Holding

The Supreme Court set aside the Tribunal’s order and restored the Appellate Collector’s order, holding that the levy beyond the period covered by the show‑cause notice is invalid and the earlier Trade Notice 220/81 based on Tariff Advice 83/81 is binding, giving the assessee the benefit of doubt.

Summary

Poulose & Mathen, manufacturers of liquid carbon‑dioxide, received impure CO2 waste from a fertilizer plant under licence L‑6 and claimed exemption under Notification No. 7/65, which exempts carbon‑dioxide used for any industrial purpose. A show‑cause notice dated 20‑Nov‑1978 demanded excise duty for the period March 1977‑September 1978; the Assistant Collector later levied duty for March 1977‑February 1982, holding the exemption inapplicable. The Appellate Collector relied on Trade Notice 220/81 (based on Tariff Advice 83/81) that classified impure CO2 from fertilizer factories under tariff item 68, not 14H, and allowed the exemption. The Appellate Tribunal reversed this, invoking a later Tariff Advice 6/85 that purportedly placed such gas under item 14H. The Supreme Court held that the show‑cause notice could not be used to levy duty for a longer period, that the Tribunal erred by ignoring the earlier binding trade notice, and that where two interpretations exist the benefit of doubt must go to the assessee. Consequently, the Tribunal’s order was set aside and the Appellate Collector’s order restored.

Issues considered

Whether a show‑cause notice issued for a limited period can be the basis for levying excise duty for a longer period.
Whether the Tribunal was correct in discarding Trade Notice 220/81 and relying on the later Tariff Advice 6/85.
Whether the appellant is entitled to exemption under Notification No. 7/65 for impure carbon‑dioxide received as waste gas.
Whether the benefit‑of‑doubt principle applies when two conflicting tariff interpretations exist.

Legislation cited

Central Excise and Salt Act, 1944s. 35L(b), s. IIA
Central Excise Rules, 1944s. Rule 10

Subjects

Excise dutyExemption notificationCarbon dioxideShow‑cause noticeNatural justiceTrade noticeTariff adviceBenefit of doubtTariff classification

Judgment

A MIS. POULOSE AND MATHEN
v.
COLLECTOR OF CENTRAL EXCISE AND ANR.

FEBRUARY 4, 1997

B [S.P. BHARUCHA AND K.S. PARIPOORNAN, JJ.]

Central Excise

Central Excises and Salt Act, 1944
c Schedule I Entry 14A-Central Excise Rule 1944-Rule JO-Appellant
receiving waste carbon-di-oxide from fertilizer factory-Manufacturing pure
carbon-di-oxide-Availing exemption under Tariff Advice 83/81-Wherein im-
pure carbon-di-oxide classifiable as item 68 and not as item UH-Tribunal
relying on a later Trade Notice holding appellant not eligible for exemp-
D tion-No records to show the later Trade Notice was in pursuance of Tariff
Advice by CBEC-Held, the decision of the Tribunal is incorrect in law.

Section I IA-Show Cause Notice-Issued for shorter periotl-Later
demand and levy for a longer period without prior notice and opportunity of
E hearing to the assessee-Held, invalid and entire proceeding is vitiated.

Trade Notices issued at different times-Department in doubt about
applicability-Held, where two opinions are possible the assessee should be
given the benefit of doubt and that which is in its favour should be given effect
to.
F
The appellant, a manufacturer of liquid Carbon-di-Oxide conform-
ing to ISi grades, availed the benefit of exemption notification No. 7/65-Ce
for removing the raw Carbon-di-Oxide from a fertilizer factory. The appel-
lants had taken IA licence for manufacturing pure Carbon-di-Oxide and
a L6 licence for removing the waste gas generated in the fertilizer factory.
.
G By the notification 7/65 Carbon-di-Oxide falling under item 14H CET was
exempted from. excise duty provided it was used for any "industrial pur-
pose" and as per procedure under Chapter X of the Central Excise Rules.
The appellants received show cause notice in 1978 to explain why the
licences should not be revoked and why duty should not be imposed from
H March 1977 to September 1978. The Revenue contended that the appellant
888
POULSOSEAND MATIIENv. CENTRAL EXCISE 889
was not eligible for exemption since they are not utilising tlie same for any A
"industrial purpose'. The Assistant Collector held that the appellants are.
not eligible for the benefit of the :Notification No.7/65 and duty was
demanded for the period from March 1977 to February 1982.

The Appellate Collector while deciding the appeal relied on a Trade
Notice issued in 1981 by 'CBEC whereby it was decided that Carbon-di- B
Oxide generated in fertilizer factories should be outside the purview of
item 14H and it will be classifiable under item 68, and held that the order
of Assistant Collector was incorrect.

On appeal by Revenue, the Tribunal relying on a Trade Notice issued C
in 1985 wherein it was mentioned that impure Carbon-di-Oxide was cor-
rectly classifiable under item 14H held that it will be applicable for all
transactions in question and reverseil. the order of the Appellate Collector.

In appeal before this Court, the Appellant contended that the show
cause notice was issued for the period from March· 1977 to September 1978 D
;- and the demand and levy is for a longer period for whkh there is no notice
which is violative of principles of natural justice, and that the Tribunal
erred in discarding the Trade Notice issued in 1981 which was communi-
I
' cated to the appellants for information.

Allowing the Appeal, the Court E

HELD: I. The show-cause notice served for a shorter period cannot be
relied on for the purpose oflevy for a much longer period. The appellant was
not served with a proper notice before saddling the liability for a period
beyond September 1978. This is unfair and vitiates the proceedings. [897-E]
F
2. The reasoning and conclusion of the Appellate Tribunal is based
on surmises and the Tribunal ignored the earlier Trade Notice of 1981
.
without proper reasons therefor. There is no material on record to show
that Trade Notices of 1985 were issued by the Collectors in pursuance of
the Tariff advice of the Central Board of Excise and Customs. The G
Tribunal also omitted to notice that the earlier Tariff advice was in force
at the time when the proceeding was pending before the Assistant Collector
-( and also the Appellate Collector. [898-A-B]

3. The appellate Tribunal casually referred to a later tariff advice
No.6/85, without fully and effectively appreciating its contents, its' scope H
890 SUPREME COURT REPORTS (1997) 1 S.C.R ..

A and the impact of the earlier tariff advice No.83/81. The above aspect is
vital and fundamental to the basis of which the Appellate Collector granted
relief to the appellant. The Appellate Tribunal failed to consider the matter
according to law and the order appealed against is set aside. [898-F]

4. There is no record to show that the earlier Tariff advice has been
B rescinded or departed from, and to what extent. The department itself was
having considerable doubt about the matter. The position was not free
from doubt. In such a case where two opinions are possible, the assessee
should be given the benefit of doubt and that opinion which is in its favour
should be given effect to. [898-H, 899-A·B]
c CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2344 of
1986.

From the Judgment and Order dated 18.3.86 of the Customs Excise ~
and Gold (Control) Appellate Tribunal, New Delhi in A No. ED. (SB) .
D (T) 60/82-C) (Order No. 179/86-C).

Joseph Vellapally, Mrs. A.K. Verma for JBD & Co. for the Appel-
lant.

Dr. R.R. Mishra, P Narsimhan, V.K. Verma and Ms. Sushma Suri
E for the Respondents.

The following Judgment of the Court was delivered by

PARIPOORNAN, J. The appellant is a small scale industry. It carries
on the business of manufacture of liquid Carbon Dioxide (C02) conform-
F ing to ISI Grades. The factory is situated at Kalamassery in Ernakulam
District, Kerala State. The first respondent in this appeal is the Collector
of Central Excise, Cochin. The Second respondent is the Fertiliser &
Chemicals Travancore Limited (FACT). This appeal is filed under Section
35L(b) of the Central Excise & Salt Act, 1944, against the order dated
18.3.1986 passed by the Central Excise and Gold (Control) Appellate
G Tribunal, New Delhi substantially modifying the order passed in the
appellants' favour by the Appellate Collector of Central Excise, Madras
dated 18.6.1982. The Appellate Collector set aside the order of the Assis-
tant Collector rendered on 2.2.1982 holding that the appellant is not
)- .
entitled to the benefit or exemption notification No. 7/65-Ce dated
H 30.1.1965.
POUl.SOSEAND MATHEN v. CENTRAL EXCISE [PARIPOORNAN, J.] 891

2. The facts of this case are in a narrow compass, The appellants A
manufacture carbon dioxide of ISi. specification out of raw carbon dioxide
gas received through pipe line from M/s. FACT Ltd., Eloor. The raw
carbon dioxide is odourous and has a purity of less than 99% and contains
moisture above 0.1 %. Such raw carbon dioxide is subjected to various
processes in order to remove traces of moisture, oxide of sulphur etc. The B
gas is then dried and fed into Rotary Booster compressor to boost the
pressure to a very high point and then passed through activated carbon to
remove final traces of oil and also to deodourise. The pure gas obtained
after these processes is liquified and filled in cylinders and removed
therefrom for making further products or for sale.
c
3. At the relevant time, Carbonic Acid (carbon dioxide) was specified
in Entry No. 14H(iv) of the 1st Schedule to the Central Excise Act, 1944
and was assessable to duty of excise at the rates in force from, time to time.
The appellants had taken out L.4 licence for the manufacture of carbon
dioxide. They were permitted to remove waste gas generated from M/s. . D
Fertiliser and Chemicals, Travancore Ltd., in view of paragraph 2 of ·
Notification No. 7/65 dated 30.1.1965 after taking out L.6 licence. The
licence was granted on 11.3.1977. Under notification No. 7/65, carbon
dioxide falling under item 14H of the Central Excise Tariff was exempted
from the whole of the duty of excise leviable thereon, provided it was used ·
for any "industrial purpose" and subject to the procedure in Chapter X of E
· the Central Excise Rules and it is common ground that such procedure
was followed by the appellant by taking out L.6 licence. The appellants had
given an undertaking that they would pay the duty on the carbon dioxide
received for processing, (raw carbon dioxide - waste gas) in case it was
subsequently decided that they were not entitled to receive the said carbon F
dioxide free of duty under notification No. 7/65.

4. The appellants were served with a show-cause notice dated
20.11.1978 to explain why L.6 licence granted to them (to receive impure
carbon dioxide gas (waste gas) by pipe line from M/s. FACT~) and also. 4
licence for the manufacture of carbon dioxide (or liquid carbonic acid) G
should not be revoked and why duty of Rs. 8,92,695.60 along with SED Rs.
19,823.10 should not be demanded from them for the period from March
1977 to September, 1978 under Rule 10 of the Central Excise Rules, 1944.

5.The plea of the Revenue was that the appellant was not entitled to H
892 SUPREME COURT REPORTS [1997] 1 S.C.R.

A 'receive C02 gas (raw carbon dioxide) free of duty under Notification
No.7/65 as they are not using the same for any "industrial purposes"involv-
ing any product other than the self sale of C02 which was received by them.

6. After hearing the appellant, the Assistant Collector of Central
Excise passed an order on 2.2.1982 holding that the appellants' are not
B eligible for the benefit of the Notification No.7/65 dated 30.1.1965 and in
consequence the Superintendent of Central Excise by proceedings dated
4.5.1983 quantified the total duty payable by the appellant in the sum of ~
Rs.25,20,694.76 for the period from March 1977 to February 1982. Thus duty
was levied on raw carbon dioxide (waste gas,) obtained from M/s. FACT.
C Ltd. by the appellant.

7. In appeal, the Appellate Collector of Central Excise relied on
Trade Notice No. 220/81 dated September, 1981 issued by the Collector of
Customs and Central Excise, Cochin-31 in consequence of Tariff Advice
No. 83/81 dated 24.8.1981 of the Central Board of Excise and Customs and
D held thus:

"The question to be decided in this case is whether the appellants
are entitled to avail the benefit of notification No.7/65 dt. 30.1.65. '
The appellants rely on the Trade Notice No.220/81 issued from
file C. No. V/68/30/3/81 C6 by the Collector of Central Excise
E Cochin. In this trade notice, it has been informed that the carbon
dioxide gas produced in distilleries and fertiliser factories or in any
other factory will fall outside the purview of item 14H. So long as
the gas does not con[orm to the marketable grade as prescribed in
th~ !SI specifications, such gas will be properly classifiable under f.
F item 68. The appellants were allowed to avail notfn. No. 7/65. But
the trade notice referred to above is in favour of the assessee and
would be binding on the department (New Gujarat Paper Industries
v. Superintendent of Central Excise, 1977 ELT J. 67 Guj. Div.8}.

G
Hence the order of the Asstt. Collector making duty retrospectively
is not correct.
....
Besides I am of the view that the carbon dioxide gas produced
from the fertiliser factory of M/s. FACT will fall outside the
purview of Item No. 14H of Central Excise Tariff so long as the
gas does not conform to the marketable grade as prescribed in the
H IS! specification. Such gas will be properly classifiable under item
(

POULSOSE AND MATIIEN v. CENfRAL EXCISE [PARIPOORNAN, J.) 893

68 of Central Excise Tariff. Henci;, necessary action in this regard A
has to be taken by the Asstt. Collector. The order of the lower
authority is set aside with these directions."

(emphasis supplied)

8. In further appeal filed bf the Revenue, the Appellate Tribunal B
reversed the aforesaid decision of the Appellate Collector dated 18.6.1982
by its order dated 18.3.1986. The Appellate Tribunal decided the matter
on merits on the other aspects as well, though the Appellate Collector
rendered his decision substantially on the basis of Trade Notice. (The
Appellate Collector also found that the carbon dioxide produced by M/s. C
FACT will fall outside the purview of item No. 14H of the central Excise
Tariff, since the gas did not conform to the "marketable grade" as
prescribed in the ISi specification). Regarding the applicability of trade
notice dated September, 1981, the Appellate Tribunal observed, in para'
graph 51 of its order, thus :
D
"The Trade Notice on which the respondents seek to rely was
issued nearly 3 years later. In these circumstances the trade notice
has no relevance to what happened earlier. Shri Tripathi had filed
before us a copy of the Tariff Advice No. 6/85 dated 6.2.85 of the
CBEC along with a model trade notice, to the effect that impure E
carbon dioxide not conforming to I.S.I. specifications produced by
distilleries and fertilizer units, was correctly classifiable under item
14H. It may be presumed that the Collectorates, or at least some
of them duly issued trade notices to this effect in early 1985. If the
trade notice of 1981 could be considered as relevant to matters
occurring 3 or more years earlier, we see no reason why a trade F
notice of 1985, to the contrary effect, should not be taken as equally
applicable to the transactions in question."

(Emphasis supplied)
G
9. We heard counsel.

10. Appellants' counsel stressed two points :

(1) The show-cause notice dated 20.11.1978 (Page 79 of the Paper-
book) was issued· for the period from March 1977 to September 1978 but H
894 SUPREME COURT REPORTS [1997] 1 S.<;R.
, A the levy and demand is for a larger period - March 1977 to February, 1982.
There was no proper notice and opportunity to explain. This is violative of
natural justice and is also unfair;

(2) The Appellate Tribunal was totally in error in discarding the
-
B Trade Notice No. 220/81 based on Tariff Advice No.83/81 dated 24.8.1981
of the Central Board of Excise and Cu;toms which was communicated to
the appellants for infonnation. (The said Trade Notice is available at page
125 of the Paperbook). The Appellate Tribunal failed to understand and
give effect to the terms of the above trade notice, and the reasons to
discard the trade notice relied on by the Appellate Collector are unsus-
C tainable. A larger contention on the merits to the effect that "waste gas" is
not a marketable commodity and is not exigible to duty, was also raised
relying on the decision in Union of India v. Indian Aluminium, (1995) 77
ELT 268.

D 11. The relevant Trade Notice relied on by the Appellate Collector
is available at page 125 of the Paperbook. It is as follows:

"Trade Notice No. 220/81 dt. 9-81.

T.1.68 A.C.C. Nes.No.42/81
E
Sub : CASES. Carbon Dioxide gas emanating from Distillery
portion of Sugar factories and Fertiliser factories
whether classifiable unde.r T.I. 14H or T.I. 68 - question
regarding.

F It is considered that carbon dioxide gas produced in distilleries
and fertiliser factories or any in other factory will fall outside the
as
purview of item 14H of Central Excise Tariff. So long the gas
does not conform to the marketable grade as prescribed in .the ISi
specifications such gas will be properly classifiable under item 68
G ofCET.

(Issued from file C. No. V/68/30/5/81CX-6)

Sd/-M. Suresh
Asst.Collector (Tech).
H For Collector.
v.
POULSOSE AND MATIIEN CENTRAL EXCISE [PARIPOORNAN, J.) 895

~ A
As per DE No. 1 and II
Space 15.

Forwarded to M/s. Poulose & Mathen, Eloor for information.

Sd!- Superintendent B
Central Excise Range
Alwaye."

It is based on the Tariff Advice No. 83/81. It reads as follows :

"TARIFF ADVICE No. 83/81 c
F.No.105/2/81-CX.3

GOVERNMENT OF INDIA
CENTRAL BOARD OF EXCISE & CUSTOMS

NEW DELHI, THE 24TH AUGUST, 1981. D

To,

All collectors of Central Excise
All collector of Customs
All Appellate Collectors of Customs & Central Excise E
All Deputy Collectors of Central.Excise.

Sir,

Sub: GASES - Carbon Dioxide gas emanating from distillery
portion of Sugar factories and factories and Fertiliser F
factories - Whether classifiable under T.I. 14H qr T.1.68
- Question .regarding.

I am directed to say that a question has been raised whether G
raw carbon dioxide gas emanating from distilleries attached to
sugar factories is classifiable under Item 14H or Item 68 of C.E.T.

2.·The matter was discussed in the 15th South Zone Tariff-
cum-General Conference held on the 19th and 20th May. 1981 . H
)_
896 SUPREME COURT REPORTS [1997) 1 S.C.R.
A at Bangalore.

3. The conference noted that the Certain gases arise in distilleries.
These are described as raw carbon dioxide, or waste gases and are
similar to kihi gas generated in sugar factories. Such waste gases
have carbon dioxide only to the extent of about 50%. However, in
B so. far as fertiliser factories are concerned, it was noted that the
P!ll'ity of Carbon Dioxide gas produced in the. factories is more
than 70%.In both the types of cases the Co2 in question does not
conform to the marketable standard. Also, in both the cases, it was
not possible to quantify the production of Carbon Dioxide.
c
4. After a detailed discussion, the Conference reached the con-
clusion that the purity of Carbon Dioxide gas produced in distill-
eries is even below 50%. It should not, therefore, be considered
as Carbon Dioxide and, further, as such a mixture of waste. gases
does not conform to any specifications of Carbon Dioxide as such
D and it should be outside the purview of Item 14H on the analogy
of kiln gas. Similarly, the carbon dioxide gas generated in the fertiliser
factories is also impure and does not confonn to the marketable
grade and hence it will also fall outside the purview of Item 14H.

E 5. The Board has accepted the recommendations of the Conference
that Carbon dioxide produced in. distilleries as well tis in the fertiliser
factories will fall outside the purview of Item 14H and will be properly
classifiable under Item 68. The Board is also of the view that Carbon
dioxide gas generated by any other factory will alw fall outside the
purview of Item 14H so long as it_ does not conform to the
F
marketable _standard of the carbon dioxide as prescribed in the IS/
specifications.

6. The above position may please be brought to the notice of the
field formations for their information and guidance. The Trade
G interests may also be informed as in the Model Trade Notice.

7. Receipt of this letter may please be acknowledged.

Sci! G.N. BHAGCHANDANI
H UNDER SECRETARY
POULSOSEAND MATHENv. CENfRALEXCISE[PARIPOORNAN,J.J 897

Copy forwarded to : As per list attached. A
MODEL TRADE NOTICE

SUB: GASES - Carbon Dioxide gas emanating from distillery
portion of sugar factories and from fertiliser factories
whether classifiable under T.l.14H or T.1.68 - Question B
regarding.

It is considered that Carbon Dioxide gas produced in distill-
eries and fertiliser factories or in any other factory will fall outside C
the purview of Item 14H of CE T. so .long as the gas does not
con/onn to the marketable grade as prescribed in the ISI specificac
tions. Such gas will be properly classifiable under Item 68 C.E.T."

(emphasis supplied)
n
) 12. It is seen that the show-cause notice dated 20.11.1978 was issued
for the period from March 1977 to September, 1978. But the order of the
Assistant Collector given effect to by the proceedings of the superintendent
dated 4.5.1983 has levied the duty for a longer period, from March 1977 to
February, 1982. The show-cause notice served for a shorter period cannot E
be relied on for the purpose of levy for a much longer period. We should
say that the appellant was not served with a proper notice before saddling
the liability for a period beyond September, 1978. This is unfair and vitiates
the proceedings.

13. The Tribunal has stated that the trade notice issued in September, F
1981 based on Trade Advice of the Board dated 24:8.1981 was issued three
years later than the relevant period. the Tribunal refers to Trade Advice ·
No. 6/85 dated 6.2.1985 of the Central Board of Excise and Customs along
with" a model trade notice" wherein it seems to have been stated that carbon

- dioxide not conforming to LS.I. specifications produced by distilleries and G
fertilizer units was correctly classifiable under item 14H. The Appellate
Tribunal was of the view "that it may be presumed" that the Collectorates,
or "at least some of them" duly issued trade notices to this effect in early
1985, and so a later trade notice could also be taken into account.

14. We hold that the reasoning and conclusion of the Appellate I;I
898 SUPREME COURT REPORTS [1997.) 1 S.C.R.

A Tribunal is based on surmises and the Tribunal ignored the earlier trade
notice of 1981 without proper reasons therefor, Firstly, the tariff advice No.
6/85 dated 6.2.1985 which is said to have been accompanied by a "model"
trade notice is not part of the record. Its contents are unknown. There is
no material on record to show that trade notices were issued by the
Collectors in pursuance of the above tariff advice of the Central Board of
B Excise and Customs. The Tribunal also omitted to notice that the earlier
tariff advice No. 83/81 was in force at the time when the proceeding was
pending before the Assistant Collector and she passed the order on
2.2.1982 and also when the Appellate Collector set side the above order
and gave relief to the assessee by his order dated 18.6.1982. The concerned
C department understood the legal position then as reflected in the trade
advice and trade notice of the year 1981. It was a plausible view of the
matter. It was pointedly stated that the carbon dioxide gas generated in the
fertilizer factories is also impure and does not confomi "to the marketable
grade" and hence it will also fall outside the purview of Item 14H. Whether
D the later tariff advice No. 6/85 adverted to all relevant aspects or deviated
from 1981 tariff advice and if so. to what extent, are not detailedly stated
in the order of the Tribunal (Paragraph 51). The earlier tariff advice and
trade notice categorically stated that in the absence of non-conformity to
the marketable grade (standard) "impure carbon dioxide not conforming to
LS.I. specifications produced by distilleries and fertilizer units was correct-
E ly classifiable under item 14H." Was the requirement, that the goods should
be of "marketable grade" (standard) dispensed with, in the later tariff
advice? This is not adverted to by the Tribunal. The Appellate Tribunal
casually referred to a later tariff advice No. 6/85, without fully and effec-
tively appreciating its contents, its scope and the impact of the earlier tariff
p advice No. 83/81. The above aspect is vital and fundamental to the basis of
which the Appellate Collector granted relief to the appellant. We are of
the view that the Appellate Tribunal has failed to consider the matter
according to law and the order appealed against should be set aside and
we hereby do so.

G 15. One aspect deserves to be noticed in this context. The earlier ....
tariff advice No.83/81 on the basis - of which trade notice No.220/81 was
issued by the Collector of Central Excise and Customs is binding on the
department. It should be given effect to. There is no material on record to
show that this has been rescinded or departed from, and even"so, to what
H extent. Even assuming that the later tariff advice No.6/85 has taken a
POULSOSE AND MAIBEN v. CENfRAL EXCISE [PARIPOORNAN, J. J 899
different view-about which there is no positive material · the facts point A
out that the concerned department itself was having considerable doubts
about the matter. The position was not free from doubt. It was far from
clear. In such a case, where two opinions are possible, the assessee should
be given the benefit of doubt and that opinion which is in its favour should B
be given effect to. In the light of the above, it is unnecessary to adjudicate
the other points involved in the appeal on the merits.

16. For the reasons stated above, we set aside the order of the C
Customs Excise and Gold (Control) Appellate Tribunal dated 18.3.1986
and allow this appeal and restore the order of the Appellate Collector of
Central Excise, Madras dated 18.6.1982. There shall be no order as to
costs.

V.M. Appeal allowed.