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Case Analysis: Union of India v/s Zenith Silk Mills

Facts of the case:
  1. Respondent 'Zenith Silk Mills' (original plaintiff in the case before the trial court) is a company. The company imported goods from foreign countries and therefore those goods were subject to customs duty.
  2. The goods imported into India are subjected to customs duty that is levied on them as mentioned in schedule I of the Customs Tariff Act, 1975. The duty levied on them was as follows:
    1. Basic customs duty chargeable under Section 12 of the Customs Act, 1962 read with Section 2 of the Act.
    2. Additional duty (countervailing duty) chargeable under Section 3 of the Act. c) Auxiliary duty on imported goods, recoverable under Section 44 of the Finance Act, 1982.
  3. The Government had issued an exemption notification (as amended from time to time) dated July 15, 1977, exempting viscose filament yarn below 600 Deniers and other commodities on filament yarn from the whole of the duty that is levied as specified in the schedule I of the Customs Tariff Act, 1975. Another notification (as amended from time to time) dated September 1, 1978 was issued by the Government exempting polyester filament yarn and other goods from a portion of the duty levied in the excess of the rates that are specified in Column 3 of the Customs Tariff Act, 1975.
  4. The respondent wanted to avoid all the customs duties. That is not only the basic duty of Custom but also an additional customs duty under Section 3 of the Custom Tariff Act and auxiliary duty under the Finance Act, 1982. Therefore, the company filed a writ petition (No. 2245 of 1982) in Delhi High Court in July.
  5. The Delhi Court granted the respondent an interim order but vacated it later by an order dated December 9, 1982. They also gave a reminder dated December 31, 1982 and called the company to pay the amount of customs duty that was due. The amount was calculated as Rs. 10,03,012.44P (ten lakhs, three thousand and twelve and forty-four paise).
  6. When the respondent received the notice for the payment of the aforesaid amount they filed a regular Civil Suit (No. 185 of 1983) on January 31, 1983 in the Court of Civil Judge (SD), Surat. The respondent had prayed for an injunction restraining the Union of India from recovering the amount and also prayed that the notice served to be deemed as not legal or valid.
  7. On January 31, 1983 (same day) the learned Civil Judge granted an ex parte injunction order restraining the Union of India from enforcing the demand notices because of which the amount of Rs. 10 lakhs stayed. The notice was served to the department on the same day. The Union of India appeared in the suit and filed a written statement in reply to the application.
  8. There was a declaration of summer vacations in the court and the case was adjourned to June 24, 1983.
  9. Feeling aggrieved by the ex parte order and inaction on the part of the lower court for not proceeding further with the matter, the Union of India moved the High court of Gujarat by filing a petition on July 19, 1983. The petition came before the Division Bench but the Bench gave the matter to a Single Judge.

Case Details:
Hon'ble Judge: A.P. Ravani, J. -  Citation: 1984 GLH 914  - Court: High Court of Gujarat
Special Civil Appeal No.: 3442 of 1983 - Decided on: 17.08.1983
Petitioner: Union of India and Ors. Counsel for Petitioner: M.M. Mehta, Sr. Central Standing Counsel v/s Respondent: Zenith Skill Mills
Counsel for Respondent: S.I. Nanavati, Adv. - AIR 1985 Guj 90.

The petitioners contended that:
  1. The Civil Court has no jurisdiction to entertain the suit in which recovery of customs is challenged. It was contended that in respect of the duty liability exhaustive machinery of appeals, revision and references have been provided in the Customs Act. The duty liability is the creation of a Special Act and not a common liability. Therefore, the civil court can have jurisdiction only if the question is not covered by the Special Act.
  2. It was also contended that the respondent had no prima facie case for an interim injunction. Its contention is as per the legislative policy reflected in the Section 129E and 131 of the Customs Act, 1983 as amended by Finance Act No. 2 of 1980, a party is required to deposit or to pay the duty in question as the case may be, notwithstanding the fact that an appeal or a reference has been made and the same is pending.
  3. No prima facie case in favour of the respondent and the balance of convenience is in the favour of the petitioner. The ex parte injunction order passed by the lower court without jurisdiction is to be quashed and set aside.
  4. In taxation matters, there is likely to be a conflict between social interest on one hand and individual interest on the other; such conflicting interest should be resolved by striking a balance so that the society at large does not suffer. Relying upon the decision of the Supreme Court in the case of Punjab Engineering College, Chandigarh v. Sanjay Gulati (AIR 1983 SC 580).

It was argued that 'law's delays' should not be permitted to enrich the manufacturers, traders or importers at the cost of society at large. The aforesaid case pertains to admission to the educational institution. Law's delay helps intermediaries, i.e. traders, manufacturers land importers. Once they obtain interim orders from the court, on account of usual delays in the disposal of matters, including interlocutory order applications, the traders and manufacturers retain the amount of tax collected by them for a number of years.

Law's delay explained for the case by the counsel for the petitioner:
  1. In this case, the respondent had first approached the Delhi High Court on July 1982 and obtained orders against the recovery of the amount of tax. Then it was vacated in October 1982. In December 1982, the Departmental authorities issued a notice for payment of tax. The respondent then obtained an ex parte injunction order on January 1983 and since then utilised the sum of Rs. 10 lakhs. The trial court did not even impose conditions of payment of interest or of furnishing security or bank guarantee. Therefore, the company was utilising public money for its private gains since July 1982 and had not even paid interest on the amount.

    The petitioner calculated the amount of interest payable at the current rate of interest of 20% on commercial advances made by banks. The amount of interest on Rs. 10 lakh came out as Rs. 16,500 (Sixteen thousand five hundred) per month and multiplied by 8 (as they had not paid the amount for 8 months) it came to Rs. 1,32,000 (One lakh and thirty-two thousand). This was the net gain by the respondent that was caused due to the trial court not disposing of the application.
  2. When a taxing authority levies or collect tax, they do so by the common will of the people. So when such authorities decide to tax people, a strong presumption arises that the decision is taken to achieve the objectives that are enshrined in the Constitution and in the national plans. The moment the taxing authority is restrained from collecting the amount of tax, the mandate given by the people which has been articulated by the taxing authority by taking the decision to impose and levy tax is frustrated. The petitioners added that it prolongs the period up to 3 to 5 years.
  3. The manufacturer or trader retains the amount of tax and gets credit without any necessary checks by appropriate credit institutions. He (In this case- Zenith Silk Mills) retains the amount of the public and spends it for private gain.
  4. Retention of tax adds to manufacture's/trader's liquid funds. It raises his liquidity and helps him to either hoard the commodity or utilise it in any matter so that he reaps maximum profit from it. This results in an increase in the price of the commodity. Therefore, taxing that is aimed at mopping the liquidity from the economy, results in adding up the liquid funds of private manufacturers and traders which gives a push to inflation.
  5. A question posed by the counsel for the petitioner:
    'Have the Big Business and Industrial Houses not developed a vested interest in the system which perpetuates the law's delay?' The Counsel had further argued: are courts not required to look at the consequences of the interim order that may be passed ex parte or bi-parte in civil suits? Are the courts not required to look at the socio-economic consequences of their orders? It was observed that the trial court had remained totally oblivious to its socio-economic obligation and had not even taken into consideration the statutory duty (Civil Procedure Code Order 39 Rules 3A) to dispose of interlocutory applications within a period of 30 days. When there is inaction on such cases then the downtrodden and poor suffer the most.

Court's View:
  1. On the basis of the principles laid down by the Supreme Court in the case of Union of India v. Narasimhalu (MANU/SC/0166/1969): It is argued that the Customs Act creates a new liability other than common law liability and it provides complete machinery for obtaining redress against the erroneous exercise of power and hence jurisdiction of civil court is barred. Therefore, it was submitted that the suit is not maintainable and the interim relief granted is without jurisdiction.
  2. The aforesaid judgement decision of the Supreme Court was relied on by the Judge (A.P. Ravani, J.) in this case. The maintainability of the suit in such matters has been clearly laid down by the Supreme Court. Unless the case falls in the excepted category of cases as observed by the Supreme Court, the civil court will not have jurisdiction to entertain a suit in such matters.
  3. The court in the matter of 'law's delay' made a reference to the decision of the Supreme Court in the case S.P Gupta v. Union of India (MANU/SC/0080/1981) and it was deduced that the court should be aware of socio-economic circumstances of the country and the changes that are taking place. Further, the judge added it was clear that the interpretation and implementation of the law should be in accord with the requirement of the fast-changing society, which is going under rapid socio-economic transformation.
  4. While deciding the prima facie and balance of convenience at the interim stage, the following considerations were weighed by the court:
    1. Why is the tax being imposed and collected? Is the collection of tax only to run the administrative machinery of taxing authority or has other purposes also? When and how the tax collected is required to be spent? Can the collection and spending be postponed?
    2. Who bears the burden of tax? Is he, who has moved the court to bear the burden of tax, or is it borne by numerous unidentified customers in the society? c) If one who has moved the court does not suffer the burden of tax, can he claim that he may be permitted to collect tax from people but the taxing authority be restrained from collecting the same tax amount from him?
  5. The answers to the following question are:
    1. Modern state is mainly a service corporation. The amount of tax collected by the State is not only for the purpose of raising revenue to run the administrative machinery of the State but the taxes are collected mainly with the view to meet the socio-economic development of the country. The amount so-called is to be spent immediately.
    2. Normally in all kinds of indirect taxes, the burden of tax is not borne by the person who initially pays the tax. The burden of tax is borne by the innumerable unidentified customers in society.
    3. Generally, the person who moves the court is not likely to suffer the burden of a tax. Once it is recognised that the court is under the obligation to keep in mind the socio-economic needs of the society and should be aware of its own. Obligation towards society, the problem of balancing the social interest and individual interest would become very easy to resolve.
  6. It was clear that matters at an interim stage, the Taxing authority should not be restrained from collecting tax. In matters like these social interests must prevail over public interests. If the injunction order is not passed as prayed by the plaintiff, there would be no loss or injury to the plaintiff. On the other hand, the loss would be caused to society. The socio-economic needs will be not met and even the administrative machinery of the State will be adversely affected. An irreparable damage would be caused to many projects and public utilities. Therefore, in such matters grant of stay should be an exception and not a rule.
  7. At the interim stage of the institution of the suit, the courts need to ensure that there is no prejudice is takes place on taxpayers in case they ultimately succeed at the conclusion of the proceedings. This can be achieved by requiring the Taxing authority to give the undertaking to refund or adjust against future dues of tax if the entire collection or a part is declared invalid by the court.

The conclusion of the following case is that the suit filed by the respondent (Zenith Silk Milk) is not maintainable and the interim order that was granted to them was without jurisdiction by the lower court. The court should have disposed of the application within 30 days. Due to the suit and interim order, the case was delayed because of which neither the tax nor the interest was paid by the company to the taxing authority.

The taxed money is for the socio-economic development of the country and directly affects the downtrodden and poor of the country the most. So, the money instead of being used for development was used by the company for private gains. The suit was not maintainable as the tax does not lead to any loss to the respondent and it was acknowledged in this case that social interest should prevail over private interest. The respondent was ordered to pay the tax as well as the interest to the taxing authority.

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