or price list.
In the absence of any disclosure to the Department it is apparent that the facts were suppressed from the Department and the extended period of limitation is rightly invokable.
Whatever correspondence has been exchanged between the department and the Appellants is after the manufacture and use of the goods in question.
In view of the decision of the Larger Bench in Nizam Sugar Factory v. CCE, Hyderabad - 1999 -TMI - 72272 - CEGAT, NEW DELHI, acquiring the knowledge by the Department subsequently does not take away the period of 5 years provided by the law maker itself.
Tribunal did not find any substance in the contention of the learned Advocate that a show cause notice for demanding duty cannot be issued on the basis of audit objection.
On the plea that the Additional Collector was not competent to adjudicate the matter involved clandestine removal as the definition of Collector was changed and Collector did not include Additional Collector at the relevant time Tribunal held that “we find that the Collector (Appeals) has given his specific finding on this aspect also. The statutory position after amendment of Section 11A(1) w.e.f. 14-5-1992 was that Central Excise Officer was competent to issue the show cause notice and adjudicate show cause notices even where proviso to Section 11A has been invoked. We, therefore, hold that the Additional Collector was competent to adjudicate the present matter”.

In view of the above facts Tribunal rejected the appeal filed by the Appellants.

Before the Supreme Court:

The appellant company preferred appeal before the Supreme Court and the appeal was dismissed for the reason that there was own admission in audited accounts, and there was no disclosure by the appellant and extended periods was rightly invoked. The observations and conclusions of the Supreme Court are analyzed below:

a. The demand for payment of central excise duty in the present case appears to have been made on the basis of statement made by the appellants in their balance sheet to the effect that there is an addition to plant and machinery including testing equipments worth Rs. 31.26 lacs which have been made in the company by capitalisation of the expenditure on (i) raw material, (ii) stores and spares and (iii) salary/wages and other benefits.

b. The aforesaid statement and details were mentioned in Schedule `Q' appended to notice of balance sheet and profit and loss account of the appellant for the year ending December, 1987. Serial No. 6 of the said Schedule reads as follows: -

"Addition to plant and machinery includes testing equipments worth Rs. 31.26 lakhs fabricated in the company by capitalisation of following expenditure:-

(i) Raw material Rs. 26.31 lakhs, (ii) Stores and spares Rs. 0.02 lakh, and (iii) Salary/wages and other benefits Rs. 4.93 lakhs (On the basis of estimated time spent)"

c. The aforesaid position is further corroborated by the Director's report appearing at page no. 2 of the Annual Report for the year ending December, 1988, wherein it was mentioned that during the year the company developed a large number of testing equipments on its own for using the same for the testing of semi- conductors.

d. Once the appellant has themselves made admission in their own balance sheet, which was not rebutted and was further substantiated in the Director's report, the appellant now cannot turn around and make submissions which are contrary to their own admissions. The Supreme court followed decision in case of Calcutta Electric Supply Corpn. v. CWT, (1972) 3 SCC 222 para 8).

e. Moreover, they have also clearly taken a stand in their reply to the aforesaid show cause notice that they bought various parts and components to develop the testing equipments for use within the factory and that such steps were undertaken to avoid importing of such equipments from the developed countries with a view to save foreign exchange.

f. From the aforesaid admission of the appellant and from the facts brought out from the records the Supreme Court considered that it is clearly proved and established that the appellant had manufactured machines in the nature of testing equipments worth Rs. 31.26 lacs to test the final products manufactured by them.

g. Even if such equipments were used for captive consumption and within the factory premises, considering the fact that they are saleable and marketable, the Court took view that duty was payable on the said goods. The Court while holding the equipment as marketable considered the submission of appellant in their reply to the show cause notice that they had undertaken such manufacturing process of the testing equipments to avoid importing of such equipments from the developed countries with a view to save foreign exchange. Supreme Court thus considered appellants own statement against the appellant by holding that “Such a statement confirms the position that such testing equipments were saleable and marketable.

h. The provision of Explanations to Rule 9 and 49 of the Central Excise Rules are very clear as it provides that for the purpose of the said rules excisable goods manufactured and consumed or utilized as such would be deemed to have been removed from the premises immediately for such consumption or utilization.

i. the contention that no such duty could be levied unless it is shown that they were taken out from the factory premises is without any merit.

j. About non- applicability of extended period of limitation the Court held that “The aforesaid contention is also found to be without any merit as the appellant has not obtained L-4 licence nor they had disclosed the fact of manufacturing of the aforesaid goods to the department. The aforesaid knowledge of manufacture came to be acquired by the department only subsequently and in view of non-disclosure of such information by the appellant and suppression of relevant facts, the extended period of limitation was rightly invoked by the department.

Consequently, finding no merit in the appeal, the Supreme Court dismissed the appeal without any order as to costs.

Weak point of appellant- case could be strengthened:

Appellant has submitted that they consumed raw material, stores, spares and workmen hours for assembling /fabrication of testing equipments for research and development and own use. And that the assemblies were not found suitable and therefore manufacture was not completed and assemblies were dismantled. However, counsels of appellant company did not bring on record any evidence for such unsuitability, dismantling, return of material to stores, accounting adjustments in subsequent years about dismantling and return of such material in the stores of company and reversal of entry of capital expenditure. Had that been shown as real fact, perhaps the case could have been made stronger as to just issue of stores and assembling as a trial for the purpose of research and development of new products and absence of manufacture of a marketable product.

By: C.A. DEV KUMAR KOTHARI - May 18, 2011