Holding

Excise duty and any penalty for loss of security holograms may be imposed only by a valid notification under the Uttar Pradesh Excise Act, 1910; circulars issued by the Excise Commissioner cannot create a presumption of loss or levy duty.

Summary

The State of Uttar Pradesh introduced a policy requiring distilleries to affix security holograms on liquor containers and, through a series of circulars, presumed that any hologram not produced before an Authorized Committee was lost and that the distillery must pay excise duty on the notional liquor that could have been sold. The distilleries challenged the legality of these circulars, arguing that excise duty can be levied only by a notification under Section 29 of the Uttar Pradesh Excise Act, 1910. The High Court held the demand illegal and allowed the writ petitions. On appeal, the Supreme Court examined whether the Excise Commissioner could impose a penalty or levy duty by executive instruction without subordinate legislation. It held that such power must be exercised only through valid subordinate legislation (a notification) and that a presumption of loss cannot be created by circulars. Consequently, the impugned levy was declared illegal and the State's appeal was dismissed.

Issues considered

Can the Excise Commissioner levy excise duty or impose a penalty for loss of security holograms by means of circulars without a statutory notification under Section 29 of the Uttar Pradesh Excise Act, 1910?
Does an executive instruction create a lawful presumption of loss of holograms for the purpose of imposing duty?
Must regulatory measures relating to excise duty be framed by the State through subordinate legislation rather than by the Excise Commissioner?

Legislation cited

Constitution of Indias. Seventh Schedule, List II, Entry 51
Uttar Pradesh Excise Act, 1910s. 18, s. 19, s. 28, s. 29, s. 3(22a), s. 41

Subjects

excise dutysecurity hologramscircularssubordinate legislationpresumption of losspenaltyUttar Pradesh Excise Actregulatory measuresConstitutional lawEntry 51 List II

Judgment

STATE OF U.P. AND ORS. A
v.
SARA YA INDUSTRIES LTD.

MAY 12, 2006

[S.B. SINHA AND P.P. NAOLEKAR, JJ.] B

Excise Laws:

Manufacture of potable liquor-State Government framed policy
requiring distilleries to ajfrx security holograms on liquor bottles, pouches c
and cans-Excise duty demanded on basis of circulars issued by Excise
Commissioner on wasted holograms not produced by the distilleries for
verification-Challenge to-Held: By reason of an executive instruction,
provisions of lmv cannot be effaced-Matter relating to excise policy must
be framed by the State-It cannot be done by the Excise Commissioner
by issuance of circulars-In absence of requisite statutory backing, D
impugned demand is not .sustainable-Uttar Pradesh Excise Act, 1910-
Section 29-Constitution of India, 1950-Vllth Schedule, List II Entry 51. jf

. In 2001, in order to prevent evasion of duty and smuggling of
liquor, the State of Uttar Pradesh took a policy decision requiring the E
distilleries to obtain and affix security holograms issued by the
Department. Subsequently the Excise Commissioner issued various
circulars relating to the holograms. It was inter alia provided that
wasted holograms not produced by the distilleries for verification before
the Authorised Committee appointed by the Excise Commissioner
would be pi:esumed to have been misused and the distilleries would_ be F
liable to compensate the State for loss of alleged duty on the quantity
of liquor, which could have been issued under such wasted holograms.
Respondents-distilleries filed writ petition questioning the legality of
the circulars issued by the Excise Commissioner. High Court allowing
the writ petitions held that the duty cannot charged on the basis of loss G
of holograms as excise duty was payable in terms of the notification
issued under Section 29 of the Uttar Pradesh Excise Act, 1910 and that
. no such notification having been issued, excise duty demanded only on
. the basis of the circulars issued by the Excise Commissioner on account
of holograms, is bad in law. Hence the present appeals.
741
H
742 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A Dismissing the appeals, the Court

HELD : 1.1. Resort to regulatory measures can be taken by the
State, but the same must be done in the manner laid down under the
Act. Although by way of regulatory measures directions may be issued
in regard to the maintenance of register in such a manner in which
B the wasted holograms were to be maintained; but by reason of a
executive fiat, a unit cannot be made responsible to compensate any
loss to the revenue as a consequence of such wastage of such holograms.
(752-E, 751-E)

1.2. A provision which confers powers upon a statutory authority
c in terms whereof a penalty is to be imposed, damages are to be paid
for non-payment of excise duty, must be done through a valid
subordinate legislation and not by way of issuance of a circular letter.
It is manifest that the duty has to be levied only in terms of the
provisions of the statute anc! not de'hors the same. (752-E, 756-H)
D
, Government of Haryana v. Haryana Brewery Ltd and Another,
(2002). 4 sec 547, distinguished.

Bimal Chandra Banerjee v. State of Madhya Pradesh Etc., [1970) 2
SCC 467; Excise Commissioner, U.P., Allahabad and Ors. v. Ram Kumar
E and Ors., (19761 3 SCC 540; State of U.P. and Ors. v. Modi Distillery and
Ors., [1995] 5 SCC 753; State of U.P. and Ors. v. Varn Organic Chemicals
Ltd and Ors., [2004) 1 SCC 225; State of U.P. and Ors. v. Delhi Cloth
Mills and Anr., [1991 I 1 SCC 454 and State of Bihar and Ors. v. Industrial
Corporation (P) Ltd. and Ors., [2003] II SCC 465, relied on.
F
2. Legislation relating to excise duty is relatable to Entry 51, List
II of the Seventh Schedule of the Constitution of India. If that be so,
provision for imposition of such duty or evasion thereof must be
provided in terms of the law. By reason of an executive order, a
presumption cannot be raised. No penalty can be levied. The matter
G would have been different, if the same was provided for, as has been
sought to be done now, by way of terms and conditions of licence or
in terms of the rules. By reason of an executive instruction, the
provisions of the law cannot be effaced. A legislative policy, furthermore,
must be laid down by the State. The matter relating to an excise policy
H must be framed by the State. It cannot be done by the Excise
STATEv. SARA YA INDUSTRIES LTD. [SINHA, J.] 743

Commissioner. A distinction must be borne in mind between the A
concept of excise duty on production and manufacture of liquor and
parting with the exclusive privilege of the State. Imposition of a penalty
would not come within the purview of either of the two. When a price
is fixed by the State for parting with its exclusive privilege, the same
must again be provided in terms of the statute and the rules framed
thereunder or by way of terms of licence. In absence of the requisite B
statutory backing, the impugned levy by the State cannot be held to
be justified in law. [757-A-C, E)

CIVIL APPELLATE JURISDICTION Civil Appeal No. 2670 of
2006.
c
from the Judgment and Order dated 6.1.2005 of High Court of
Judicature at Allahabad in Writ Petition No. 1204 of 2004.

WITH
D
Civil Appeal No. 2648 of 2006

Civil Appeal No. 2649 of 2006

Civil Appeal No. 2650 of 2006

Civil Appeal No. 2669 of 2006 E
Civil Appeal No. 2678 of 2006

Civil Appeal No. 2647 of 2006

Civil Appeal No. 2671 of 2005
F
Rakesh Dwivedi and Dr. R.G. Padia, Sr. Advs., Kamlendra Mishra,
Rajeev Dubey, Gaurav Bhatia, Piyush Vats, Gaurav Librahan, Adarsh
Upadhyay and Ms. Vimla Sinha, Advs. with them for the Appellants.

Ashok K. Desai, Sr. Adv., Mrs. Anjali K. Verma, Ms. Meera Mathur,
Vishwajit Singh, Jitendra Mohan Sharma and Ambhoj Kumar Sinha, Advs. G
with him for the Respondent.

The following Judgment of the Court was delivered by

S.B. SINHA, J : Leave granted.
H
744 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A The respondents herein are owners of distilleries. Right to manufacture
various categories of Indian Made Foreign Liquor within the meaning of the
provisions of the Uttar Pradesh Excise Act, 1910, as amended in 1950, (for
short, the Act) has been granted to them by the State of Uttar Pradesh. They
have been granted licence for manufacturing potable liquor. They indisputably
have been paying excise duty in terms of the provisions of the Act.
B
The State of Uttar Pradesh on or about 03 .02.200 I allegedly adopted
a policy decision for the excise year 2001-02 which commenced from
01.04.2001 to the effect that the distilleries had to obtain and affix security
holograms issued by the department to prevent evasion of duty and smuggling
c of liquor. The Excise Commissioner issued a circular on 21.02.200 I
providing that every distillery would receive holograms from his office,
wherefor plants had been established. Another circular letter was issued on
24.03.2001 directing that holograms on bottles, pouches and canes would
be affixed by the distilleries. The excise duty was payable on the bottles,
pouches and canes etc. on which holograms had been affixed. Different
D kinds of holograms had been provided for different sizes of bottles/pouches,
for different quantities and qualities of liquor. Procedures to be followed for
obtaining the said holograms, transporting etc. thereof by the distilleries
were also provided. It was provided that the distilleries would be entitled to
receive holograms from the incharge excise inspector on day-to-day basis
and a register was .required to be maintained as regards the stock of the
E
holograms issued, the number of holograms wasted and the closing stock
thereof. The excise duty was to be deposited before issuance of bottles,
pouches and canes affixed with holograms. Furthermore, the excise duty
was to be chargeable on the wasted holograms, which would be destroyed
under the orders of the Excise Commissioner.
F
A new policy of execution of indemnity bonds in the prescribed form
in Form PD-16-A was directed to be issued by circular letter dated
08.11.2001, whereby and whereunder, the distilleries were made themselves
responsible for indemnifying the State for any loss of excise duty or such
other payment awarded as compensation or damages by any court of law or
G tribunal or Commissioner. The said circular letter further provided that
holograms which were returned to the excise department as damaged or
wasted and verified by the Authorized Committee would not be exigible to
any excise duty. However, if the wasted holograms were not produced for
verification, the same shall be presumed to have been misused as a result
H whereof the distilleries would be liable to pay excise duty on the quantity of
STATE v. SARA YA INDUSTRIES LTD. [SINHA, J.] 745

liquor which could have been charged, if the holograms had not been A
wasted and the distilleries were made liable to compensate the State for the
loss of duty on the quantity of liquor which could have been issued under
the missing security holograms.

On or about 19.11.200 I, the Excise Commissioner issued a clarification
that in case any loss is caused to the security holograms during transit, the B
distilleries would be liable to compensate the Governor for loss of alleged
duty on the quantity of the liquor, which could have been issued under the
lost security holograms'.

An Authorized Committee came to be appointed by the Excise C
Commissioner, which visited the premises of the distillery of the respondents
between 15.07.2001 to 20.07.2004. Before the said Committee all the
wasted holograms were allegedly not produced. A statement was prepared
by the said Committee showing the number of holograms found to have
been wasted/damaged but the serial number could not be read and
categorized as missing holograms. The respondents were directed to deposit D
the excise duty on the quantities mentioned in the said holograms.

The writ petitions were filed by the respondents herein before the
Allahabad High Court questioning the legality of the said circular dated
03 .02.200 I as also the circulars dated 21.02.200 I, 24.02.200 I, 16.06.200 I, E
29.10.200 I, 08.11.200 I and 19.11.200 I issued by the Excise Commissioner,
inter alia, on the ground that no presumption could be raised that wasted
security holograms which could not be produced for verification before the
Authorized.Committee would be deemed to have been misused. By reason
of the impugned judgment, the said writ petitions have been allowed.
F
The State is, thus, before us.

The High Court in passing the impugned judgment, inter alia,
opined : (i) that the duty cannot be charged on the basis of loss of holograms,
as excise duty as payable in terms of the notification issued under Section G
29 of the Act; and (ii) no notification having been issued, excise duty
demanded only on the basis of the circulars issued by the Excise
Commissioner on account of holograms, is bad in law.

Mr. Rakesh Dwivedi, the learned Senior Counsel appearing on behalf H
746 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A of the Appellant, submitted that by reason of the circular letters issued by
the Excise Commissioner only effect was given to the rules frame by the
State dated 19.03.2001.

Our attention, in this connection, has been drawn to the indemnity
bond as prescribed in Fonn No. PD-16-A in tenns whereof the distillers
B had undertaken to pay such amount of damages in case of loss or
misplacement of the holograms, which would be equal to the amount of
excise duty involved in such missing holograms. Our attention, in this
behalf, has also been drawn to a rule made on 23.01.2004, in tenns whereof
a similar provision had been inserted.
c
Mr. Dwivedi urged that the regulatory measures having been taken
by the Excise Commissioner so as to prevent evasion of payment of excise
duty, no notification was required to be issued nor any rule was required
to be fanned. The Act, whenever any such notification is required to be
issued, Mr. Dwivedi would contend, provides for the same and, thus,
D notifications were not required to be issued.

Mr. Ashok H. Desai, the learned Senior Counsel appearing on behalf
of the respondents, on the other hand, submitted that the object sought to
be achieved being levy of additional excise duty, it was obligatory on the
E part of the State to issue an appropriate notification in tenns of Section 29
of the Act. It was submitted that excise duty was payable on actual quantity
of liquor manufactured and not on notional quantity thereof. Furthennore a
duty cannot be levied by incorporating a condition in the licence. It was
furthennore contended that the power of the Excise Commissioner to issue
F direction being limited, and imposition of duty is within the exclusive
domain of the State, the same must be effected by way ofa notification and
not by way of a circular.

Before we advert to the rival contentions of the parties, as noticed
hereinbefore, we may take note of certain provisions of the Act.
G
'Excisable articles' has been defined in Section 3(22a) to mean : (a)
any alcoholic liquor for human consumption; or (b) any intoxicating drug.

Section 18 provides for establishment or licensing of distilleries and
H werehouses. A licence therefor is to be issued on such condition as the State
STATE v. SARA YA INDUSTRIES LTD. [SINHA, J.) 747

Government deems fit to impose as regards the construction and working A
of a distillery or brewery or manufacturer.

Section 19 provides for removal of intoxicants from distillery, etc. The
power to levy duty on excisable articles is provided for under Section 28 of
the Act. Section 29 of the Act lays down the manner in which the duty is
to be levied, mandating that for the said purpose a notification should be B
issued in terms whereof directions as enumerated in the clauses mentioned
therein should be made. Section 3 I provides for the forms and conditions
oflicences on the terms mentioned therein. In terms of Section 41 of the Act,
the Excise Commissioner may make rules.
c
Indisputably, the rules in terms of the said provisions providing for
issuance of such holograms have been made for the first time in 2004.
Pursuant to or in furtherance of such rule making power, however, rules have
been framed. indisputably, in terms of the said rules, manufacture, processing,
distribution, and payment of excise duty, transport etc. are regulated. Rule
·' 715 provides for accounts to be kept by distillers. Rule 716 provides that
D
such accounts would be open to inspection at all times by the officer-in-
charge and all superior officers. Rule 719 empowers the Excise Commissioner
to appoint officer to the charge of distilleries, in the following terms :

"719. Excise Commissioner to appoint officer to the charge of E
distilleries. - The Excise Commissioner will appoint such officers
of the Excise Department as he may see fit to the charge of
distilleries. The pay of such officers. will be must by Government
provided that when the annual establishment charges exceed the
sum of total of 10 per cent of the duty leviable on the issues made F
from the distillery to districts in the State, plus 60 per cent, of the
export duty levied on the export of liquor during the year, this
excess shall be realized from the distillers.

Instructions for maintaining forms and registers are also provided in
Rules 815 and 821, which read as under: G

"815. General rules to be observed. -The prescribed registers and
forms of accounts are not to be deviated from or added to without
the special orders of the Excise Commissioner. All fractions of
gallons and of degree of strength are to be shown to the nearest first H
748 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A point of decimals. To preserve uniformity,the system of increasing
the first figures of decimals by one when the second is 5 or more
should be adopted in proof conversions.

Overwriting and erasures are forbidden; any necessary corrections
must be clearly made and must be initiated."
B
"821. Distillers declaration of wash From P.O. 8 - Distillers must
thoroughly dissolve the saccharine materials used by them when
they set up the wash;_ and declare in Form P.O. 8 the kind and
quantity of material used, the actual saccharometric gravity corrected
for temperature before fermentation commenced and the total
c quantity for wash made."

No controversy has been raised on behalf of the appellant that in the
event it be held, as has been done by the High Court, that by reason of the
said circular letters excise duty sought to be levied, the same would be bad
D in law.

The submission of Mr. Dwivedi, however, as noticed herein before, was
that it was done with a view to obviate the difficulties faced by the distillers
and for the purpose of preventing evasion of payment of excise duty by way
ofregulatory measure. The rule made by way ofnotification dated 19.03 .200 I
E is not applicable to the distillers. It is only applicable to wholesale shops.
The provisions of the said rules cannot be made applicable to the distillers, as
the rules for the wholesale shops and distillers stand on different footings.

Mr. Dwivedi, in our opinion, is no correct in contending that the
F circular letters referred to hereinbefore, were issued only with a view to
obviate the difficulties faced by the distillers for implementation of matters
relating to issuance of holograms, as provided for in the rules. Mr. Dwivedi
was also not correct in relying upon the indemnity bond purported to have
been executed by the appellant in terms whereof the licensees agreed to keep
the State indemnified for the loss of security of holograms, inasmuch as the
G indemnity bonds were executed after the period in question, 2004 Rules
to which our attention has also been drawn are also indisputably not
applicable.

Our attention has also been drawn to the licences granted in favour of
H the distillers which allegedly contained clauses relating to payment of duty,
STATE v. SARAYA INDUSTRIES LTD. [SINHA, J.] 749

in cash of damages or shortages of security holograms by the licensees in A
their personal capacity. The icence, to which our attention has been drawn
by the appellant, was issued on or about 01.04.2004 i.e. after the coming
into force of the 2004 Rules.

The State indisputably is entitled to take recourse to such measures
as it may think necessary, with a view to prevent evasion of payment of B
excise duty or for the purpose of preventing adulteration etc. The State does
not say that prevention of adulteration was the purpose for which the said
circular letters were issued. We have noticed hereinbefore that during the
period in question, there did not exist any rules. No notification was also
issued by the State. The licence did not contain any clause relating to c
payment of excise duty either by way of penalty or damages for loss and/
or damage caused to the security holograms. In the circular letter dated
03.02.2001,it was, inter alia, provided :

"7. The main revenue is of Excise duty.Therefore, the license fee
should be so determined that on the basis of consumption a D
substantial increase in Revenue is achieved in the next year.

8. In order to check the evasion of excise duty and smuggling
of excise, a serialized/holographic sticker is to be provided for
use on the bottles of liquor and the convenience issue of liquor E
after payment of due excise duty is made."

The said circular letter, therefore, did not provide for any penal clause
or a clause requiring the licensee to pay any damages. It merely provides
for the manner in which the purported evasion of excise duty was sought
to be prevented. By circular letter dated 21.02.200 l, the distilleries were
F
advised to arrange application machine in every distillery for affixing
security holograms on bottles etc. It specified the price of such holograms.
It however, provides that without affixing the security holograms and paying
the excise duty liquor for human consumption will not be issued. A letter
was issued by the Excise Commission where again emphasis has been laid G
on the purpose for which the security holograms were to be affixed on
bottles etc. namely, to secure Government revenue or to impose restriction
on the sale of illegal liquor. By reason of circular letter dated 24.03.2001,
a detailed procedure has been laid down in regard to issuance of such
holograms, relevant clauses whereof are as under:
H
750 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A "1. ... These security holograms are to be affixed on bottles,
pouches and canes at the level of Distilleries/Breweries/
Vintineries/foreign liquor bond (BWFL2/2A/2B) which shall
be conclusive proof of the fact that liquor contained in it is
manufactured by a legally authorized unit as per" standard
norms. Accordingly a safe and secure transportation, storage
B possession and custody is essential so that unsocial elements
and liquor smugglers may not illegally catch hold of such
holograms and the Government Revenue as well as the safety
of public health may be secured.

c 5. The supply of security holograms shall be made only to such
authorized representative of Distillery/BreweriesNintinery/
license holders of Foreign liquor bond whose signatures have
been attested in the indent form by the officer incharge of the
Distillery/BreweryNintinery/license holder of foreign liquor
bond and a photo identity card jointly signed by the officer
D
incharge of the Distillery/BreweryNintinery/license holder of
foreign liquor bond and the incharge of the indenting unit.
Such an identity card had to be produced before the officer
incharge (hologram)" Excise Headquarter Allahabad at the
time of issue of security holograms."
E
10. Th~ Distillery/Brevery/vintinery/license holders of foreign
liquor bond shall as per their requirement obtain the security
holograms from the officer incharge (Excise) of the concerned
unit and their daily receipt shortage, use, wastage etc. shall be
recorded in the prescribed register HG-6. The wasted security
F
holograms during its use by the concerned unit shall be kept
safe in an envelop and the code number mentioned on such
hologram shall be recorded in the register and a fortnightly
statement of wastage of such holograms shall be made available
through officer incharge of the concerned unit to the officer
G incharge (holograms) headquarter at Allahabad.

II. The work of destroying the wasted holograms by burning
them shall be done on a quarterly basis, after verification of
wastage of such holograms by the officer incharge (Excise)
H of the concerned unit and after the approval of the Excise
STATE v. SARA YA INDUSTRIES LTD. [SINHA, J.] 751
...
Commissioner and in the presence of Deputy Commissioner A
Excise of the charge, officer incharge (Excise) of the unit an
officer nominated by the Excise Commissioner and the Manager
of the concerned unit. A report to this effect shall be forwarded
to the officer incharge (Holograms) to headquarters.

12. After the receipt of the holograms from the officer incharge
B
(Excise) of the unit, the concerned unit shall be responsible
for the safety, storage, use etc. of such holograms and its daily
record shall be kept by the concerned unit in a register HG-
6 and they shall be totally responsible to compensate any loss
in revenue as a consequence of such wastage of holograms . c
13. ... For any misure of security holograms or for not affixing the
proper hologram as per classification of the liquor resulting in
any loss to the revenue the concerned unit shall be totally
responsible."
D
A presumption can be raised only by law. 'Conclusive proof is also
within the realm of Evidence Act.

Although by way of regulatory measures directions may be issued in
regard to the maintenance of register in such a manner in which the wasted E
holograms were to be maintained; but by reason of an executive fiat, a unit
cannot be made responsible to compensate any loss to the revenue as a
consequence of such wastage of such holograms. Furthermore making the
concerned unit totally responsible for any misuse of security holograms or
for not affixing the proper hologram as per classification of the liquor must F
result in loss to the revenue.

We may notice the difference between the rules and the conditions
of licence which came to be imposed as regard issuance and use of security
holograms and the provisions contained in the impugned circular letters. The
circular dated 19.03.2001 categorically provided for payment in advance of G
excise.

We have noticed herein before that the contention of Mr. Dwivedi, that
the circular letters have been issued to the benefit of the respondent
distilleries was wholly incorrect. The said rules were not applicable at all and H
752 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A the question of giving any relaxation from the rigours thereof did not and
cou Id not arise. The distillers were asked to execute bonds. Such bonds had
been executed in November 2001, which is beyond the period in question.
Only in terms of such indemnity bonds, the concept of payment of damages
and that too in the form of liquidated damages, was evolved. The position
came to be clarified only by the rules framed by the State on 23.01.2004
B wherein it was stated :

"6(c) The licensee shall submit the Security Hologram/Holographic
Shrink Sleeves in tact received from the approved supplier with
Hologram Removal pass to officer in charge of the distillery. In case
c of shortage in Security Hologram/Holographic Shrink Sleeves the
licensee shall be liable to deposit the excise duty involved in the
missing Hologram/Holographic Shrink Sleeves."

Thus, by reason of the circular letter, the concept of payment of
damages measured in terms of the excise duty had not been conceptualized.
D
The legislative field in regard to levy of excise duty is covered by Entry
51, List II of the Seventh Schedule of the Constitution of India. It may be
true that the resort to regulatory measures can be taken by the State, but the
same must be done in the manner laid down under the Act. A provision which
I-~ confers powers upon a statutory authority in terms whereof a penalty is to
be imposed, damages are to be paid for non payment of excise duty, in our
opinin, must be done through a valid subordinate legislation and not by way
of issuance of a circular letter.

F In Bimal Chandra Banerjee v. State of Madhya Pradesh Etc., [1970]
2 SCC 467, this Court clearly laid down :

"Neither Section 25 nor Section 26 nor Section 27 nor Section
62( I) or clauses (d) and (h) of Section 62(2) empower the rule-
making authority viz. the State Government to levy tax on excisable
G articles which have not been either imported exported, transported,
manufactured, cultivated or collected under any licence granted
under Section 13 or manufactured in any distillery established or
any distillery or brewery licensed under the Act. The Legislature
has levied excise duty only on those articles which come within
H the scope of Section 25. The rule-making authority has not been
-
STATE v. SARA YA INDUSTRIES LTD. [SINHA, J.] 753

conferred with any power to levy duty on any articles which do not A
fall within the scope of Section 25. Therefore it is not necessary to
consider whether any such power can be conferred on that authority.
Quite clearly the State Government purported to levy duty on liquor
which the contractors failed to life. In so doing it was attempting
to exercise a power which it did not possess."
B
The said decision has been followed in Excise Commissioner, U.P.
Allahabad and Others v. Ram Kumar and Others, [1976) 3 SCC 540,
wherein this Court stated the law in the following terms :

"The common question of law that arises for determination in c
all these appeals is whether the condition incorporated in the
licences of the respondents that they would lift the fixed minimum
quantity of liquor and sell the same at their. allotted shops and in
cash of their default or failure to do so, they would be liable to
pay compensation equal to the amount of the excise duty Ieviable D
on the unlifted quantity is valid and enforceable. This point is no
longer res integra. In Bimla Chandra Banerjee v. State of Madhya
Pradesh this court held that :

"No tax can be imposed by any bye-law or rule or
regulation unless the statute under which the subordinate
E
legislation is made specially authorises the imposition. In the
present case, the Legislature has levied excise duty or
countervailing duty on the excisable articles which have been
either imported, exported, transported, manufactured, cultivated
or collected under any licence granted under Section I 3, or F
manufactured in any distillery or brewery established or
licensed under the Act; and the State Government has not been
empowered to levy any duty on liquor which the contractors
failed to lift. Therefore, the State Government was exercising
a power which it did not possess and hence the rule imposing
G
the condition in the licences and the demand notices are
invalid."

In State, of U.P. and Others v. Modi Distillery and Others, [1995) 5
SCC 753, this Court opined
H
754 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A "Mr. Sehgal submitted, in the alternative, that if it was the
ultimate beverage which alone was exigible, the process of
determining the wastage and levying excise duty thereon was only
-
regulatory and, therefore, permissible, We are here concerned with
the demand of the State for excise duty. The power of the State to
demand excise duty is limited in the manner aforementioned. The
B demand for excise duty is not a regulatory measure. The power
of the State to levy excise duty cannot be expanded with reference
to its power to regulate manufacture. We are not required to and
do not express any opinion in regard to the power of the State to
regulate the manufacture of alcoholic liquors for human
c consumption."

The ratio of the said decision has been reiterated in State of UP. and
Other v. Varn Organic Chemicals Ltd. and Others, [2004] 1 SCC 225.

In State of UP. and Others v. Delhi Cloth Mills and Another, [1991]
D I sec 454, this Court held :

"It is emphasised by Mr. Agarwal that this provision is meant to
discourage evasion of duty. If any part of the lower export duty
charged liquor is not in fact exported it should be made to pay the
higher excise duty as payable on home consumed liquor. It does not
E impose any new duty. We are inclined to agree. This rule does not
authorise imposition of any new tax but only authorises charging
up excise duty on the excess wastage of liquor in course of export
which was charged at concessional rate. The old Rule 8 I 4 of the
Rules was made by 8.0. No. 423/V-234-8. dated September 6,
F 1910 and No. 20/8 V-E 980-B, dated May 28, 1918 providing for
allowance for loss in transit. It said .. ;

"8 I 4. An allowance will be made for the actual loss in transit,
by leakage, evaporation or other unavoidable cause, of spirit
transported or exported under bond. The allowance is subject to
G the following maximum limits."

Lim its were prescribed differently for wooden casks and metal
vessels. keeping in mind the duration of transport. 0

H It was fmther observed :
STATE v. SARA YA INDUSTRIES LTD. [SINHA, J.] 755

- "Thus, we find that the minimum (sic maximum) limits of
wastage in transit was prescribed even under the old rule. This by
implication enjoined that the excess wastage would be taxed as if
not wasted.
A

xxx xxx xxx
B
In Mohan Meakin Breweries Ltd. v. Excise & Taxation
Commissioner, Chandigarh 6 the appellant company .carried on the
business of manufacture, storage and sale of liquors. Between June
1967 and April 1969, it transported various quantities of liquor
from its distilleries in U.P. to its bonded warehouse at Chandigarh. C
On arrival, the consignments were examined by the officer-in-
charge of the warehouse, and a shortage was found, exceeding the
wastage allowance permissible under Rule 8 of the Punjab Bonded
Warehouse Rules, 1957. The Excise and Taxation Commissioner,
exercising the powers of the Financial Commissioner, issued a D
show cause notice and then ordered the appellant to pay duty on
the wastage in excess. The show cause notice required the
appellant to pay duty on ex~ess wastage in course of import of
liquor from U.P. and the rules governing the appellant's licence
provided for a wastage allowance not exceeding I per cent of the
actual loss in transit by leakage or breakage of vessels or bottles E
containing liquor, and if the wastage exceeded the prescribed limit
the licensee should be liable to pay duty at the prescribed rate as
if the wastage in excess of the prescribed limit had actually been
removed from the werehouse, and it was also provided that the
Financial Commissioner could in his discretion on good cause F
being shown remit the whole or a part of the duty leviable on such
wastage, and these provisions were challenged. This Court held
that the impugned rules did not impose any new duty or create any
liability and that they were in essence and substance of a
regulatory character meant to guard against perpetration of fraud
or deception on the revenue. "They provide for and regulate the G
storage and subsequently the removal of liquor from the bonded
werehouse, on payment or otherwise of the duty which is chargeable
under the Fiscal Rules of 1937." We agree with Mr. Agarwal that
the instant Rules 636 and 814 are also of regulatory character and
they are precautionary against perpetration of fraud on the excise H
756 SUPREME COURT REPORTS (2006) SUPP. 2 S.C.R.

A revenue of the exporting State. If out of the quantity of military
rum in a consignment, a part or portion is claimed to have been
....
wastage in transit and to that extent did not result in export, the
State would, in the absence of reasonable explanation, have reason
to presume that the same have been disposed of otherwise than by
export and impose on it the differential excise duty. A statute has
B to be construed in light of the mischief it was designed to remedy.
There is no dispute that excise duty is a single point duty and may
be levied at one of the points mentioned in Section 28.

In Government of Haryana v. Haryana Brewery Ltd. and Another.
c (2002] 4 SCC 547, whereupon Mr. Dwivedi relied upon, this Court
emphasized the need of a forum where a reasonable explanation for loss of
good could be raised. In this case, such a forum was not available.

In State of Bihar and Others v. Industrial Corporation (P) Ltd. and
Others, (2003] 11 SCC 465, this Court clearly held :
D
"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 regards the breach committed by the respondents. We
also find that no opportunity of any kind was offered to the
respondents before the demand as regards the penal duty was
E pressed against the respondents. The matter 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
F being against the principles of natural justice is illegal and void.

The statutory authorities must act within the four corners 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.
G Such a power did not vest in the Commissioner of Excise or the
Superintendents of Excise who had issued the imP.ugned demand
notices."

It is, therefore, manifest that the duty has to be levied only in terms
H of the provisions of the statute and not de'hors the same.
STATE v. SARAYA INDUSTRIES LTD. [SINHA, J.] 757

It is accepted by Mr. Dwivedi that legislation relating to excise duty A
is relatable to Entry 51, List II of the Seventh Schedule of the Constitution
of India. If that be so, provision for imposition of such duty or evasion
thereof must be provided in terms of the law. By reason of an executive
order, a presumption cannot be raised. No penalty can be levied. The matter
would have been different, ifthe same was provided for, as has been sought
to be done now, by way of terms and conditions of licence or in terms of
B
the rules. By reason of an executive instruction, the provisions of the law
cannot be effaced. A legislative policy, furthermore, must be laid down by
the State. The matter relating to an excise policy must be framed by the
State. It cannot be done by the Excise Commissioner. A distinction must
be borne in mind between the concept of excise duty on production and c
manufacture of liquor and parting with the exclusive privilege of the State.
Imposition of a penalty would not come within the purview of either ·of
the two. When a price is fixed by the State for parting with its exclusive
privilege, the same must again be provided in terms of the statute and the
rules framed-thereunder or by way of terms of licence.
D
Before parting with the case, however, we may observe that we have
not gone into the question as regard the applicability of the rules vis-a-vis
the new conditions imposed in the licence, in the instant case.

We are, therefore, of the opinion that in absence of the requisite E
statutory backing, the impugned levy by the State cannot be held to be
justified in law. We, therefore, do not find any merit in these appeals. They
are dismissed accordingly. No costs.

B.B.B. Appeals dismissed. F