The Gujarat High Court has set aside a long-pending central excise demand against a textile processor, ruling that proceedings initiated and continued under Section 3A of the Central Excise Act, 1944 and Rule 96ZQ of the Central Excise Rules, 1944 could not survive after those provisions were omitted without any saving clause. 

The Bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati observed that the department  lacked jurisdiction to continue adjudication or recovery proceedings under provisions that had ceased to exist in the statute book.

The petitioner, an independent textile processor, was governed by the Compounded Levy Scheme under Section 3A of the Central Excise Act read with Rule 96ZQ of the Central Excise Rules. Under this scheme, excise duty liability was determined based on the annual production capacity of the processing unit rather than actual production. The petitioner’s annual production capacity had been fixed at ₹18 lakh per month.

The dispute arose for the period between October and December 2000, when the petitioner’s hot-air stenter remained sealed and non-operational for substantial periods. The company claimed abatement of duty under Rule 96ZQ(7) on account of factory closure and accordingly did not pay the full compounded levy amount for those periods.

However, the department rejected the abatement claim and subsequently issued a show cause notice in September 2001 seeking recovery of ₹6.40 lakh, alleging short payment of duty. The department’s case was that the petitioner could claim abatement only after first depositing the entire monthly duty amount in advance.

The Additional Commissioner adjudicated the matter and rejected the abatement claim on the ground that the petitioner had not paid the full monthly duty liability in advance as required under Rule 96ZQ(7)(f). Consequently, a duty demand of ₹6.40 lakh was confirmed along with interest and an equivalent penalty.

Although the penalty was later reduced by the Commissioner (Appeals) and eventually set aside by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), the duty demand survived. Following dismissal of the appeals, the department initiated recovery proceedings and threatened attachment action for recovery of dues.

The principal question before the High Court was whether proceedings initiated under Rule 96ZQ and Section 3A could continue after Rule 96ZQ was omitted on 1 March 2001 and Section 3A itself was omitted on 11 May 2001 without any saving clause.

The petitioner relied heavily on the Gujarat High Court’s earlier decision in Krishna Processors v. Union of India, which had subsequently been affirmed by the Supreme Court in Shree Bhagwati Steel Rolling Mills v. Commissioner of Central Excise. The petitioner argued that once the charging provision and machinery provisions were omitted, no fresh proceedings could be initiated and pending proceedings could not continue in the absence of a statutory saving clause.

The High Court observed that the controversy was no longer res integra. Referring extensively to Krishna Processors and its affirmation by the Supreme Court, the Bench noted that Rule 96ZQ, Rule 96ZP and Rule 96ZO were omitted with effect from 1 March 2001 and Section 3A was omitted with effect from 11 May 2001 without any saving clause.

The Court reproduced key findings from Krishna Processors, where it had been held that after omission of the rules, no proceedings could be initiated thereunder and any pending proceedings that had not attained finality before the omission could not continue thereafter.

The Bench emphasized that Rule 96ZQ was merely a machinery provision and Section 3A was the substantive charging provision. Once the charging provision itself stood omitted, no recovery could be sustained by resorting to the procedural rules.

The Court further relied on the Supreme Court’s ruling in Shree Bhagwati Steel Rolling Mills, which clarified that an “omission” is effectively a form of “repeal”. The Supreme Court had held that expressions such as “delete,” “omit,” and “repeal” are often used interchangeably and that omission of a statutory provision amounts to its repeal for legal purposes.

Applying this principle, the High Court held that both Section 3A and Rule 96ZQ stood repealed by omission and therefore could not form the basis of any continuing adjudication or recovery action after their removal from the statute book.

Allowing the petition, the Gujarat High Court held that the excise authorities lacked jurisdiction to continue proceedings or recover dues under provisions that had already been omitted and repealed. 

The Court quashed the show cause notice dated 3 September 2001, the CESTAT orders, recovery notices, and all consequential proceedings.

The Bench concluded that no proceedings could have been initiated or continued under Section 3A of the Central Excise Act read with Rule 96ZQ after the omission of those provisions in the absence of any saving clause, rendering the entire recovery action unsustainable in law.

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