Judgment

VAIDIALINGAM, J.: This appeal by certificate is directed against the judgment and order of the Division Bench of the Bombay High Court dated July 1/2, 1965 confirming the decision dated August 6/7, 1963 of the learned Single Judge in Misellaneous petition No. 20 of 1962 quashing the two notices of demand dated November 3, 1961 issued by the second appellant as also the notice dated December 2, 1961 issued by the first appellant for payment of the amount covered by the said two notices.

2. The circumstances leading up to the filing of the writ petition may be mentioned: The respondents own a textile mill at Elphinstone Road, Parel, Bombay where they, manufacture, inter alia, grey cloth. They also have a factory situated at Tulsi Pipe Lane Road, Bombay for processing grey cloth into various other goods like leather cloth, book binding cloth and other coated fabrics. Under Section 3 of the Central Excises and Salt Act 1944 (hereinafter to be referred as the Act) duty is imposed on all excisable goods produced or manufactured in India at the rates set forth in the First Schedule to the Act. Item 19 of the First Schedule includes cotton fabrics. Section 3 of the Act provides that excise duty is to be collected in such manner as may be prescribed by rules made under the Act. On cotton fabrics additional excise duty called handloom cess is also imposed under the Additional Duties of Excise (Goods of Special Importance) Act, 1957 and Khadi and Other Handloom Industries Development (Additional Excise Duty on Cloth) Act, 1953 respectively. Under Section 37 of the Act, the Central Government has made rules called the Central Excise. Rules, 1944 (hereinafter to be referred as the Rules). Rule 8 gives power to the Central Government to exempt by notification subject to such conditions as may be specified therein any excisable goods from whole or any part of duty leviable on such goods. Accordingly the Central Government issued a notification Ex. A dated January 5, 1957 exempting cotton fabrics mentioned therein wholly from excise duty. Item No. 2 related to leather cloth and inferior or imitation leather cloth ordinarily used in book binding . The exemption granted in respect of this item and another item was withdrawn by the Central Government with effect from July 30, 1960 by notification Ex. D. dated July 29, 1960.

3. There does not appear to have been any controversy before the High Court that the two notices dated November 3, 1961 and the notice dated December 2, 1961 related only to goods falling under item No. 2. of the notification Ex. A. The respondents between July 4, 1958 and July 30, 1960 manufactured grey cloth in the textile mill and sent some of those items to their factory for being processed and manufactured into leather cloth and imitation leather cloth. During the material period the company used to manufacture grey cloth and used to store them in a bounded godown. Periodically they used to send to the factory such quantities of grey cloth as were required after filling in the necessary forms prescribed by the rules and after obtaining the necessary permission in the manner prescribed by the rules from the Excise Inspector Incharge of the Textile Mill. The respondents had, however, not obtained the requisite licence and so they paid excise duty on grey cloth manufactured in their mill during the period July 4, 1958 to September 30, 1959 although it was utilised for manufacturing leather cloth and imitation cloth. The respondents later on obtained the necessary licence with the result that they became entitled to remove the grey-cloth manufactured at their textile mill to their factory without paying excise duty on the grey-c1oth at the time when the goods were removed. The grey-cloth so removed after September 30, 1959 and before July 30, 1960 used to be kept in the bounded godown. Those goods were removed to the factory after filling up the necessary forms and obtaining the permission of the Excise Inspector Inc