Holding

The imposition of the penal duty was illegal, void, and contrary to natural justice, and the State lacks competence to levy such a penalty; therefore, the appeals are dismissed.

Summary

The State of Bihar levied a penal duty on several distilleries for an alleged shortfall in the production of rectified spirit from molasses, relying on a Comptroller and Auditor General report. The distilleries filed writ petitions under Article 226, contending that the penalty was imposed without any hearing, adjudication, or statutory authority. The Patna High Court set aside the levy, holding that the demand violated natural justice, that the Molasses (Control) Act, 1947 and the Excise Act, 1915 contain no provision for such penalty, and that the State lacked legislative competence to tax industrial alcohol. On appeal, the Supreme Court affirmed the High Court’s decision, emphasizing that the State cannot impose a penalty absent a clear statutory basis and that the imposition breached the principles of natural justice. Consequently, the appeals were dismissed and the penal duty orders were declared illegal and void.

Issues considered

The State of Bihar's authority to levy a penal duty for shortfall in rectified spirit production under the Bihar Molasses (Control) Act, 1947 and Bihar Excise Act, 1915.
Whether the imposition of the penal duty violated the principles of natural justice by denying a hearing and adjudication.
The legislative competence of the State to impose a duty on industrial alcohol (rectified spirit) versus potable liquor under the Constitution of India.
Whether a tender condition can be enforced as a penalty in the absence of a statutory provision.
The legality of recovering the penalty by executive fiat rather than through a legislative enactment.

Legislation cited

Bihar Excise Act, 1915s. Section 22
Constitution of India

Subjects

penal dutynatural justiceexcise lawrectified spiritmolasseslegislative competenceconstitutional lawadministrative lawshortfalltender notice

Judgment

A STATE OF BIHAR AND ORS.
v.
INDUSTRIAL CORPORATION PVT. LTD. AND ORS.

SEPTEMBER 4, 2003

B [V.N. KHARE, CJ. AND S.B. SINHA, J.)

Bihar Molasses (Control) Act, I 947:

S.22-Rectified spirit manufactured from molasses-Shortfall in
production reported by Comptroller and Auditor General-Penal duty
C imposed by State Government on distillers to the extent of shortfall-
Distillers filing writ petitions-High Court setting aside the levy-Held,
imposition of penal duty being against the principles of natural justice is
illegal and void-No opportunity of any kind was afforded to the
manufacturers before the demand as regards the penal duty was pressed
D against them-Before creating a demand of penal duty or penalty, there
was no adjudication by any authority as regards the breach committed by
the distillers-The matter was not even examined as to what was the
shortfall in the production of rectified spirit-The Act does not provide for
imposition of such penalty in the event of shortfall of spirit-Bihar Excise
E Act, 19 I 5-s.22-Administrative !aw-Principle ofnaturaljustice-Excise
Law-Penal duty-Imposition of

A. Mohammed Basheer v. State of Kera/a and Ors., (2003) 6 SCC
159; General Manager, North East Frontier Railway and Ors. v.
Dinabandhu Chakraborty, [1971) 3 SCC 883; Mis Vishnu Rice Mill,
F Bilaspur v. Regional Food Controller, Bareilly and Ors., (1984) All. L.J.
592 and Dwarka Prased Agarwal (D) by Lrs. And Anr. v. B.D. Agarwal
and Ors., [2003) 6 SCC 230, relied on.

Constitution of India, 1950:

G Seventh Schedule, List I, Entry 52, List II, Entry 51-Rectified spirit-
Shortfall in production-State Government's power to impose penal duty--
Held, no penal duty could have been imposed by authorities of State
Government on rectified spirit-The stage at which penalty was sought to
be levied was manufacture of rectified spirit-Manufacturers had not
H carried out any activities in relation to manufacture ofpotable liquor from
362
STATE v. INDUSTRIAL COPRN. PVT. LTD. 363

molasses-However, it is clarified that the opinion of the High Court to A
the effect that in view of the decision of Supreme Court in Synthetics and
Chemicals Ltd.*, the State has no legislative competence even in relation
to potable liquor (which is fit for human consumption) is not correct.

*Synthetics and Chemicals Ltd. v. State of U.P., [1990) 1 sec 109, B
explained and relied on.

Bihar Distillery and Anr. v. Union of India and Ors. (1997) 2 SCC
727; relied on.

The New Swadeshi Sugar Mills Ltd. and Anr. v. The State of Bihar C
and Ors., (1980) PLJR 105; State of U.P. and Ors. v. Modi Distillery and
Ors., (1995) 5 SCC 753; Siel Ltd. and Ors. v. Union of India and Ors.,
(1998) 7 SCC 26; State of U.P. andAnr. v. Synthetics and Chemicals Ltd.,
(1993) 2 SCC 308 and State of U.P. v. Synthetics and Chemicals Ltd.,
[19911 4 sec 139, referred to. D
Article 226-Seventh Schedule-List II-Entry 8-Rectified spirit -
Shortfall in production-Imposition of penal duty--Challenged in writ
petitions before High Court-State authorities contending that penalty was
in the nature of compensation for breach of the condition of the Tender
Notice-Held, the tender notice does not provide for imposition of any E
penalty and in the absence of any opportunity to the distillers, the penalty
could not be realized nor could it be adjusted against the statutory price
for rectified spirit-Revenue being a subject-matter of legislation in terms
of Entry 8 of List II of the Seventh Schedule to the Constitution of India,
the recovery thereofmust be made in terms of the provisions ofa legislative F
Act enacted pursuant thereto and not by reason of an executive fiat-State
authorities have sought to exercise their statutory power and not a
contractual obligation--Constitution of India.

State of Orissa and Ors. v. Narain Prasad and Ors., (1996) 5 sec G
740, held not applicable.

Administrative Law:

Statutory authorities-Levy of penalty by for shortfall in production
of rectified spirit-Held, the statutory authorities must act within the four- H
364 SUPREME COURT REPORTS [2003] SUPP. 3 S.C.R.

A corners of a statute-They could take recourse to proceeding for levy of
penalty and recovery thereoffrom the manufacturers only in the event there
existed any agreement or statutory provision therefor-Such a power did
not exist in the Commfrsioner of Excise or the Superintendents of Excise
who had issued the impugned demand notices-The statutory authorities
B also could not have sought to levy penalty relying on or on the basis of
audit report only-They were required to apply their own independent
mind for the purpose offinding out as to whether the manufacturers in law
had committed any breach of the terms and conditions of licence or the
provisions of 1947 or I 915 Acts so as to make them liable for levy of
penalty-The authorities concerned acting in terms of the statutory
C provisions, therefore, without any farther investigation could not have
acted mechanically on the audit report.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4618-
4630 of I 997.
D From the Judgment and Order dated 15.5.96 of the Patna High court
in C.W.J.C. Nos. 1517, 1518, 2334/84, 5648, 5649/86, 2385, 6433/88,
5484, 5487/90, 6845/89, 11972/93, 4696/94 and 8032 of 1995.

Tapas Ray, Kumar Rajesh Singh and B.B. Singh for the Appellants.
E
Sunil Kumar Gupta, Y.V. Giri, Mrs. A.K. Verma, Niraj Gupta, Harish
J. Jhaveri, Parveen Kumar and Prateek Kumar for the Respondents.

Mis J.B.D. & Co., (NP) for the Respondents in C.A. Nos. 4619-23/
97.
F
The following Order of the Court was delivered :

Whether the State of Bihar can levy penalty for loss or wastage of
molasses, and if so, under which law and to what extent and further whether
such loss can be directed to be recovered from the respondents, are the
G questions involved in this batch of appeals which arise out of the judgment
and order dated 15.05.1996 passed by a Division Bench of the Patna High
Court allowing the writ petitions filed by the respondents herein.

Molasses is a bye-product of sugar and is mainly used as a raw
H material for manufacture of spirit, including alcohol for human consumption.
STATE v. INDUSTRIAL COPRN. PVT. LTD. 365

The sale of molasses in the State of Bihar is regulated by an Act, A
known as 'the Bihar Molasses (Control) Act, 1947 (the 1947 Act).

The respondents herein are the companies registered under the Indian
Companies Act and are engaged in the business of manufacture of spirit
in the State of Bihar for which they hold licence under the Bihar Excise B
Act, 1915 (the 1915 Act).

The respondents had been granted different licences under the
provisions of the Bihar and Orissa Excise Act, the details whereof are as
under:
c
SI. Name of the distilleries Licence granted Writ applications
No. in Excise filed by them
Form Nos.

I. Mis Bihar Distillery Ltd. 25, 28-A CWJC No. 68451
D
89, 11972193

2. Mis. Arun Chemical 25,27,28 1517 and 1518
Industries of 1984

3. Mis. Cawnpore Sugar 25,27,28 2334184, 5648 E
Works Ltd. and 5649of1986

4. Mis. S.K.G. Consolidated Ltd. 25, 27, 28, 28-A 2385188

5. Mis. New Swadeshi Distillery 25, 28-A 6433188, 4696194
F
Ltd. & 8032195

6. Mis. Ram Narain & Sons 28, 28-A 5484 & 5487190

It is not in dispute that the respondents herein admittedly were engaged
in the manufacture of rectified spirit from molasses which are allotted by G
the Controller of Molasses in terms of the provisions of the 1947 Act and
the rules framed thereunder. Some of them are also holders of licences
granted in terms of Section 13 of the 1915 Act. While carrying on such
manufacture of spirit, allegedly some loss had occurred in the quantity of
molasses supplied by the Controller of Molasses. The Comptroller and H
366 SUPREME COURT REPORTS [2003] SUPP. 3 S.C.R.

A Auditor General in its report allegedly found out a potential loss ofrevenue
by reason of such loss or wastage of molasses. In the said report the
purported potential loss of revenue in relation to each of the licensee had
been quantified. Pursuant to or in furtherance of the said audit report notices
were issued to the respondents herein levying penal duty. The nautre of
B such penal duty, the extent of shortfall and the period wherefor notices had
been issued would appear from the following chart which may be noticed
herein by way of example as disclosed in C.A. No. 4619-20of1997.

"Civil Appeal No. 4619-20 of 1997
State of Bihar v. Arun Chemical Industries Pvt. Ltd
c CHART OF SHORTFALL AND PENAL DUTY
1 2 3 4 5 6
Period Molasees Rectified Rectified Short Penal
Allotted Spirt Spirit Duty
(in desired as actually In recovery Demand under Excise
D quintals per Tender produced by of Commissioner's
Notice the distillery Rectified impugned order dt.
condition from the spirit as 13.2.84 on the short
No. 8 of molasses alleged by fall relying on Tender
recovery of allotted to the Excise Notice@ Rs. 17.30
36 London the Commissioner and Rs. 20 per Lpl.
E proof litres Respondent Respectively. Later
(Lpl) per qi. under the (in Lpl) sought to be recovered
of molasses Bihar under letter dt.13.3.84
Molasses by set-off against
(in LPI.) Control Act, price payable to the
1947 Respondent under
F From 27 for the
(in Lpl) supply of Rectified
spirit

(in Rupees)

1.12.81 to 11706.5 421434.0 377939.1 43494.9 7,52,461, 77
G 31.3.82

1.4.82 to 21203.7 763333.2 72885.2 37778.0 7,55,560.00
30.11.82

15,18,021.77

H The appellants herein sought to justify levy of the said penal duty
STATE v. INDUSTRIAL COPRN. PVT. LTD. 367

relying on or on the basis of condition no. 8 of the Tender Notice dated A
25.8.1980 purported to have been issued under Section 22 of the Bihar
Excise Act for wholesale supply of country spirit to the retail vendors for
the period from 1.11.1980 to 30.9.1983. It is not in dispute that the owners
of the distilleries who had been granted licences in Excise Form Nos. 28
and 28A questioned the terms and conditions of licences as also the terms B
and conditions of molasses allotment order, whereby and whereunder they
were required to produce/manufacture 22.5 bulk liters or 36.0 L.P. liters
of spirit from one quintal of molasses.

The appellant in imposing the penalty, presumably was of the view
that the respondents herein had diverted the molasses towards manufacturing C
either country liquor or liquor, which is fit for human consumption.

It is at this stage the respondents herein filed petitions under Article
226 of the Constitution before the Patna High Court, inter a/ia, on the
ground that the penalty is illegally sought to be imposed in respect whereof D
neither the State Legislature is competent nor the State Government is
entitled to recover the same. In any event neither any notice of any kind
was issued on the quantum of penalty sought to be imposed and recovered.

A counter affidavit was filed on behalf of the appellants herein
wherein the levy was sought to be justified on the ground that the State E
legislature is competent to levy duty on the out-come of the molasses and
in any event the spirit was meant for human consumption. The matter was
heard before a Division Bench of the Patna High Court. The appellants
herein conceded that the penal duty is not in the nature of a duty under
the Excise Act. However, imposition of penalty was sought to be justified F
on the ground that since condition No. 8 of tender notice, provided that
in the event any shortfall occurs in recovery of spirit from the molasses
allotted, the licencee would be liable therefor.

The High Court noticed that the purported clause 8 of the afore-
mentioned tender notice was incorporated only in the licences contained G
in Form No. 27. It further noticed that all the respondents were not holders
of licences in the said form. The High Court considered the jurisdiction
of the appellants herein for impost of such levy from the viewpoint of the
State's legislative competence in the light of the decision of this Court in
Synthetics and Chemical Ltd. v. State of U.P., [1990] I SCC 109. Upon H
368 SUPREME COURT REPORTS [2003] SUPP. 3 S.C.R.

A a detailed consideration of the contentions raised by the parties, the High
Court allowed the writ applications upon setting aside the levy impugned
in the writ applications holding :

(i) before creating a demand of penal duty or penalty, no show
cause notice was issued to the respondents and the same was
B levied merely on the basis of the audit report;

(ii) that the State had no jurisdiction to levy and duty;

(iii) no finding has been arrived at by the authorities before issuing
the impugned demand notice as regard shortfall in production
c of rectified spirit that the molasses had been diverted or
misutilised for illicit distillation or there had been contravention
of the 1947 Act and the rules framed thereunder;

(iv) the 1947 Act and 1915 Act do not provide for levy of any such
D penalty;

(v) all the respondents did not take part in the tender process nor
were they eligible therefor having regard to the nature of
licences possessed by them;

(vi) even in relation to those who were holders of the licences for
E carrying out the distillation work such a clause in the tender
notice without any specifications as to how and under what
circumstances penalty could be levied was arbitrary;

(vii) no machinery for recovery of the same having been created nor
F any authority has been specified under the 1915 Act for
adjudication of levy or recovery of such penalty, reference to
condition no. 8 of the tender notice providing for levy of penalty
was meaningless;

(viii) nothing has been brought on record to show that either in the
G 1915 Act or 1947 Act or the rules framed thereunder penalty
could be levied, or there is any factual foundation that by Jess
production of ethyl alcohol from molasses, the same had been
diverted or misused as a substitute for potable alcohol and the
State has suffered the purported loss of excise duty on potable
H alcohol and thus, the claim is farfetched;
STATE v. INDUSTRIAL COPRN. PVT. LTD. 369
(ix) the provisions of 1915 Act could be invoked only against a A
person to whom, a licence had been granted in terms of Section
13 thereof and who is bound to manufacture country liquor from
the molasses so supplied; and

(x) even if it be assumed that there has been less production of spirit
from the molasses, the remedy as provided for breach of the B
provisions of the Molasses Act or the Rules framed thereunder
could only be resorted to having regard to the facts and
circumstances of the case, and not by way of raising the
impugned demands.

It is against the said judgment of the High Court, the appellants are
c
in appeal by way of special leave petitions before us.

Shri Tapas Ray, learned senior counsel appearing for the appellants,
inter alia, urged that in the facts and circumstances of the case, no
opportunity was required to be given to the respondents before imposing D
the penalty and that the State legislature is competent to levy duty on the
products of the molasses, which partakes to the character of compensation.
In any case the penalty imposed was in the nature of compensation for the
breach of Condition No. 8 of the tender notice.

Coming to the first ground, it is not disputed that no opportunity of E
hearing of any kind was afforded to the respondents herein before the
penalty was sought to be imposed and recovered. It is also admitted that
there was no adjudication of the alleged breach of condition No. 8 of the
tender notice. In A. Mohammed Basheerv. State ofKera/a and Ors., (2003]
6 sec 159, it was held that unless there is a determination of breach of F
contract and damages are quantified, no damages can be imposed and
recovered. In General Manager, North East Frontier Railway and Ors. v.
Dinabandhu Chakraborty, reported in [1971] 3 SCC 883, this Court held
that the Government cannot be a judge in its own cause in absence of any
statutory provision empowering it to act as such. In Mis. Vishnu Rice Mill, G
Bi/aspur v. Regional Food Controller, Bareil/y and Ors., (1984) All L.J.
592 it was held by Allahabad High Court as under :

"Learned Standing Counsel, however, contended that the State
Government was justified in withholding both the price payable
to the petitioner and the release certificate claimed by the H
370 SUPREME COURT REPORTS [2003] SUPP. 3 S.C.R.

A petitioner if it could be shown that the claimed by the petitioner
if it could be shown that the petitioner had failed to perform its
obligation under the agreement between the parties. Learned
Standing Counsel placed reliance upon Cl. 9 of the said Order
which has been quoted above. In our opinion, this contention of
the learned Standing Counsel is not tenable. Cl. 9 itself shows that
B even though the State Government has a statutory authority to
direct a rice miller, still, the terms and conditions on which the
Government paddy will be converted into rice by the licensed rice
miller will be 'such terms and conditions as may be agreed upon'.
The agreement itself containing the terms and conditions cannot
c be said to be a statutory contract merely because the State
Government has a right under Cl. 9 to direct a rice mill to convert
paddy into rice. It has been stated above that along with the
counter-affidavit annexure C.A. 1 has been annexed, which is said
to be the agreement between the parties. In Cl. 11 of the said
D agreement there is a provision for arbitration in case of dispute,
difference, or question touching or arising out of the agreement
or the subject-matter thereof. In our view, ifthe State Government
has any grievance that the licensed miller has failed to fulfill the
terms and conditions of the said agreement between the parties,
it is not open to the State Government to seek its redress in respect
E of such grievance by withholding the release certificate under Cl.
3(4) or by withholding or by making any deduction from the price
which is payable by the State Government to the petitioner under
Cl. 7 of the said Order."

F We may further notice that in Dwarka Prasad Agarwal (D) By LRs.
and Another v. B.D. Agarwal and Others, [2003] 6 SCC 230 this Court
laid emphasis on the right of a citizen to have his grievances adjudicated
by an impartial tribunal holding :

"There is another aspect of the matter which must also be taken
G notice of. A party cannot be made to suffer adversely either
indirectly or directly by reason of an order passed by any court
of law which is not binding on him. The very basis upon which
a judicial process can be resorted to is reasonableness and fairness
in a trial. Under our Constitution as also the International Treaties
H and Conventions, the right to get a fair trial is a basic fundamental/
STATE v. INDUSTRIAL COPRN. PVT. LTD. 371

human right. Any procedure which comes in the way of a party A
in getting a fair trial would be violative of Article 14 of the
Constitution of India. Right to a fair trial by an independent and
impartial Tribunal is part of Article 6( 1) of the European Convention
for the Protection of Human Rights and Fundamental Freedoms
1950." B
In the present case, what we find is that before creating a demand of
penal duty or penalty, there was no adjudication by any authority as regard
to the breach committed by the respondents. We also find that no
opportunity of any kind was offered to the respondents before the demand
as regard the penal duty was pressed against the respondents. The matter C
was not even examined as to what was the reason for shortfall in the
production of rectified spirit. The Molasses Act does not provide for
imposition of such penalty in the event of shortfall of spirit. It must,
therefore, necessarily be held that the imposition of the impugned penalty
being against the principles of natural justice is illegal and void. D
The statutory authorities must act within the four-comers of a statute.
They could take recourse to the proceeding for levy of penalty and the
recovery thereof from the respondents only in the event there existed any
agreement or statutory provision therefor. Such a power did not exist in
the Commissioner of Excise or the Superintendents of Excise who had E
issued the impugned demand notices.

The statutory authorities also could not have sought to levy penalty ·
relying on or on the basis of the audit report only. They were required to
apply their own independent mind for the purpose of finding out as to
whether the respondents in law had committed any breach of the terms and F
conditions of licence or the provisions of 194 7 or 1915 Acts so as to make
them liable for levy of penalty. The concerned authorities acting in terms
of the statutory provisions, therefore, without any further investigation
could not have acted mechanically on the audit report.

So far as the second submission of Mr. Ray is concerned, it would G
not detain us very long as the matter stands almost covered by a catena
of decisions of this Court. In Synthetics and Chemicals .Ltd and Ors. v.
State of U.P. and Ors., Reported in [1990] I SCC I 09 this Court, while
interpreting Entry 84 of List I, Entries 8 and 51 of List II and Entry 33
of List III of Schedule VII, held that the State legislature has no power to H
372 SUPREME COURT REPORTS (2003] SUPP. 3 S.C.R.

A enact law levying duty on the spirit, which is not meant for human
consumption. It was also held that the State has the power to impose duty
only on the spirit, which is for human consumption under Entry 5 I of List
II of Schedule VII.

The appellants have admitted that the stage at which such penalty was
B sought to be levied was manufacture of rectified spirit. The respondents
had not carried out any activities in relation to manufacture of potable
liquor from the molasses.

This decision was followed in State of UP. and Ors. v. Modi
C Distillery and Ors., (1995] 5 SCC 753 stating :
"9. It is convenient now to note the judgment of a Bench of seven
learned Judges of this Court in Synthetics and Chemicals Ltd. v.
State of UP. This Court stated that it had no doubt that the framers
of the Constitution, when they used the expression "alcoholic
D liquors for human consumption", meant, and the expression still
means, that liquor which, as it is, is consumable in the sense that
it is capable ofbeing taken by human beings as such as a beverage
or drink. Alcoholic or intoxicating liquors had to be understood
as they were, not what they were capable of or able to become.
Entry 51 of List II was the counterpart of Entry 84 of List I. It
E authorised the State to impose duties of excise on alcoholic liquors
for human consumption manufactured or produced in the State.
It was clear that all duties of excise save and except the items
specifically excepted in Entry 84 of List I were generally within
the taxing power of the Central Legislature. The State Legislature
F had limited power to impose excise duties. That power was
circumscribed under Entry 51 of List II. It had to be borne in mind
that, by common standards, ethyl alcohol (which had 95 per cent
strength) was an industrial alcohol and was not fit for human
consumption. The ISi specifications had divided ethyl alcohol (as
known in the trade) into several kinds of alcohol. Beverages and
G industrial alcohols were clearly and differently treated. Rectified
spirit for industrial purposes was defined as spirit purified by
distillation having a strength not less than 95 per cent by volume
of ethyl alcohol. Dictionaries and technical books showed that
rectified spirit (95 per cent) was an industrial alcohol and not
H potable as such. It appeared, therefore, that industrial alcohol,
STATE v. INDlJSTRIAL COPRN. PVT. LTD. 373

which was ethyl alcohol (95 per cent), by itself was not only non- A
potable but was highly toxic. The range of potable alcohol varied
from country spirit to whisky and the ethyl alcohol content thereof
varied between 19 to about 43 per cent, according to the ISi
specifications. In other words, ethyl alcohol (95 per cent) was not
an alcoholic liquor for human consumption but could be used as B
a raw material or input, after processing and substantial dilution,
in the production of whisky, gin, country liquor, etc. In the light
of experience and development, it was necessary to state that
"intoxicating liquor" meant only that liquor which was consumable
by human beings as it was."

Shri Ray, however, relied upon the decision in Bihar Distillery and
c
Anr. v. Union of India and Ors., reported in [1997] 2 SCC 727. In that
case it was held that the State is empowered to impose duty if it is found
that the rectified spirit is being removed from the distillery for the purpose
of manufacture of potable liquor. In this case, we find that as a matter of
fact, no foundation in that behalf in the counter affidavit of the appellants D
before the High Court has been laid down.

Even in Bihar Distillery (supra) the court categorically held that the
State legislature had no legislative competence in relation to manufacture
of industrial alcohol which is a subject-matter of Entry 52, List I of the
Seventh Schedule of the Constitution of India, having regard to the fact E
that the Parliament had enacted the Industries (Regulation and Development)
Act, 1951. It, however, sought to distinguish Synthetics and Chemicals
(supra), inter alia, on the ground that where industries are engaged in the
manufacture of rectified spirit for the purpose of obtaining or manufacturing
potable liquors or supplying the same to the State Government or its F
nominees for the said purpose, they would be under the total and exclusive
control of the States in all respects including the establishment of the
distillery. However, a third category wasalso carved out in relation to those
industries which are engaged in manufacture of rectified spirit both for the
purpose of supplying it to industries and for obtaining and manufacturing G
potable liquor in relation whereto it was stated :

" ... The power to permit the establishment and regulation of the
functioning of the distillery is concerned, it shall be the exclusive
domain of the Union. But so far as the levy of excise duties is
concerned, the duties on rectified spirit removed/cleared for H
374 SUPREME COURT REPORTS [2003] SUPP. 3 S.C.R.

A supply to industries (other than industries engaged in obtaining or
manufacturing potable liquors), shall be levied by the Union while
the duties of excise on rectified spirit cleared/removed for the
purposes of obtaining or manufacturing potable liquors shall be
levied by the State Government concerned. The disposal, i.e.,
clearance and removal of rectified spirit in the case of such an
B industry shall be under the joint control of the Union and the State
concerned to ensure evasion of excise duties on rectified spirit
removed/cleared from the distillery. It is obvious that in respect
of these industries too, the power of the States to take necessary
~teps to ensure against the misuse or diversion of rectified spirit
c meant for industrial purposes (supply to industries other than
those engaged in obtaining or manufacturing potable liquors) to
potable purposes, both during and after the manufacture of
rectified spirit, continues unaffected. Any rectified spirit supplied,
diverted or utilised for potable purposes, i.e., for obtaining or
manufacturing potable liquors shall be supplied to and/or utilised,
D as the case may be, in accordance with the State excise enactment
concerned and the rules and regulations made thereunder. If the
State is so advised, it is equally competent to prohibit the use,
diversion or supply of rectified spirit for potable purposes."

E How far and to what extent the said observations are correct need not
be considered by us but suffice it to point out that this decision had not
noticed the earlier decision given by a Bench of three learned Judge in
Modi Distillery (supra). Modi Distilleries (supra) applies in all fours to the
facts of the present case and we are bound thereby. Even otherwise, it
appears that the question as to whether any excise duty can be levied by
F the State upon the industrial alcohol or rectified spirit useable for industrial
purposes is concluded by a decision of this Court in State of Bihar and
Others v. New Swadeshi Sugar Mills ltd. and Others, Civil Appeal No.
3343 of I 983 disposed of on 24.8. I 994 which arose out of a judgment of
the Patna High Court in The New Swadeshi Sugar Mills ltd and Another
G v. The State of Bihar and Others, (1983) PLJR 105 wherein it was held:

"8. The contention of the learned counsel for the State, apart from
what is stated in the notice (Annexure 2), was that the petitioner-
Company is liable to pay duty on the spirit because rectified spirit
by subsequent dilutation becomes potable and thus fit for human
H consumption and, therefore, duty could be recovered from the
STA TE v. INDUSTRJAL COPRN. PVT. LTD. 375

petitioner-Company, which is thus liable to compensate the loss A
caused to the Government due to non-delivery by application of
rule 33 of the Rules made by the Board of Revenue under the
notification dated the 29th April, 1919 (hereinafter referred to as
'the Rules').

9. It is, therefore, essential to examine whether rectified spirit can J3
be subjected to levy of duty under the Act. Excisable article has
been defined in section 2(6) of the Act and clause (a) thereof is
relevant for the present purpose, which is as follows :-

"excisable article means -
c
(a) any alcoholic liquor for human consumption.

Xx xx xx

Liquor is defined in section 2(14) of the Act which "includes all D
liquids consisting of or containing alcohol, such as spirit of wine, spirit,
wine fermented tari pachwai and bear, and also unfermented tari, and also
any other substance· which the State Government may, by notification,
declare to be liquor for the purposes of this Act." Intoxicant has been
defined in section 2(12a) of the Act, which means "any liquor or
intoxicating drug". Section 2(19) defines 'spirit' as 'any liquor containing E
alcohol obtained by distillation, whether it is denatured or not.' Thus, the
total effect of the definition of 'intoxicant', 'liquor' and 'spirit', read with
the definition of excisable article, means that only a spirit meant for human
consumption can be subjected to excise duty."
F
For the aforesaid reason, it must be held that ni:> penal duty could have
been imposed on rectified spirit.

So far as the third submission of Mr. Ray to the effect that the penalty
was in the nature of compensation for the breach of condition No. 8 of the G
tender notice is concerned, the same has no merit. The tender notice does
not provide for imposition of any penalty and in the absence of any
opportunity to the distillers the penalty could not be realized nor could it
be adjusted against the statutory price for rectified spirit.
(
It is furthermore interesting to note that the Comptroller and Auditor H
376 SUPREME COURT REPORTS (2003) SUPP. 3 S.C.R.

A General in its counter affidavit before the High Court as also before this
Court stated that the steps for recovery of such amount was required to be
taken for avoiding 'potential loss of revenue due to wastage of molasses
in the distilleries'. The stand of the appellants, thus, runs contrary to the
stand of the Comptroller and Auditor General, although the impugned
B demand was made pursuant to or in furtherance of its report.
It will bear repetition to state that the appellants herein by issuing the
demand notices sought to give effect to the report of the Comptroller and
Auditor General. It is, therefore, not correct to contend that they intended
to recover the amount by way of compensation by alleging loss to it for
C which respondents became liable in terms of condition No. 8 of the tender
notice (supra). Revenue being a subject-matter of legislation in terms of
Entry 8 of List II of the Seventh Schedule of the Constitution of India, the
recovery thereof must be made in terms of the provisions of a legislative
Act enacted pursuant thereto and not by reason of an executive fiat.
D
As is evident, the appellants have sought to exercise its statutory
power and not a contractual obligation. Reliance placed in this behalf by
Mr. Ray on State of Orissa and Others v. Narain Prasad and Others,
[1996) 5 sec 740 is not apposite in the fact situation obtaining herein. The
E respondents therein were the highest bidders in respect of the various liquor
shops in Orissa. Their bids were accepted. They executed agreements in
the prescribed form and were issued licences. Each of them had undertaken
under the agreement/contract to. lift a particular specified quantity of liquor
every month. They carried on their business in terms of the licences but
F failed to lift the agreed minimum guaranteed quantity and further failed
to remit the excise duty as provided under Rule 6-A. It was, in that
situation, this Court observed :

" ...A person who enters into certain contractual obligations with his
eyes open and works the entire contract, cannot be allowed to turn round
G according to this decision, and question the validity of those obligations
or the validity of the Rules which constitute the terms of the contract. The
extraordinary jurisdiction of the High Court under Article 226, which is
of a discretionary nature and is exercised only to advance the interests of
justice, cannot certainly be employed in aid of such persons. Neither justice
H nor equity is in their favour."
STATE v. INDUSTRIAL COPRN. PVT. LTD. 377

Therein the liability of the respondents were found to have arisen A
from the terms of contract qua contract. Such is not the position herein.

Mr. Ray, therefore, is not correct when he submits that such demand
was made in terms of the condition of the contract in respect whereof the
writ petitions of the respondents were not maintainable.
B
However, before we part with this case, we would like to clarify that
the opinion of the High Court to the effect that in view of the decision of
this Court in Synthetics and Chemicals (supra), the State has no legislative
competence even in relation to potable liquor (which is fit for human
consumption) is not correct. The legal position in this behalf has succinctly C
been explained inter alia in State of U. P. v. Synthetics and Chemicals Ltd.,
[1991] 4 SCC 139, State of UP. and Another v. Synthetics & Chemicals
Ltd and Another, [1993] 2 SCC 308 and Siel Ltd and Others v. Union
of India and Others, [1998] 7 SCC 26.

For the aforesaid reasons and subject to the aforesaid modification of
D
the impugned judgment, we dismiss these appeals, There shall be no order
as to costs.

R.P. Appeals dismissed.