M/S Kesar Enterprises Ltd vs State Of U.P. & Ors

KESAR ENTERPRISES LTD. -- APPELLANT

VERSUS

STATE OF U.P. & ORS. -- RESPONDENT

S

J U D G M E N T

D.K. JAIN, J.:

1.Challenge in this appeal, by special leave, is to the judgment and order

dated 18th January, 1996, delivered by the High Court of Judicature at

Allahabad in C.W.P. No.599 of 1994. By the impugned judgment, the

High Court has come to the conclusion that although the State

Government had no authority to levy Excise duty under Section 28 of the

U.P. Excise Act, 1910 (for short "the Act") on rectified spirit (industrial

alcohol) in question but it could impose penalty on the appellant under

Rule 633(7) of the Uttar Pradesh Excise Manual, (for short "the Excise

Manual").

2.The background facts, essential for disposal of the instant appeal, in

brief, are that on 15th October, 1988, the Excise Commissioner, Uttar

Pradesh, issued an order authorising nine distilleries in the State,

including M/s Daurala Sugar Works, to export rectified spirit (industrial

alcohol), outside India. Since the export consignment was to be routed

through the appellant, as handling agent as also the owner of the bonded

warehouse at Kandla Port, where the spirit was to be stored before

export, the appellant was required to furnish an indemnity bond, in the

prescribed form, in favour of the Excise Commissioner as the authorised

nominee of the exporter. On 20th December 1988, the appellant executed

an indemnity bond in favour of the Governor of Uttar Pradesh in relation

to permission for removal by rail 67.77 lac bulk litres of rectified spirit of

any strength ranging between 91.68% V/V @ 15.60C to 95% V/V @

15.60C. One of the conditions in the indemnity bond was that if the said

quantity of rectified spirit, after deducting such allowance for dryage and

wastage, as may be sanctioned, is not delivered at the warehouse at

Kandla, the authorised nominee, the appellant herein, shall indemnify the

Governor for any loss of duty, which the Governor may suffer by reason

of such non delivery or short delivery, by paying him on demand the duty

@ `40/- per alcoholic litre, on spirit not so delivered, after making the

allowances aforesaid.

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3.On 8th January, 1989, M/s Daurala Sugar Works consigned a rake of 15

tank wagons, loaded with 3,54,413 bulk litres of rectified spirit under

PD-25 pass for export against order dated 15th October, 1988. The said

consignment was dispatched through the Northern Railway to Kandla

Port. However, out of 15 tank wagons only 14 tank wagons reached the

Kandla Port. On 16th January, 1989, it was discovered that the 15th tank

wagon was lying empty at Gandhi Dham Railway Station.

4.On 2nd October, 1992, a notice was issued by the Excise Commissioner

to the appellant alleging that since the pass in form PD-25, issued to the

appellant by the concerned Collector in terms of Rule 633 of the Excise

Manual had not been received back along with certificate from the

Collector for due delivery, they were liable to deposit in the Government

Treasury, Excise duty on the rectified spirit @ `40/- per alcoholic litre,

which amounted to `8,71,744/- along with interest at the rate of 18% per

annum (`5,49,199/-).

5.The appellant having failed to deposit the said amount, another notice

was issued by the Commissioner requiring them to show cause as to why

their name be not black-listed and in future, permission for export may

not be granted, on account of default on their part in not depositing

Excise duty as demanded earlier.

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6.The appellant responded to the said show cause notice by their letter

dated 11th February, 1993, in which it was stated that since the reason for

non receipt of the said rectified spirit was being investigated, the matter

may be deferred till 30th June, 1993. Finally, vide their letter dated 29th

April, 1994, the appellant replied to the show cause notice, contesting

Excise Commissioner's claim for payment of Excise duty on account of

non-receipt of full quantity of rectified spirit at the Kandla Port. It was

pleaded that since the entire rake of 15 tank wagons was handed over to

the Railway authorities at Daurala station for its delivery at Kandla Port,

it was the responsibility of the Railways to make safe delivery of the

goods at the destination and, therefore, the appellant was in no way

responsible for the disappearance of rectified spirit contained in one of

the tank wagons. It was, thus, urged that no Excise duty was payable by

the appellant as the State Government had not suffered any loss of duty

by reason of non delivery or short delivery of the rectified spirit.

7.Not being satisfied with the explanation furnished by the appellant,

vide letter dated 6th April, 1994, the Excise Commissioner directed the

District Excise Officer, Bareilly to issue recovery certificate and take

appropriate steps against the appellant for the recovery of Excise duty

amounting to `8,71,744/- and interest thereon. By letter dated 22nd June,

1994, the Bank of Baroda, Mandwi Branch, informed the appellant that

pursuant to an order dated 22nd June, 1994, issued by the Sub-Divisional

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Magistrate, their bank account had been attached and a sum of

`12,00,000/- had been earmarked from their account for payment of

Excise duty.

8.Being aggrieved, the appellant filed a writ petition before the High

Court, seeking quashing of notice of demand dated 6th April, 1994.

Relying on the decision of a Bench of seven Judges in Synthetics And

Chemicals Ltd. & Ors. Vs. State of U.P. & Ors.1, wherein it was held

that the States are not competent to impose a tax or charge imposts in

respect of rectified spirit for industrial purposes, having a strength not

less than 95% by volume of ethyl alcohol, the High Court held that

though the State of U.P. did not have jurisdiction to levy and demand

Excise duty on the rectified spirit (industrial alcohol), which disappeared

during transit, but Rule 633 of the Excise Manual empowered the State

to impose penalty at the same rate at which the Excise duty was payable

for breach of conditions in the Bond. The High Court also held that it

could be presumed that the appellant had diverted the rectified spirit into

potable alcohol on which penalty and penal interest could be levied and,

therefore, it was not a fit case where it should exercise its jurisdiction

under Article 226 of the Constitution of India and quash demand notice

dated 6th April, 1994. Accordingly, the writ petition was dismissed.

Being dissatisfied, the appellant is before us in this appeal.

1 (1990) 1 SCC 109 5

9.We have heard learned counsel for the parties.

10.Assailing the decision of the High Court, Mr. D.K. Agarwal, learned

senior counsel appearing for the appellant, strenuously urged that in light

of decision of this Court in Synthetics And Chemicals (supra), which

was duly noticed in the impugned judgment, the High Court exceeded its

jurisdiction in converting the levy of Excise duty into penalty and interest

under Rule 633 of the Excise Manual. It was argued that the High Court

misread the Rule inasmuch as Rule 633(7) contemplates recovery of

penalty under the bond in order to indemnify the Governor of the State

for loss of Excise duty but when admittedly no Excise duty could be

levied by the State Excise Commissioner on the entire consignment of

rectified spirit, covered under the bond, there was no question of loss of

Excise duty on that account, for which the Governor was to be

indemnified. It was asserted that in any event imposition of penalty

under the said Rule was ex-facie illegal as neither any show-cause notice

was issued to the appellant before such levy nor any amount by way of

penalty on account of the alleged non-compliance with the conditions of

the bond was quantified and communicated to the appellant. It was thus,

asserted that since an order under Rule 633, entails serious consequences

the elementary principles of natural justice and fair play are required to

be observed and consequently, an opportunity of hearing has to be

afforded before an order under the said Rule is made, which was

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admittedly not done in the instant case. In fact, the said Rule was

invoked for the first time by the High Court.

11. Mr. Ravi Prakash Mehrotra, learned counsel appearing for the State,

on the other hand, supporting the view taken by the High Court,

submitted that Rule 633, does not postulate a show-cause notice before

levy of penalty or interest because penalty or interest being compensatory

in nature because of infringement of condition of an indemnity bond

furnished by the appellant to the Collector or the Excise Inspector, the

liability under the Bond is absolute. It was argued that since in

the present case, admittedly, the discharge certificate in terms of Rule

633 had not been furnished by the appellant within the stipulated time,

penalty under the said Rule was clearly exigible.

12.The precise question at issue is whether sub-rule (7) of Rule 633 of

the Excise Manual postulates the requirement of hearing before steps for

recovery of penalty under the said Rule are initiated?

13.Before addressing the issue, it is necessary to bear in mind the fact

that in so far as the question of levy of Excise duty on the high strength

rectified spirit in 15 tank wagons is concerned, parties are ad-idem that in

view of the judgment of this Court in Synthetics And Chemicals (supra),

the State was not empowered to levy Excise duty on the said

consignment. In the said decision, while interpreting Entry 84 of List I,

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Entry 8 and 51 of List II and Entry 33 of List III of the Seventh Schedule

to the Constitution of India, it was held that the State legislature has no

power to enact law levying duty on the spirit, which is not meant for

human consumption. It was also held that the State has the power to

impose duty only on spirit, which is meant for human consumption

under Entry 51 of List II of the Seventh Schedule. In light of the said

decision, it is clear that under Section 28 of the Act, the charging Section,

an Excise duty or a Countervailing duty, as the case may be, can be

imposed by the State on alcoholic liquor only when it reaches the stage of

human consumption and not on high strength rectified spirit (industrial

alcohol), a Central subject. Therefore, the High Court is correct in law in

holding that the State did not have the jurisdiction to levy Excise duty on

rectified spirit, loaded in 15 tank wagons.

14.However, Rule 633 of the Excise Manual, which has been pressed into

service by the High Court to sustain the demands raised against the

appellant, reads as follows :

"633. Any person may export in bond foreign liquor

manufactured at a distillery in Uttar Pradesh to any place

in India under a pass in form P.D.25 granted as provided

in the following rules:

(1) When any person desires to export in bond spirit

manufactured at a distillery in Uttar Pradesh, he shall

present a written application in form P.D. 58 to the

Collector of the district in which the distillery of

manufacture is situate.

The application must specify--

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(i) the name of the consignor;

(ii) the name of the consignee;

(iii) the description, quantity and strength of the

spirit to be exported.

(2) Every application must be accompanied by--

(i) a permit from the Collector, Deputy

Commissioner, or other officer specially appointed in this

behalf of the district to which the spirits are to be

exported authorizing the import of spirit; and

(ii) a duly executed special bond in form P.D. 16 or a

reference to a general bond in form P.D. 15.

(3) The pass granted by the Collector of the exporting

district or the Excise Inspector to whom the

Collector may have delegated his power vide

paragraph 58(c) of this Manual, shall be in

triplicate in form P.D.-25.

One copy of the pass shall be delivered to the

exporter, the second forwarded to the Collector, Deputy

Commissioner, or *other* officer specially appointed in

this behalf of the district to which the spirits are to be

taken, and the third retained for record.

*NOTE-This will usually be the officer-in-charge

of the bonded warehouse to which the spirit is consigned.

An advance in form P.D. 26 must also be sent by

the officer-in-charge direct to the authority granting the

import permit who will return the same duly filed in as

soon as possible after receipt and verification of the

consignment.

Within a reasonable time to be fixed by the

Collector of the exporting district and specified in the

bond or pass the importer shall produce before the

Collector of the exporting district his copy of the pass

endorsed with a certificate signed by the Collector,

Deputy Commissioner or other officer specially

appointed in this behalf, of the importing district

certifying the due arrival or otherwise of the spirit at its

destination;

(4) On each cask or other vessel containing spirit for

export there shall be legibly cut or painted:

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(i) the name and mark of the exporting distillery;

(ii) the number of the cask or other vessel and its

capacity;

(iii) the nature, quantity and strength of its contents.

These particulars shall correspond with those entered in

the pass.

(5) On a written application being made to the

Collector of the exporting district establishing sufficient

cause for the grant of an extension of time, or on the

production before him of a certificate from the Collector,

Deputy Commissioner, or other officer specially

appointed in this behalf, of the district of destination, to

the effect that there are good and sufficient reasons for

extending the currency of the pass or bond, it shall be

competent for the Collector of the exporting district, if he

thinks fit, to extend the time specified in the pass or bond

for the due arrival of the spirit at its destination.

(6) In the case of spirit exported under special bond

the Collector of the exporting district shall discharge the

bond on receipt of the pass in form P.D.-25 and

certificate mentioned in clause (3), provided that none of

the conditions of the bond have been infringed. The duty

on consignment issued under a general bond shall be

written off on receipt of the pass and certificate

mentioned in clause (3), provided that none of the

conditions of the bond have been infringed.

(7) If the certificate be not received within the time

mentioned in the bond or pass, or if on receipt of the

certificate it appears that any of the conditions of the

bond have been infringed the Collector of the exporting

district or the Excise Inspector who granted the pass shall

forthwith take necessary steps to recover from executant

or his surety the penalty due under the bond."

15.It is manifest that the said Rule, made in exercise of the rule-making

power of the State under the Act, would apply only in relation to

manufacture, import, export and transport of potable liquor, i.e. the liquor

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which is capable of being consumed by human beings. Precisely for the

aforesaid reason, in order to bring appellant's case within the scope of

Rule 633, High Court went on to observe that it could be presumed that

rectified spirit in the missing tank wagon was diverted for conversion

into potable alcohol. Rule 633 is of regulatory character meant to ensure

that the liquor being exported under a bond reaches its destination and is

not misused or misutilized in transit. It contemplates that if the bond

along with certificate signed by the Collector or other named officers of

the importing district, certifying due arrival or otherwise of the liquor at

its destination, is not furnished to the Collector of the exporting district,

he would be entitled to presume that the liquor has been disposed of

otherwise than by export and can proceed to take necessary steps as

postulated in sub-rule (7) of Rule 633 of the Excise Manual. The said

Rule provides for imposition of penalty, which may be equivalent to the

Excise duty, leviable under the charging Section 28 of the Act on potable

liquor. Bearing in mind the scope of Rule 633, we may now advert to the

moot question, viz. whether the principles of natural justice demand that

an opportunity of hearing should be afforded before an order under Rule

633(7) of the Excise Manual is made?

16.Before we deal with the question, it would be necessary to understand

and appreciate the concept of natural justice and the principles governing

its application.

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17.Rules of "natural justice" are not embodied rules. The phrase

"natural justice" is also not capable of a precise definition. The

underlying principle of natural justice, evolved under the common law, is

to check arbitrary exercise of power by the State or its functionaries.

Therefore, the principle implies a duty to act fairly i.e. fair play in action.

As observed by this Court in A.K. Kraipak & Ors. Vs. Union of India &

Ors.2 the aim of rules of natural justice is to secure justice or to put it

negatively to prevent miscarriage of justice. These rules can operate only

in areas not covered by any law validly made. They do not supplant the

law but supplement it. (Also see Income Tax Officer & Ors. Vs. M/s

Madnani Engineering Works Ltd., Calcutta3).

18.In Swadeshi Cotton Mills Vs. Union of India4 R.S. Sarkaria, J.,

speaking for the majority in a three-Judge Bench, lucidly explained the

meaning and scope of the concept of "natural justice". Referring to a

catena of decisions, his Lordship observed thus:

"Rules of natural justice are not embodied rules.

Being means to an end and not an end in themselves,

it is not possible to make an exhaustive catalogue of

such rules. But there are two fundamental maxims of

natural justice viz. (i) audi alteram partem and (ii)

nemo judex in re sua. The audi alteram partem rule

has many facets, two of them being (a) notice of the

case to be met; and (b) opportunity to explain. This

rule cannot be sacrificed at the altar of administrative

convenience or celerity. The general principle--as

distinguished from an absolute rule of uniform

2 (1969) 2 SCC 262

3 (1979) 2 SCC 455

4 (1981) 1 SCC 664

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application--seems to be that where a statute does

not, in terms, exclude this rule of prior hearing but

contemplates a post-decisional hearing amounting to a

full review of the original order on merits, then such a

statute would be construed as excluding the audi

alteram partem rule at the pre-decisional stage.

Conversely if the statute conferring the power is silent

with regard to the giving of a pre-decisional hearing

to the person affected and the administrative decision

taken by the authority involves civil consequences of

a grave nature, and no full review or appeal on merits

against that decision is provided, courts will be

extremely reluctant to construe such a statute as

excluding the duty of affording even a minimal

hearing, shorn of all its formal trappings and dilatory

features at the pre-decisional stage, unless, viewed

pragmatically, it would paralyse the administrative

process or frustrate the need for utmost promptitude.

In short, this rule of fair play must not be jettisoned

save in very exceptional circumstances where

compulsive necessity so demands. The court must

make every effort to salvage this cardinal rule to the

maximum extent possible, with situational

modifications. But, the core of it must, however,

remain, namely, that the person affected must have

reasonable opportunity of being heard and the hearing

must be a genuine hearing and not an empty public

relations exercise."

(Emphasis added)

19.In Canara Bank Vs. V.K. Awasthy5 the concept, scope, history of

development and significance of principles of natural justice have been

discussed in extenso, with reference to earlier cases on the subject. Inter

alia, observing that the principles of natural justice are those rules which

have been laid down by the courts as being the minimum protection of

the rights of the individual against the arbitrary procedure that may be

5 (2005) 6 SCC 321

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adopted by a judicial, quasi-judicial and administrative authority while

making an order affecting those rights, the court said:

"Concept of natural justice has undergone a great deal of

change in recent years. Rules of natural justice are not

rules embodied always expressly in a statute or in rules

framed thereunder. They may be implied from the

nature of the duty to be performed under a statute. What

particular rule of natural justice should be implied and

what its context should be in a given case must depend to

a great extent on the fact and circumstances of that case,

the framework of the statute under which the enquiry is

held."

20.The question with regard to the requirement of an opportunity of

being heard in a particular case, even in the absence of provisions for

such hearing, has been considered by this Court in a catena of cases.

However, for the sake of brevity, we do not propose to refer to all these

decisions. Reference to a recent decision of this Court in Sahara India

(Firm), Lucknow Vs. Commissioner of Income Tax, Central-I & Anr.6

would suffice. In that case, the question for adjudication was whether in

the absence of a provision in the Income Tax Act, 1961, an opportunity

of hearing was required to be given to an assessee before an order under

Section 142(2-A) of the said Act, directing special audit of his accounts

was passed? A Bench of three Judges, speaking through one of us (D.K.

Jain, J.), explaining the concept of "natural justice" and the principles

governing its application, summed up the legal position as under :

6 (2008) 14 SCC 151

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"Thus, it is trite that unless a statutory provision either

specifically or by necessary implication excludes the

application of principles of natural justice, because in that

event the court would not ignore the legislative mandate,

the requirement of giving reasonable opportunity of being

heard before an order is made, is generally read into the

provisions of a statute, particularly when the order has

adverse civil consequences for the party affected. The

principle will hold good irrespective of whether the power

conferred on a statutory body or tribunal is administrative

or quasi-judicial.

We may, however, hasten to add that no general rule of

universal application can be laid down as to the

applicability of the principle audi alteram partem, in

addition to the language of the provision. Undoubtedly,

there can be exceptions to the said doctrine. Therefore, we

refrain from giving an exhaustive catalogue of the cases

where the said principle should be applied. The question

whether the principle has to be applied or not is to be

considered bearing in mind the express language and the

basic scheme of the provision conferring the power; the

nature of the power conferred and the purpose for which

the power is conferred and the final effect of the exercise

of that power. It is only upon a consideration of all these

matters that the question of application of the said

principle can be properly determined."

21.Having considered the issue, framed in para 12 supra, on the

touchstone of the afore-noted legal principles in regard to the

applicability of the principles of natural justice, we are of the opinion that

keeping in view the nature, scope and consequences of direction under

sub-rule (7) of Rule 633 of the Excise Manual, the principles of natural

justice demand that a show-cause notice should be issued and an

opportunity of hearing should be afforded to the person concerned before

an order under the said Rule is made, notwithstanding the fact that the

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said Rule does not contain any express provision for the affected party

being given an opportunity of being heard. Undoubtedly, action under

the said Rule is a quasi-judicial function which involves due application

of mind to the facts as well as to the requirements of law. Therefore, it is

plain that before raising any demand and initiating any step to recover

from the executant of the bond any amount by way of penalty, there has

to be an adjudication as regards the breach of condition(s) of the bond or

the failure to produce the discharge certificate within the time mentioned

in the bond on the basis of the explanation as also the material which may

be adduced by the person concerned denying the liability to pay such

penalty. Moreover, the penalty amount has also to be quantified before

proceedings for recovery of the amount so determined are taken. In our

view, therefore, if the requirement of an opportunity to show-cause is not

read into the said Rule, an action thereunder would be open to challenge

as violative of Article 14 of the Constitution of India on the ground that

the power conferred on the competent authority under the provision is

arbitrary.

22.Thus tested, in the instant case, vide his letter dated 2nd October 1992,

the Excise Commissioner called upon the appellant to deposit an amount

of `14,20,943/- towards Excise duty and interest on account of default on

their part to furnish PD-25 pass duly certified by the competent authority

at Kandla Port. The letter /notice does not indicate the exact quantity of

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rectified spirit on which duty @ `40/- per alcoholic litre has been

charged, though the total amount of duty payable is mentioned.

Similarly, in the final show-cause notice dated 6th April 1994, threatening

action for black listing for future exports on account of non-payment of

the aforenoted amount, there is not even a whisper as to how and why

rectified spirit in question was being subjected to Excise duty by the

State. As stated above, this Court having categorically held in Synthetics

And Chemicals (supra) and in catena of subsequent decisions that the

State Legislature had no legislative competence to impose Excise duty on

rectified spirit (industrial alcohol), the Commissioner of Excise could not

demand Excise duty on rectified spirit contained in the tank wagon

which, later on, was found to be empty, without returning a finding that

the said spirit had been diverted/converted into potable alcoholic liquor

fit for human consumption, on which the State was empowered to

impose duty. It bears repetition that such a finding could not be recorded

by the Commissioner without affording due opportunity to the appellant

to explain its stand in this regard for which, the onus lay on them as

transporter and the executant of the bond. We may, however, add that in

the absence of any reasonable explanation regarding disappearance of

rectified spirit, the Commissioner would have reason to presume that the

same has been disposed of otherwise than by way of export outside the

country, for which purpose it was being transported. We are convinced

that in the present case, before imposing the impugned demand of penalty

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and interest, there was absolutely no adjudication by any authority as

regards the breach committed by the appellant, except the allegation that

the appellant had failed to furnish the PD-25 pass certified by the

Collector. In our opinion, therefore, the action of the respondents for the

recovery of penalty and interest, being violative of principles of natural

justice, is null and void.

23.In the afore-said premises, we allow the appeal; set aside the

impugned demand raised by the Commissioner of Excise vide notice

dated 2nd October 1992, as well as the judgment of the High Court,

sustaining the demand by invoking Rule 633 of the Excise Manual and

remit the matter to the jurisdictional Excise Commissioner to decide the

question of levy of Excise duty and/or penalty and interest on the subject

consignment of rectified spirit, after affording adequate opportunity of

hearing to the appellant.

24.In the facts and circumstances of the case, the parties are left to bear

their own costs throughout.

..................................J.

(D.K. JAIN)

..................................J.

(H.L. DATTU)

NEW DELHI;

JULY 6, 2011.

RS

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