2003 (10) TMI 137 - AT - Central Excise

Tribunal Overturns Order on Firm Clearances Due to Lack of Financial Interdependence Evidence.

The Tribunal ruled in favor of the appellants, setting aside the impugned order that clubbed the clearances of two firms with common partners. The ... Clubbing of clearances of two firms with common partners - Show cause notice - demand of duty - HELD THAT:- It is also evident from the record that only on 9-11-97, when the tragedy struck the family on account of death of P.K. Aggarwal, proprietor of firm, appellant No. 1 and also of Manoj Aggarwal, one of the partners along with P.K. Aggarwal, in the firm appellant No. 2, in a car accident, the constitution of both the firms stood changed. In the firm, appellant No. 1, Smt. Sashi Aggarwal (Widow), Anurag Aggarwal, son of P.K. Aggarwal became partners, while the other two minor sons Tarun Aggarwal and Arjun Aggarwal were admitted to the benefit of the partnership. Similarly, in firm appellant No. 2, due to death of both the partners, Manoj Aggarwal, Son and P.K. Aggarwal, father, the widows of both of them Smt. Sashi Aggarwal and Rachna Aggarwal became partners besides Anurag Aggarwal, Tarun Aggarwal and Arjun Aggarwal being minors were admitted to the benefit of the partnership and the partnership deeds were reduced to writing regarding these firms. They became partners, being natural heirs of the deceased founders of both the firms. Therefore, it could not be said that they intentionally formed the constitution of both the firms, in such a manner, with intent to defraud the Revenue. They even informed about this change in the firms to the Department. More over, even thereafter, both the firms had remained engaged in the manufacture of different products detailed above which were being manufactured when the original proprietor/partners were alive. No doubt business is being conducted by Anurag Aggarwal, Rachna Aggarwal and Sashi Aggarwal of both the firms after the death of original proprietor/partners, but from this no irresistable conclusion could be drawn that both the firms virtually constitute one unit in the eyes of law, especially when both still stand registered separately from the very inception, with the Central Excise and Sales Tax, Income Tax authorities separately, and there is no proof of flow back of money from one firm to another. There is also no evidence to prove that both the firms have common suppliers of raw materials and payment to them are being paid from the common fund. Therefore, the firms appellants Nos. 1 and 2 could not be treated as one unit for clubbing their clearances for the purposes of payment of duty, on the simple ground that the partners are common. Therefore, the view taken by the Commissioner to this effect cannot be sustained. Apart from this, even the very show cause notice issued suffers from legal defect which goes to the root of the case. In the show cause notice, it has been no where alleged and identified that which of the two firms was a dummy or a firm which only existed on papers and not in reality. The duty demand had been raised from both the firms on the ground that they have got common partners who have got mutuality of interest therein. Even the learned Commissioner while adjudicating the show cause notice has failed to record specific finding regarding the dummy character of any of these two firms. He has likewise confirmed the duty against both of them and had made them liable to pay individually or severally. Therefore, not only the show cause notice issued but also the impugned order are bad in law. It is well settled in a case of clubbing of clearances of two units, it has to be alleged and proved by the Department that which one was only a dummy and non-existent unit and which was the principal/main unit. The duty liability can be fastened, in such a case, only on the principal/main unit and not on the so called dummy or non-existent unit. In this view, we stand fortified by the ratio of law laid down in Gajanan Fabrics Distributors [1997 (5) TMI 50 - SUPREME COURT] wherein it has been so observed. Thus, in our view, the impugned order cannot be legally sustained and is set aside. The appeals of the appellants are allotted with consequential relief, if any, permissible under the law. Issues involved: Clubbing of clearances of two firms with common partners, demand of duty, imposition of penalties, defective show cause notice.Summary:The appellants challenged an order confirming demand and penalties, which clubbed the clearances of two firms with common partners based on the presumption of oneness due to shared partners. The appellants argued lack of evidence showing financial flowback or common operations between the firms. The Commissioner's order was contested as defective and legally unsound, citing relevant case laws.The learned SDR supported the impugned order, emphasizing the common partners in both firms as justification for clubbing clearances. Various legal precedents were cited to uphold the decision.Upon review, the Tribunal found that the mere commonality of partners did not justify clubbing clearances. The firms had distinct histories, operations, and registrations, with no evidence of financial interdependence or shared resources. Changes in partnership post-tragedy were natural and not indicative of fraudulent intent.Citing legal precedents, the Tribunal emphasized the distinction between partners and firms, concluding that the firms could not be treated as one unit for duty payment solely based on shared partners. The show cause notice was deemed legally flawed for not identifying a dummy unit, leading to the impugned order being set aside. The facts did not align with the cases referenced by the SDR.In light of the discussion, the Tribunal ruled in favor of the appellants, setting aside the impugned order and granting any consequential relief under the law.