STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. versus M/S MCDOWELL AND COMPANY LIMITED on 5 January 2022

STATE OF UP THROUGH SECRETARY (EXCISE) & ORS.

v.

M/S MCDOWELL AND COMPANY LIMITED

(Civil Appeal Nos. 169-170 of 2022)

JANUARY 05, 2022

[A. M. KHANWILKAR, DINESH MAHESHWARI ANDKRISHNA MURARI, JJ.]

Uttar Pradesh Excise Act, 1910: Uttar Pradesh Excise Manual– Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 – In theinstant case, fire incident took place in godown of distillery of therespondent company in which liquor got destroyed – ExciseDepartment raised demand of excise duty on the liquor destroyedfrom the respondent company – Whether the demand in question isauthorised by law – Held: s.19 of the Act 1910 states that nointoxicant can be removed from the distillery unless duty leviablethereupon has been paid – Liquor that was lying stored in the bondedwarehouse had already become subject to the excise duty – Taxableevent was production or manufacture and not sale – r.7(11) of theRules of 1969 is required to be taken into account for the legalconsequences that so far as the bottled spirit is concerned, thelicencee remains responsible for payment of duty on any kind ofwastage in excess of 1% – Rule 709 of the Excise Manual makes itclear that the distillery remains responsible for safe custody of thestock of spirit and remains liable to make good any loss of revenuecaused to the Government by their negligence – Therefore demandof excise duty cannot be said to be unauthorized by law –Constitution of India – Art.265.

Uttar Pradesh Excise Act, 1910: Uttar Pradesh Excise Manual– Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 – Fireincident took place in godown of distillery of the respondentcompany in which liquor got destroyed – Whether respondentcompany remains liable to pay excise duty on the liquor lost in fire– Held: In the scheme of the Act of 1910, the Rules of 1969 and theExcise Manual, it is evident that the Government is not liable fordestruction, loss or damage of any spirit stored in distillery by fireor theft or any other cause – Distillery is made responsible for safe

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Acustody of the stock of spirit and is also made liable to make goodany loss of revenue caused to the Government by their negligence– The rules provide for strict supervision and control of the ExciseDepartment over the working of distillery at every stage but thatsupervision and control does not correspondingly absolve thedistillery of its duty and responsibility towards safe custody of theBstock – The warehouse in question indeed got engulfed in fire andthat led to destruction of the liquor stored therein – The respondentcompany could be held liable to pay the excise duty on the liquordestroyed in fire only if it could be held negligent in not ensuringsafe custody of the stored liquor –In the present case, nothing hasChappened by natural forces like storm, floods, lightning orearthquake – Hence, the fire incident in question cannot be termedas an act of God – Even when the exact cause of fire could not beascertained, the only inference by considering the reports ofAssistant Excise Commissioner could be about some fault orshortcoming in electric installations which led to the abnormal flowDof current and thereby, to the fire incident in question – It is difficultto accept that the fire and the resultant loss had been beyond thecontrol of human agency so as to be termed as inevitable accident– When the respondent had not been able to protect the goods inquestion from fire within the warehouse and when all other factors,Eas noticed above, are taken into account, the negligence ascontemplated in Rule 709 of the Excise Manual is directlyattributable to the respondent company – Further, the fact that therespondent company had taken insurance coverage only of the valueof liquor (and not that of excise duty thereupon) and then, hadreceived the insurance claim towards the value of liquor alsoFoperates against the respondent company and fortifies the conclusionabout negligence of the respondent company.

Allowing the appeal, the Court

Conclusion

Allowing the appeal, the Court

HELD: 1. In terms of Article 265 of the Constitution, bothGlevy and collection of tax must be authorised by law. By virtue ofEntry 51 of List II, the State has been authorised to impose dutyof excise on alcoholic liquors for human consumptionmanufactured or produced in the State. As per Section 19, nointoxicant can be removed from the distillery or the place of H

storage unless the duty leviable thereupon has been paid or abond has been executed for the payment thereof. Consideringthe overall scheme of the Act and the Rules, it may not be out ofplace to interpret the expression “removal” in Section 19 toinclude wastage in excess of permissible limit of total quantity ofspirit produced or manufactured and stored. A comprehensivelook at the scheme of Sections 17 to 19 and 28 and 29 of the Actof 1910 and the enunciations of this Court leave nothing to doubtthat in respect of the liquor that had undergone the process ofdistillation, exigibility to excise duty had occurred at the end ofthe distillation process or when it was issued from the distillery.The point of quantification of this duty, even if linked in point oftime to the date of issue for sale in terms of proviso to Section29, does not relate to the ‘event of chargeability’ that had occurredas soon as the liquor was distilled and received in the bottlingtank or had been otherwise issued from distillery. In other words,the liquor that was lying stored in the bonded warehouse hadalready become subject to the excise duty, with postponement ofactual charging of the duty as per the rate applicable on the dateand time of issue for sale from the warehouse. It gets perforcereiterated that taxable event was production or manufacture, andnot sale, of the liquor. In this view of the matter, the submissionthat the levy in question is not authorised by law, and is hit byArticle 265 of the Constitution of India, remains untenable. [Paras39, 41] [937-E-F; 940-B-F]

2.1 Rule 7(11) of the Rules of 1969 is required to be takeninto account for the legal consequences that so far as the bottledspirit is concerned, the licencee remains responsible for paymentof duty on any kind of wastage in excess of 1%. Coupled with thisprovision, Rule 709 of the Excise Manual makes it clear that thedistillery remains responsible for safe custody of the stock ofspirit and remains liable to make good any loss of revenue causedto the Government by their negligence. Therefore, the demandin question cannot be said to be unauthorised but, its validitywould depend on answer to the question as to whether negligencecould be imputed on the respondent company in terms of Rule709 of the Excise Manual. [Paras 44, 45][941-H; 942-A-C]

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A2.2 The present one had not been a case where anythingrelated with the forces of nature like storm, floods, lightning orearthquake had been in operation or caused the fire. Whennothing of any external natural force had been in operation inviolent or sudden manner, the event of the fire in question couldbe referable to anything but to an act of God in legal parlance.BThe observations of High Court in this regard do not appear soundand are required to be disapproved. [Para 55][952-A-B]

2.3 The warehouse in question indeed got engulfed in fireand that led to destruction of the liquor stored therein. Here, therespondent company could be held liable to pay the excise dutyCon the liquor destroyed in fire only if it could be held negligent innot ensuring safe custody of the stored liquor. As regards thisaspect, the fact that Department had control and supervision overthe distillery and godown would not absolve the respondent ofits liability. Further, the fire incident in question cannot be termedDas an “act of God”. [Para 59][955-D-E]

3. The fault of “negligence” need not always be of activenegligence or of gross negligence, but it may also be of aninadvertent negligence or of a passive negligence. It does notrequire much of discussion to say that the goods in question,Ebeing highly inflammable, required extra and excessive care fortheir safe custody; and any laxity or slackness in that regard wasimpermissible. To put it differently, what was required forensuring safe custody of the goods in question was that ofheightened safeguard measures with foresight. When therespondent had not been able to protect the goods in questionFfrom fire within the warehouse and when all other factors, aretaken into account, the negligence as contemplated in Rule 709of the Excise Manual is directly attributable to the respondentcompany. In other words, even if the present case is taken to bethat of inadvertence or of unintentional omission on the part ofGthe respondent company, it would fall within the definition of“negligence” for the purpose of Rule 709 of the Excise Manual.[Para 63][958-A-D]

4. The liability of the respondent company in this matter israther fortified from the facts that it had taken insurance coverageof the value of liquor and indeed received such claim from theinsurer. Further, failure to insure the risk of excise duty liabilitycannot extricate the respondent from that liability. Hence, thisCourt agreed with the appellants, that not taking of insurancecoverage of the excise duty while taking such coverage on thevalue of liquor itself amounts to negligence on the part of therespondent company. [Paras 67, 69][959-A; 960-A-D]

Somaiya Organic (India) Pvt. Ltd. and Anr. v. State ofU.P. and Anr. (2001) 5 SCC 519 : [2001] 3 SCR 33;State of U.P. & Ors. v. Delhi Cloth Mills & Anr. (1991)1 SCC 454 : [1990] 2 Suppl. SCR 168; State of U.P.and Ors. v. M/s Mohan Meakin Brewery Ltd. and Anr.(2011) 13 SCC 588 : [2011] 14 SCR 98; VohraSadikbhai Rajakbhai & Ors. v. State of Gujarat andOrs: (2016) 12 SCC 1 : [2016] 2 SCR 772; PatelRoadways Limited v. Birla Yamaha Limited (2000) 4 SCC91 : [2000] 2 SCR 665 – relied on.

Divisional Controller, KSRTC v. Mahadeva Shetty andOrs. (2003) 7 SCC 197: [2003] 2 Suppl. SCR 14; HarShankar and Others v. Deputy Excise & TaxationCommissioner and Others (1975) 1 SCC 737 : [1975]3 SCR 254; State of U.P. and Others v. M/s ModiDistillery Etc. (1995) 5 SCC 753 : [1995] 3 Suppl. SCR119; Dharampal Satyapal v. Commissioner of CentralExcise, Noida (2004) 167 ELT 291; Grill v. GeneralIron Screw Colliery Co. (1866) L.R. 1 C.P; State ofMaharashtra and Ors. v. Kanchanmala Vijaysing Shirkeand Ors. (1995) 5 SCC 659 : [1995] 3Suppl. SCR 1;Shyam Sunder and Ors. v. The State of Rajasthan (1974)1 SCC 690 : [1974] 3 SCR 549; Scott v. London & St.Katherine Docks (1865) 3 H&C 596, 601; PushpabaiPurshottam Udeshi and Ors. v. M/s. Ranjit Ginning &Pressing Co. (P) Ltd. and Anr. (1977) 2 SCC 745 :[1977] 3 SCR 372 – referred to.

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ACase Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 169-D170 of 2022.

From the Judgment and Order dated 10.04.2017 of High Court ofJudicature at Allahabad, Lucknow Bench, Lucknow in Misc. Bench No.4493 of 2006.

EMs. Aishwarya Bhati, ASG, Samar Vijay Singh, Ms. CelesteAgarwal, Ms. Prabjot Kaur, Advs. for the Appellants.

Dinesh Dwivedi, Sr. Adv., Niraj Gupta, Mrs. Anshu Gupta, Advs.for the Respondent.

The Judgment of the Court was delivered by FDINESH MAHESHWARI, J.

Contents*

Preliminary and brief outline.......................................................2

Relevant factual aspects and background: The fire incident Gand demand of excise duty on the liquor destroyed...................6

Before the fire...........................................................................6

The fire incident and relevant reports.........................................8Demand of excise duty on the liquor lost in fire.......................11

H*Ed. Note : The pagination in the contents is as per the original judgment.

Writ petition in the High Court and interim order therein........17Impugned orders dated 10.04.2017 and 06.11.2019:High Court allowed the writ petition and passedconsequential orders.................................................................18Rival submissions......................................................................21Questions for determination......................................................33Relevant statutory provisions....................................................34Whether the demand in question is authorised by law?................41Whether respondent company remains liable to pay exciseduty on the liquor lost in fire.....................................................49Control of Department over the distillery and godown: effect of...50Negligence..............................................................................52Act of God.............................................................................56Inevitable accident...................................................................61Res ipsa loquitur.....................................................................63The respondent company remains liable....................................65Insurance coverage only of the value of liquor: effect of...........70Summation..................................................................................74Conclusion.....................................................................................75

Preliminary and brief outline

1. Leave granted.

2. By way of these appeals, the State of Uttar Pradesh and itsofficers related with the Excise Department as also the DistrictMagistrate, Shahjahanpur have essentially questioned the order dated10.04.2017 in Misc. Bench No. 4493 of 2006, whereby the High Courtof Judicature at Allahabad, Lucknow Bench, Lucknow[1] quashed thedemand raised against the writ petitioner company (respondent herein)towards loss of excise revenue because of destruction of liquor in fire.The appellants have also questioned the order dated 06.11.2019 in C.M.Application No. 90936 of 2019, whereby the High Court directed the 1 Hereinafter also referred to as ‘the High Court’.

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Aappellant No. 2 (Excise Commissioner, Uttar Pradesh[2]) to expeditiouslytake a final decision on theapplication for refund of the amount that wasdeposited by the writ petitioner pursuant to the interim order passed inthe said writ petition.

3. Before dilating on the issues raised in this case, we may drawBa brief outline of the matter to indicate the contours of forthcomingdiscussion.

3.1. The genesis of the present litigation had been in a fire incidentthat took place in a godown of the distillery of the respondent companyon 10.04.2003. As many as 35,642 cases of Indian Made Foreign Liquor[3]Cof different brands got destroyed in this fire. After receiving the initialreports that the fire possibly took place due to short circuit of electricity,the department proposed to recover the amount of excise duty lost, dueto such destruction of liquor, from the respondent company. Therespondent maintained that there was no negligence on its part and,therefore, no case for recovery of the alleged loss of excise duty wasDmade out under Rule 7(11) of the Uttar Pradesh Bottling of ForeignLiquor Rules, 1969[4] and Rule 709 of the Uttar Pradesh Excise Manual[5].

3.4. However, the Excise Commissioner, by his order dated11.07.2006, rejected the submissions of the respondent and raised ademand to the tune of Rs. 6,39,32,449.44 towards loss of excise revenueEon account of destruction of liquor. Accordingly, the District Magistrate,Shahjahanpur asked the respondent to deposit the amount within oneweek.

3.3. Assailing the demand and recovery steps aforesaid, therespondent-company preferred a writ petition[6] wherein, the High Court,Fby way of an interim order dated 25.07.2006, stayed the recoveryproceedings, subject to the respondent company (writ petitioner)depositing an amount of Rs. 3 crores. A petition seeking special leave toappeal against this interim order was rejected by this Court on 14.08.2006.Thereafter, on 21.08.2006, the respondent company deposited the saidGamount of Rs. 3 crores with the District Magistrate, Shahjahanpur.

2 Hereinafter also referred to as ‘the Excise Commissioner’.

3 ‘IMFL’ for short

4 Hereinafter also referred to as ‘the Rules of 1969’.

5 Hereinafter also referred to as ‘the Excise Manual’.

6H Misc. Bench No. 4493 of 2006

3.4. The writ petition so filed by the respondent company wasallowed by the High Court in its impugned order dated 10.04.2017,essentially with findings that Rule 7(11)(a) of the Rules of 1969 was notapplicable in the matter because there was no wastage in handlingoperations of bottling and storage of IMFL; that Rule 709 of the ExciseManual was attracted for which negligence was required to be shown;that the order passed by the Excise Commissioner was based onconjectures and without any cogent evidence about negligence on thepart of the writ petitioner; and that the ‘incident was nothing but anact of God. The High Court, accordingly, set aside the impugned ordersof demand and recovery towards the alleged loss of excise revenue.Thereafter, for the department having failed to refund the amountdeposited pursuant to the interim order in the writ petition, the respondentcompany moved an application before the High Court whereupon, bythe order dated 06.11.2019, the High Court directed the ExciseCommissioner to take a decision on the application for refund withinfour weeks.

3.5. As noticed, the aforesaid orders dated 10.04.2017 and06.11.2019 passed by the High Court are questioned in these appeals.The appellants maintain that the High Court was not justified in its findingsthat the incident in question was an act of God and not that of negligenceon the part of the respondent. The appellants rely upon Rule 7(11)(a)of the Rules of 1969 and Rules 708 and 709 of the Excise Manual tocontend that the respondent company is absolutely liable to pay theexcise duty payable on the stock of IMFL destroyed in fire. An ancillaryaspect relating to the effect of insurance coverage, only of the valueof liquor, and receiving of insurance claim by the respondent companyhave also been raised. Per contra, it submitted that the claim of exciseduty in the present case cannot be enforced, for being not authorisedby law; and that the respondent is not liable to pay excise duty on theIMFL destroyed in fire, particularly when there was no negligence onits part.

4. The foregoing outline would indicate that the focal point in thiscase is, as to whether the appellants are entitled to levy, andcorrespondingly, the respondent is liable to pay, the excise duty on theliquor destroyed in fire? As regards this focal point, three principalquestions would require determination, as noticed infra.

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ARelevant factual aspects and background: The fire incidentand demand of excise duty on the liquor destroyed

5. Having regard to the questions involved, we may briefly takenote of the relevant factual and background aspects, particularly thoserelating to the functioning of the respondent company and setup of theBdistillery and godown in question as also the fire incident and the demandof excise duty, leading to the present litigation.

Before the fire

6. The respondent company had been engaged in the business ofdistillation, bottling and vending of different brands of IMFL. For theCpurpose of these activities, the respondent was granted license in FormPD-2 to establish and run a distillery for distillation and manufacture ofpotable alcohol at Distillery Unit Rosa, Shahjahanpur; and was alsogranted license for wholesale vend of IMFL in Form FL-3 and FL-3Aunder the Rules of 1969. The respondent company had been functioningat the licensed premises since the year 1994.D

7. We need not elaborate on various features of the processes ofdistillation, bottling and storage but, a few facts placed on record by theparties, relating to the electrical installations and firefighting measures inthe premises in question could be usefully noticed.

7.1. On 19.09.2002, the Assistant Electricity Inspector, GovernmentEof Uttar Pradesh, Shahjahanpur Zone, Shahjahanpur, after havingconducted a periodical inspection of the said premises of the respondentcompany, made the following observations pertaining to the electricalinstallations: - “(a) Except the endorsement made herein the relevant rules ofFIndian Electricity Rules, 1956 was being complied with.

(b) The details mentioned in the subsequent page are not accordingto Indian Electricity Rules, 1956

Hence, in the interest of Safety, you are requested that youshould rectify the deficiency by engaging any of the authorizedGelectrician and sent a report within one month after compliance inaccordance with the Indian Electricity Rules,1956.

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Rule 35: It is found that CAUTION place is not placed at certainprominent places. The same should be placed/installed.

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Rule 61(2): At one point of Turbine’s Distribution Board Panel,earthwiring has been done with a thin wire. Hence the sameshould be removed and strip earthing should be done.”

In response to the aforesaid, the respondent company stated, inits letter dated 23.09.2002, that the work pointed out in the report hadbeen completed.

7.2. Apart from the above, it appears that certain modification/upgradation work was undertaken at the production plant in the distilleryand in that regard, the Excise Inspector, Production Section, RosaDistillery, Shahjahanpur, in his letter dated 26.12.2002, advised therespondent that electrical and gas wielding jobs be performed carefullywith full safety, while ensuring standard methods of fire safety and therequired firefighting devices. The said Excise Inspector cautioned therespondent that “You will be responsible for any loss of revenue/other loss if that occurs due to your carelessness.”

7.3. On 01.03.2003, the office of Fire Brigade Officer, Shahjahanpurissued a No Objection Certificate of Fire Fighting Department for theperiod between 06.02.2003 to 30.09.2003 after carrying out inspectionof the premises in question. In this inspection, the Fire Brigade Officertook note of the fact that different types of fire extinguishers and otherfirefighting instruments were at the right place and were in workingcondition, which were refilled by the Chief Engineer of the respondentcompany. However, a direction was given with regard to the refillingand testing of the instruments; and Foam Installation was also suggestedfor better firefighting arrangements in the following terms: -

“You are directed that, in future Fire Fighting Instruments (FireExtinguisher) should be tested in Fire Station Shahjahanpur beforerefilling. It is also suggested that, for better management of firefighting arrangements, Foam Installation should be done inDistillation Plant. With this suggestion, NO objection Certificateof Fire Fighting Department is granted for a period between06.02.2003 to 30.09.2003, because the said firm has depositedthe Testing Fee to the Fire Brigade Department on 06.02.2003.”

The fire incident and relevant reports

8. The aforesaid had been the position of record in relation to theelectrical installations and firefighting measures in the premises in A

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Aquestion. However, on 10.04.2003, a fire incident did take place in agodown of the respondent company, which resulted in 35,642 cases ofmanufactured IMFL getting destroyed.

8.1. It has been the case of the respondent company that thegodown in question was locked for lunch at 12:00 noon on 10.04.2003Bunder joint lock and key of the Excise Inspector in-charge of the distilleryand the company’s representative and at that time, nothing objectionablewas noticed and the stocks were in safe condition. However, at about12:55 p.m., smoke was noticed emitting from the godown. Thereupon,the Excise Inspector in-charge of the distillery was immediately informedand the joint locks were opened; and it was noticed that the stocks ofCIMFL were on fire. The information about this fire was given to thePolice Department and also to the Fire Department and other ExciseAuthorities. As per the averments and the material on record, it appearsthat the firefighters could bring the fire under control only by 5:00 a.m.on 11.04.2003.D

9. It is borne out that upon receiving information about the incidentin question, the Deputy Excise Commissioner, Bareilly, reached thedistillery at about 06:30 p.m. on 10.04.2003 and carried out spot inspectionwith other officers of the department and the Manager Personnel of therespondent company. In his initial report drawn on spot inspection, theEsaid Deputy Excise Commissioner took note of the efforts being madefor controlling and dousing the fire as also damage to a substantial quantityof liquor; and also indicated that upon enquiring about the possible reasonsof this fire, he was informed that the same took place, probably, due toshort circuit in the electricity supply. According to the appellants, eventhe Station House Officer concerned opined in his investigation reportFdated 11.04.2003 that the reason for fire was short circuit of electricity.

10. On 13.04.2003, the Fire Brigade Officer of Uttar PradeshFire Service also drew up the report about the incident and the effortsmade for controlling the fire. He, however, indicated that the reason offire was unknown. The relevant part of this report, counter signed byGthe Deputy Superintendent of Police, as placed on record by therespondent, reads as under: - “ON receiving information about Fire, Fire Service Unit rushed tothe Place of Incident. On arriving, it was seen that the front partof Godown of Indian Made Foreign Liquor was burning in fire H

badly, which is situated in Rosa Kothi, M/s Mcdowell CompanyLtd. Thana- R., District- Shahjahanpur, and fire was in a horrible,which was being doused by the Staff of M/s Mcdowell & CompanyLtd. with the help of available instrument but the fire was out ofcontrol for them. After seeing the horrible condition of fire,immediately started the work to control fire by laying two lines inone motor fire engine, immediately thereafter second motor fireengine was brought from Kasba- Tilhar. In dousing the Fire otherunit Oswal Chemical Fertilizer and O.C.F. also helped, and afterenough hard work, process of dousing was started and after puttingthe life at risk and after several hours, fire was doused/controlled.On investigation/inspection of fire, it was found that, due to fire,Liquor kept in Go-down was destroyed. Hence, in this fire afteradding building and Liquor, in total, according to station officer,approximately a damage worth Rs. 2 crore has been assessedand Rs. 1 crore value of property was saved. Reason of fire wasunknown.

Therefore, after finishing the entire work, the fire Service unitreturned to the Fire Station after giving instructions that in caseagain the Fire shows up again, the Fire Station should be informedimmediately. We came back to the Fire Station.”

11. Another report dated 02.08.2003 was submitted by the AssistantExcise Commissioner, Rosa Distillery, Shahjahanpur to the ExciseCommissioner, detailing out the statements of stock of liquor saved asalso the stock destroyed in fire and his comments on the cause of fire.The relevant part of this report could be usefully extracted as under: - “(f) Cause of Fire: A detailed enquiry and Investigation wasdone by me in the distillery after the fire incident. All the Officersmentioned in para (d) have also made inquiries and investigatedthe matter in detail. All the Investigating Officers have also reachedto the conclusion that undisputedly the cause of fire was unknown.During my Investigation and calculation work also, no fact orevidence came to my knowledge, which indicates that there wasany negligence either on the part of Distiller or on the part ofExcise Staff deputed in the Distillery. It also does not appear thatthe said incident was deliberately done by any of them. In fact, ABC

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the Distiller and the Excise Staff have worked jointly with greatefficiency and hard work during and after the fire Incident. Therebystock was saved from the damaged stock.

This fact was confirmed by, Joint Excise CommissionerInvestigation dated 30.04.2003, Deputy Excise Commissioner,Bareilly Incharge, Bareilly , investigation dated 10.04.03, FireBrigade Officer, Investigation report dated 13.04.03 and StationHouse Officer’s Final Report dated 11.04.03, also with copiesannexed. In the report of Station House Officer reason of incidentis possibly due to short circuit in Electricity. I had also seen theburned cable in debris, but in my opinion Nothing can be confirmed.It can be such an incident, in which reason is Unknown.

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On the Distiller level, in the month of December, Instrumentaccording to Fire safety standard, were installed and safety orderswere ordered in respect of Letter No. 39/ dated 26.12.02 by thedistillery Fire Brigade Officer, Shahjahanpur; Letter No. Memo/F.S./ date 1.03.03, and received the certificate regarding theInstrument in good condition. The Distillery also produced certificateby U.P. Electricity Department, regarding Electricity cabelEstablishment.

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In accordance, with letter sent by me dated 14.04.03 and21.04.03 in view of the aforementioned points before the FireIncident, during the Fire Incident and after that, the calculation ofthe damaged stock and possible reason of Fire incident wasdiscussed.”

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Demand of excise duty on the liquor lost in fire

12. In view of the fact that a substantial quantity of the storedliquor got destroyed in the fire and that had the consequence, inter alia,of loss of excise revenue, the Excise Department proposed to recoverGthis loss from the respondent company.

12.1. In the first place, on 24.09.2003, a show-cause notice No.463/CAA/Rosa Distillery/Shahjahanpur was issued by Assistant ExciseCommissioner, Rosa distillery to the respondent company seekingexplanation regarding the recovery of excise duty in view of Rule 7(11)Hof the Rules of 1969, as the respondent allegedly failed in its responsibility to keep the stock of liquor safe and secure. In its response letter dated01.10.2003, the respondent company stated that there was no negligenceon its part in regard to the said fire incident; that Rule 7(11) of Rules of1969 was of no application; and that Rule 709 of the Excise Manualwould apply only in case of negligence, which was not proved.

12.2. The Excise Commissioner, however, proposed to recoverexcise duty from the respondent company and sent a letter dated27.11.2003 to the Principal Secretary to the Government seekingdirections. The said Principal Secretary, in his response letter dated17.02.2004, stated that the provision regarding imposition of excise dutyon the stock of IMFL destroyed in fire was laid down in Rule 709 of theExcise Manual and on the basis thereof, the Excise Commissioner wascompetent enough to proceed. The Principal Secretary, inter alia, statedas under: - “Please refer to your letter No. G-43/9-alcohol/Rosa- Fire incidentdated 27[th ]November, 2003 regarding directions to be given to theDistrict Magistrate Shahjahanpur with regard to imposition ofexcise duty on the stock of IMFL destroyed in fire incident dated10.04.2003 at M/s McDowell & Co. Ltd., Rosa, Shahjahanpur.

1. In this Connection I have been advised to ask you that theprovision regarding imposition of excise duty involved in thestock of IMFL destroyed in the above fire incident at McDowell& Co Ltd., Rosa Shahjahanpur on 10.04.2003 is laid down inrule 709 of Excise Manual, on the basis of which you arecompetent enough to proceed in the matter.

2. Your proposal regarding levy of excise duty on the stock ofIMFL destroyed in the above fire incident is in Order. Pleasetake necessary steps at the earliest and inform the same to theGovernment within 15 days.”

12.3. Proceeding on the letter so received from the PrincipalSecretary, the Excise Commissioner, on 23.02.2004, asked the DistrictMagistrate to quantify the excise duty leviable under Rule 7(11) of theRules of 1969. Having noticed such steps on the part of the authorities,the respondent company remonstrated in its letter dated 08.06.2004addressed to the Excise Commissioner and requested that the competentauthority must first determine as to whether excise duty could at all belevied on IMFL destroyed due to fire before the point of issue of liquor A

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Afor sale was reached. It was also submitted that the directions may begiven only to proceed in terms of Rule 709 of the Excise Manual and notRule 7(11) of the Rules of 1969. The Excise Commissioner, in his letterdated 12.05.2005, sought a point-wise reply from the respondent companyand this letter was replied on 16.05.2005, wherein the respondent companymaintained that fire incident was due to the reasons beyond human controlBand there was no negligence on the part of the company.

12.4. Yet further, the respondent company stated in its letter dated05.06.2005 that they had a certificate issued by Fire Department, validup to 03.09.2003; that appropriate fire protection equipments wereinstalled; that electricity safety certificate was also given on 19.09.2002;Cthat MCBs were installed; that there was no material to show that it was an accident due to negligence on part of the company; and thatthere was no compulsion to get insurance with respect to excise duty.The aforesaid reply was forwarded by the Excise Commissioner to thePrincipal Secretary, Excise with his letter dated 29.06.2005. Thereafter,Dthe State Government, in its letter dated 27.12.2005, observed that exciseduty on the rates prevailing should be imposed on the respondent companyin the interest of revenue.

13. The aforesaid exchange of communications culminated in theimpugned order dated 11.07.2006 by the Excise Commissioner, seekingEto recover a sum of Rs. 6,39,32,449.44 from the respondent companytowards the loss of excise revenue. The Excise Commissioner, interalia, relied upon the inspection reports and held that the respondent wasresponsible for the safety of the alcohol but failed to ensure such safety;had been careless in not providing fire-proof electric equipments of goodquality; and had taken insurance of liquor but not of excise duty. ThisForder dated 11.07.2006, being the bone of contention in the present matter,could be reproduced in extenso as under:

“OFFICE OF EXCISE COMMISSIONER, UTTAR PRADESH,ALLAHABAD

No. 7244/9-Alcohol/131/Rosa/Fire Incident Allahabad G

Dated – 11.07.2006

ORDER

M/s McDowell & Company Ltd., Rosa, District Shahjhanpuris a PD-2 Licensed distillery. The abovementioned distillery has H

been granted FL-3 and FL 3A license under the Uttar PradeshBottling of Foreign Liquor Rules, 1969 and has been doing thebottling of Indian Made Foreign Liquor of their brand and brandof Harbartsons Ltd. respectively. On 10.04.2003, due to fireincident in the FL-3 and FL3A godown of the distillery, 35,642(Thirty five thousand six hundred forty two) cases of Indian MadeForeign Liquor of different brands got destroyed. Duringinvestigation, it is revealed that the McDowell and company ltd.had taken the insurance of the Indian Made Foreign Liquor keptin the sealed godown. The distillery has also received the claimfor that. A Show cause Notice no. 463/CAA/Rosa Distillery/Shahjahanpur dated 24.09.2003 was given to the M/s. McDowelland Company ltd. in relation to the burning of the alcohol kept inthe sealed godown. It has been stated by the M/s Mcdowell andCompany Ltd. in its explanation dated 01.10.2003 to theabovementioned Show Cause Notice that the fire incident is anact of god and they have no control over this. On10.04.2003,during the spot inspection conducted by Deputy ExciseCommissioner Bareilly, Manager Personnel Shri Anurag Dhawanwho was present has stated that possibly fire took place due toshort circuit in the electricity supply. The Station officer Shri RamChandra Mishan, District Shahjahanpur has stated in hisinvestigation report dated 11.04.2003 that the reason for fire isthe short circuit of electricity. The inspection of the M/s McDowelland Company Ltd. was conducted by Joint Excise Commissioner(Task Force) and Deputy Excise Commissioner (Law). It hasbeen found in the inspection that the godown is very old and itsrepair has also not been done. It is also necessary to mention thatM/s Mcdowell and Company Ltd. in the distillery from the time ofBritish period and the distillery & sealed godown has been runningin the old building. The roof of the godown was made of asbestossheet. The short circuit can take place due to old electric wiring inthe godown.

In this relation District Officer, Shahjahanpur vide his letterno. 689/OSD/Camp/2004 dated 01.04.2004 has requested forguidance/instruction on the incident. The Excise Commissioner,Uttar Pradesh, vide his letter no. G-43/9-alcohol/Rosa fire incidentdated 17.11.2003 has referred this incident to the government inwhich the government vide letter no. 3763 E-2/13-03 dated AB

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17.02.2004 has directed that the excise duty may be charged onthe class of alcohol prevalent at that time on the class of alcoholdestroyed and it was also directed that Excise Commissioner iscapable to act in this incident.

In perspective to the direction made by Government, the caseis that the M/s Mcdowell and Company Ltd., Rosa Shahjhanpurhad taken license of FL-3 and FL 3A under UP Bottling of ForeignLiquor Rules, 1969. According to Rule 7 (11) (a) of theabovementioned rules, the licensee is liable to pay excise duty onthe wastage of more than 1%. It was responsibility of the licenseholder to take remedy /precautions for the safety of the alcoholkept in the godown but proper safety of the alcohol kept in thegodown was not taken up. The licensee had taken the insuranceof the price of alcohol, bottle, label, etc. but insurance of the exciseduty imposed on the alcohol was not done. In this way, the licenseehas secured his

value of alcohol. The licensee has not suffered any loss in thisincident and whatever loss has taken place has been recoveredfrom the insurance. Therefore, perhaps the licensee was carelessregarding the electric equipments.The licensee was aware aboutthe terms and conditions while taking license that he is to pay theexcise duty on the wastage of stocked alcohol greater than 1 %of the quantity. Inspite of having knowledge, the licensee has notarranged the fire proof electric equipments of good quality due towhich questioned incident has taken place. The carelessness takenby the distiller in the safety of the stock of alcohol cannot beconsidered as Act of God.The license is granted to him under theUP Bottling of Foreign Liquor Rules, 1969. There is provision ofcharging excise duty on the wastage more than 1 % under Rule7(11) (a) of those Rules. The Licensee cannot deny the conditionsof the license. It has been clearly stated by the Constitution Benchof the Hon’ble Supreme Court in judgment Har Shankar and Anr.Vs. Deputy Excise and Taxation Commissioner and Anr. (1997)1 SCC 737 that the licensee has taken the license after carefullyreading the questioned rules of 1969 and now he cannot wriggleout from the conditions of the license. The licensee has receivedthe license after reading the Uttar Pradesh Bottling of ForeignLiquor Rules 1969 with open eyes, therefore he cannot wriggleout to follow the Rules.

It has been mentioned in Khode Distilleries Ltd. and Ors. vs.State of Karnataka and Ors. (1975) SCC 576 at point (h) “TheState can adopt any mode of selling the licences for trade orbusiness with a view to maximize its revenue so long as the methodadopted is not discriminatory”.

It is clear from the Rule 7(11)(a) of UP Bottling of ForeignLiquor Rules, 1969 are made to secure the revenue. The Statehas special privilege on manufacturing of liquor, custody, transport,import - export. The State in public interest to increase the revenuestrictly monitor the business of alcohol so that neither it can bemisused and nor it can cause loss of revenue to be received fromit. In respect to the abovementioned according to Rule 7(11)(a) ofUP Bottling of Foreign Liquor Rules, 1969, the excise duty of Rs.6,39,32,449.44/- (Rupees Six Crore Thirty Nine Lakh Thirty TwoThousand Four Hundred Forty Nine and Forty Four Paise Only)is leviable on M/s Mcdowell and Company Ltd., Rosa, districtShahjahanpur as per prevalent rate at the time of incident foryear 2003-2004 on different brands of alcohol.

Gejendra PalExcise CommissionerUttar Pradesh.”(underlining supplied)

13.1 Pursuant to the order so passed by the Excise Commissioner,District Magistrate, Shahjahanpur commenced recovery proceedings anddirected the respondent company to deposit the aforesaid sum of Rs.6,39,32,449.44 within one week.

Writ petition in the High Court and interim order therein

14. Aggrieved by the demand so raised by the ExciseCommissioner and the recovery proceedings so adopted by the DistrictMagistrate, the respondent company filed the writ petition, being Misc.Bench No. 4493 of 2006, before the High Court of Judicature atAllahabad, Lucknow Bench, Lucknow, with the following prayers: - “i. Issue, a writ order, or direction in the nature of Certiorari callingfor the records and quashing the impugned order dated 11[th ]July,2006 passed by the Excise Commissioner, U.P. and letter dated17[th ]July, 2006 of the District Magistrate Shahajahanpur, U.P. de-manding Rupees 6,39,32,449.44.

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Aii. Issue, a writ order, or direction in the nature of mandamuscom- manding the respondents not to recover any amount fromthe peti- tioner towards the alleged demand with regards to thequantity of Indian Made Foreign Liquor destroyed due to fireaccident at Shahjhanpur on 10[th ]April, 2003.

Biii. Issue a writ/order or directions in the nature of mandamus de-claring Rule 7 (11) of the UP Bottling of Indian Made ForeignLiquor Rules, 1969 as null and void and ultra vires of the UPExcise Act.

iv. Issue a writ/order or directions in the nature of Certiorari callingCfor the records and quashing the Impugned Order of the StateGov- ernment which was conveyed through letter dated17.02.2004 of the Principal Secretary (Excise), Government ofUP to Excise Commissioner.”

14.1. In the said writ petition, an interim order was passed by theDHigh Court on 25.07.2006 staying the recovery proceedings subject tothe respondent company depositing an amount of Rs. 3 crores with theExcise Commissioner. The respondent company attempted to challengethis interim order dated 25.07.2006 by way of SLP(C) No. 12902 of2006 but, this Court declined to interfere with the interim order and thespecial leave petition was dismissed on 14.08.2006. Thereafter, theErespondent company deposited the said sum of Rs. 3 crores with theDistrict Magistrate, Shahjahanpur on 21.08.2006. The appellants filedtheir counter affidavit in the writ petition on 08.09.2006 and the writpetition was finally heard and decided by the High Court by its impugnedjudgment dated 10.04.2017.FImpugned orders dated 10.04.2017 and 06.11.2019: HighCourt allowed the writ petition and passed consequential orders

15. The High Court, in its impugned order dated 10.04.2017, aftertaking note of the aforesaid background aspects as also the Rules of1969 and the Excise Manual, in the first place noted the fact that thoughGthe validity of Rule 7(11) of Rules of 1969 was questioned in the writpetition but while arguing the matter, learned counsel for the companyconfined his challenge to the impugned orders of recovery of exciseduty essentially on the grounds that the company could have been heldguilty only if there was any negligence on its part in causing loss ofexcise revenue but, in the present case, there was no negligence on theH

part of the company; and that it was an act of God and, therefore, noliability could be imposed on the company. The High Court observedthat Rule 7(11)(a) of the Rules of 1969, dealing with wastage, in theoperation of bottling and storage of IMFL was of no application becausein the present case, there was no wastage in handling operations ofbottling and storage but there was loss of spirit due to fire. The HighCourt pointed out that Rule 709 of the Excise Manual would apply and inthat regard, if the company was shown to have caused loss to exciseduty on account of any negligence, it would be liable to make good theloss. The High Court, inter alia, observed as under: - “26. Rule 7(11)(a) of Rules, 1969 talks of wastage which occurredin the operation of bottling & storage of IMFL, but here is not acase where there is any wastage in handling operations of bottling& stor- age of IMFL but there is total loss of spirit due to fire andthis in turn has caused loss to excise duty.

27. In our view, it is Rule, 709 of U.P. Excise Manual which appliesand if petitioner can be shown to have caused loss to excise dutyon account of any negligence, it is liable to make good the saidloss. The condition precedent, therefore, is the factum of“negligence” on the part of petitioner. We have no manner ofdoubt that in the pre- sent case Rule 7(11)(a) of Rules, 1969 hasno application and it is Rule 709 of U.P. Excise Manual which isattracted.”

16. The High Court, thereafter, proceeded to analyse the impugnedorder dated 11.07.2006 and observed that the inferences drawn thereinwere lacking in material foundation and were only of conjectures andsurmises. The High Court found that there was no apparent negligenceon the part of the company and also recorded its conclusion that theincident was nothing but an act of God. The High Court further observedthat negligence being the condition precedent for the fiscal liability inquestion, no such liability could be fixed unless negligence was found onthe basis of some material; and held that in absence of any material toshow that the loss was caused on account of any negligence on the partof the company, the demand in question was wholly illegal andunsustainable. The High Court proceeded to set aside the demand inquestion with the following observations and findings: - “29. In order to hold petitioner guilty of negligence, ECUP videim- pugned order dated 11.7.2006 while admitting that police AB

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Aofficials as well as joint inspection report, possible reason hasbeen given as “short circuit” from electrical supply, but havingsaid so, it has further said that (i) godown is very old and has notbeen properly repaired; (ii) Distillery is of British period, Distilleryand Warehouse both are running in old buildings; (iii) roof of godownis made of abestos sheets and there is possibility of short circuitBdue to old electrical wire in the godown; (iv) Insurance of exciseduty was not obtained, though spirit was insured; (v) licensee wasprobably neg- ligent in maintenance of electrical equipments; (vi)licensee did not insure electrical equipments; (vii) fire proof ofelectrical equipments were not of good quality, and this resulted inCthe incident. Therefore, it is not an act of God. When we askedfrom learned counsel for respondents as to wherefromrespondents got information that fire equipments were not of goodquality and have caused incident or that Distillery was negligentin maintenance of electrical equiments, he could not point out anymaterial on record, wherefrom the afore- said inference drawnDby ECUP could have been substantiated or to be justified. In fact,the aforesaid inference is nothing but conjec- tures and surmiseson part of ECUP without having any material foundation.

30. On the contrary, various authorities from time to time, whohave visited site, have clearly reported that there was no apparentEnegli- gence on the part of petitioner. The incident was nothingbut an act of God. When a fiscal liability is founded on certaincondition prec- edent, i.e. “negligent” on the part of the personwhom we have to hold responsible, then no responsibility can befixed unless such negligence is shown to be founded on the basisFof some material.Factum that building was old or the wiringswere old have pointed out to be dangerous or prone to fire eitherby Electricity Department or Fire Department or even by ExciseAuthorities, who were In charge of bonded Distillery, storage andgodown.

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31. Further, electrical equipments installed at the Distillery werenot of good quality is also conjectures and surmises as no materialwas shown to fortify the same. In absence of any material toshow that loss was caused on account of any negligence on thepart of petitioner, we find that demand made in this writ petition iswholly illegal and cannot sustain.

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32. The writ petition is accordingly allowed. Impugned orders dated11.7.2006 and 17.7.2006 are hereby set aside. No costs.”

17. After the decision aforesaid, the respondent company soughtdirections for refund/adjustment of the sum of Rs. 3 crores deposited incompliance of the interim order. The said application, being C.M. No.90936 of 2019, was considered and allowed by the High Court by itsorder dated 06.11.2019 requiring the Excise Commissioner to decide theapplication moved by the company while keeping in view of the fact thatthe money was deposited pursuant to the interim order and subsequently,the writ petition was allowed.

Rival submissions

18. While assailing the orders passed by the High Court, learnedcounsel for the appellants has advanced essentially two-fold contentions:one, that it had been clearly a case of negligence on the part of therespondent company where the fire incident cannot be termed as an actof God; and second, that as per the applicable provisions of U.P. ExciseAct, 1910[7], the Excise Manual and the Rules of 1969, the demand ofexcise duty on the liquor lost in fire has rightly been raised. The learnedcounsel has also addressed the Court on another facet of the case, asregards the effect of insurance claim received by the respondent companytowards the cost of IMFL destroyed in fire.

19. Learned counsel has submitted that an act of God is aninevitable, unpredictable and unreasonably severe event caused by naturalforces without any human interference, such as earthquake, lightning,flood etc.; it is a natural hazard outside the human control for which, noperson could be held responsible. It is submitted that for the fire in distilleryto be an act of God, there must have been some such incident likeearthquake or lightning but no such natural forces were in operation atthe time of the incident; and this incident cannot be attributed to anysuch force of nature but only to some human fault. Learned counselwould submit that when operation of natural forces is ruled out and theincident had, in fact, taken place, it would obviously be referred to theelements of negligence on the part of the respondent company. Thelearned counsel has elaborated on the submissions that negligence is a 7 Hereinafter also referred to as ‘the Act of 1910’.

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Aspecific tort and essentially refers to a failure to exercise that care whichcircumstances demand. To support the contentions that the present onehas not been an act of God, learned counsel has referred to and reliedupon the decisions in Divisional Controller, KSRTC v. Mahadeva Shettyand Ors.: (2003) 7 SCC 197, Vohra Sadikbhai Rajakbhai & Ors. v.State of Gujarat and Ors: (2016) 12 SCC 1 and Patel RoadwaysBLimited v. Birla Yamaha Limited: (2000) 4 SCC 91.

19.1. Learned counsel for the appellants would submit that theincident of fire in the present case, on account of short-circuit in thegodown storing large quantity of highly inflammable IMFL, was clearlyan incident which was avoidable, if proper and necessary care was takenCby the respondent company. It is submitted that distilleries are evenotherwise susceptible to fire due to large amount of alcoholic vapourbeing in the air and the respondent company was required to take allcare and precautions to avoid any such incident. With reference to theinspection reports, learned counsel has contended that even before theDincident in question, the defects and deficiencies in electrical installationsand wiring had been indicated and when the incident of fire took placedue to short-circuit, the company cannot avoid its liability by merelysuggesting that they had followed all preventive measures or had takena certificate from the Fire Department.

E20. As regards the entitlement of appellants to demand and recoverthe excise duty on IMFL lost in fire and corresponding liability of therespondent company to make such payment, learned counsel for theappellants has made elaborate reference to the relevant statutoryprovisions and has submitted that the demand in question has beensquarely in conformity with law and deserves to be upheld.F

21. With reference to entries 8 and 51 of List II of the SeventhSchedule to the Constitution of India, learned counsel would submit thatthe entire field of legislation on the subject relating to intoxicating liquorsas also the matters concerning duties of excise and countervailing dutiesis in the domain of the State legislature; and for the present purpose, theGmatter is governed by the provisions contained in the Act of 1910, theExcise Manual and the Rules of 1969. With reference to Sections 17,18, 19, 28, 29 and 30 of the Act of 1910 the learned counsel has submittedthat no intoxicant can be manufactured and no liquor can be bottled forsale except under the authority and subject to the terms and conditionsHof a licence granted in that behalf (Section 17); and, as per Section 18, the Excise Commissioner may grant a licence for establishment of distilleryand warehouse in which spirit may be manufactured under a licencegranted under Section 17. Further, as per Section 19, no intoxicant canbe removed from any distillery, brewery, warehouse or the place ofstorage, unless duty has been paid or a bond has been executed forpayment thereof. It is thus submitted that the condition precedent forremoval of any intoxicant is actual payment of the duty payable orexecution of bond for such payment. Learned counsel has referred tothe bond executed in favour of the Governor of Uttar Pradesh by therespondent for bottling of IMFL and has submitted that the licencee hasbeen under obligation to observe all the provisions of the Act of 1910and the rules made thereunder.

21.1 The learned counsel would submit that the distillery havingbeen established under PD-2 licence, the respondent was under obligationto follow the terms and conditions of the licence and correspondingly,has always been under obligation to deposit the duty demanded underthe provisions of the Act of 1910, particularly when all the operations,including that of transfer of the liquor from PD-2 licensed area to thebottling hall and to the godown and then, dispatch are covered by theterms of licence and the bond executed by the distiller. Yet further, learnedcounsel would submit that in terms of Rule 7(11) (a) of the Rules of1969, the respondent company was responsible for payment of duty onwastage in excess of 1 per cent and cannot avoid this obligation. Withreference to Rule 813 of the Excise Manual, the learned counsel hassubmitted that in terms thereof, free wastage allowance for differentkinds of spirits stored in a distillery is provided but with the specificexclusion of bottled spirit; and it is clear that once the spirit is bottled andstored, the licencee remains liable to make payment of excise duty incase of wastage of bottled spirit in terms of Rule 7(11)(a) of the Rulesof 1969 read with Rule 709 of Excise Manual. With reference to thedecision of this Court in the case of Har Shankar and Others v. DeputyExcise & Taxation Commissioner and Others: (1975) 1 SCC 737,the learned counsel would submit that when the licencee has taken thelicence after carefully reading the Rules of 1969, it cannot wriggle out ofthe conditions of licence.

22. On the question as to when IMFL became exigible to exciseduty, learned counsel has contended that in the scheme of the Act of1910 and Rules thereunder, excise duty is leviable right from the point of ABC

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Aentry of spirit into the distillery for manufacturing of alcohol and on everypoint including the points of blending, manufacturing and bottling; andthereafter on the bottled spirit. It is thus contended that the respondentcompany is incorrect in its assertion that the goods having been destroyedin the godown, excise duty did not become leviable. It is submitted thatthe moment spirit has been stored in the bottle, excise duty is leviable onBthe bottle, even if the same is not taken out of the warehouse.

22.1. With reference to Sections 28 and 29 of the Act of 1910,learned counsel would submit that these provisions, respectivelyempowering the State to impose excise duty and providing for the mannerin which the duty is to be levied, clearly show that the excise duty, whichCin real terms is price of exclusive privilege of the State, may be imposedon the liquor manufactured in the distillery and it is wrong to contendthat excise duty cannot be levied on bottled spirits or is liable to bequantified and collected only at the point of issuance of liquor fromgodown. Learned counsel has particularly referred to the decision ofDthis Court in the case of State of U.P. and Others v. M/s ModiDistillery Etc.: (1995) 5 SCC 753, as regards various features ofthe demand of excise duty at different stages and different events.The learned counsel has also referred to the decision in the case ofState of U.P. and Ors. v. M/s Mohan Meakin Brewery Ltd. andAnr.: (2011) 13 SCC 588.E

23. As regards another facet of the stand of respondent that therebeing regular deployment of the staff of Excise Department at thedistillery; the entire operation being under the control and supervision ofthe Excise Department; the bonded warehouse being always under thejoint lock of Excise Department and the respondent; and liquor beingFissued only upon the Excise Inspector opening the department’s lock,learned counsel would submit that such deployment of Excise Officersis necessary to ensure the implementation of the rules and to safeguardthe revenue interests of the State but for the matter, the safety andsecurity of the distillery and prevention of any mishap by properGmaintenance of the building and installations cannot be shifted on theExcise Department; and such safety and security had been the soleresponsibility of the licencee. Thus, according to the learned counsel, forthe fire incident in question, which could only be attributed to want ofproper maintenance and upkeep of installations and/or equipment, therespondent company alone remains liable and responsible.H

24. In another limb of submissions, learned counsel has referredto the fact that the respondent company had taken insurance coverageof the value of liquor and hence, was compensated by the insurer. Thelearned counsel has contended that when the respondent company gotreimbursement of value of liquor from the insurance company, the eventwas akin to that of the sale of liquor; and on the principles of equity andfair play, the State cannot be put to loss in the manner that even whenthe distiller has received value of liquor, the corresponding excise dutywould not be made available to the State. The learned counsel has alsocontended that omission on the part of the respondent company to takeinsurance coverage of the value of excise duty, while taking insurancecoverage of the value of the liquor, itself amounts to negligence on thepart of the respondent and for this reason too, the respondent is liable tomake payment of the excise duty on the value of liquor recovered fromthe insurance company. In support of these contentions, the learnedcounsel has referred to an order passed by the Customs, Excise andService Tax Appellate Tribunal, Northern Bench, New Delhi[8] in the caseof Dharampal Satyapal v. Commissioner of Central Excise, Noida:(2004) 167 ELT 291, wherein remission of duty on account of damageof goods (pan masala) in rain water was disallowed, when it was foundthat the assessee had been compensated by the insurance companywith an amount which was much more than the duty involved.

25. Per contra, the learned counsel for the respondent hassupported the order passed by the High Court allowing the writ petitionand has contended that there had not been any negligence on the part ofthe respondent company in relation to the incident of fire and no liabilitycould be fastened on it towards excise duty on the liquor destroyed infire. This apart, the learned counsel would contend, with reference toArticle 265 of the Constitution of India, that levy and collection of taxmust be authorized by law and in the scheme of the Act of 1910, theExcise Manual and the Rules of 1969, the excise duty could have beencollected only at the point of issuance of IMFL from distillery and therewas no question of demand of excise duty on the stock of IMFL destroyeddue to fire in the godown. The learned counsel has also submitted that inregard to the stock of IMFL destroyed in fire, there was no transfer ofproperty to anyone else and therefore, there was no sale so as to occasionrecovery of excise duty.

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A26. While asserting that the respondent had taken all precautionsof safe maintenance/storage of the stock of IMFL in the godown ofdistillery, learned counsel has submitted that the fire extinguishingequipments were installed in the distillery premises and the FireDepartment issued No Objection Certificate dated 01.03.2003 on beingfully satisfied with the precautions taken by the distillery in respect ofBthe safety against fire; that the Assistant Electrical Inspector issued thecertificate dated 19.09.2002 after inspection and on being satisfied thatthe electrical wiring equipments etc. were in accordance with IndianElectricity Act, 1966; that the distillery had obtained license to work on06.10.1994 which was renewed annually and was valid on the date ofCincident; that it was specifically stated in the report of the AssistantExcise Commissioner dated 02.08.2003 that the cause of fire could notbe ascertained and there was nothing to show that distillery was, in anymanner, negligent or had caused the fire deliberately; that even in thereport submitted by the police department, it was stated that the causeof fire could not be ascertained and there was absolutely no mention ofDany negligence on the part of the respondent; that in the report of theFire Department too, it was pointed out that the cause of fire could notbe ascertained; that the District Magistrate, Shahjahanpur, in his letterdated 21.10.2003 to the Principal Secretary(Excise) similarly stated thatthe reason of fire was unknown and there was no proof with regard toEthe negligence of distillery. With these facts and factors, learned counselfor the respondent would submit that the fire incident due to which IMFLgot destroyed was not caused by any negligence of the respondent andcoupled with this remains the fact that complete control and supervisionof the distillery was exercised by the State Excise Department. Thus,according to the learned counsel, there being no negligence on the partFof the respondent, no liability of excise duty on the liquor destroyed infire could be fastened on it.

27. While maintaining that there was no negligence on the part ofthe respondent, the learned counsel has assailed the legality and validityof the demand of duty against the respondent. In this regard, learnedGcounsel has referred to Article 265 of the Constitution of India, theprovisions of the Act of 1910 and the Rules thereunder as also the ExciseManual and has submitted that Rule 708 of the Excise Manual absolvesthe State Government from the responsibility for the destruction, loss ordamage of any spirit stored in distillery by fire or theft or by gauging orHproof or by any other cause, for the reason that the entire distillery (including godown) is under the lock and key of Excise Department.Learned counsel has referred to Rule 709 of the Excise Manual to submitthat in the event of loss, the distilleries are made liable to make good anyloss of revenue to the Government only in the event of such loss havingbeen caused due to their negligence. Learned counsel has emphaticallyargued that in terms of Rule 709, if a distillery has not been negligent insafe custody of the stock of spirit, it cannot be held liable to make paymenttowards loss of excise duty, if any, due to accident or reasons beyondthe control of human agency.

27.1. Yet further, learned counsel has submitted that entire bottlingoperations including the storage of bottled liquor are done under thestrict supervision of the Excise Inspector and the stocks are maintainedin separate rooms under joint lock and key of the department and thecompany. With reference to the Rules of 1969, particularly Rule 7 thereof,the learned counsel would submit that the stock so maintained under thejoint lock and key is issued for the purpose of export outside the state ofUP or for the purpose of wholesale vend within the state of UP; and it isonly at the point of issuance of liquor from the bottling rooms/godownswhen the excise duty is liable to be quantified and collected with referenceto the date, time and place of issuance. In this regard, learned counselhas also referred to the provisions contained in Sections 28 and 29 of theAct of 1910 and has re-emphasised that in exercise of powers thereunder,the State Government has chosen the point of issue for sale as being thepoint for quantification, calculation and collection of excise duty underits notification dated 30.03.1962 which makes it clear that the rate ofduty is linked to the point of time to the date of issue for sale and not tothe date of manufacture. Learned counsel would submit that IMFL inquestion having been destroyed on account of fire before its issuancefrom the godown for sale, there arise no question of collecting any exciseduty on the said destroyed stock of IMFL. Learned counsel has furthersubmitted that under the Excise Act though the duty is levied at the pointof manufacture but the point of collection of the duty is only at the timeof issuance for sale and hence, to cover the eventuality in between post-manufacturing and before sale, Rule 7(11) of the Rules 1969 allows 1%of wastage and mandates to charge full rate if wastage occurs beyond1%; and in case of destruction or loss due to fire or theft etc., the distilleryis made liable for loss of revenue only if there is negligence on its part.Thus, according to the learned counsel, in the present case, where theliquor had not been issued from the godown for sale and had not been A

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Alost due to any negligence on the part of distiller, the levy of excise dutydeserves to be disapproved, for being not the one authorized by law andbeing hit by the requirements of Article 265 of the Constitution of India.Learned counsel has referred to the decision in Somaiya Organic (India)Pvt. Ltd. and Anr. v. State of U.P. and Anr.: (2001) 5 SCC 519 tosubmit that both the levy and collection of tax must be authorised by law.BAccording to the learned counsel, the High Court has correctly held thatRule 709 of the Excise Manual would be applicable and no duty could beimposed on the respondent as there was no negligence on its part.

28. As regards the effect of insurance and reimbursement of thevalue of IMFL by the insurance company, learned counsel has referredCto the definition of sale in the Sale of Goods Act, 1930 as also in the U.P.Trade Tax Act, 1948, and has submitted that in the stock of IMFLdestroyed due to fire, neither there was any transfer of property northere was a sale; and the claim received from the insurer on account ofloss of goods in a fire cannot be termed as consideration. It is also submitted

Dthat not taking insurance cover for the excise duty was an irrelevant andimmaterial fact because liability to pay excise duty would have arisenonly when there was negligence on the part of the respondent companyand not otherwise. The learned counsel has also submitted that in fact,the insurance company itself would not have cleared the insurance claimif there was any negligence on the part of the respondent and clearanceEof insurance claim itself fortifies that there was no negligence on thepart of the respondent. It is also submitted that the respondent companyhad not earned any profit in the matter and in fact, it pays the exciseduty when the same is recovered from the ultimate consumer but in thepresent case, when the respondent did not pass on and did not recoverexcise duty from any consumer, the question of levying the same on theFrespondent does not arise.

29. We have heard learned counsel for the parties at sufficientlength and have examined the material placed on record with referenceto the law applicableGQuestions for determination30. In view of rival submissions, the following three major questionsarise for determination in this case:

A. As to whether demand of excise duty on the liquor lost in fireis authorised by law and has rightly been raised as per the applicableHprovisions of the Act of 1910, the Excise Manual and the Rules of 1969?

B. As to whether the fire incident in question had been an eventbeyond human control and no negligence could be imputed on therespondent company?

C. What would be the effect of the fact that the respondentcompany had taken insurance coverage only of the value of liquor (andnot that of excise duty thereupon) and then, had received the insuranceclaim towards the value of liquor?

Relevant statutory provisions

31. Having regard to the questions involved, we may take note ofthe constitutional and statutory provisions, which do carry their ownrelevance in the present case.

32. The fundamental constitutional mandate that no tax shall belevied or collected except by authority of law is contained in Article 265of the Constitution of India, which reads as under: - “265. Taxes not to be imposed save by authority of law.- Notax shall be levied or collected except by authority of law.”

32.1. The relevant Entries 8 and 51 in List II (State List) of theSeventh Schedule to the Constitution of India could also be usefullyreproduced as under: - “8. Intoxicating liquors, that is to say, the production, manufacture,possession, transport, purchase and sale of intoxicating liquors.

51. Duties of excise on the following goods manufactured orproduced in the State and countervailing duties at the same orlower rates on similar goods manufactured or produced elsewherein India: - (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics,but not including medicinal and toilet preparations containingalcohol or any substance included in sub-paragraph (b) of thisentry.”

33. The law relating to intoxicating liquors and intoxicating drugsin the State of Uttar Pradesh is principally governed by the provisionscontained in the U.P. Excise Act, 1910. A few of the relevant definitions A

B

C

D

E

F

G

H

Acontained in Section 3 as also the relevant provisions, which are of directbearing in the present case, as contained in Sections 17, 18, 19, 28 and29 read as under:-

3. Interpretation.- In this Act, unless there is somethingrepugnant in this subject or context -B(1) “excise revenue” means revenue derived or derivable fromany duty, fee, tax, fine (other than a fine imposed by a court oflaw), or confiscation imposed or ordered under the provisions ofthis Act, or of any other law for the time being in force relating toliquor or intoxicating drugs;*********C

(3a) “excise duty” and “countervailing duty” means any suchexcise duty or countervailing duty, as the case may be, as ismentioned in entry 51 of List II in the Seventh Schedule to theConstitution; *********D(8) “spirit” means any liquor containing alcohol obtained bydistillation, whether it is denatured or not;*********

(11) “liquor” means intoxicating liquor and includes spirits of wine,Espirit, wine, tari, pachwai, beer and all liquid consisting of orcontaining alcohol, also any substance which the State Governmentmay by notification declare to be liquor for the purposes of thisAct;*********F(22-a) “excisable article” means -(a) any alcoholic liquor for human consumption; or(b) any intoxicating drug;*********

G17. Manufacture of intoxicants prohibited except under theprovisions of this Act. - (1) (a) No intoxicant shall bemanufactured; (b) no hemp plant (cannabis sativa) shall be cultivated;

(c) no portion of the hemp plant (cannabis sativa) from whichHany intoxicating drug can be manufactured shall be collected; (d) no liquor shall be bottled for sale; and (e) no person shall use, keep or have in his possession anymaterials, still, utensil, implement or apparatus whatsoever for thepurpose of manufacturing any intoxicant other than tari.

Except under the authority and subject to the terms andconditions of a licence granted in that behalf by the Collector.

(2) No distillery or brewery or manufactory shall be constructedor worked except under the authority and subject to the termsand conditions of a licence granted in that behalf by the ExciseCommissioner under Section 18.

18. Establishment or licensing of distilleries andwarehouses.- The Excise Commissioner may- (a) establish a distillery in which spirit may be manufacturedunder a licence granted under Section 17 on such conditions asthe State Government deems fit to impose; (b) discontinue any distillery so established;

(c) licence, on such conditions as the State Government deemsfit to impose the construction and working of a distillery or breweryor manufactory; (d) establish or licence a warehouse wherein any intoxicantmay be deposited and kept without payment of duty; and (e) discontinue any warehouse so established.

19. Removal of intoxicants from distillery, etc.- No intoxicantshall be removed from any distillery, brewery, manufactory,warehouse or other place of storage established under this Actunless the duty (if any) payable under Chapter V has been paid ora bond has been executed for the payment thereof.

*********

28. Duty on excisable articles – (1) An excise duty or acountervailing duty, as the case may be at such rate or rates asthe State Government shall direct may be imposed, either generallyor for any specified local area, on any excisable article - A

B

C

D

E

F

G

H

(a) imported in accordance with the provisions of Section 12(1); A

or

(b) exported in accordance with the provisions of Section 13; or

(c) transported; or

(d) manufactured, cultivated or collected under any licencegranted under Section 17; or B

(e) manufactured in any distillery established, or any distilleryor brewery licensed, under Section 18 :

Provided as follows-

C

(i) duty shall not be so imposed on any article which has beenimported into India and was liable on such importation to dutyunder the Indian Tariff Act, 1894, or the Sea Customs Act, 1887.

Explanation. - Duty may be imposed under this section atdifferent rates according to the places to which any excisablearticle is to be removed for consumption, or according to the varyingstrength and quality of such article.

D

(2) The State Government shall, in imposing an Excise duty ora countervailing duty as aforesaid and in fixing its rate, be guidedby the directive principles specified in Article 47 of the Constitutionof India.

E

“29. Manner in which duty may be levied.-Subject to suchrules as the Excise Commissioner may prescribe to regulate thetime, place and manner of payment, such duty may be levied inone or more of the following ways as the State Government mayFby notifi- cation direct :

(a) In the case of excisable articles imported under Section 12 (1)-

(i) by payment either in the province of import or in the prov-ince or territory of export; or G

(ii) by payment upon issue for sale from a warehouse estab-lished or licensed under Section 18 (d); (b) in the case of excisable articles exported under Section 13-bypayment either in the province of export or in the province orterri- tory of import ; H

(c) in the case of excisable articles transported-

(i) by payment in the district from which the excisable articleis to be transported or

(ii) by payment upon issue for sale from a warehouse estab-lished or licensed under Section 18 (d) ; (d) in the case of intoxicating drugs manufactured under anylicence granted under Section 17 (1) -

(i) by a rate charged upon the quantity manufactured under alicence granted under the provisions of Section 17 (1) (a), orissued from a warehouse established or licensed under Sec-tion 18 (d) ;

(ii) where the intoxicating drug is manufactured from hempplant (cannabis sativa) cultivated or collected under a licencegranted under the provisions of Section 17 (1) (b) and (c), byan acreage rate levied on the cultivation, or by a rate chargedupon the amount collected ; (e) in the case of spirit or beer manufactured in any distilleryestab- lished or any distillery brewery or manufactory licensedunder Sec- tion 18-

(i) by a rate charged upon the quantity produced or issuedfrom the distillery brewery or manufactory, as the case maybe, or issued from a warehouse established or licensed underSection 18 (d) ;

(ii) by a rate charged in accordance with such scale or equiv-alents, calculated on the quantity of materials used or by thedegree of attenuation of the wash or wort, as the case may be,as the State Government may prescribe :

Provided that, where payment is made upon issue of an ex-cisable article for sale from a warehouse established or licensedunder Section 18(d), it shall be at the rate of duty which is inforce on the article on the date when it is issued from thewarehouse.”

34. Rules 708, 709 and 813 of the Excise Manual, dealing with theissues pertaining to loss of spirit in distilleries and wastage allowance,read as under: - A

B

C

D

E

F

G

H

A

A“708. Government not liable for loss, of spirit indistilleries.- Government shall not be liable for the destruction,loss or damage of any spirit stored in distilleries by fire or theft, orby gauging, or proof, or by any other cause whatsoever. In caseof fire or other accident officers in-charge of distilleries shallimmediately attend, to open the premises at any hour by day orBnights.

709. Distillers responsible for loss etc. of spirit in distilleries.- Distillers shall be responsible for the safe custody of stock ofspirit in their distilleries and shall be liable to make good any lossof revenue caused to Government by their negligence.

C

*********

813. Wastage allowance. – The free wastage allowances fordifferent kinds of spirit (excluding bottled spirit) stored in a distilleryshall be as follows:

D

E

If the total wastage on any kind of spirit does not exceed 3 percent duty will be charged on the net wastage in excess of the freeallowances. But if the total wastage exceeds 1.5 per cent dutyshall be liable to be charged on the whole wastage without allowingFfor the free allowances at the following rates :

(1) Plain and rectified sprits. - At the highest rate of dutyleviable on country spirit in the case of plain spirit and atthe highest rate of duty leviable on I.M.F.L., in the case ofRectified sprit.

G

-(2)Sophisticated spirits including spiced Country spirit. At the rate of duty leviable on that spirit.

(3) Denatured spirit. - A penalty at the highest rate of purchasetax leviable on such spirit :

H

Provided that if it is proved to the satisfaction of the ExciseCommissioner that the deficiency or wastage in excess of theprescribed limit has been caused by an accident or otherunavoidable cause, the payment of duty on such deficiency orwastage shall be not be required.

When the wastage does not exceed the prescribed limit, no actionneed be taken by the officer-incharge, but when an excess isfound in any case at the time of monthly stock-taking, the officerincharge must obtain a written explanation from the distillers andforward the same together with a full report of the circumstancesto the Assistant Excise Commissioner/Deputy ExciseCommissioner. The Assistant Excise Commissioner/Deputy ExciseCommissioner shall charge the duty on excess wastage if he issatisfied that the wastage in excess of the prescribed limit is noton account of an accident or any unavoidable cause. In case theexcess wastage is due to an accident or unavoidable cause, thematter will be referred to the Excise Commissioner for orders.”

35. One major activity concerning one of the intoxicating liquors,namely, bottling and storage of foreign liquor, is regulated in the State ofUttar Pradesh by the Rules of 1969 which, inter alia, provide for grantof bottling licence in Form FL-3 to a distiller to bottle spirits; to a brewerto bottle beer; and to a vintner to bottle wines. Various general conditionsof such a licence are contained in Rule 6 of these Rules and then,additional special conditions in relation to bottling of IMFL in bond underFL-3 licence are contained in Rule 7. Elaborate provisions have beenmade in Rule 7 concerning the actual operations of bottling and storageas also supervision thereof. For the present purpose, only sub-clause(11) of Rule 7 needs to be noticed and the same is reproduced hereunder(while omitting other sub-clauses, being not relevant): - “7. Following additional special conditions will be applicable tobot- tling of Indian Made Foreign Liquor in bond under F.L.-3licence :

******

***

(11) (a) An allowance up to one per cent. may be made on thetotal quantity of spirit stored during a month for actual loss inbottling and storage. The licensee shall be responsible for thepayment of duty on wastage in excess of one per cent.

A

BC

D

E

F

G

H

A(b) When the wastage does not exceed the prescribed limit, noac- tion need be taken by the Excise Inspector incharge but if anexcess is found at the time of monthly stock taking the ExciseInspector shall submit a statement to the Collector by fifth day ofthe month in Form F.L.B.-10 showing the quantity of actualwastage and the duty to be paid by the licensee on the excessBwastage. On receipt of the statement, the Collector shall recoverthe duty from the licensee at the full rate of duty leviable on Indianmade foreign spirit.

******

***”

C

36. Before proceeding further we may, at once, summarise thatIMFL destroyed in fire in this case undoubtedly answered to thedescription of “spirit”, “liquor” and “excisable article” within the meaningof Clauses (8), (11) and (22-a) of Section 3 of the Act of 1910, for beingan intoxicating liquor containing alcohol obtained by distillation; and theDsame was manufactured under a licence granted in terms of Section 17in the distillery of the respondent and was kept in the warehouseestablished in terms of Section 18 of the Act of 1910. Thus, this liquor(IMFL) could not have been removed from the place of storage unlessexcise duty payable thereupon had been paid or a bond was executedfor the payment thereof. The duty was payable in terms of Section 28Eand its rate was to be that as applicable on the date of its issue from thewarehouse in terms of Section 29. An allowance upto 1% was admissibleon the total quantity of liquor stored during a month for actual loss inbottling and storage and else, no wastage allowance as such wasadmissible thereupon. Moreover, the Government was not to be liableFfor any loss in the quantity of this stored liquor for whatever reason; andon the other hand, the distillery, i.e., the respondent was to be responsiblefor the safe custody thereof and also liable to make good any loss ofrevenue including owing to any loss during storage beyond permissibleone per cent of the total quantity. Considering that mandate, therespondent was solely liable for payment of excise duty on wastage ofGstored total quantity with allowance only upto one per cent, as specified.While keeping in view these salient features emerging from a combinedreading of the above quoted provisions of the Act of 1910, the ExciseManual and the Rules of 1969, we may take up the questions calling fordetermination in this case.

H

Whether the demand in question is authorised by law?

37. With reference to the provisions above-mentioned, the mainplank of submissions on behalf of the respondent company has been thatthe point of quantification and calculation of excise duty being the pointof issue from the bonded warehouse and that point/stage having notreached in relation to the liquor destroyed in fire, the question of demandof excise duty would not arise. It has also been submitted that Rule7(11) of the Rules of 1969 has no application and only Rule 709 of theExcise Manual could apply for which, negligence on the part of thedistillery is required to be proved. Before taking up the issue relating tothe applicable rule, we may deal with the fundamental question raisedon behalf of the respondent, i.e., as to whether the demand is unauthorisedfor the reason that the point/stage of quantification and calculation ofduty had not reached and liquor got destroyed while lying in warehouse.

38. As noticed, such an argument, that the demand of duty remainsunauthorised for the point of issue of liquor having not reached, was notraised as such before the High Court nor the High Court had proceededon that basis. Be that as it may, the submission even otherwise remainsuntenable and is required to be rejected.

39. It remains a fundamental constitutional mandate, and needsno elaboration, that in terms of Article 265 of the Constitution, both levyand collection of tax must be authorised by law, as held by this Court inthe case of Somaiya Organics (supra). It remains equally trite that byvirtue of Entry 51 of List II, the State has been authorised to imposeduty of excise on alcoholic liquors for human consumption manufacturedor produced in the State. The question raised on behalf of the respondentcompany, about the authority of the appellant-State to levy excise dutyon the liquor in question that was destroyed in fire and had not reachedthe point of issue, could be adequately answered with reference to theprinciples concerning the event and the point where entitlement of theState to levy excise duty, and corresponding liability of the respondent tomake payment thereof, comes into existence.

39.1. In the case of State of U.P. & Ors. v. Delhi Cloth Mills &Anr.: (1991) 1 SCC 454, this Court dealt with the question as to whetherexcise duty could have been levied on the wastage of liquor in transitand held that the levy of differential duty, which was charged uponreporting of excess wastage, did not cease to be an excise duty even ifit was levied upon declaration of excess wastage because, ‘the taxable A

B

C

D

E

F

G

H

Aevent was production or manufacture of liquor.’ This Court furthermade it clear that the excise duty remained a single point duty whichcould be levied at one of the points mentioned in Section 28 of the Act of1910. The relevant observations and declaration of law by this Courtcould be usefully reproduced as under: - B“8. The original Section 28 of the Act now re-numbered as sub-section (1) thereof, and sub-sections (2) and (3) inserted by Section2 of the U.P. Act 7 of 1970 clearly covers Indian made foreignliquors. There can be no dispute as to military rum being one ofthe Indian made foreign liquors excisable under the Act. A duty ofexcise under Section 28 is primarily levied upon a manufacturerCor producer in respect of the excisable commodity manufacturedor produced irrespective of its sale. Firstly, it is a duty uponexcisable goods, not upon sale or proceeds of sale of the goods. Itis relatedto production or manufacture of excisable goods. Thetaxable event is the production or manufacture of the liquor.DSecondly, as was held in A.B. Abdulkadir v. State of Kerala:AIR 1962 SC 922, an excise duty imposed on the manufactureand production of excisable goods does not cease to be so merelybecause the duly is levied at a stage subsequent to manufactureor production. That was a case on Central Excise, but the principleis equally applicable here. It does not cease to be excise dutyEbecause it is collected at the stage of issue of the liquor out of thedistillery or at the subsequent stage of declaration of excesswastage.Legislative competence under entry 51 of List II onlevy of excise duty relates only to goods manufactured or producedin the State as was held in Bimal Chandra Banerjee v. State ofFM.P.: 1970 (2) SCC 467. In the instant case there is no disputethat the military rum exported was produced in the State of U.P.In State of Mysore v. D. Cawasji &Co.: 1970 (3) SCC 710,which was on Mysore Excise Act, it was held that the excise dutymust be closely related to production or manufacture of excisablegoods and it did not matter if the levy was made not at the momentGof production or manufacture but at a later stage and even if itwas collected from retailer. The differential dutyin the instantcase, therefore, did not cease to be an excise duty even if it waslevied on the exporter after declaration of excess wastage. Thetaxable event was still the production or manufacture.H*********

17. …. If out of the quantity of military rum in a consignment, apart of portion is claimed to have been wastage in transit and tothat extent did not result in export, the State would, in the absenceof reasonable explanation, have reason to presume that the samehave been disposed of otherwise than by export and impose on itthe differential excise duty. A statute has to be construed in lightof the mischief it was designed to remedy. There is no disputethat excise duty is a single point duty and may be levied at one ofthe points mentioned in Section 28.”

39.2 In the case of M/s Mohan Meakin Brewery Ltd. (supra),the question of exigibility of beer to excise duty arose in respect of excesswastage in the brewery. With reference to the aforesaid decision in thecase of Delhi Cloth Mills as also several other decisions and uponinterpretation of Section 29(e)(i) of the Act of 1910, this Court reaffirmedthat exigibility of the liquor (beer in that case) to excise duty occurred atthe stage of manufacture or production in the following words:- “33. Section 29(e)(i) of the U.P. Excise Act makes it clear that inthe case of beer manufactured in a brewery, excise duty may belevied, by a rate charged upon the quantity produced or issuedfrom the brewery or issued from a warehouse. This means that inrespect of beer that undergoes the process of filtration, theexigibility to excise duty will occur either at the end of the filtrationprocess when it is received in storage/bottling tanks or when it isissued from the brewery.In regard to draught beer drawn directlyfrom fermentation vessels, without further processing or filtration,the exigibility to excise duty will occur either at the end of thefermentation process or when it is issued from the brewery.”

40. The very same provision [i.e., Section 29(e)(i) of the Act of1910], which has been interpreted by this Court in the aforesaid decisionof M/s Mohan Meakin in relation to beer manufactured in a brewery,applies with necessary variations to the case of spirit manufactured in adistillery established under Section 18. Undoubtedly, the liquor in questionwas manufactured by the respondent company in its distillery establishedunder Section 18. Thus, the liquor that had been produced, became exigibleto excise duty at the end of the distillation process when it was received A

B

C

D

E

F

G

H

Ain storage/bottling tanks or when it was issued from the distillery. To putit differently, the taxable event was production or manufacture of thisliquor, for it being a duty upon the goods and not upon sale or proceedsof sale of the goods.

41. As per Section 19, no intoxicant (and that obviously includesBthe liquor manufactured by the respondent) can be removed from thedistillery or the place of storage unless the duty leviable thereupon hasbeen paid or a bond has been executed for the payment thereof.Considering the overall scheme of the Act and the Rules, it may not beout of place to interpret the expression “removal” in Section 19 to includewastage in excess of permissible limit of total quantity of spirit producedCor manufactured and stored. A comprehensive look at the scheme ofSections 17 to 19 and 28 and 29 of the Act of 1910 and the enunciationsof this Court leave nothing to doubt that in respect of the liquor that hadundergone the process of distillation, exigibility to excise duty had occurredat the end of the distillation process or when it was issued from theDdistillery. The point of quantification of this duty, even if linked in point oftime to the date of issue for sale in terms of proviso to Section 29, doesnot relate to the ‘event of chargeability’ that had occurred as soon as theliquor was distilled and received in the bottling tank or had been otherwiseissued from distillery. In other words, the liquor that was lying stored in

the bonded warehouse had already become subject to the excise duty,Ewith postponement of actual charging of the duty as per the rate applicableon the date and time of issue for sale from the warehouse. It gets perforcereiterated that taxable event was production or manufacture, and notsale, of the liquor. In this view of the matter, the submission that the levyin question is not authorised by law, and is hit by Article 265 of theFConstitution of India, remains untenable and is required to be rejected.

42. As regards the applicable rules for the demand in question,the High Court has proceeded on the reasoning that the present one hadnot been the case of wastage in handling and therefore, Rule 7(11) ofthe Rules of 1969 would not be applicable. The respondent companyGhas also submitted that Rule 7(11) of the Rules of 1969 is inapplicableand it is pointed out that even the State Government had directed theExcise Commissioner to proceed under Rule 709 of the Excise Manualand not Rule 7(11) of the Rules of 1969, which deals only with wastagein normal course of bottling operation and storage. It has further beencontended that only Rule 709 of the Excise Manual could be takenH

recourse of by the Government, but in that case, the distillery could bemade liable only if it could be shown that the loss had been caused to theGovernment by any negligence on part of the distillery.

43. In regard to the above submissions, though the demand inquestion would be essentially referable to Rule 709 of the Excise Manual,but Rule 7(11) of the Rules of 1969 provides for an allowance up to 1%on the total quantity of spirit stored during a month towards actual loss inbottling and storage; and the licencee is responsible for payment of dutyon the wastage in excess of 1%. This Rule 7(11) makes it clear thateven in relation to the wastage in storage, the allowance is only up to 1%of total quantity of spirit stored during a month. This provision may alsobe read with Rule 813 of the Excise Manual, which provides for freewastage allowance for different kinds of spirit in a distillery with thespecified percentage, namely the plain and spiced spirit (0.7%), rectifiedand sophisticated spirit (0.4%), and denatured spirit (0.5%). Thesignificant aspect of the matter is that though wastage allowance isprovided for different kinds of spirit but, the bottled spirit is specificallyexcluded therein.

44. A comprehensive look at the relevant provisions of law makesit clear that so far as IMFL is concerned, no provision is made in theExcise Manual for any wastage allowance in relation to the bottled sprit,but, in terms of Rule 7(11) of the Rules of 1969, an allowance up to 1%on the total quantity of spirit stored during a month may be allowed foractual loss in bottling and storage. Any allowance for any wastage orloss beyond the same remains, obviously, impermissible. The logic is notfar to seek. As noticed, in respect of the liquor that had undergone theprocess of distillation, exigibility to excise duty had occurred at the endof the distillation process or when it was issued from the distillery. Thus,any loss or wastage of the bottled spirit would be directly a loss of exciseduty it had already become exigible to. The rule making authority hastaken abundant care to ensure that there is no pilferage of the exciserevenue available to the Government on the bottled spirit by any act ofwastage, while making the licencee responsible for payment of duty onwastage in excess of 1% on the total quantity of spirit stored during themonth. Thus, neither the submissions on behalf of the respondent companynor the observations of the High Court about the total inapplicability ofRule 7(11) could be accepted. In other words, Rule 7(11) of the Rules of1969 is required to be taken into account for the legal consequences that ABCDE

F

G

H

ABCDE

F

G

H

Aso far as the bottled spirit is concerned, the licencee remains responsiblefor payment of duty on any kind of wastage in excess of 1%. Coupledwith this provision, Rule 709 of the Excise Manual makes it clear thatthe distillery remains responsible for safe custody of the stock of spiritand remains liable to make good any loss of revenue caused to theGovernment by their negligence.B

45. Therefore, a plain answer to the legal issue raised on behalfof the respondent company is that the demand in question cannot be saidto be unauthorised but, its validity would depend on answer to the questionas to whether negligence could be imputed on the respondent companyin terms of Rule 709 of the Excise Manual. We shall examine variousCfeatures related with this question in the next segment of discussion.Whether respondent company remains liable to pay excisedutyon the liquor lost in fire

46. As noticed, the fire incident in question led the ExciseDCommissioner to propose recovery of excise duty on the stock of IMFLdestroyed in fire from the respondent company and the respondentcompany maintained that the incident was due to the reasons beyondhuman control and there was no negligence on its part. However,ultimately, the Excise Commissioner passed the order dated 11.07.2006holding, inter alia, that the respondent company had not arranged theEfire proof electric equipments of good quality due to which the incidenthad taken place; and the carelessness of the distillery for the safety ofstock cannot be attributed to an act of God. The High Court has, however,held that the inference drawn by the Excise Commissioner was nothingbut of conjectures and surmises without any material foundation. TheFHigh Court has also observed that when a fiscal liability was founded ona condition precedent, i.e., negligence on the part of the person concerned,no responsibility could be fixed unless such negligence was shown to befounded on some material. According to the appellants, the incident inquestion is attributable only to some negligence on the part of therespondent company and it had not been an act of God for having occurredGon account of fault in the electrical installation and short circuit; and theincident was avoidable if proper and necessary care was taken by therespondent company. On the other hand, on behalf of the respondent,though the principles relating to an “act of God” have not been invokedas such before us but the contention has been that the fire was notHcaused by the negligence of the respondent company in maintaining safe custody of the stock of spirits; and the incident had been the one whichoccurred for the reasons beyond the control of human agency. It hasalso been contended that the entire distillery (including the godown) hasbeen under lock and key of the department; and the department hadbeen exercising complete control and supervision over the distillery and,therefore, no negligence could be imputed on the respondent.

Control of Department over the distillery and godown: effect of

47. In view of rival submissions, we may begin with the issuerelating to supervision and control of State Excise Department over thedistillery and the godown. The submissions made in this regard on behalfof the respondent company remain baseless and have only been notedto be rejected. In the scheme of the Act of 1910, the Rules of 1969 andthe Excise Manual, it is evident that the Government is not liable fordestruction, loss or damage of any spirit stored in distillery by fire ortheft or any other cause (as per Rule 708 of the Excise Manual). On theother hand, distillery is made responsible for safe custody of the stock ofspirit and is also made liable to make good any loss of revenue caused tothe Government by their negligence.

47.1. It has rightly been contended on behalf of the appellantsthat the purpose of posting Excise Officers in the distillery is for securingthe interest of the State by collection of revenue and to put a check overany act of theft, wastage, illegal sale as also to ensure properimplementation of rules. Rule 736 of the Excise Manual makes it clearthat the doors of buildings or rooms which are used for storage of spiritare under double locks, where one of the locks is of the Excise Departmentand other of the distillery. The other provisions of the Rules of 1969 andthe Excise Manual further make it clear that as regards generalarrangement and management of distilleries, elaborate provisions havebeen made like as to how the pipes would be laid, fixed and painted, asto how lock fastening would be constructed etc. Even a minor alterationin the distillery arrangement requires previous sanction of the ExciseCommissioner (Rule 771) and repairs etc. are to be reported (Rule 772).The rules in their conspectus provide for strict supervision and control ofthe Excise Department over the working of distillery at every stage butthat supervision and control does not correspondingly absolve the distilleryof its duty and responsibility towards safe custody of the stock of spiritand towards avoidance of wastage. Any doubt in that regard is effectivelyquelled by a combined reading of Rules 708 and 709 of the Excise Manual A

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Aas also Rule 7(11) of the Rules of 1969. The contentions in this regard asurged on behalf of the respondent company are, therefore, rejected.

Negligence

48. Now, for entering into the core of this matter, i.e., as to whetherthe loss of revenue caused to the Government by destruction of liquor inBfire could be attributed to any negligence on the part of the respondentcompany, we may take note of the legal principles related with the liabilityarising out of, or due to, negligence as also the exceptions and defencesin relation to any claim based on negligence.

49. “Negligence” is one such class of “wrongs” that leads toCliability. The fundamental jurisprudential principle of “liability” is crisplydefined in Salmond on Jurisprudence[9] thus: - “Liability or responsibility is the bond of necessity that existsbetween the wrongdoer and the remedy of the wrong.”

“Liability” arises from breach of duty, which may be in the formDof an act or omission. We need not delve, for the present purpose, on theclassification of liability into civil or criminal and remedial or penal andvarious other jurisprudential features of liability. In the present case, weare primarily concerned with the question of liability arising out ofnegligence. Having regard to the questions involved and the provisionsapplicable, it would be appropriate to take into comprehension the meaningEand connotation of the term “negligence” with reference to thedictionaries, lexicons and decided cases.

49.1. In Concise Oxford English Dictionary[10], the term “negligence”is defined and explained as under: - F“negligence n. failure to take proper care over something. Law breach of a duty of care which results in damage.”

The adjective of this expression is “negligent” and its adverb formis ‘negligently’. These expressions, for deeper understanding need to becorrelated with the verb ‘neglect’ that has been defined and explained inthe same dictionary as under: -G

“neglect v. fail to give proper care or attention to. — fail to dosomething. n. the state or process of neglecting or beingneglected. — failure to do something.”

H109 12th Edition, p. 349. 11th Edition, p. 958.

49.2. In Webster’s Third New International Dictionary,[11] the terms“neglect” and “negligence” are defined and explained as under: -

“ne•glect 1 a : to give little or no attention or respect to : consideror deal with as if of little or no importance : DISREGARD,SLIGHT <some of the most significant issues have been ~ed -Bruce Payne> <~ed the real needs of the students> b : to fail toattend to sufficiently or properly : not give proper attention orcare to ….. 2 : to carelessly omit doing (something that should bedone) either altogether or almost altogether : leave undone orunattended to through carelessness or by intention : pass lightlyover <~ing their obvious duty> <~ed to mention that he was aconvict –Bernard Smith>.

“neg•li•gence 1 a : the quality or state of being negligent b : afailure to exercise the care that a prudent person usu. exercises –opposed to diligence;”

49.3. In Black’s Law Dictionary[12], “negligence” and several ofits forms and features have been explained. For the present purpose, wemay usefully extract the relevant parts as under: - “negligence, n. (14c) 1. The failure to exercise the standard ofcare that a reasonably prudent person would have exercised in asimilar situation; any conduct that falls below the legal standardestablished to protect others against unreasonable risk of harm,except for conduct that is intentionally, wantonly, or willfullydisregardful of others’ rights; the doing of what a reasonable andprudent person would not do under the particular circumstances,or the failure to do what such a person would do under thecircumstances…..

active negligence. (1875) Negligence resulting from an affirmativeor positive act, such as driving through a barrier. Cf. passivenegligence.

advertent negligence. (1909) Negligence in which the actor isaware of the unreasonable risk that he or she is creating;RECKLESSNESS. – Also termed willful negligence; supinenegligence.

11 1976 Edition Vol. II p. 1513

12 10th Edition pp. 1196-1198

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Acasual negligence. (1812) A plaintiff’s failure to (1) payreasonable attention to his or her surroundings, so as to discoverthe danger created by the defendant’s negligence, (2) exercisereasonable competence, care, diligence, and skill to avoid thedanger once it is perceived, or (3) prepare as a reasonable personwould to avoid future dangers.Bgross negligence. (16c) 1. A lack of even slight diligence orcare.

• The difference between gross negligence and ordinarynegligence is one of degree and not of quality. Gross negligenceCis traditionally said to be the omission of even such diligence ashabitually careless and inattentive people do actually exercise inavoiding danger to their own person or property. – Also termedwillful and wanton misconduct. 2. A conscious, voluntary act oromission in reckless disregard of a legal duty and of theconsequences to another party, who may typically recoverDexemplary damages. – Also termed reckless negligence; wantonnegligence; willful negligence; willful and wanton negligence;willful and wanton misconduct; hazardous negligence; magnaneglegentia.

inadvertent negligence. (18c) Negligence in which the actor isEnot aware of the unreasonable risk that he or she is creating, butshould have foreseen and avoided it. – Also termed simplenegligence.

passive negligence. (18c) Negligence resulting from a person’sfailure or omission in acting, such as failing to remove hazardousFconditions from public property. Cf. active negligence.”49.4. In P. Ramanatha Aiyar’s Advanced Law Lexicon[13], variousconnotations of the expression “negligence” are stated, inter alia, in thefollowing terms: -

“Negligence. Failure to use the care that a reasonable and prudentGperson would have used under the same or similar circumstances.

Negligence in law signifies a coming short of the performance ofduty.

13H 5th Edition, Vol. 3, p. 3435

Failure to use the care that a reasonably prudent and careful personwould use under similar circumstances.

Negligence is “the absence of proper care, caution and diligence;of such care, caution and diligence, as under the circumstancesreasonable and ordinary prudence would require to be exercised.”

50. Salmond on Jurisprudence[14] refers to a terse exposition inGrill v. General Iron Screw Colliery Co.: (1866) L.R. 1 C.P., thatnegligence is “the absence of such care as it was the duty of thedefendant to use”; and further explains the subtle distinction ofinadvertent and advertent negligence in the following: - “It is to be observed, in the second place, that carelessnessor negligence does not necessarily consists in thoughtfulness orinadvertence. This is doubtless the commonest form of it, but it isnot the only form. If I do harm, not because I intended it, butbecause I was thoughtless and did not advert to the dangerousnature of my act, or foolishly believed that there was no danger, Iam certainly guilty of negligence. But there is another form ofnegligence, in which there is no thoughtlessness or inadvertencewhatever. If I drive furiously down a crowded street, I may befully conscious of the serious risk to which I expose other persons.I may not intend to injure any of them, but I knowingly andintentionally expose them to the danger. Yet if a fatal accidenthappens, I am liable, at the most, not for wilful, but for negligenthomicide. When I consciously expose another to the risk ofwrongful harm, but without any wish to harm him, and harm actuallyensues, it is inflicted not wilfully, since it was not desired, norinadvertently, since it was foreseen as possible or even probable,but nevertheless negligently (c).

Negligence then is failure to use sufficient care, and thisfailure may result from a variety of factors…..”

51. Without multiplying the case law on the topic, sufficient itwould be to refer to the connotation of the term “negligence” explainedsuccinctly by this Court in the case of State of Maharashtra and Ors.v. Kanchanmala Vijaysing Shirke and Ors.: (1995) 5 SCC 659 asfollows: - A

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A“9.…‘Negligence’ is the omission to do something which areasonable man is expected to do or a prudent man is expected todo...”

52. Therefore, it could be reasonably summarised for the presentpurpose that failure to exercise that care which a reasonably prudentBperson would usually exercise under similar circumstances would amountto negligence; it is not necessary that negligence would always beadvertent one where the wrongdoer is aware of unreasonable risk beingcreated but it may be inadvertent or passive too, arising for want offoresight or because of some omission. However, the question as towhether the liability because of negligence could be fastened on theCrespondent company or not cannot be determined without dealing withthe other aspects related with exceptions and defence to the allegationof negligence.

Act of God

Act of God

D53. In its assertions before the Department as also before theHigh Court, the respondent company attempted to rely upon the principlesrelated with “act of God” and it was sought to be suggested that if thefire had taken place despite the company having taken all care, it wasnothing but an act of God of which, no human agency had any control.The High Court has accepted this part of submissions. Though in theEargument before us, learned counsel for the respondent has not laidmuch stress on this theory but looking to the relevant background, itwould be apposite to take note of a few features related with “act ofGod” and its connotations on the jurisprudential principles of liability.

54. In P. Ramanatha Aiyar’s Advanced Law Lexicon[15], variegatedFconnotations of the term “act of God” or Vis major are specified withreference to the treatise and citations. A few relevant aspects for thepresent purpose could be usefully extracted as under: - “All natural agencies, as opposed to human activities, constituteacts of God, and not merely those which attain an extraordinaryGdegree of violence or are of very unusual occurrence. Thedistinction is one of kind and not one of degree. The violence orrarity of the event is relevant only in considering whether it couldor could not have been prevented by reasonable care : if it could not, then it is an act of God which will relieve from liability,howsoever trivial or common its cause may have been. If this becorrect, then the unpredictable nature of the occurrence will goonly to show that the act of God in question was one which thedefendant was under no duty to foresee or provide against. It isonly in such a case that the act of God will provide a defence.”R.F.V. HEUSTON. Salmond on the Law of Torts 330 (17th ed.1977).

“A natural act such as a storm, floods or an earthquake whichcannot be foreseen and usually absolves a person from liability ifdamage occurs as a result.

Any event so out of the ordinary that it could not have beenprevented by any amount of human care and forethought, e.g.lightning, freak tidal waves or floods etc., which relieves acontractor, such as a freight carrier, of any liability for lossessuffered as a result of it.”

“…..The expression ‘act of God’ signifies the operation of naturalforce free from human intervention, such as lightning. It may bethought to include such unexpected occurrences of nature assevere gale, snowstorms, hurricanes, cyclones and tidal-bures andthe like. But every unexpected wind and storm does not operateas an excuse from liability, if there is a reasonable possibility ofanticipating their happening. An act of God provides no excuse,unless it is so unexpected that no reasonable human foresightcould be presumed to anticipate the occurrence, having regard tothe conditions of time and place known to be prevailing at…..”

54.1 The case of Mahadeva Shetty (supra) related to the losssuffered by the claimant due to the injuries sustained in a vehicularaccident that rendered him paraplegic. The bus in which he was apassenger plunged into a pit after rolling down from a great height. Thestand of the appellant Corporation in opposition to his claim petition wasthat the accident was not due to rash and negligent driving but was anact of God. In that context, this Court explained the essential featuresconcerning an act of God in contradistinction to an act or omission ofhuman beings in the following words: - “9. The expression “act of God” signifies the operation of naturalforces free from human intervention, such as lightening, storm AB

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Aetc. It may include such unexpected occurrences of nature assevere gale, snowstorms, hurricanes, cyclones, tidal waves andthe like. But every unexpected wind and storm does not operateas an excuse from liability, if there is a reasonable possibility ofanticipating their happening. An act of God provides no excuseunless it is so unexpected that no reasonable human foresightBcould be presumed to anticipate the occurrence, having regard tothe conditions of time and place known to be prevailing. Forinstance, where by experience of a number of years, preventiveaction can be taken, Lord Westbury defined the act of God(damnum fatale in Scotch Laws) as an occurrence which noChuman foresight can provide against and of which human prudenceis not bound to recognize the possibility. This appears to be thenearest approach to the true meaning of act of God. LordBlancaburgh spoke of it as “an irresistible and unsearchableprovidence nullifying our human effort”.

D54.2. In the case of Vohra Sadikbhai Rajabhai (supra), the waterreleased from a dam constructed by the respondents flooded the land ofthe appellants and destroyed the plantation therein. As per the respondents,the water had to be released from the dam as it reached alarming levelbecause of heavy rains and non-release would have breached the dam;and that the action was taken in public interest and it was occasionedEbecause of the rains, which was an act of God. The appellants, on theother hand, contended that it was sheer negligence on the part of therespondents in not maintaining low level of the water keeping in mindthe ensuing monsoon season and, therefore, the damage which theappellants suffered had direct nexus or causal connection with theFaforesaid act of negligence and it could not be attributed to the rains;and hence, the respondents could not term it as an act of God and excusethemselves from tortious liability. The Trial Court and the High Courtaccepted the case of respondents that they were forced to release thewater due to the heavy rains; and that the land of the appellants wasGsituated adjacent to the river bank and, therefore, due to heavy rain, theriver could have overflown resulting in entering of the water into thefields of the appellants in any case.

54.2.1. In appeal, this Court, while examining the question as towhether it were a case of gross negligence, observed that the respondentsdid not properly controvert the allegations of the appellants that waterH

was not maintained at an appropriate level to take care of ensuingmonsoons. They had also not supported their plea to the effect that hadthe water been not released, it would have breached the dam and thatact would have caused more public harm. This Court held that since thedam was constructed and maintained by the respondents and theappellants suffered losses as a result of release of water from the saiddam, onus was on the respondents to prove that they had taken propercare in maintaining appropriate level of water in the dam. This Courtfurther held that the respondents were the owners of the dam in question;and they were expected to keep the dam in such a condition whichavoided any loss or damage of any nature to the neighbours or passersby.This Court observed that merely by saying that the level of water in thedam increased because of monsoon rains and that the water was releasedin public interest could not be treated as discharging the burden on thepart of the respondents in warding off the allegation of negligence. Whilerejecting the defence of an “act of God”, this Court explained thus: -

“22. …. An act of God is that which is a direct, violent, suddenand irresistible act of nature as could not, by any amount of ability,have been foreseen, or if foreseen, could not by any amount ofhuman care and skill have been resisted. Generally, those actswhich are occasioned by the elementary forces of nature,unconnected with the agency of man or other cause will comeunder the category of acts of God. Examples are: storm, tempest,lightning, extraordinary fall of rain, extraordinary high tide,extraordinary severe frost, or a tidal bore which sweeps a ship inmid-water. What is important here is that it is not necessary thatit should be unique or that it should happen for the first time. It isenough that it is extraordinary and such as could not reasonablybe anticipated……”

54.3. The case of Patel Roadways (supra) essentially related toa common carrier’s liability when goods entrusted to it were destroyedin a fire that took place in the godown of the appellant. As regards thequestion of negligence vis-a-vis a common carrier’s liability, this Courtreferred to a passage from Sarkar on Evidence (15th Edn., 1999) at p.1724 and observed that as a rule, negligence is not to be presumed; it israther to be presumed that ordinary care has been used but that this ruledoes not apply in the case of common carriers, who, on grounds ofpublic policy, are presumed to have been negligent if goods entrusted totheir care have been lost or damaged or delayed in delivery.

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A55. The present one had not been a case where anything relatedwith the forces of nature like storm, floods, lightning or earthquake hadbeen in operation or caused the fire. When nothing of any external naturalforce had been in operation in violent or sudden manner, the event of thefire in question could be referable to anything but to an act of God inlegal parlance. The observations of High Court in this regard do notBappear sound and are required to be disapproved.

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Inevitable accident

56. The submissions before this Court on behalf of the respondentcompany had been that the company had taken all precautions whichCwas expected of it and yet if the fire incident took place, it was somethingbeyond human control for which respondent company cannot be heldliable. This line of submission, at best, could be taken into anotherexception to the rules governing liability, where inevitable accident isgenerally recognised as a ground of exception. Again, we may refer tothe principles stated by Salmond[16] thus: -D

“Accident, like mistake, is either culpable or inevitable. It is culpablewhen due to negligence, but inevitable when the avoidance of itwould have required a degree of care exceeding the standarddemanded by the law. Culpable accident is no defence, save inthose exceptional cases in which wrongful intent is the exclusiveEand necessary ground of liability. Inevitable accident is commonlya good defence, both in the civil and in the criminal law.

To this rule, however, there are, at least, in the civil law, importantexceptions. These are cases in which the law insists that a manshall act at his peril, and shall take his chance of accidentsFhappening. If he desires to keep wild beasts (f), or to construct areservoir of water (g), or to accumulate upon his land anysubstance which will do damage to his neighbours if it escapes(h), he will do all these things suo periculo (though none of themare per se wrongful), and will answer for all ensuing damage,Gnotwithstanding consummate care…..”

57. To accept the case of respondent company about it being an“inevitable accident”, it is to be seen if preventing of the fire in questionwould have required a degree of care from the respondent company

beyond or exceeding the standard demanded by law. The question wouldthus be as to what had been the normal and reasonable requirement forsafe custody of the liquor in question and if the respondent company,despite having attended on all such normal and reasonable requirements,could not have prevented the fire in question. While looking for anappropriate answer to this question, we shall have to take an overallview of the material available on record as also all the surrounding factorsand circumstances. In this regard, before proceeding further, we couldprofitably refer to a significant guiding principle embodied in the maximres ipsa loquitur whereby negligence may be presumed from the merefact of accident; of course, the presumption depends upon the nature ofthe accident and the surrounding factors.

Res ipsa loquitur

58. In order to understand the operation of the maxim res ipsaloquitur, we may usefully refer to a couple of the decisions of this Court.Of course, these decisions related with vehicular accidents but theprinciples therein remain fundamental in operation of res ipsa loquitur.

58.1. Shyam Sunder and Ors. v. The State of Rajasthan:(1974) 1 SCC 690 had been a case where the victim was travelling ina truck whose engine got fire and while jumping from the vehicle, hestruck against a stone on the side of the road and died on the spot. TheHigh Court in that case held that merely for the truck catching the firewould not be evidence of negligence on part of the driver; and that resipsa loquitur had no application. However, this Court, inter alia, pointedout and held as under:- “9.… The maxim res ipsa loquitur is resorted to when anaccident is shown to have occurred and the cause of the accidentis primarily within the knowledge of the defendant. The mere factthat the cause of the accident is unknown does not prevent theplaintiff from recov- ering the damages, if the proper inference tobe drawn from the cir- cumstances which are known is that itwas caused by the negli- gence of the defendant. The fact of theaccident may, sometimes, constitute evidence of negligence andthen the maxim res ipsa loquitur applies.”

58.1.1. This Court then quoted the following passage from thecase of Scott v. London & St. Katherine Docks: (1865) 3 H&C 596,601: - A

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A“... where the thing is shown to be under the management of thedefendant or his servants, and the accident is such as in the ordi-nary course of things does not happen if those who have the man-agement use proper care, it affords reasonable evidence, in theab- sence of explanation by the defendants, that the accident arosefrom want of care.”B

58.1.2. This Court further explained the operation of this maximfor importing strict liability into negligence cases and observed: - “The mere happening of the accident may be more consistentwith the negligence on the part of the defendant than with otherCcauses. The maxim is based on commonsense and its purpose isto do justice when the facts bearing on causation and on the careexercised by defendant are at the outset unknown to the plaintiffand are or ought to be within the knowledge of the defendant (seeBarkway v. S. Wales Transo [(1950) 1 All ER 392, 399]).”

D58.2. In Pushpabai Purshottam Udeshi and Ors. v. M/s. RanjitGinning & Pressing Co. (P) Ltd. and Anr. (1977) 2 SCC 745, thisCourt again explained the application of the principle of res ipsa loquiturand explained various features thereof in the following words: -

“6. The normal rule is that it is for the plaintiff to prove negligenceEbut as in some cases considerable hardship is caused to the plaintiffas the true cause of the accident is not known to him but is solelywithin the knowledge of the defendant who caused it, the plaintiffcan prove the accident but cannot prove how it happened toestablish negligence on the part of the defendant. This hardship issought to be avoided by applying the principle of res ipsa loquitur.FThe general purport of the words res ipsa loquitur is that theaccident “speaks for itself” or tells its own story. There are casesin which the accident speaks for itself so that it is sufficient forthe plaintiff to prove the accident and nothing more. It will then befor the defendant to establish that the accident happened due toGsome other cause than his own negligence. Salmond on the Lawof Torts (15th Ed.) at p. 306 states: “The maxim res ipsa loquiturapplies whenever it is so improbable that such an accident wouldhave happened without the negligence of the defendant that areasonable jury could find without further evidence that it was socaused”. In Halsbury’s Laws of England, 3rd Ed., Vol. 28, at p.H

77, the position is stated thus: “An exception to the general rulethat the burden of proof of the alleged negligence is in the firstinstance on the plaintiff occurs wherever the facts alreadyestablished are such that the proper and natural inference arisingfrom them is that the injury complained of was caused by thedefendant’s negligence, or where the event charged as negligence‘tells it own story’ of negligence on the part of the defendant, thestory so told being clear and unambiguous”. Where the maxim isapplied the burden is on the defendant to show either that in facthe was not negligent or that the accident might more probablyhave happened in a manner which did not connote negligence onhis part…..”

The respondent company remains liable

59. For what has been discussed hereinabove, this much isapparent that in this case, the warehouse in question indeed got engulfedin fire and that led to destruction of the liquor stored therein. Here, therespondent company could be held liable to pay the excise duty on theliquor destroyed in fire only if it could be held negligent in not ensuringsafe custody of the stored liquor. As regards this aspect, the fact thatDepartment had control and supervision over the distillery and godownwould not absolve the respondent of its liability. Further, the fire incidentin question cannot be termed as an “act of God”.

60. The matter then boils down to the question if the fire incidentcould be said to be an inevitable accident. For that matter, we need toexamine as what had been the normal and reasonable requirement forsafe custody of the liquor in question and as to what could be deducedfrom the surrounding factors.

60.1. One of the basic factors to be noticed is that the goods inquestion were not ordinary goods but had been containing alcohol which,by its very nature, is highly inflammable. Therefore, a particular natureof care which might be sufficient as regards ordinary goods may not beadequate or sufficient for the goods in question.

60.2. On 19.09.2002, the Assistant Electricity Inspector whoconducted periodical inspection of the premises in question made twoobservations. One of them was a minor aspect that ‘Caution’ plate wasnot placed at certain prominent place but the other observation was asignificant one that at one point of distribution panel, earth wiring was A

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Afound with thin wire; and it was suggested that same should be removedand strip earthing should be done.[17] On 01.03.2003, while issuing NoObjection Certificate, the Fire Brigade Officer, inter alia, observed thatfirefighting equipments were at right place and were in working conditionbut in future, they should be tested in fire station Shahjahanpur beforerefilling; and it was also suggested that Foam Installation should beBprovided for better management of firefighting arrangements.[18]

60.2.1. From the material placed on record, it is not forthcoming ifstrip earthing had indeed been carried out, though the respondent companygenerally stated in its letter dated 23.09.2002 that what was pointed outby the Assistant Electricity Inspector had been carried out. As to whenCstrip earthing was done and in what manner is not forthcoming. Further,it is also not forthcoming if Foam Installations were provided, as suggestedby the Fire Brigade Officer. In view of extra care required of the highlyinflammable material, significance of none of these aspects could begainsaid.

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60.3. Though it is true that as per the suggestions made in thereports relating to the fire incident in question, exact cause of fire couldnot be ascertained but there had been indications that the officers, includingthe Excise Officer and Station House Officer had seen burnt wires; andit was reported that the fire ‘possibly’ took place because of short circuit.ETaking note of these facts as also the other facts that godown was anold one and the roof of the godown was made of asbestos sheets, theExcise Commissioner, in his order dated 11.07.2006, inferred that shortcircuit could have taken place in old electric wiring in the godown and inthat context, observed that the licencee had not arranged the fire proofelectric equipments of good quality, which led to the incident in question.F61. A few words as regards ‘short circuit’ would also be appositeat this juncture.

61.1. Short circuit is explained in the Dictionary of TechnicalTerms[19] by F.S. Crispin as follows :-G“Short circuit (elec.): A path of low resistance placed across anelectrical circuit causing an abnormal flow of current.”

1718 vide paragraph 7.1 supraH19 vide 11th Edition, p. 369.paragraph 7.3 supra.

61.2. In McGrow-Hill Encyclopedia of Science and Technology[20],the relevant features of short circuit are stated as under: - “An abnormal condition (including an arc) of relatively lowimpedance, whether made accidentally or intentionally, betweentwo points of different potential in an electric network or system.SEE CIRCUIT (ELECTRICITY); ELECTRICAL IMPEDANCE.

Common usage of the term implies an undesirable condition arisingfrom failure of electrical insulation, from natural causes (lightning,wind, and so forth), or from human causes (accidents, intrusion,and so forth). From an analytical viewpoint, however, short circuitrepresent a severe condition that the circuit designer must considerin designing an electric system that must withstand all possibleoperating conditions. The short circuit thus is important in dictatingcircuit design parameters (wire size and so on) as well as protectivesystems that are intended to isolate the shorted element. SEEELECTRIC PROTECTIVE DEVICES; ELECTRICALINSULATION; LIGHTNING AND SURGE PROTECTION.”

61.3. In the present case, even when the exact cause of fire couldnot be ascertained, the indications in the reports like that of AssistantExcise Commissioner dated 02.08.2003[21] that burnt cables were seen inthe debris and possibility had been of short circuit, the only inferencecould be about some fault or shortcoming in electric installations(equipments and/or wiring) which led to the abnormal flow of currentand thereby, to the fire incident in question.

62. As noticed, the fire incident in question had not taken placedue to operation of any forces of nature. It has also not been the casethat the fire was a result of any mischief by any person. Noticeably, thefire that started around 12:55 p.m. on 10.04.2003 could be brought undercontrol by the firefighters only by 5:00 a.m. on 11.04.2003. When all therelevant factors are cumulatively taken into account, we find it difficultto accept that the fire and the resultant loss had been beyond the controlof human agency so as to be termed as inevitable accident. Obviously,the fire had not generated on its own and, with appropriately laid fireproof electrical installations as also firefighting measures, the incidentwas an avoidable one or at least the loss could have been minimised.

20 6th Edition, volume 16, p 387.

21 vide paragraph 11 supra.

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A63. As noticed, the fault of “negligence” need not always be ofactive negligence or of gross negligence, but it may also be of aninadvertent negligence or of a passive negligence. It does not requiremuch of discussion to say that the goods in question, being highlyinflammable, required extra and excessive care for their safe custody;and any laxity or slackness in that regard was impermissible. To put itBdifferently, what was required for ensuring safe custody of the goods inquestion was that of heightened safeguard measures with foresight. Whenthe respondent had not been able to protect the goods in question fromfire within the warehouse and when all other factors, as noticed above,are taken into account, the negligence as contemplated in Rule 709 ofCthe Excise Manual is directly attributable to the respondent company. Inother words, even if the present case is taken to be that of inadvertenceor of unintentional omission on the part of the respondent company, itwould fall within the definition of “negligence” for the purpose of Rule709 of the Excise Manual.D63.1. In the given set of facts and circumstances, we are unable 63.1. In the given set of facts and circumstances, we are unableto endorse the approach and views of the High Court, where it hadbasically proceeded on the premise as if the incident in question wasreferable to an ‘act of God’. As noticed, the incident in question had notbeen because of any forces of nature and cannot be said to be an ‘act ofGod’. The criticism of Excise Commissioner’s order dated 11.07.2006Eby the High Court, while taking the observations and findings thereinbeing of surmises and conjectures, is also required to be disapproved.What the Excise Commissioner had observed in the order dated11.07.2006 had been of his inferences, which were deduced out of thefacts and circumstances of the case and in true application of theFprinciples of res ipsa loquitur.

64. Hence, we have no hesitation in disapproving the order of theHigh Court and in endorsing the views of the Excise Commissioner inthe order dated 11.07.2006.

GInsurance coverage only of the value of liquor: effect of

65. Before concluding on the matter, it would also be appropriateto deal with yet another feature of this case relating to the insurancecoverage taken by the respondent company only of value of liquor andnot that of excise duty payable thereupon.H

66. Admittedly, the respondent company had taken insurancecoverage of the value of liquor and indeed received such value of liquorfrom the insurer. However, respondent company did not take insurancecoverage of the excise duty payable over such value of liquor. Theappellants contend that when the distiller has received value of liquor, onthe principles of equity and fair play, the corresponding excise duty oughtto be made available to them. It has also been contended that omissionon the part of the respondent company to take insurance coverage ofvalue of excise duty, while taking coverage of the value of liquor, itselfamounts to negligence. On the other hand, the respondent would submitthat the claim received from the insurer cannot be termed as considerationbecause there was no transfer of property in goods and there was nosale. It has also been submitted that there was no such requirement inlaw that the respondent company was to take insurance coverage of theexcise duty too. Yet further, it has also been submitted that clearance ofinsurance claim by the insurer itself shows that there was no negligenceon the part of the respondent. The Excise Commissioner in its orderdated 11.07.2006 has observed that the distiller had taken insurance ofthe value of goods and for this reason too, it remained rather lax intaking all care against fire.

67. Having examined the matter in its totality, we are clearly ofthe view that the liability of the respondent company in this matter israther fortified from the facts that it had taken insurance coverage ofthe value of liquor and indeed received such claim from the insurer.Further, failure to insure the risk of excise duty liability cannot extricatethe respondent from that liability.

68. As noticed, in the scheme of law applicable, when duty ofexcise is upon the goods and the taxable event is the production ormanufacture of the liquor, the liability to pay excise duty had arisen assoon as the liquor was manufactured. Thereafter, when the liquor gotdestroyed in fire but its value was recovered from the insurer, in ourview, these events shall answer to the broad expression “issue of anexcisable article for sale from a warehouse” for the purpose of provisoto Section 29(e) of the Act of 1910. Putting it differently, receiving ofinsurance claim over the value of goods by the respondent related backto the date of fire and the respondent became liable to pay excise duty atthe rate which was in force on the date of fire, which would be deemedto be the date of “issue” from the warehouse.

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A68.1 In the given set of facts and circumstances, we are not dilatingon the decision of CESTAT in the case of Dharampal Satyapal (supra)wherein remission of duty on account of damage of pan masala in rainwater was disallowed, when it was found that the assessee had beencompensated by the insurance company with an amount which wasmuch more than the duty involved but, the submissions in the presentBcase that the goods had not been sold and duty has not been recoveredfrom consumers, do not take the case of respondent company any further.It was for the respondent company to take necessary measures andcare to ensure that payable excise duty would reach the appellants oncethe goods had been manufactured.

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69. Another facet of this part of matter remains, and we agreewith the appellants, that not taking of insurance coverage of the exciseduty while taking such coverage on the value of liquor itself amounts tonegligence on the part of the respondent company. As noticed,“negligence” has different connotations and any particular act or omission,Dwhich may not be negligence in a particular set of facts may still amountto negligence in another set of facts. In the facts of the present case,where excise duty became payable on manufacture of liquor, it wasobviously expected of the respondent company, as a reasonable andprudent distiller, to take all necessary steps to safeguard not only theEliquor and value thereof but also the corresponding interest of theGovernment, i.e., the excise revenue. The Excise Commissioner hadbeen rather justified in drawing inference that the respondent company,after having secured the value of goods for its purpose, might not havebeen conscious and alert in taking all the necessary care to guard againstany loss to the Government due to any mishap like fire.F

70. The submission, that insurer would not have made payment ofinsurance claim if there was any negligence on the part of the respondentcompany, has its own shortcomings. The terms of fire insurance policyhave not been placed on record and it cannot be deduced as to whatwere the terms and conditions of that policy under which insurer hadGacted in accepting the claim of the respondent company. Secondly, whatwas not treated as negligence by the insurer for the purpose of insuranceclaim would not ipso facto become a proposition binding on the appellantsas regards loss of revenue because of loss of liquor in fire. Such acontention of the respondent could only be rejected.

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Summation

71. In summation of what has been discussed hereinabove, wehold, -

(i) . The demand raised by the appellants against the respondentcompany, of excise duty on the liquor lost in fire, is authorised by lawand has rightly been raised as per the applicable provisions of the Act of1910, the Excise Manual and the Rules of 1969.

(ii) . The fire incident in question cannot be said to be that of anevent beyond human control and the High Court has been in error inholding that no negligence could be imputed on the respondent company.

(iii) . The fact that the respondent company had taken insurancecoverage only of the value of liquor (and not that of excise duty thereupon)and then, had received the insurance claim towards the value of liquoralso operates against the respondent company and fortifies the conclusionabout negligence of the respondent company.

71.1. Upshot of the discussion foregoing is that this appeal deservesto succeed and the writ petition filed by the respondent company deservesto be dismissed. As a necessary corollary, the miscellaneous applicationfiled by the respondent company, for consideration of its refundapplication, is rendered redundant and deserves to be dismissed as such.

Conclusion

72. Accordingly, and in view of the above, this appeal is allowed;the impugned orders dated 10.04.2017 in Misc. Bench No. 4493 of 2006and dated 06.11.2019 in C.M. Application No. 90936 of 2019 are setaside; and the writ petition as also the miscellaneous application filed bythe respondent company are dismissed but with no order as to costs.

Devika Gujral

Appeal allowed.

(Assisted by : Shevali Monga, LCRA)

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