Holding

The instrument is a bond (an indemnity bond) and is liable to stamp duty under Entry 32 of the Kerala Stamp Act Schedule.

Summary

The State of Kerala challenged the classification of a document executed by McDowell & Co. under Form VI of the Distillery and Warehouse Rules, required by Section 7 of the Kerala Abkari Act for deferred export duty, as an agreement rather than a bond for stamp duty purposes. The High Court held the instrument to be an agreement, exempt from the higher stamp duty applicable to bonds, and the Board of Revenue had earlier classified it as a bond. The Supreme Court examined whether the instrument created a fresh obligation to pay money, as required by the definition of a bond in the Kerala Stamp Act, and if so, under which entry of the Schedule stamp duty was payable. By a majority, the Court held that the instrument does create a new conditional obligation and is a bond, specifically an indemnity bond, thus liable to duty under Entry 32 of the Schedule. Consequently, the appeal was allowed, the High Court judgment set aside, and the State was directed to refund any excess duty paid by the respondent. The dissenting judges argued that the obligation arose from the Abkari Act, not the instrument, and therefore it should be treated as an agreement.

Issues considered

Whether the instrument executed under Form VI of the Distillery and Warehouse Rules is a 'bond' within the meaning of Article 13 of the Kerala Stamp Act or an 'agreement' under Article 5.
Whether the obligation to pay duty arises from the instrument itself or from the pre‑existing duty under the Kerala Abkari Act.
If the instrument is a bond, under which entry of the Schedule (Entry 13 or Entry 32) is stamp duty payable.

Legislation cited

Distillery and Warehouse Ruless. Form VI
Indian Stamp Acts. Section 2(5)
Kerala Abkari Acts. Section 7(1)(b)
Kerala Stamp Act, 1939s. Article 5, s. Schedule Entry 13, s. Schedule Entry 32, s. Section 2(a)
Revenue Recovery Act

Subjects

stamp dutybondindemnity bondKerala Abkari ActKerala Stamp Actexport dutyconditional obligationrevenue law

Judgment

STATE OF KERALA AND ORS. A
v.
MCDOWELL AND CO. LTD.

FEBRUARY 15, 1_994

(S.P. BHARUCHA AND N. VENKATACHALA, JJ.] B

Kera/a Abkari Act:

Section 7-1.ndian made Foreign Liquor-Export of-Bond executed for •
deferred payment of duty on such export in Fonn VI of the Distillery and C
Warehouse Rules-Whether a bond within the meaning of Art. 13 of the
Schedule to the Kera/a Stamp Act. 1939 or an agreement as defined in A1ticle
5 thereof-Whether liable to stamp duty under Entry 32 of the Schedule.

Kera/a Stamp Act, 1939:
D
Articles 5 and 13 of the Schedule-Bond executed by manufacturers of
Indian made Foreign Liquofk-ln Fonn VI of the Disti(lery and Warehouse
T
Rules-Whether a bond under Art.13 or an agreement as defined in Anicle
~Whether liable to Stamp duty under Entry 32 of the Schedule.

E
Words & Phrases:

"Bond''-Meaning of in the context of Kera/a Stamp Act. 1939.

The manufacture, sale and supply of Indian made Foreign Liquor in
the State of Kerala is governed by the Kerala Abkari Act under which a F
distiller is permitted to export liquor manufactured by it outside Kerala
after obtaining permission from the Excise Authorities. The State Govern~
ment issued notification levying concessional duty of Rs. 0.50 per proof
litre on such export. In case the quantity exported did not reach the
destination or if there was wastage, etc. then the liability to pay normal G
duty arose. To ensure such payment, the distillers were required to execute
a bond under cl.(b) of sub-section(l) of S.7 of the Kerala Abkari Act.

In 1982 the Board of Revenue issued a Circular stating that such
documents executed by the distillers were being treated as agreement1'
when in fact they were bonds, and, therefore stamp duty be levied accord- H
981
982 SUPREME COURT REPORTS [1994) 1 S.C.R.

A ingly and the short levy be recovered from the distillers. The High Court
quashed the circular and directed the Board of Revenue to decide the
matter afresh after affording opportunity of hearing to the distillers. The
Board decided the matter accordingly and held that since obligation in the
bond was to pay a fixed sum of money to Government on condition that
the condition shall be void if a specified act was not performed, the
B document was a bond and not an agreement. The distiller challenged this
order before the High Court and it held that since the bond executed by
the distiller was an obligation incurred under S.7 of the Abkari Act it was
not an obligation created under the bond and, therefore, not liable to
stamp duty. Against this, State of Kerala preferred the present appeal.
c Allowing the appeal, this Court

HELD : By the Court:

1. The instrument executed by the distiller in Form VI of the Distill-
D ery and Warehouse Rules made under the provisions of the Kerala Abkari
Act shall be liable to stamp duty under Entry 32 of the Schedule to the
Kerala Stamp Act. [1001-C]

2..fn pursuance of the interim order passed by the High Court the
respondent has paid duty on the document to the State Government as
E was payable under Art.13 of the Schedule to the Kerala Stamp Act. Since
tbe amount of duty payable by the respondent was much less than what
was paid by it, the appellant was directed to refund the excess amount paid
by the respondent: [1001-D, E]

Per Majority (By Bharucha. J, for himself and Venkatachala. !.)
F
1. The definition of bond in sub-clause (1) of clause (a) of section 2
of the Kerala Stamp Act is clear and unambiguous. It must be read as it
stands, nothing may be read in or implied. The word 'whereby' must be
read as meaning what it ordinarily does, namely, by which. An instrument,
G therefore, by which person puts himself under an obligation to pay sum of
money to another on condition that the obligation shall be void if some
specific act is, or is not, performed is a bond. If the executant can be sued
for that sum of money only upon the strength of the instrument, the ·
instrument is a bond. [990-B-C]

H 2. The obligation of the respondents under the instrument in ques-
STATEOFKERALA v. MCDOWELLCO. 983

ti on is that if there be breach of all or any of its provisions or of the Rules A
they would forthwith pay to the State of Kerala the sum of .money men-
tioned in it, representing the amount of the excise duty payable upon the
quantity of Liquor to be exported, upon payment the obligation would be
void and of no effect. By the instrument in question, therefore, the respon-
dents avail themselves of the advantage of clearing from their distillery for B
export outside the State of Kerala liquor without paying excise duty
thereon. They do so upon the condition that the liquor shall be delivered
into the custody of the Excise Officer in charge of the importer and Excise
duty shall be paid to that Excise Officer on all or any portion of the liquor
which is not so delivered. As required by the Abkari Act, the respondents
oblige themselves in the event of breach of the condition, to pay to the State C
of Kerala the sum of money mentioned in the instrument in question, being
the amount of the excise duty. Under the instrument in question the
respondents clearly oblige or bind themselves to pay to the State of Kerala
a specified sum of money and came sued thereon. The instrument in
question is, therefore, an instrument whereby a person obliges himself to D
pay money to another, the obligation to become void if a specified act is
performed. It is a bond within the meaning of the Kerala Stamp Act.
(990-F-H; 991-A, BJ

3. Entry 13 is the residuary entry applicable to bonds which are not
expressly provided for in the Schedule. Entry 13 can have no application E
to the instrument in question if it is an indemnity bond. It must then bear
the duty provided for under Entry 32. (991-G]

4. The instrument in question indemnifies the State of Kerala
against loss of excise duty in the event that delivery of the liquor exported F
is not made to the Excise Officer in charge of the importer or in the event
that the excise duty is not paid to him by reason of failure of delivery of
all or any part of the liquor. The instrument in question must, therefore,
be assessed to duty under the provisions of Entry 32 of the Schedule.
[991-H; 992-A] G
-{ Bira Lal Sircar v. Queen Empress, ILR 22 Cal. 757; M.D. Gupta v.
Board of Revenue U.P. ,Vtd Others, 1969 A.LJ. 333; M/s. Hindustan Sugar
Mills Ltd. v. State of U.P. and others, AIR (1972) Allahabad 8 and Mis.
Patel Stone Trading Co., Nagpur v. Ramsing, AIR (1975) Bombay 79,
referred to. H
984 SUPREME COURT REPORTS [1994] 1 S.C.R.

A Per Sahai, J. (dissenting):

1. The liability to pay duty arises under the Abkari Act, the rules
framed under it and not under the instrument. The Stamp Act does not
visualise duty for extension of facility to the distiller. If the legislature on
Section 7 (l)(b) would have used the word 'agreement' it would have been
B difficult for the department to claim duty on it as bond. The result shall
be not different if it uses the word 'bond' as it is not the use of the word
but nature of document which is decisive of duty. The Stamp Act is a fiscal
statute. It should not be construed as to cause unintented hardship. Since
the language of the section does not admit of any doubt and document
C executed in Form VI being in respect of right arising out of permit issued
by the department it was not liable ~o be stamped as bond, but as
agreement. [1000-F-H; 1001-A]

2. The principal ingredient or the main basis which makes an
agreement a bond according to the definition is the obligor obliging to pay
D the obligee. The obligation, therefore, must arise from the agreement. The
word 'oblige' according to dictionary means, 'bind ( person, oneself) by
oath, promise, contract, etc., to person or to do'. In other words a person
who executes a bond binds himself to pay the amount. But this bind must
arise from the instrument or document executed between the parties. If the
E recital is only in respect of something which is already existing then it is
mere agreement in respect of existing state of affairs and not an obligation
arising out of the instrument. [996-E-G]

3. The word 'obligation' used in. the Stamp Act is in the special sense,
and not in the ordinary sense. In Abkari Act it is on the other hand in
F ordinary or normal sense. It is further clear from use of the word
'whereby'. It mean, 'in consequence of which' or 'in accordance with which'.
In other words the obligation to pay must arise from the instrument, that
is, the responsibility to pay or liability to pay must be created or accrue
from the instrument itself. It must be in consequence of it. [997-A, 8]
G 4. The liability to pay or the obligation undertaken to pay on later
date does not arise as between a debtor and creditor but in lieu of liability
which already exists in law. An instrument or document does not become
bond under Stamp Act because it is so described but only when an
obligation to pay arises in consequence of it. Mere use of the word 'bond'
H in Section 7 of the Abkari Act does not render it a bond for purposes of
STATEOFKERALA v. MCDOWELLCO. 985

stamp duty. The distiller executing the agreement in Form VI avails of the A
facility of exporting the liquor without payment of duty. But it undertakes
to pay the amount if the duty on liquor sent to another State is not paid
to it. The obligation to pay under the instrument, thus, arises not as a
creditor or debtor !n the commercial sense or special sense but for failure
of duty enjoined by law. [999-G, H; 1000-A, BJ
B
5. The obligation in consequence of which the amount is liable to be
paid is not as a result of any relationship of debtor and creditor but
violation or breach arising out of permission granted by the Excise
authorities. The agreement itself shows that the bounden shall be liable to
pay the government in case bounden commits breach of any condition of C
the permit issued by the department. The obligation to pay thus arises not
as a creditor or debtor but for breach of the condition imposed not by the
~.
bond or agreement but of some condition imposed in the permit issued by
the Excise authorities. UOOO·D·F]

Visbome & Co. v. Subalbowri, 8 Cal. 284; Chimnaji v. Renu, (1880) D
T l.L.R. 4 Bombay 19; Venkata Chinnaya Rau Garu v. Venkataramaya Gam
(1882) l.L.R. 4 Mad 137 (140); Hira Lal Sircar v. Queen Empress, XXII ILR
. , Cal. 757; M.D. Gupta v. Board of Revenue, 1969 AlJ 333; Dadri Railways
Pvt. Ltd. v. Mis. Chinaria Transport Co. & Ors., (1971) RLR 531; M/s. Patel
Stone Trading Company v. Ramsing, AIR (1975); Bombay, Hindustan Sugar E
Mill Ltd. v. State of U.P., AIR (1972); Allahabad page 8, Mahabir Prasad v.
Peer Bux, AIR (1972) Allahabad 466; Board of Revenue v. Sellwell T.
Agencies, 1984 K.L.T. 955 and Mathai Mathew v. Thampi, 19891 K.L.T.138,
referred to.

American Jurispmdence 2nd Ld. Vol.64 and Leak's Law of Contract, F
referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 12 of
1992.
G
From the Judgment and Order dated 27.7.91 of the Kerala High
Court in W.A. No. 634 of 1991.

G.V. Aiyyer and M.A. Firoz for the Appellants.

C.S. Vaidyanathan and S.R. Setia for the Respondents H
986 SUPREME COURT REPORTS (1994) 1 S.C.R.

A The Judgment of the Court were delivered by

BHARUCHA, J. 1. The Division Bench of the Kerala High Court
held that instrument before us, which shall be reproduced hereafter, was
not a bond within the meaning of sub-clause (1) of clause (a) section 2 of
the Kerala Stamp Act; it was an agreement and chargeable to stamp duty,
B accordingly. This appeal by special leave is filed by the State of Kerala
thereagainst.

2. The respondent i:nake what is called Indian made foreign liquor
within the State of Kerala. They export the liquor to other States in India.
The respondents are liable to pay excise duty on the liquor under the
C provisions os Section 17 of the Kerala Abkari Act at the rate prescribed
under Section 18 thereof. Sub-section (1) of Section 7 of the Abkari Act
permits them to export the liquor outside the State of Kerala if a bond for
such payment is executed. It reads thus,

No liquor or intoxicating drug shall be exported unless its export
D is permitted by the Government or any officer authorised by the
Government in this behalf and unless: -

(a) the duties, taxes, fees and such other sums as are due to the
Government under this Act, in respect of such liquor or intoxicat-
E ing drug, have been paid, or

(b) a bond for such payment on its exportation or re-exportation.
has been executed.

The bond is required to be executed in a form provided by the rules made
under the Abkari Act, called the Distillery and Warehouse Rules. The form
F
(Form VI) reads thus.

Know all men by these presents that I/We.......... (hereinafter called
the bounden/boundens) and.......... (hereinafter called the surety)
are bounden to the Governor of Kerala (hereinafter called the
G Government) in the sum of Rs ........ ( rupees ........) to be paid to the
Government for which payment we bind ourselves and our legal
representatives.

Dated this the ...... day of ....... corresponding to the.....day of ........

H. (signed)
I

f

STATEOFKERALA v. MCDOWELLCO.[BHARUCHA,J.) 987

Whereas the bounden has/boundens have been permitted by the A
Government unde.r the Distillery and Warehouse Rules 19..... and
the amendments thereof made from time to time (hereinafter
called the Rules) to remove .........litres of spirits of the strength of
degrees.....under/over Bounden proof from his/their...... at ..........to
the..... at... ........ without previous payment of duty thereon subject B
to the condition that (1) the bounden/boundens shall on or before
the expiration of........ day from date here of deliver or cause to be
)- delivered the above mentioned ........litres of spirits into the custody
of the Government Officer in charge of the said ............ .

(2) the bounden/boundens shall on demand to pay or cause to be C
paid to the said Government Officer duty at the accepted rate on
all or any portion of the above-mentioned litres of spirits which
shall not be so delivered.

Now the condition of the above written obligation is that in the D
T case the bounden/boundens commits/commit breach of all or any
of the provisions herein contained or contained in the Rules, the
bounden/boundens shall forthwith ..... pay to the Government the
said sum of Rs........ and upon the payment of such sum, the above
written obligation shall be void and of no effect otherwise this shall
be and remain in full force and effect: E

Provided further that the bounden/boundens and the surety
hereby agree that all sums found due to the Government under or
by virtue of this bond shall be recovered from the bounden/boun-
dens and their properties movable and immovable as if such sums F
are arrears of land revenue under the provisions of the Revenue
Recovery Act for the time being in force or in such other manner
as the Government may deem fit.

The liability of the surety under the bond is co-extensive with
that of the bounden/boundens and it shall not be affected by the G
Government giving time or any other indulge1we to the boun-
den/boundens,

Signed by the bounden/boundens .................... .
In the presence of witnesses. 1. 2. H
988 SUPREME COURT REPORTS (1994] 1 S.C.R.

A Signed by the surety
In the presence of witnesses. 1. 2.

3. The instrument executed in the aforesaid terms by the respon-
dents was held to be a bond within the meaning of the Kerala Stamp Act
by the Board of Revenue and accordingly liable to Stamp duty under
B Article 13 of its Schedule. The respondents impugned the decision in a writ
petition, which was allowed by a learned single judge of the Kerala High
Court. The appeal filed by the State of Kerala before the Division Bench
of the Kerala High Court was dismissed by the judgment under appeal.
The Division Bench held that the instrument in question was not a bond
c but an agreement because the obligation mentioned in it was incurred
under Section 7 of the Abkari Act and not an obligation created under it.

4. Sub-clause (i) of clause (9) of Section 2 of the Kerala Stamp Act
reads thus:

D (a) 'bond' includes -

(i) any instrument whereby a person obliges himself to pay money
to another, on condition that the obligation shall be void if a
specified act is performed, or is not performed, as the case may
be.
E
5. Learned counsel for the appellant contended that under instru-
ment in question the respondents obliged themselves to pay the sum of
money set out therein, the obligation to be void on the happening of events
specified therein. There was, in his submission, no warrant for holding that
the obligation. of the respondents arose under the Abkari Act and that,
F therefore, the instrument in question created no new obligation so that it
was not a bond. Learned coun.sel for the respondents submitted that for
an instrument to be a bond the obligation must be created thereunder. In
the instant case, the respondents were obliged to pay the excise duty on
the liquor exported by them outside the State of Kerala by reason of the
G provisions of the Abkari Act. The instrument in question, therefor created
no obligation and was merely an agreement and liable to be stamped
accordingly. Learned counsel relied upon High Court judgments to which
we shall now advert.

6. The Division Bench of the Calcutta High Court in Bira Lal Sircar
H v. Queen Emperess, ILR 22 Cal. 757, considered the case of money-lenders
I

f
STATEOFKERALA v. MCDOWELLCO.[BHARUCHA,J.] 989

who were convicted under the Stamp Act. They lent money and the A
transactions wen.. entered in their account books. The entries were signed
by the debtors and were attested. The Division Bench held that these
entries were not bonds out acknowledgments. Emphasis was placed upon
the word obliges in the definition of a bond and it was said that no
document can be a bond .............unless it is one which itself creates an
obligation to pay money............ Documents acknowledging promises to B
repay advances or to pay for goods, which the law always implied when
money was borrowed and goods were purchased, were not bonds. In Mai
Dhan Gupta v. Board of Revenue, U.P. and others. 1969 A.L.J. 333, the
instrument was executed ensure payment of the State Government's dues.
A learned single judge of the Allahabad High Court held that the words C
in the definition of a bond obliges himself to pay money made it clear that
the obligation was not a pre-existing one. Where the obligation was a
pre-existing one an instrument executed subsequently setting out the nature
of the obligation was a mere agreement. In the case before the learned
single Judge, while the instrument did not create any fresh liability or
T obligation, it imposed a personal liability upon a person who was not D
otherwise liable and it was held that it was a bond. In Mis. Hindustan Sugar
Mills Ltd. v. State of U.P. and others., AIR (1972) Allahabad 8, the facts
were that the company was assessed to sales tax, it appealed, asked for stay
of recovery thereof . The tax court granted a stay on condition that the
appellant furnished security to the satisfaction of the Sales Tax Officer. In
order to comply with that condition one Adukiya executed an instrument E
for and on behalf of the company. The question which a Special Bench of
the Allahabad High Court considered was this instrument a bond. The
Special Bench noted that the Stamp Act described a bond as an instrument
whereby a person obliged himself to deliver money. These words, in its
view, indicated that the obligation to pay money should arise under the
terms of the instrument itself. In other words the obligation should be
F
created by the instrument. In the case before the Special bench, the liability
to pay sales tax existed under the provision of the Sales Tax Act itself and
the mere recital in the document that Adukiya would discharge the liability
did not create a new liability under and by the instrument. The instrument
was, therefore, held not to be a bond. In Mis. Patel Stone Trading Co., G
Nagpur v. Ramsing, AIR (1975) Bombay 79, a learned single judge of the
Bombay High Court considered an instrument in which the defendant
acknowledged liability in a stated amounts and expressly promised to repay
the same. The learned Judge held that the document was executed for the
purposes of creating an obligation whereby the defendant agreed \o pay to
H

-~
990 SUPREME COURT REPORTS [1994) 1 S.C.R.

A the plaintiff the stated amount and interest thereon. This being the
dominant purpose and intention of the instrument, it was a bond. En
passant the learned Judge said, and upon this sentence much emphasis was
laid. In the present case, either in the statute or common law there was no
pre-existing right or liability between the parties.

B 7. In our view, the definition of "bond" in sub-clause (1) of clause
(a) of Section 2 of the Kerala Stamp Act is clear and unambiguous. It must
be read as it stands, nothing may be read in or implied. The word 'whereby'
must be read as meaning what it ordinarily does, namely, 'by which'. An
instrument, therefore, by which person puts himself under an obligation to
C pay a sum of money to another on condition that the obligation small be
void if some specific act is, or is not, performed is a bond. The only
question to pose is has the executant of the instrument put himself under
an obligation, or bound himself, to pay a sum of money to another, the
obligation to be void under specified circumstances? If the executant can
be sued for that sum of money only upon the strength of the instrument,
D the instrument is a bond.

8. The respondents become liable to pay excise duty on the liquor
they make at the point of time at which it is made. Collection of the amount
of excise duty is ordinarily deferred until the liquor is cleared from the
E respondents distillery. Section 7 of the Abkari Act entitles the appellants
to clear the liquor for export outside the State of Kerala upon their
executing an instrument in a form set out in the Rules made under the
statute. The instrument in question perm~ts the respondents to remove the
quantity of liquor stated therein from their distillery to a location outside
--
the State of Kerala without payment of the excise duty thereon subject to
F the condition that the respondents would deliver the same into the custody
of the Excise Officer in charge of the importer thereof and the respondents
would on demand pay or cause to be paid to that Excise Officer excise
duty on all or any portion of the such liquor not delivered, The obligation
of the respondents under the instrument in question is that if there be a
G breach of all or any of its provisions or of the Rules they would forthwith
pay to the State of Kerala the sum of money mentioned in it, representing
the amount of the excise duty payable upon the quantity of liquor to be
exported, upon payment the obligation would be void and of no effect. By
the instrument in question, therefore, the respondents avail themselves of
the advantage of clearing from their distillery for export outside the State
H of Kerala liquor without paying excise duty thereon. They do so upon the

-··
STATEOFKERALA v. MCDOWELL CO. [BHARUCHA,J.) 991

condition that the liquor shall be delivered into the custody of the Excise A
Officer in charge of the importer and excise duty shall be paid to that
Excise Officer on all or any portion of the liquor which is not so delivered.
As required by the Abkari Act, the respondents oblige themselves in the
event of breach of the condition, to pay to the State of Kerala the sum of
money mentioned in the instrument in question, being the amount of the
excise duty. Under the instrument in question the respondents clearly B
oblige or bind themselves to pay to the State of Kerala a specified sum of
money and can be sued thereon. The instrument in question is, therefore,
an instrument whereby a person obliges himself to pay money to another,
).--
the obligation to become void if a specified act is performed. It is a bond
within the meaning of the Kerala Stamp Act. C

9. It was submitted in the alternative by learned counsel for the
respondents that, even though the instrument in question may be a bond,
it was not liable to duty under Entry 13 of the Schedule of the Kerala Stamp
Act but was liable to duty under Entry 32 which related to indemnity bonds.
Entries 13, 25, 32, 49 and 50 deal with bonds. Entry 25 deals with Customs D
or Central excise bonds. Entry 32 reads, "Indemnity Bond ........ The same
T
duty as a Security Bond (No.50) for the same amount". Entry 50 deals with
security bonds and the duty payable thereon when the amount secured
exceeds Rs.1,000 is Rs. 60. Item 13 reads, so far as is relevant, thus:
E
SI.
Description of instrument Proper Stamp duty
No.
15. Bond as defined by section 2(a), Two rupees fifty paise for
not being a debenture and not every Rs. 100 or part thereof
being otherwise provided for by of the amount or value F
this Act or by the Kerala Cmpt secured.
Fees and Suits Valuation Act. 1959
(10 of 1960) or other enactment
for the time being in force.

10. Entry 13 is the residuary entry applicable to bonds which are not G
expressly provided for in the Schedule. Entry 13 can have no application
to the instrument in question if it an indemnity bond. It must then bear the
duty provided for under Entry 32.

11. We have already analysed the instrument in question. It indem- H
·'

992 SUPREME COURT REPORTS [1994) 1 S.C.R.

A nifies the State of Kerala against loss of excise duty in the event that
delivery of the liquor exported is not made to the Excise Officer in charge )-.
of the importer or in the event that the excise duty is not paid to him by
reason of failure of delivery of all or any part of the liquor. The instrument
in question must, therefore, be assessed to duty under the provisions of
Entry 32 of the Schedule.
B
12. Our attention was drawn to the fact that it had been averred by
the respondents that another distillery had been permitted to export liquor
outside the State of Kerala without executing a bond but only upon entering ~
into a revolving credit arrangement. All that we need to say in this behalf
c is that an appropriate application may be made by the. respondents, which
the State of Kerala will consider in the light of the applicable law.

13. In the result, the appeal is allowed. The judgment and order
under appeal is set aside. The writ petition filed by the respondents is
allowed only to the extent that it is declared the instruments executed by
D them in Form VI of the Distillery and warehouse Rules made under the
provisions of the Kerala Abkari Act shall be liable to stamp duty under
Entry 32 of the Schedule Kerala Stamp Act

There shall be no- order as to costs. ...

E R.M. SARAI, J. 14. The short but important question of law that
arises for consideration in .this appeal directed against the judgment and
order of the Kerala High Court is whether the bond executed under
Section 7 of the Kerala Abkari Act for deferred payment of duty on export
by the manufacturers of Ifidian made Foreign Liquor in Form VI was a
F bond within meaning of Article 13 of the Kerala Stamp Act 1939
(hereinafter referred to as 'the Act') or an agreement as defined in Article
5 of the Schedule of the Act.

15. The manufacture, sale and supply of Indian made Foreign Liquor
in the State of Kerala is governed by the Kerala Abkari Act. Under it a
G distiller is permitted to export liquor manufactured by it outside the State
after obtaining permission from the excise authorities. Since such liquor is
consumed in another State the. Government in exercise of its power under
Section 17 of the Act issued notification levying concessional duty of
)- -
· Rs.0.50 per proof litre. But if the quantity exported did not reach the
H destination or there was wastage etc. then the liability to pay normal duty
f
I

STATEOFKERALA v. MCDOWELLCO.(SAHAl,J.) 993

arose. To ensure such payment the distiller is required to execute a bond A
under Clause (b) of sub-section (1) of Section 7 of the Abkari Act which
reads as nuder :

''No liquor or intoxicated drug shall be exported unless its
export is permitted by the Government or any officer authorised
by the government in this behalf and unless :- B

(a) the duties, truces, frees and such other sums as are due to the
Government under this Act, in respect of such liquor or
intoxicating drug, have been paid, or

(b) a bond for such payment on its exportation or re-exportation
c
has been executed."

The terms of the agreement are entered as provided in Form VI. Relevant
portion of the agreement is extracted below :
D
"Whereas the boundens have permitted by the Government under
the Distillery and Warehouse Rules 1968 and the amendments
thereof made from time to time (hereinafter called the Rules) to
remove ...... to bulk litres .......to proof litres) of I.M.E.L. of the
strength of ..... df)gtees under proof from our distillery at Varanad
to...... without previous payment of duty thereon subject to the E
conditions that (i) the boundens shall on or before the expiration
of the currency of the permit from the date hereof deliver or cause
to be delivered the above mentioned ..... to bulk litres of I.M.E.L.
into the custody of the Government Officer in charge of the said
imported (2) the boudens shall on demand to pay or cause to be F
paid to the said Government Officer duty at the tariff rate on all
or any portion of the above mentioned litres of I.M.E.L. OSF which
shall not be so delivered. Now the conditions of the above written
obligation is that in case the boundens commit breach of all of any
of the provisions herein contained or contained in the Rules the G
boundens shall forthwith pay to the Government the said sum
of.......... and upon the payment of such sum the above written
obligation shall be void and of no effect, otherwise this shall or
and remain in full force and effect".

16. In the 1982 the Board of Revenue issued a circular that such H
994 SUPREME COURT REPORTS (1994) 1 S.C.R.

A documents executed by the distillers were being treated as agreements
when in fact they were bond, therefore, the duty be levied accordingly and
the short levy may be recovered from them. This circular was quashed by
the High Court and the Board of Revenue was directed to decide afresh
after affording opportunity of hearing to the distiller. In pursuance of this
direction the Board of Revenue on 26th December 1988 decided the
B dispute afresh and held that since obligation in the bond was to pay a fixed
sum of money to Government on condition that the condition shall be void
if a specified act was not performed the document was a bond and not an
agreement. This order was challenged again by the distiller in the High
Court. Both the Division Bench and the learned Single Judge held the
C agreement executed in Form VI could be a bond for purposes of Stamp
Act only if the obligation was created by or under the instrument, and not
if it was in respect of pre-existing right. The High Court was of opinion
that since the bond executed by the distillers was an obligation incurred
under Section 7 of the Abkari Act it was not an obligation created under
the bond. It is the correctness of this view that has been assailed by the
D State.

17. 'Bond' dictionarily means a certificate or evidence of debt. In
Oxford Dictionary it is defined as, 'binding engagement, agreement, deed
by which person binds himself to pay another; government's or public
company's documentary promise to repay borrowed money'. Stroud's Judi-
E cial Dictionary defines it as, 'an obligation by deed.' Black's Law Dictionary
defines it as, 'a certificate or evidence of a debt on which the issuing
company or governmental body· promises to pay the bondholders a
specified amount of interest for a specified length of time, and to repay the
loan on the expiration date. In every case a bond represents debt- its
F holder is a creditor. Commonly, bonds are secured by a mortgage'. Thus a
bond is a promise to pay money at a future date. It is an instrument in
writing or written acknowledgment for the payment of debt.

18. Bonds can be categorised in different ways. They may by clas-
sified on, 'the basis of purpose for which the bonds are issued' or on,
G 'nature, form or terms and hence may involve difference in rights and
obligation' (American Jurisprudence 2nd Ed. Vol.64). In England, bond is
an obligation in writing and under seal to pay money. It may be simple or
conditional bond. The former requires payment on a date named in the
bond whereas in latter if the obligor does some particular act or abstains
H from so doing, the obligation shall be void or remains in force. It is a word
f
'

STATEOFKERALA v. MCDOWELL CO. (SAfW,J.] 995

normally used in the statutes to indicate security or obligation to pay money A
to public bodies. But what it is, what is its meaning, how it should be
construed or understood depends on the language of the statute, the
context in which it has been used and the purpose it seeks to achieve.
'There is nothing inherent in the word 'bonds' which makes them in every
case either synonymous or different in meaning. To determine their mean-
ing the court must look to the context in which such words are used in the
B
relevant statute or other provision of law, to the intent and purpose of such
provisions and to the circumstances in which such words are used'
(American Jurisprudence 2nd Ed. Vol.64).

19. The definition of the word 'bond' in the Kerala Act is reproduced C
below:

"Bond" includes -

(i) any instrument whereby a person obliges himself to pay money
to another, on condition that the obligation shall be void if a D
specified act is performed, or is not performed, as the case may
be;

(ii) any instrument attested by a witness and not payable to order
or bearer, whereby a person obliges himself to pay money to
another; and E
(iii) any instrument so attested, whereby a person obliges himself
to deliver grain or other agricultural produce to another;
- Section 2(5) of the Indian Stamp Act is also extracted:
F
"(5) (a) - any instrument whereby a person obliges himself to pay
money to another, on condition that the obligation shall be void if
a specified act is performed, or is not performed, as tht case may
be;
G
(b) any instrument attested by a witness and not payable to onkr
or bearer, whereby a person obliges himself to pay money to
another; and

(c) any instrument so attested, whereby a person obliges himself
to deliver grain or other agricultural produce to another;" H
996 SUPREME COURT REPORTS [1994) 1 S.C.R.

A Both Section 2 of the Kerala Act and Section 2 of the Indian Stamp Act
are identical. The purpose of extracting the definition is to demonstrate
that whereas clause (a) of the Indian Stamp Act or the Kerala Act deals
with conditional obligation clauses (b )and (c) are concerned with simple
obligation. In Gisborne & Co. v. Subalbowri, 8 Cal. 234 it was observed that,
'the definition of a bond in Section 2(5) of the Act is precisely what we
B understand by a bond in England and it is an obligation of a different
character from a covenant to do a particular act'. This observation was
made on Section 5(2) as it stood in the original Stamp Act and was simil~r
to what it is 5(2)(a) now in the Act. In Chimnaji v. Ranu (1880) I.L.R. 4
Bombay 19 where the defendant promised to repay with \nterest the sum
C borrowed and promised in addition to pay 'pailies' of nagli in the month of
Phalgoon of the year and on failure to give wadh at rate of quarter of a
maund for every maund per year, it was held that proper stamp duty
payable on it was as required for agreement. Similar view was taken in
Veflkata Chinniaya Rau Garu v. Ventaramaya Garu (1882) I.L.R. 4 Mad.
D 137 (140). The plaintiff's sister by deed of gift made over certain landed
property to the defendant, her daughter. By terms of registered deed it was .
stipulated that a certain sum shall be paid until a village could be given to
them. The defendant executed in plaintiff's favour a Kararnama promising
to give effect to the stipulation in the deed. It was held that it was not a
bond and was properly stamped as agreement. These dedsions were
E rendered on Section 5(2) but they are relevant for the present Section
5(2)(a) of the Indian Stamp Act and Article 13 of the Kerala Act. The
principal ingredient or the main basis which makes an agreement a bond
according to the definition is the obligor obliging to pay the obligec. The
obligation, therefore, must arise from the agreement. The word 'oblige'
F according to dictionary means, 'bind (person, oneself) by oath, promise,
contract, etc., to person or to do'. In other words person who executes a
bond binds himself to pay the amount. But this binding must arise from
the instrument or document executed between the parties. If the recital is
only in respect of something which is already existing then it is mere ·
agreement in respect of existing state of affairs and not an obligation arising
G out of the instrument.

20. 'A bond is a deed wherein a party acknowledging himself to be
bound or indebted to another in a certain sum of money. It is sometimes
called an obligation in a special sense of the word; and the parties are
H called respectively the obligor and the obligee' (Leak's Law of Contract).
STATEOFKERALA v. MCDOWELL CO. (SAHAl,J.] 997

The word 'obligation' used in the Stamp Act is in the special sense, and A
not in the ordinary sense. In Abkari Act it is on the other hand in ordinary
or normal sense. It is further clear from use of the word 'whereby'. It
means, 'in consequence of which' or 'in accordance with which'. In other
words the obligation to pay must arise from the instrument, that is, the
responsibility to pay or liability to pay must be created or accrue from the B
instrument itself. It must be in consequence of it.

21. Various High Courts had occasion to consider this entry and the
consistent view appears to be that the bond for purposes of the Stamp Act
should be understood and concerned in special sense and not in ordinary
sense. It has been held an instrument which for purposes of levy of stamp C
duty must create an obligation to pay for the first time. It must not be in
recognition of any pre-existing right. As far back as 1895, in Hira Lal Sircar
v. Queen Empress, XXII ILR Cal. 757 it was held that the word 'oblige'
indicates that a document can be a bond only when it cr~ates an obligation
to pay money as is the case with those documents which are known as D
bonds but is not the case with the acknowledgments of advances, or of the
purehase and. receipt of goods, the obligation to pay for which is not
created by instrument, but arises from the promises to repay advanees and
to pay for goods,which the law always implies when money is borrowed or
goods are purchased. In M.D. Gupta v. Board of Revenue, 1969 AL.J 333 it
was held that where .an obligation to pay was a pre-existing one the E
document executed subsequently giving the nature of the obligation or the
terms and conditions of the contract shall be a mere agreement. In Dadri
~ailways Pvt. Ltd. v. Mis Chinaria TranspoTt Co. & Ors., (1971) RLR 531 it
was held that in order that a certain document itself should be hon :l within
the meaning of Section 2(5) of the Act, it was necessary that document p
itself should create its liability to pay money to another person. Where,
however, there is a pre-existing liability and the subsequent document
merely evidences the liability of the debtor for the balance of the money
due from him, that document would not be a 'bond' but merely an
'agreement'. In Mis fate/ Stone Trading Company v. Ramsing, AIR (1975)
Bombay it was held that the real test to decide as to whether a particular G
document is a bond or not is to find out after reading the document as a
whole as to whether an obligation is created by the document itself or it is
merely an acknowledgment of a pre-existing liability. If there is merely an
acknowledgment of a pre-existing liability which could have been enforced
apart from the document itself then the matter stands on a different H
998 SUPREME COURT REPORTS [1994) 1 S.C.R.

A footing. But if the document creates an obligation itself with an express
. promise for payment of an amount, such a document will have to be termed
as a bond within the meaning of Section 2(c) (ii) of the Bombay Stamp
Act. The most important decision is the one decided by a Full Bench in
Hindustan Sugar Mills Ltd. v. State of U.P., AIR (1972) Allahabad page 8
B where the assessee who went up in revision against the order passed by the
Assessment Officer and succ~eded in obtaining interim order restraining
the assessing authority from realising sales tax on condition that it furnished
a security to the s~tisfaction of the Sales Tax Officer and in order to comply
which it executed a document by a joint declaration by the sureties guaran-
teeing performance of that had been undertaken by the assessee and in
C ca~e of default to be bound jointly and severally in favour of the Governor
. of U ttar Pradesh it was held that in order to bring the case within the
definition of the word 'bond' it was necessary that the obligation should be
. created by the instrument itself. In another seven Judges' full bench in
Mahabir Prasad v. Peer Bux, AIR (1972) Allahabad 466 it was helds,
D "Clause (a) will not be applicable to a transaction where the
obligation to pay money arises as a consequence of the commission
of a breach of some other obligation. This clause will not apply
where the obligation accrues on the non-performance of some
stated act, because on the language of clause (a), on the non-per-
E formance of the specified act the obligation to pay money is to
become void, not become enforceable. The sequence of events
stipulated in clause (a) cannot be reversed in order to bring an
instrument within its purview."

In Board of Revenue v. Shel/well T. Agencies, (1984) K.L.T. 955 a full Bench
F
of the Kerala High Court held that an instrument could be termed as a
bond only if an obligation to pay on its basis was created for the first time.
Same view was taken by Kerala High Court in Mathai Mathew v. Thamp~
(1989) 1 K.L.T. 138.

G 22. The bond under the Abkari Act is executed by a manufacturer
for payment of exportation duty as required under sub-section (1) of
sectism 7 of the Abkari Act. It is the liability to pay under the Statute which
is reduced in form of a bond of as provided under Rules 47 and 50 of the
Distillery and Warehouse Rules (referred as rules) framed under Section
H 29 of the Act. Even if no bond would have been executed the manufacturer
STATEOFKERALA v. MCDOWELLCO.(SAHAl,J.) 999

would have been liable to pay duty as required under the Abkari Act and A
the notifications issued under it. But the mere fact that a document is
executed to do what the law requires to be done does not alter either the
nature of liability or the character of the document. In Halsbury's Law of
England it is stated that, 'the test is not what the document calls itself or
what form, .it adopts' but 'what is the true meaning and effect of the B
writing'. Therefore, a document under sub-section (7) of Abkari Act
described as bond does not become bond for purposes of duty under the
Stamp Act unless it satisfies the primary and basic criteria that payment is
obliged to be made on a future date by the obligor on consequence of the
obligation created under the instrument. The use of the word 'bond' in
Section 7 is used in the normal sense of creating a binding agreement C
between the Government and the manufacturer or distiller to pay the duty
in respect of the liquor exported if it is not paid in the State where it is
sent. But that is not a bond in terms as defined in the Stamp Act.
Sub-section (1) of Section 7 extracted earlier prohibits any export without
payment of duty as provided in the Act or the rules. The obligation to pay D
duty, therefore, arises under the Act and rules framed thereunder. Clause
(b) only enables a distiller that it may instead of paying execute a bond
on exportation or export. The execution of the bond for future payment no
doubt arises on execution of bond but it is in respect of an amount which
· is due under the Act or the rules. Liability is created by the Abkari Act E
and not by the bond executed under sub-section. The relevant portion of
the agreement entered between parties in Form VI have already been
extracted earlier. It also shows that the distiller obliges itself to pay the
duty if the liquor exported does not reach the importer. The execution c;f
the bond is in the alternative. It is further clear from combined reading of F
clauses (a) and (b) of the sub-section (1) of Section 7 of the Abkari Act.
Clause (a) of section 7(1) requires the duty to be paid on the amount due
under the Act whereas clause (t>) permits the distiller in alternative to
execute a document to pay on b.ter date. But the payment under (a ) or
deferred payment under (b) u1 der the bond arises out of duty due and
fixed under the Act. The liability to pay or the obligation undertaken to G
pay on later date does not arise as between a debtor and .creditor but in
lieu of liability which already exist:; in law. An instrument or document does
not become bond under Stamp Act because it is so described but only when
an obligation to pay arises in consequence of it. Mere use of the word
H
1000 SUPREME COURT REPORTS [1994] 1 S.C.R.

A 'bond' in Section 7 of· the Abkari Act does not render it a bond for
purposes of stamp duty. The agreement in Form VI has been reproduced
earlier. The distiller executing this agreement avails of the facility of
exporting the liquor without payment of duty. But it undertakes to pay the
amount if the duty on liquor sent to another State is not paid to it. The
B obligation to pay under the instrument, thus, arises not as a creditor or
debtor in the commercial sense or special sense but for failure of duty
enjoined by law.

23. The meaning of ordinary and special bond is explained by Rule
51. A special bond is executed for specified occasion or particular consign-
C ment of spirit removed from distillery under Rule 50 without payment of
duty on condition that duty shall be paid on the prescribed rate in case of
failure to account for to the satisfaction of the Commission. The specified
occasion as is clear from Form VI is the breach of condition of the permit
issued by the Excise authorities. _The written obligation under the bond
D which gives rise to payment of money to Government is breach of any of
the conditions of the permit granted by the Excise Officer. The obligation
to pay arises not under the instrument but for breach of condition imposed
by the Department. The Obligation in consequence of which the amount
is liable to be paid is not as a result of any relationship of debtor and
E creditor but violation or breach arising out of permission granted by the
Excise authorities. The agreement itself shows that the bounden shall be
liable to pay the government in case bounden· commits breach of any
condition of the permit issued by the department. The ·obligation to pay
thus arises not as a creditor or debtor but for breach of the condition
imposed not by the bond or agreement but of some condition imposed in
F the permit issued by the Excise Authorities. The liability to pay duty arises
nuder the Abkari Act, the rules framed under it and· not under the
instrument. The Stamp Act does not visualise duty for extension of facility
to the distillery. If the legislature in Section 7 (l)(b) would have used the
word 'agreement' it would have been difficult for the department to claim
G duty on it as bond. The result shall be no different if it uses the word 'bond'
as it is not the use of the word but nature of document which is decisive
of duty. The Stamp Act is a fiscal statute. It should not be so construed as
to cause unintended hardship. Since the language of the section does not
admit of any doubt and the document executed in Form VI being in respect
H
STATEOFKFRALA v. MCDOWELLCO. 1001

of rigl~t. arising out of permit issued by the department it was not liable to A
be stamped as bond, but as agreement.

24. For theses reasons the appeal fails and is dismissed. But there
shall be no order as to costs.

ORDER B
For the reasons given by the majority (R.M. Sahai, J. dissenting and
S.P. Bharucha, J. with whom N. Venkatachala, J. has agreed) the appeal is
allowed and the judgment and order under appeal is set aside. The Writ
Petition filed by the respondent is allowed only to the extent that it is
declared the instrument executed by them in Form VI of the Distillery _and C
Warehouse Rules made under the provisions of the Kerala Abkari Act
shall be liable to stamp duty under Entry 32 of the Schedule to the Kerala
stamp Act. There shall be no order as to costs.

We are informed the the respondent in pursuance of the interim D
order passed by the High Court had paid duty on the document to the
State Government as one payable under Article 13 of the Schedule to the
Kerala Stamp Act. Since we have held that the document was only indem-
nity bond, the amount of duty payable by the respondent was much less
than what was paid by it. In the circumstances, the appellant is directed to E
refund the excess amount, if any, paid by the respondent. The amount shall
be refunded, as requested by the learned counsel for the State, within
three months from today.

G.N. Appeal allowed.