1984 (11) TMI 320 - HC - Central Excise

Summary

Issues Involved:
1. Classification of spun yarn under the Central Excises and Salt Act, 1944.
2. Demand notice issued without prior notice or hearing.
3. Violation of principles of natural justice.
4. Jurisdiction of the Assistant Collector of Central Excise to review classification.
5. Retrospective application of duty demand.
6. Procedural irregularities and show cause notice requirements.

Issue-wise Detailed Analysis:

1. Classification of Spun Yarn:
The petitioners, a company manufacturing spun yarn, classified their product under Tariff Item 18-III(i) of the Central Excises and Salt Act, 1944, claiming it contained no man-made fibres of non-cellulosic origin. The respondents reclassified the product under Item 18-III(ii), which includes yarn containing man-made fibres of non-cellulosic origin, based on chemical test results.

2. Demand Notice Issued Without Prior Notice or Hearing:
The respondents issued a demand notice on 7th February 1984, demanding Rs. 26,47,749.39 without prior notice or hearing, which the petitioners contended was against the principles of natural justice and without jurisdiction.

3. Violation of Principles of Natural Justice:
The petitioners argued that no opportunity for a hearing was provided before the reclassification and demand notice, violating the principles of natural justice. The court noted that natural justice requires informing the person proceeded against of the material to be used against them, allowing them to offer explanations and evidence.

4. Jurisdiction of the Assistant Collector of Central Excise to Review Classification:
The petitioners contended that only the Collector of Central Excise has the jurisdiction to review the classification under Section 35-E(2) of the Act. The court held that the Assistant Collector had the jurisdiction to reconsider the classification based on new facts and materials but emphasized that proper procedural steps must be followed.

5. Retrospective Application of Duty Demand:
The court found no material on record indicating that the petitioners had been manufacturing yarn covered by Item 18-III(ii) since 15th August 1983. Therefore, the excess duty demand for the period from 15th August 1983 to 6th February 1984 could not be applied retrospectively. The demand could only be prospective from 7th February 1984, after giving the petitioners a proper hearing.

6. Procedural Irregularities and Show Cause Notice Requirements:
The respondents admitted that the initial demand notice did not follow the procedure outlined in Section 11-A of the Act. The court emphasized that a show cause notice is essential before any demand, providing the petitioners with a reasonable opportunity to respond. The subsequent show cause notices issued after the writ petition was filed did not rectify the initial procedural error, as the demand was kept alive.

Conclusion:
The court quashed the demand for Rs. 26,47,749.39 for the period from 15th August 1983 to 6th February 1984, stating it could only be demanded prospectively from 7th February 1984, provided a proper hearing was given. The court also held that the Assistant Collector had jurisdiction to reconsider the classification but must follow due process, including issuing a proper show cause notice. The petition was allowed to the extent of quashing the retrospective demand, and the case was remanded for a fresh decision after giving the petitioners an adequate opportunity to be heard. The bank guarantee furnished by the petitioners was to remain in force until the decision of the appeal.