1. Fire destroyed bottled liquor in a distillery godown — Dispute over liability to pay excise duty under the UP Excise Act, 1910 and related rules. (Para 8 , 12 , 13 )
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2022 Supreme(SC) 88
SUPREME COURT OF INDIA
A.M. KHANWILKAR, DINESH MAHESHWARI, KRISHNA MURARI, JJ.
State of U.P., Through Secretary (Excise) & Ors. - Appellants
Versus
M/s Mcdowell and Company Limited - Respondent
Civil Appeal No(s). 169-170 of 2022 (Arising out of SLP(C) Nos. 11596-11597 of 2020)
Decided On : 05-01-2022
Important Points
Excise duty is leviable upon the manufacture of liquor, not its sale. Consequently, liquor destroyed by fire in a bonded warehouse remains taxable. Such incidents are not 'acts of God' but constitute negligence, rendering the licensee liable for the loss of excise revenue under the applicable laws.
Subject
Excise Law - Tax Liability
Act Referred
CONSTITUTION OF INDIA: Art.47, Art.265
UTTAR PRADESH BOTTLING OF FOREIGN LIQUOR RULES: R.7(11), R.7(11)(a)
UTTAR PRADESH EXCISE ACT: S.29, S.17, S.18, S.19, S.28, S.30, S.3
UTTAR PRADESH EXCISE MANUAL RULES: R.709, R.813
UTTAR PRADESH BOTTLING OF FOREIGN LIQUOR RULES: R.7(11), R.7(11)(a)
UTTAR PRADESH EXCISE ACT: S.29, S.17, S.18, S.19, S.28, S.30, S.3
UTTAR PRADESH EXCISE MANUAL RULES: R.709, R.813
Headnote
(A) U.P. Excise Act, 1910 - U.P. Bottling of Foreign Liquor Rules, 1969 - Excise Manual, Rules 708, 709 - Demand for excise duty on liquor destroyed in fire - High Court quashed demand citing lack of negligence and classified incident as an act of God. Appeals by State upheld, finding negligence on part of respondent regarding safety measures. Respondent's insurance of liquor without excise duty liability not an excuse for non-payment. (Paras 71, 72)
(B) Negligence - Definition and standards - Duty of care to ensure safety of goods, especially highly flammable materials. Laxity in safety measures leading to fire incident did not amount to an inevitable accident. Court found lack of adherence to safety protocols. (Paras 48-70)
Facts of the case:
Respondent company sustained loss of 35,642 cases of liquor due to fire incident on 10.04.2003, resulting in excise duty demand of Rs. 6,39,32,449.44. Respondent argued unpreventable nature of fire, claiming it as an act of God. (Paras 3.1-3.4, 12)
Findings of Court:
Demand is valid; fire not an act of God; negligence in safety standards led to loss. Respondent’s failure to insure excise duty constitutes negligence. (Paras 71-72)
Issues: Whether demand for excise duty on liquor lost in fire was legally authorized and if respondent company was liable for negligence. (Paras 38, 39)
Ratio Decidendi: Court ruled that the respondent company was not only responsible for the safe custody of liquor but also for ensuring compliance with required safety measures to prevent incidents that could lead to loss of excise revenue. (Paras 45-68)
Result: Appeal allowed; impugned orders of High Court set aside; writ petition dismissed.
(B) Negligence - Definition and standards - Duty of care to ensure safety of goods, especially highly flammable materials. Laxity in safety measures leading to fire incident did not amount to an inevitable accident. Court found lack of adherence to safety protocols. (Paras 48-70)
Facts of the case:
Respondent company sustained loss of 35,642 cases of liquor due to fire incident on 10.04.2003, resulting in excise duty demand of Rs. 6,39,32,449.44. Respondent argued unpreventable nature of fire, claiming it as an act of God. (Paras 3.1-3.4, 12)
Findings of Court:
Demand is valid; fire not an act of God; negligence in safety standards led to loss. Respondent’s failure to insure excise duty constitutes negligence. (Paras 71-72)
Issues: Whether demand for excise duty on liquor lost in fire was legally authorized and if respondent company was liable for negligence. (Paras 38, 39)
Ratio Decidendi: Court ruled that the respondent company was not only responsible for the safe custody of liquor but also for ensuring compliance with required safety measures to prevent incidents that could lead to loss of excise revenue. (Paras 45-68)
Result: Appeal allowed; impugned orders of High Court set aside; writ petition dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether excise duty is leviable on destroyed liquor before issuance for sale — Whether the fire was an act of God or caused by negligence. (Para 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 )
3. Taxable event is manufacture, not sale — Fire not an act of God — Failure to maintain electrical safety and insure excise duty constitutes negligence. (Para 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 47 , 48 , 49 , 50 , 51 , 52 , 53 , 54 , 55 , 56 , 57 , 58 , 59 , 60 , 61 , 62 , 63 , 64 , 65 , 66 , 67 , 68 , 69 , 70 )
4. Excise duty is leviable upon manufacture — Liability for loss of revenue arises if the distiller is negligent in ensuring safe custody of the stock. (Para 40 , 41 , 44 , 63 )
5. Appeal allowed — High Court orders set aside — Demand for excise duty on destroyed liquor upheld. (Para 71 , 72 )
6. When does excise duty become exigible for manufactured liquor?
The taxable event is the production or manufacture of the liquor. Exigibility occurs at the end of the distillation process or when issued from the distillery, regardless of whether it has reached the point of sale. (Para 40 , 41 )
7. Can a fire caused by a short circuit be classified as an act of God?
No. An act of God requires the operation of natural forces (e.g., lightning, earthquake) free from human intervention. A fire resulting from electrical faults is not an act of God. (Para 54 , 55 )
8. What constitutes negligence regarding the safe custody of inflammable liquor?
Negligence includes failure to exercise the care a prudent person would, including passive or inadvertent omissions. Failure to maintain fire-proof electrical installations or ignore safety suggestions constitutes negligence. (Para 49 , 52 , 63 )
9. How does the principle of res ipsa loquitur apply to distillery fires?
Where an accident occurs and the cause is primarily within the defendant's knowledge, the accident may speak for itself, allowing an inference of negligence if the event is improbable without it. (Para 58 )
10. Does receiving an insurance claim for the value of goods affect excise duty liability?
Yes. Receiving insurance for the value of goods fortifies the liability to pay duty. Failure to insure the excise duty liability itself can be viewed as negligence. (Para 67 , 68 , 69 )
JUDGMENT :
Dinesh Maheshwari, J.
| Contents | |
| Preliminary and brief outline | 2 |
| Relevant factual aspects and background: The fire incident and demand of excise duty on the liquor destroyed | 6 |
| Before the fire | 6 |
| The fire incident and relevant reports | 8 |
| Demand of excise duty on the liquor lost in fire | 11 |
| Writ petition in the High Court and interim order therein | 17 |
| Impugned orders dated 10.04.2017 and 06.11.2019: High Court allowed the writ petition and passed consequential orders | 18 |
| Rival submissions | 21 |
| Questions for determination | 33 |
| Relevant statutory provisions | 34 |
| Whether the demand in question is authorised by law? | 41 |
| Whether respondent company remains liable to pay excise duty on the liquor lost in fire | 49 |
| Control of Department over the distillery and godown: effect of | 50 |
| Negligence | 52 |
| Act of God | 56 |
| Inevitable accident | 61 |
| Res ipsa loquitur | 63 |
| The respondent company remains liable | 65 |
| Insurance coverage only of the value of liquor: effect of | 70 |
| Summation | 74 |
| Conclusion | 75 |
Preliminary and brief outline
Leave granted.
2. By way of these appeals, the State of Uttar Pradesh and its officers related with the Excise Department as also the District Magistrate, Shahjahanpur have essentially questioned the order dated 10.04.2017 in Misc. Bench No. 4493 of 2006, whereby the High Court of Judicature at Allahabad, Lucknow Bench, Lucknow,1[Hereinafter also referred to as ‘the High Court’.] quashed the demand 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 appellant No.2 (Excise Commissioner, Uttar Pradesh,2[Hereinafter also referred to as ‘the Excise Commissioner’.] ) to expeditiously take a final decision on the application for refund of the amount that was deposited by the writ petitioner pursuant to the interim order passed in the said writ petition.
3. Before dilating on the issues raised in this case, we may draw a brief outline of the matter to indicate the contours of forthcoming discussion.
3.1. The genesis of the present litigation had been in a fire incident that took place in a godown of the distillery of the respondent company on 10.04.2003. As many as 35,642 cases of Indian Made Foreign Liquor,3[‘IMFL’ for short] of different brands got destroyed in this fire. After receiving the initial reports that the fire possibly took place due to short circuit of electricity, the department proposed to recover the amount of excise duty lost, due to such destruction of liquor, from the respondent company. The respondent maintained that there was no negligence on its part and, therefore, no case for recovery of the alleged loss of excise duty was made out under Rule 7(11) of the UTTAR PRADESH BOTTLING OF FOREIGN LIQUOR RULES , 1969,4[Hereinafter also referred to as ‘the Rules of 1969’.] and Rule 709 of the Uttar Pradesh Excise Manual,5[Hereinafter also referred to as ‘the Excise Manual’.].
3.2. However, the Excise Commissioner, by his order dated 11.07.2006, rejected the submissions of the respondent and raised a demand to the tune of Rs.6,39,32,449.44 towards loss of excise revenue on account of destruction of liquor. Accordingly, the District Magistrate, Shahjahanpur asked the respondent to deposit the amount within one week.
3.3. Assailing the demand and recovery steps aforesaid, the respondent-company preferred a writ petition,6[Misc. Bench No. 4493 of 2006] wherein, the High Court, by way of an interim order dated 25.07.2006, stayed the recovery proceedings, subject to the respondent company (writ petitioner) depositing an amount of Rs.3 crores. A petition seeking special leave to appeal against this interim order was rejected by this Court on 14.08.2006. Thereafter, on 21.08.2006, th
