By TIOL News Service

NEW DELHI, MAR 25, 2017: THE Background : Section 3A of the Central Excise Act 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. Section 3 A (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 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" (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 factory and also "redetermine the amount of duty payable by the assessee with reference to such actual production ".

In exercise of the powers conferred under Section 3 A (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 known as the Hot Re-Rolling Steel Mills Annual Capacity Determination Rules, 1997 ("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".

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."

In these appeals, the ACP of the factories was determined by different orders. 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.

Aggrieved by the determination of the ACP , 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 challenging the validity of the abovementioned Rule 5 in the Karnataka High Court.

The writ petitions came to be dismissed by the judgment dated 07.12.2005 of the Single Judge of the Karnataka High Court. Aggrieved, the appellants 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 before the Supreme Court.

The validity of Rule 5 of the RULES of 1997 is challenged both before the High Court and before the Supreme Court 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.

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."

According to the appellants, Section 3 A (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.

On the other hand, it is argued by the Revenue 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.

However, the question in this case is - whether Section 3 A (2) and/or Rule 5 really create fictions.

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 1996-97 to be the ACP of that assessee.

The words "shall be deemed to be" occurring in both Section 3 A (2) and Rule 5 appear to create a fiction. But do they?

The Supreme Court opined that Section 3 A (2) only embodies a rule of evidence which command the department to presume certain facts. Such presumptions are not unknown to law.

Difference between legal fiction and presumption : There is a clear distinction in law between a legal fiction and presumption. A distinction commonly taken between the fiction and the legal presumption runs something as follows: A fiction assumes 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. Presumptions are closely related to legal fictions … but they operate differently. Fictions always conflict with reality, whereas presumptions may prove to be true. Legal fictions create an artificial state of affairs by a mandate of the legislature.

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 making body.

Whereas presumptions are rules of evidence for determining the existence or otherwise of certain facts in issue in a litigation. Presumptions 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.

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 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.

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?

The Legal Twist : The Supreme Court noticed that the decision in Supreme Steels was rendered by a Bench of three Judges. The vires of Rule 96ZO was directly in issue in Supreme Steels . The Supreme Court in Venus Castings noted 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.

The Supreme Court found it difficult to accept the submission of the Revenue that the issue is covered by the judgments of the Court in Venus Castings and Supreme Steels.

The Supreme Court felt that these two judgments require a further examination. Apart from that, these judgments did not deal with vires of Rule 96 ZP (3). However, in view of the fact that Supreme Steels is a decision rendered by a Bench of three learned Judges, the Court deemed it appropriate that the question of law be settled by a Bench of an appropriate strength.

The matter is placed before the Chief Justice of India for further orders. The matter will perhaps go to a five member Bench.

(See 2017-TIOL-134-SC-CX)