Capacity assessment under compounded levy turns on the actual furnace structure; separate rolling mill capacities were not clubbed.

Under the compounded levy scheme, capacity determination is based on the unit's actual furnace-based capacity structure, not actual production. On the facts proved, the Punjab and Haryana HC accepted that there was only one furnace and found that the report did not establish the existence of two furnaces. As a result, the capacities of both rolling mills were not required to be clubbed for levy purposes, and annual capacity was to be fixed by reference to the higher-capacity rolling mill alone.

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Issues: Whether, for determining the annual capacity of the respondent's rolling mills, the capacities of both mills were required to be clubbed or only the higher-capacity mill could be taken into account where there was only one furnace.

Analysis: The dispute turned on the factual position regarding the number of furnaces and the method of capacity assessment under the compounded levy regime. The Court accepted the revenue's own stand that there was only one furnace and held that the report did not establish the existence of two furnaces. Referring to the governing principle that capacity, not actual production, is the basis of levy, the Court concluded that clubbing of the capacity of both rolling mills was not warranted on the facts proved.

Conclusion: The annual capacity was to be fixed with reference to the higher-capacity rolling mill alone and not by clubbing the capacity of both mills. The question of law was answered against the revenue.

Ratio Decidendi: Under the compounded levy scheme, capacity determination depends on the actual furnace-based capacity structure of the unit, and where only one furnace exists, the capacities of separate rolling mills are not to be clubbed for levy purposes.

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