Captive consumption of marketable goods remains dutiable; extended limitation requires deliberate suppression of material facts.

Cigarettes already rolled and capable of being smoked remained excisable goods even when taken captive for empirical test smoking within the factory, so duty was payable on that manufacture. The rule requiring packing before delivery affected the stage of removal and duty collection, not the existence of the taxable article. However, the extended limitation period under Section 11A could apply only on proof of deliberate suppression of material facts, and long departmental awareness of the testing activity defeated that requirement, so the older demand was time-barred. In the absence of mala fides and after the suppression finding failed, the penalties were set aside.

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Issues: (i) Whether loose cigarettes removed for empirical test smoking within the factory were excisable goods liable to duty as manufacture under the Central Excises and Salt Act, 1944 and the Central Excise Rules. (ii) Whether the demand beyond six months was barred by limitation under Section 11A of the Central Excises and Salt Act, 1944 for want of suppression. (iii) Whether the penalties imposed were sustainable.

Issue (i): Whether loose cigarettes removed for empirical test smoking within the factory were excisable goods liable to duty as manufacture under the Central Excises and Salt Act, 1944 and the Central Excise Rules.

Analysis: The cigarettes were already rolled and capable of being smoked, and the process of testing by actual smoking did not take them outside the scope of manufacture or excisability. The statutory rule requiring packing before delivery governed the stage of removal and collection of duty, not the existence of the taxable article. Manufacture is complete when the goods come into existence in a marketable form, and captive consumption does not negate dutiability. The loose cigarettes used for test smoking therefore remained excisable goods, and duty was payable.

Conclusion: The duty liability on cigarettes consumed captively for testing was upheld and the contention that such loose cigarettes were not excisable goods was rejected.

Issue (ii): Whether the demand beyond six months was barred by limitation under Section 11A of the Central Excises and Salt Act, 1944 for want of suppression.

Analysis: The factory was under physical control and the record showed long-standing departmental awareness of testing of cigarettes. In the circumstances, the mere absence of minute details of empirical testing did not amount to deliberate withholding of information. The extended period could be invoked only on proof of conscious suppression, which was not established. The demand covering the period beyond six months was therefore time-barred, while the notices confined to the normal period were not affected.

Conclusion: The extended limitation was not available to the department for the older demand period, and that demand was barred by limitation.

Issue (iii): Whether the penalties imposed were sustainable.

Analysis: In the absence of mala fides and in view of the surrounding correspondence and departmental supervision, the penalties were found to be unduly harsh. Once the finding on suppression failed, the basis for the penal orders became untenable.

Conclusion: The penalties were set aside.

Final Conclusion: The appeals succeeded in part: duty was sustained on the captively consumed cigarettes, but the time-barred demand failed and the penalties were annulled.

Ratio Decidendi: Goods remain excisable if they are manufactured and capable of being marketed, even when captively consumed for testing; the extended limitation period requires deliberate suppression of material facts.

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