Holding

The exemption under Notification No. 163/1965 applies to all factories producing packing and wrapping paper from 1 March 1964, but for existing factories it is limited to the production attributable to the enlarged capacity.

Summary

The respondent, a paper manufacturing company established in 1942, sought exemption from central excise duty on its packing and wrapping paper under Notification No. 163/1965. It asked whether the exemption applied to production based on its installed capacity as of 1967 as well as to the additional capacity added later. The Assistant Collector allowed exemption only for the enlarged capacity and rejected the claim for the earlier capacity; this order was upheld by the Appellate Collector. The Gujarat High Court, however, interpreted the phrase "any factory commencing production" to mean only the specified categories of paper, granting a broader exemption. The Supreme Court examined the entire notification and held that the exemption was intended for all factories producing packing and wrapping paper from 1 March 1964, but for existing factories it applied only to the portion of production attributable to the enlarged capacity, thereby rejecting the respondent's claim for exemption on its pre‑enlargement capacity. Consequently, the appeal was allowed, the High Court order set aside, and the writ petition dismissed.

Issues considered

Whether the phrase 'any factory commencing production' in Notification No. 163/1965 confers exemption on an existing factory for production based on its pre‑1964 capacity.
Whether the exemption under the notification applies to the entire production of packing and wrapping paper of an existing factory or only to the portion attributable to enlarged capacity.

Legislation cited

Central Excise and Salt Act, 1944s. Section 4
Central Excise Ruless. Rule 8, s. Section 4

Subjects

central excisetax exemptionstatutory interpretationnotificationany factory commencing productioncapacity enlargementpacking and wrapping paper

Judgment

UNION OF INDIA AND ORS.
v. A
MIS. WOOD PAPERS LTD. AND ANR
)
APRIL 24, 1990
~-
[K. JAGANNATHA SHETIY AND R.M. SAHA!, JJ.]
Central Excise and Salt Act, 1944/Central Excise Rules: Section 4, B
Schedule I item 17/Rule 8 and Notification No. 163 of 1965-Exemptjon to
all sorts of paper by 'any factory commencing production'-Claim for
exemption on capacity as it existed in 1967-Whether permissible?
~/
The Respondent Company which was established in 1942 went into
production in 1944 manufacturing Straw Boards and Mill boards only uptil
-r the year 1964. In 1965 it expanded its activities by manufacturing duplex c

- board. In the following year it started manufacturing packing and wrapping
paper on experimental basis and on commercial basis after 1967. Sometime
in 1971 the Company wrote to the Assistant Collector of Central Excise
~..._,,_ .. enquiring as to whether it would be entitled to exemption from duty under
Notification No. 163/1965 both in respect of production attributable to its D
installed capacity as in 1%7 as well as in respect of production attributable
to its expanded capacity. The Assistant Collector passed an Order holding
the company was entitled to concession under column 5 of the Table of the
Notification No. 163 of 1965 in respect of production attributable to its
enlarged capacity namely, the third machine and rejected its claim for ex-
emption on production attributable to its capacity as it existed in 1967. Dis- E
, /(
satisfied the company preferred appeal to the Appellate Collector who
maintained the order of the Assistant Collector.
The Respondent-Company thereupon moved the High Court by a writ
petition under Article 226 of the Constitution of India. In allowing the Writ
Petition the High Court held that on a plain literal construction it is obvious
that the commencement of production must refer not to the production of F
)-.. excisable goods-paper in general falling under item 17, but to production
of those specified exempted categories of paper in column 2 of the aforesaid
notification. Hence this appeal by the Union of India.
->- Allowing the appeal and dismissing the Writ Petition of the Company.
this Court,
HELD: When the question is whether a subject falls in the Noli- G
fication or in the exemption clause then it being in nature of exception is
to be construed strictly and against the subject but once ambiguity or doubt
about applicability is removed and the subject falls in the notification then
full play should be given to it and it calls for a wider and liberal cons-
~
!ruction. [663D-E]
H
A close reading of both parts of the Notification together leaves no
659
660 SUPREME COURT REPORTS [1990] 2 S.C.R.
room for doubt that it was intended to be exhaustive granting exemption to
A all factories producing packing and wrapping paper whether existing or
commencing production from Isl March. 1964 to the former to the extent of
enlarged capacity and to latter to the full extent. [663G-H]
As the Respondent Company did not fall in the first clause of the
--
>

notification there was no question of giving the clause a liberal construction
B and hold that production of goods by the Respondent mentioned in the
Notification were entitled to the benefit.
Production of packing and wrapping paper by Respondent was entitled
to exemption only to the extent it was attributable to enlarged capacity and
not to the existing capacity. [665F; 664F]
C Hansraj Goverdhan v. H.H. Dave, Asst/. Collector, Central Excise&
•
Customs, Surat and Others, [1969] 2 S.C.R. 252; Commissioner of
/name-tax v. Madho Prasad, [1989] 4S.C.C. 541; Tata Oil Mills Co. Ltd. v.
Collector of Central Excise, A.I.R. 1989 SC 644 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 539
D of 1'!76.
From the Judgment and Order dated 26.8.1975 of the Gujarat
High Court in Spl. Civil Application No. 1627 of 1972.
Soli J. Sorabjee, Attorney General, A. Subba Rao, C.V.S. Rao,
P. Parmeswaran and Ms. Nisha Bache for the Appellants.
E S.K. Dhingra for the Respondents.
The Judgment of the Court was delivered by
R.M. SAHA!. J. By this appeal Union Government has chal-
lenged correctness of construction by High Court of Gujarat of notifi-
cation No. 163 of 1965 issued under Rule 8 framed under Central
F Excise and Salt Act allowing exemption to all sorts of papers by "any
factory commencing production" to refer "not to the production of
excisable goods-paper in general falling under Item 17, but to pro-
duction of these specified exempted categories of paper in Column 2 of
this notification" and canvasses for acceptance of the construction put
on it by the Collector, Central Excise "that the factory must have
G commenced production on or after that date and not that the produc-
tion of these items must have been commenced after the date".
M/s. Arvind Boards & Paper Products Limited, Antalia, Bili-
mora, Gujarat State, was established in 1942. From 1944 when it went
into production till 1964 it manufactured only straw boards and mill
H boards. It expanded its activities in 1965 and commenced manufacture
of du_plex board. The packing and wrapping paper was manufactured
U.0.L v. MIS. WOOD PAPERS (SAHA!, J.( 661
on exp.erimental basis in 1966 and on commercial basis after 1967. In
) December, 1971 the company wrote a letter to the Assistant Collector A
.-.:>--' of Central Excise inquiring as to whether the company would be
entitled to exemption under notification No. 163/65 both in respect of
the production attributable to its installed capacity as in 1967 as well as
in respect of the production attributable to its expanded capacity. In
1972 it was informed that it would be entitled to concession under B
Column 5 of the Table of the notification in respect of the production
attributable to the enlarged capacity, namely, the third machine only.
Consequently the claim of the petitioners for exemption on capacity as
it existed in 1967 was not accepted. The order was maintained in
appeal as well. The Appellate Collector held:

- "I do not agree with the appellant's contention that the
Assistant Collector erred in holding that "any factory
which commenced production" related to any factory
c

-~ .· manufacturing paper falling under 1Itemi 17 of the said
schedule irrespective of the varieties manufactured there-
of. The exemption contained in the aforesaid Notification
·No. 163/65 as amended is in respect. of the goods. Said D
exemption is conditional i.e. it is applicable to. paper pro-
duced in a factory which commenced production on or after
a specific date. Therefore, the condition is that the factory
must have commenced production on or after that date and
not that the production of these items must have been com-
menced after that date." E

The High Court did not agree with the construction of the Notification
made by the Collector (Appeal) and held:
"That is why the whole controversy has arisen as regards
r-· these key words "commencement of production". On a
plain literal construction, bearing in mind the context of F
the exemption, where only certain specified categories of
paper which is excis'1ble item as specified in Column 2 had
been exempted, it is obvious that the commencement of
production must refer not to the production of excisable
goods-paper in general falling under item 17, but to pro-
duction of these 'Specified exempted ca\egories of paper in G
Col. 2 of this notification. Any other interpretation would •
make the specification of various kinds of paper in Column
2 which alone attracted exemption redundant and would
make even this condition in Cols. 3, 4 and 5 unworkable."
Excise duty was leviable under the Act on manufacture and H
clearance of paper under Item 17 of Schedule 1 to the Act. It reads as
662 SUPREME COURT REPORTS• [1990] 2 S.C.R.
"MANUFACTURED GOODS CLASSIFIED CH!EFL Y
A BY MATERIAL
17. PAPER, all sorts (including pasteboard, millboard.
straw-board and cardboard), in or in relation to the
manufacture of which any process is ordinarily carried on
with the aid of power'.
B
xxx xxx xxx
(3) Printing and writing paper, packing and wrapping --_
paper, straw board and pulp board, including grey board,
corrugated board, duple" and triplex boards. other sorts
..... 35 paise per kg." ~

c In 1965 the Ce.ntral Government issued notification exempting papers
of all sorts, from so much of the excise duty leviable thereon under the
-
said item read within notification for the time being in force iss.ued by
the Central Government in relation to the duty so leviable, as is
specified in the corresponding entry in Columns 3, 4, 5(a), 5{b) & 5(c)
of the Table as the case may be:
D
TABLE

S. Description Any factory Any factory Any factory commencing
which comm- which comm-production for the first
enced pro- enced pro- time on or after the 1st
E duction duction on or March, 1964, or any
before the after the factory existing immedia-
lst April, lst April, tely, before the 1st March
1961. 1961 but 1964whose production
before the capacity has been enlar-
lst March, ged and brought into
F 1964. operation on or after thl
ls! March, 1964 to the
extent such production is
attributable to the en-
large capacity.

G During the During the
During the
first 12 second period
months of 12monthssubsequent
the com- of the com-
to the first __...c,...
mencement mencement 24months
of produc- ofproduc- of the com-
H tion. tion. mencement
of produc-tion.
U.0.J. v. MIS. WOOD PAPERS [SAHA!, J.[ 663

5(b) (Sc) A
1 2 3 4 5(a)

Entitlement of exemption depends on construction of the expres-
sion "any factory commencing production" used in the Table extrac-
ted above. Literally exemption is freedom from liability, tax or duty.
Fiscally it may assume varying shapes, specially in a growing economy. B
For instance tax holiday to new units, concessional rate of tax to goods
or persons for limited period or with the specific objective etc. That is
why its construction, unlike charging provision, has to be tested on
different touchstone. Infact an exemption provision is like an excep-
...,- tion and on normal principle of construction or interpretation of sta-
tutes it is construed strictly either because of legislative intention or on
economic justification of inequitable burden or progressive approach c
of fiscal provisions intended to augment state revenue. But once
exception or exemption becomes applicable no rule or principle re-
quires it to be construed strictly. Truly, speaking liberal and strict
construction of an exemption provision are to be invoked at different
stages of interpreting it. When the question is whether a subject falls in D
the notification or in the exemption clause then it being in nature of
exception is to be construed strictly and against the subject but once
ambiguity or doubt.about applicability is lifted and the subject falls in
the notification then fuJI play should be given to it and it calls for a
wider and liberal construction. Therefore, the first exercise that has to
be undertaken is if the production of packing and wrapping material in E
the factory as it existed prior to 1964 is covered in the notification.

From the table extracted above it is clear that it is in two parts
and exemption is allowable in the first part to the factory commencing
production on or after 31st March, 1964, and in the second .Part to the
existing factory to extent of enlarged capacity. If the first part ts read in F
isolation it is susceptible of construction as was adopted by the High
Court. But the notification has to be read in its entirety and constured
as a whole. Once that is done cloud of uncertainty disappears. A close
reading of both the parts together leaves no room for doubt that it was
intended to be exhaustive granting exemption to .all factories produc-
ing packing and wrapping paper whether existing or commencing pro- G
duction from 1st March, 1964. To the former to the extent of enlarged
capacity and to latter to full extent. The ambiguity arose because of
absence of words new before 'factory' or goods after the word 'produc-
tion' in the first clause. To harmonise it the High Court added the
words 'goods'. But what was lost sight of that the words 'commencing;
in the first part and 'existing' in the second part had to be read injux- H
taposition. That is all those factories which were existing from before
664 SUPREME COURT REPORTS [1990] 2 S.C.R.

A were entitled to exemption on production of goods to the extent of
enlarged capacity. This enlargement could be as a result of installation \.
of additional machinery. The word 'capacity must necessarily relate to
capacity of factory and not to goods. For instance a factory with capa-
city of say 1 lakh kg. of paper but producing only 75 thousand kg.
achieving maximum after 1964 could not be covered in the clause as
B the production cannot be held to be due to enlarged capacity. That
could be only if the capacity to produce goods increased due to instal-
lation of additional machinery. If this be true and correct, as it appears
to be, then the first part presents no difficulty. The expression 'com-
mencing production' has to be read as commencing production of
goods by a factory which was not existing and has started production
on or after 1st March, 1864. Any other construction shall result in
c discrimination. A factory like respondent existing from 1942 produc-
ing straw board and mill board shall be entitled to exemption on pro-
duction of wrapping and packing paper on construction of the expres-
sion 'commencing production' by the High Court even though it
switched over from straw board and mill board to packing and wrapping
D paper after the relevant date whereas another unit existing and pro-
ducing wrapping and packing paper itself from before 1st March, 1964
could not be entitled to exemption except to the extent of enlarged
capacity. That is if an existing unit would have installed a new machi-
nery it would have been entitled to exemption of production only to
that extent whereas any unit producing goods other than the exempted
E goods would become entitled to exemption in respect of entire produc-
tion. That could not have been the intention. A construction which
results in inequitable results and is incongruous, has to be avoided.
Therefore, production of packing and wrapping paper by respondent
was entitled to exemption only to the extent it was attributable to
enlarged capacity and not to the existing capacity.
F
Hansraj Goverdhan v. H.H. Dave, Asstt. Collector, Central
Excise & Customs, Surat and Others, [1969] 2 SCR 252 relied on behalf
of respondent demonstrates mis-conception about interpreting an
exemption provision. It was a case where goods of third persons were
manufactured by cooperative society. But once initial hurdle was cros-
G sed and it was held that goods had been produced by cooperative
society it was found squarely covered in the notification and the Court
extended it to goods manufactured by third persons and repelled the
submission that object of granting exemption was to encourage forma-
tion of cooperative societies and it should be confined to goods
manufactured by its members and not others. Similarly in Commissioner
H of Income Tax v. Madho Prasad, [1989] 4 SCC 541 the provision
U.0.1. v. MIS. WOOD PAPERS [SAHA!, J.] 665

allowing exemption to 'such part of the income in respect of which the A
said tax is payable under the head 'property' as is equal to the amount
of rent payable for a year', was construed liberally and it was held that
the expression 'equal to the amount of rent payable for a year' did not
'warrant the inference that the benefit of exemption' could 'be claimed
only once' becuase the amount of rent which was sought to be
deducted in more than one years was found squarely to fall in Item 30 of B
notification. It was again a case of interpreting an exemption notifica-
tion at later stage. Recently in Tata Oil Mills Co. Ltd. v. Collector of
Central Excise, [1989] 4 SCC 541, exemption was to soap made from
indigenous rice bran oil as against edible oil. The assessee was engaged
in manufacture of soap from rice bran fatty acid which was extracted
from rice bran oil, in assessees factory. lt was found rice bran oil as such c
could not be used unless it was converted into fatty acid. Therefore.
the assessee was covered in the notification. Once the ambiguity or
about manufacture of soap from rice bran fatty acid was removed the
Bench proceeded to construe the word "indigenous" in the notifica-
tion liberally. In Collector of Central Excise v. Parle Exports (P) Ltd.,
AIR 1989 644 this Court while accepting that exemption clause should D
be construed liberally applied rigorous test for determining if expen-
sive items like Gold Spot base or Limca base or Thums Up base were
covered in the expression food products and food preparations used in
item No. 68 of First Schedule of Central Excise and Salt Act and held
'that it should not be in consonance with spirit and the reason of law to
give exemption for non-alchoholic beverage basis under the notifica- E
tion in question.' Rationale or Ratio is same. Do not extend or widen
the ambit at stage of applicability. But once that hurdle is crossed
construe it liberally. Since the respondent did not fall in the first clause
of the notification there was no question of giving the clause a liberal
construction and hold that production of goods by respondent
mentioned in the notification were entitled to benefit. F
\
-- }-. In the result this appeal succeeds and is allowed. The order of the
High Court is set aside and the Writ Petition is dismissed with costs.

R.N.J. Appeal allowed.
G

--).,..__