Holding

The demand for excise duty is authorised by law and the respondent is liable because negligence is attributable to it.

Summary

A fire on 10 April 2003 destroyed 35,642 cases of Indian Made Foreign Liquor stored in the bonded godown of M/s McDowell & Co. Ltd. The Uttar Pradesh Excise Department levied a demand for excise duty on the destroyed liquor, which the High Court set aside on the ground that the fire was an act of God and no negligence could be shown. On appeal, the Supreme Court examined whether the demand was authorised by law, whether the company was liable for the duty, and whether the fire could be characterised as an act of God or an inevitable accident. The Court held that the taxable event is the manufacture of the liquor, so duty becomes payable at that stage, and that the demand is therefore lawful. It found that the fire was not an act of God, that the company’s inadequate safety measures and failure to insure the excise duty amounted to negligence under Rule 709 of the Excise Manual, and that the insurance of only the liquor’s value reinforced this negligence. Consequently, the demand for excise duty was upheld and the High Court’s orders were set aside.

Issues considered

Whether the demand for excise duty on liquor destroyed in fire is authorised by law.
Whether the respondent company is liable to pay excise duty on the destroyed liquor.
Whether the fire incident constitutes an act of God or an inevitable accident.
Whether negligence can be imputed to the respondent under Rule 709 of the Excise Manual.
Effect of the respondent’s insurance covering only the value of the liquor and not the excise duty.

Legislation cited

Constitution of Indias. Article 265
Uttar Pradesh Bottling of Foreign Liquor Rules, 1969s. Rule 7(11)
Uttar Pradesh Excise Act, 1910s. 17, s. 18, s. 19, s. 28, s. 29
Uttar Pradesh Excise Manuals. Rule 708, s. Rule 709, s. Rule 813

Subjects

excise dutyfire lossnegligenceact of GodUttar Pradesh Excise Actbottling rulesinsurancetax liabilitywastage allowanceRule 709

Judgment

[2022] 3 S.C.R. 899 899

STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. A
v.
M/S MCDOWELL AND COMPANY LIMITED
(Civil Appeal Nos. 169-170 of 2022)
JANUARY 05, 2022 B

[A. M. KHANWILKAR, DINESH MAHESHWARI AND
KRISHNA MURARI, JJ.]
Uttar Pradesh Excise Act, 1910: Uttar Pradesh Excise Manual
– Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 – In the C
instant case, fire incident took place in godown of distillery of the
respondent company in which liquor got destroyed – Excise
Department raised demand of excise duty on the liquor destroyed
from the respondent company – Whether the demand in question is
authorised by law – Held: s.19 of the Act 1910 states that no
intoxicant can be removed from the distillery unless duty leviable D
thereupon has been paid – Liquor that was lying stored in the bonded
warehouse had already become subject to the excise duty – Taxable
event was production or manufacture and not sale – r.7(11) of the
Rules of 1969 is required to be taken into account for the legal
consequences that so far as the bottled spirit is concerned, the E
licencee remains responsible for payment of duty on any kind of
wastage in excess of 1% – Rule 709 of the Excise Manual makes it
clear that the distillery remains responsible for safe custody of the
stock of spirit and remains liable to make good any loss of revenue
caused to the Government by their negligence – Therefore demand
of excise duty cannot be said to be unauthorized by law – F
Constitution of India – Art.265.
Uttar Pradesh Excise Act, 1910: Uttar Pradesh Excise Manual
– Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 – Fire
incident took place in godown of distillery of the respondent
company in which liquor got destroyed – Whether respondent G
company remains liable to pay excise duty on the liquor lost in fire
– Held: In the scheme of the Act of 1910, the Rules of 1969 and the
Excise Manual, it is evident that the Government is not liable for
destruction, loss or damage of any spirit stored in distillery by fire
or theft or any other cause – Distillery is made responsible for safe
H
899
900 SUPREME COURT REPORTS [2022] 3 S.C.R.

A custody of the stock of spirit and is also made liable to make good
any loss of revenue caused to the Government by their negligence
– The rules provide for strict supervision and control of the Excise
Department over the working of distillery at every stage but that
supervision and control does not correspondingly absolve the
distillery of its duty and responsibility towards safe custody of the
B
stock – The warehouse in question indeed got engulfed in fire and
that led to destruction of the liquor stored therein – The respondent
company could be held liable to pay the excise duty on the liquor
destroyed in fire only if it could be held negligent in not ensuring
safe custody of the stored liquor –In the present case, nothing has
C happened by natural forces like storm, floods, lightning or
earthquake – Hence, the fire incident in question cannot be termed
as an act of God – Even when the exact cause of fire could not be
ascertained, the only inference by considering the reports of
Assistant Excise Commissioner could be about some fault or
shortcoming in electric installations which led to the abnormal flow
D
of current and thereby, to the fire incident in question – It is difficult
to accept that the fire and the resultant loss had been beyond the
control of human agency so as to be termed as inevitable accident
– When the respondent had not been able to protect the goods in
question from fire within the warehouse and when all other factors,
E as noticed above, are taken into account, the negligence as
contemplated in Rule 709 of the Excise Manual is directly
attributable to the respondent company – Further, the fact that the
respondent company had taken insurance coverage only of the value
of liquor (and not that of excise duty thereupon) and then, had
received the insurance claim towards the value of liquor also
F
operates against the respondent company and fortifies the conclusion
about negligence of the respondent company.
Allowing the appeal, the Court
HELD: 1. In terms of Article 265 of the Constitution, both
G levy and collection of tax must be authorised by law. By virtue of
Entry 51 of List II, the State has been authorised to impose duty
of excise on alcoholic liquors for human consumption
manufactured or produced in the State. As per Section 19, no
intoxicant can be removed from the distillery or the place of

H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 901
MCDOWELL AND COMPANY LTD.

storage unless the duty leviable thereupon has been paid or a A
bond has been executed for the payment thereof. Considering
the overall scheme of the Act and the Rules, it may not be out of
place to interpret the expression “removal” in Section 19 to
include wastage in excess of permissible limit of total quantity of
spirit produced or manufactured and stored. A comprehensive
B
look at the scheme of Sections 17 to 19 and 28 and 29 of the Act
of 1910 and the enunciations of this Court leave nothing to doubt
that in respect of the liquor that had undergone the process of
distillation, exigibility to excise duty had occurred at the end of
the distillation process or when it was issued from the distillery.
The point of quantification of this duty, even if linked in point of C
time to the date of issue for sale in terms of proviso to Section
29, does not relate to the ‘event of chargeability’ that had occurred
as soon as the liquor was distilled and received in the bottling
tank or had been otherwise issued from distillery. In other words,
the liquor that was lying stored in the bonded warehouse had
D
already become subject to the excise duty, with postponement of
actual charging of the duty as per the rate applicable on the date
and time of issue for sale from the warehouse. It gets perforce
reiterated that taxable event was production or manufacture, and
not sale, of the liquor. In this view of the matter, the submission
that the levy in question is not authorised by law, and is hit by E
Article 265 of the Constitution of India, remains untenable. [Paras
39, 41] [937-E-F; 940-B-F]
2.1 Rule 7(11) of the Rules of 1969 is required to be taken
into account for the legal consequences that so far as the bottled
spirit is concerned, the licencee remains responsible for payment F
of duty on any kind of wastage in excess of 1%. Coupled with this
provision, Rule 709 of the Excise Manual makes it clear that the
distillery remains responsible for safe custody of the stock of
spirit and remains liable to make good any loss of revenue caused
to the Government by their negligence. Therefore, the demand
in question cannot be said to be unauthorised but, its validity G
would depend on answer to the question as to whether negligence
could be imputed on the respondent company in terms of Rule
709 of the Excise Manual. [Paras 44, 45][941-H; 942-A-C]

H
902 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 2.2 The present one had not been a case where anything
related with the forces of nature like storm, floods, lightning or
earthquake had been in operation or caused the fire. When
nothing of any external natural force had been in operation in
violent or sudden manner, the event of the fire in question could
be referable to anything but to an act of God in legal parlance.
B
The observations of High Court in this regard do not appear sound
and are required to be disapproved. [Para 55][952-A-B]
2.3 The warehouse in question indeed got engulfed in fire
and that led to destruction of the liquor stored therein. Here, the
respondent company could be held liable to pay the excise duty
C on the liquor destroyed in fire only if it could be held negligent in
not ensuring safe custody of the stored liquor. As regards this
aspect, the fact that Department had control and supervision over
the distillery and godown would not absolve the respondent of
its liability. Further, the fire incident in question cannot be termed
D as an “act of God”. [Para 59][955-D-E]
3. The fault of “negligence” need not always be of active
negligence or of gross negligence, but it may also be of an
inadvertent negligence or of a passive negligence. It does not
require much of discussion to say that the goods in question,
E being highly inflammable, required extra and excessive care for
their safe custody; and any laxity or slackness in that regard was
impermissible. To put it differently, what was required for
ensuring safe custody of the goods in question was that of
heightened safeguard measures with foresight. When the
respondent had not been able to protect the goods in question
F from fire within the warehouse and when all other factors, are
taken into account, the negligence as contemplated in Rule 709
of the Excise Manual is directly attributable to the respondent
company. In other words, even if the present case is taken to be
that of inadvertence or of unintentional omission on the part of
G the respondent company, it would fall within the definition of
“negligence” for the purpose of Rule 709 of the Excise Manual.
[Para 63][958-A-D]

H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 903
MCDOWELL AND COMPANY LTD.

4. The liability of the respondent company in this matter is A
rather fortified from the facts that it had taken insurance coverage
of the value of liquor and indeed received such claim from the
insurer. Further, failure to insure the risk of excise duty liability
cannot extricate the respondent from that liability. Hence, this
Court agreed with the appellants, that not taking of insurance
B
coverage of the excise duty while taking such coverage on the
value of liquor itself amounts to negligence on the part of the
respondent company. [Paras 67, 69][959-A; 960-A-D]
Somaiya Organic (India) Pvt. Ltd. and Anr. v. State of
U.P. and Anr. (2001) 5 SCC 519 : [2001] 3 SCR 33;
State of U.P. & Ors. v. Delhi Cloth Mills & Anr. (1991) C
1 SCC 454 : [1990] 2 Suppl. SCR 168; State of U.P.
and Ors. v. M/s Mohan Meakin Brewery Ltd. and Anr.
(2011) 13 SCC 588 : [2011] 14 SCR 98; Vohra
Sadikbhai Rajakbhai & Ors. v. State of Gujarat and
Ors: (2016) 12 SCC 1 : [2016] 2 SCR 772; Patel D
Roadways Limited v. Birla Yamaha Limited (2000) 4 SCC
91 : [2000] 2 SCR 665 – relied on.
Divisional Controller, KSRTC v. Mahadeva Shetty and
Ors. (2003) 7 SCC 197: [2003] 2 Suppl. SCR 14; Har
Shankar and Others v. Deputy Excise & Taxation E
Commissioner and Others (1975) 1 SCC 737 : [1975]
3 SCR 254; State of U.P. and Others v. M/s Modi
Distillery Etc. (1995) 5 SCC 753 : [1995] 3 Suppl. SCR
119; Dharampal Satyapal v. Commissioner of Central
Excise, Noida (2004) 167 ELT 291; Grill v. General
Iron Screw Colliery Co. (1866) L.R. 1 C.P; State of F
Maharashtra and Ors. v. Kanchanmala Vijaysing Shirke
and Ors. (1995) 5 SCC 659 : [1995] 3Suppl. SCR 1;
Shyam Sunder and Ors. v. The State of Rajasthan (1974)
1 SCC 690 : [1974] 3 SCR 549; Scott v. London & St.
Katherine Docks (1865) 3 H&C 596, 601; Pushpabai G
Purshottam Udeshi and Ors. v. M/s. Ranjit Ginning &
Pressing Co. (P) Ltd. and Anr. (1977) 2 SCC 745 :
[1977] 3 SCR 372 – referred to.

H
904 SUPREME COURT REPORTS [2022] 3 S.C.R.

A Case Law Reference
[2003] 2 Suppl. SCR 14 referred to Para 19
[2016] 2 SCR 772 relied on Para 19
[2000] 2 SCR 665 relied on Para 19
B [1975] 3 SCR 254 referred to Para 21
[1995] 3 Suppl. SCR 119 referred to Para 21
[2011] 14 SCR 98 relied on Para 22
[2001] 3 SCR 33 relied on Para 27
C [1990] 2 Suppl. SCR 168 relied on Para 39.1
[1995] 3 Suppl. SCR 1 referred to Para 51
[1974] 3 SCR 549 referred to Para 58.1
[1977] 3 SCR 372 referred to Para 58.2
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 169-
D
170 of 2022.
From the Judgment and Order dated 10.04.2017 of High Court of
Judicature at Allahabad, Lucknow Bench, Lucknow in Misc. Bench No.
4493 of 2006.
E Ms. Aishwarya Bhati, ASG, Samar Vijay Singh, Ms. Celeste
Agarwal, Ms. Prabjot Kaur, Advs. for the Appellants.
Dinesh Dwivedi, Sr. Adv., Niraj Gupta, Mrs. Anshu Gupta, Advs.
for the Respondent.
The Judgment of the Court was delivered by
F DINESH MAHESHWARI, J.
Contents*
Preliminary and brief outline.......................................................2
Relevant factual aspects and background: The fire incident
G and demand of excise duty on the liquor destroyed...................6
Before the fire...........................................................................6
The fire incident and relevant reports.........................................8
Demand of excise duty on the liquor lost in fire.......................11
H *Ed. Note : The pagination in the contents is as per the original judgment.
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 905
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Writ petition in the High Court and interim order therein........17 A
Impugned orders dated 10.04.2017 and 06.11.2019:
High Court allowed the writ petition and passed
consequential orders.................................................................18
Rival submissions......................................................................21
B
Questions for determination......................................................33
Relevant statutory provisions....................................................34
Whether the demand in question is authorised by law?................41
Whether respondent company remains liable to pay excise
C
duty on the liquor lost in fire.....................................................49
Control of Department over the distillery and godown: effect of...50
Negligence..............................................................................52
Act of God.............................................................................56
D
Inevitable accident...................................................................61
Res ipsa loquitur.....................................................................63
The respondent company remains liable....................................65
Insurance coverage only of the value of liquor: effect of...........70
E
Summation..................................................................................74
Conclusion.....................................................................................75
Preliminary and brief outline
1. Leave granted. F
2. By way of these appeals, the State of Uttar Pradesh and its
officers related with the Excise Department as also the District
Magistrate, Shahjahanpur have essentially questioned the order dated
10.04.2017 in Misc. Bench No. 4493 of 2006, whereby the High Court
of Judicature at Allahabad, Lucknow Bench, Lucknow1 quashed the G
demand raised against the writ petitioner company (respondent herein)
towards loss of excise revenue because of destruction of liquor in fire.
The appellants have also questioned the order dated 06.11.2019 in C.M.
Application No. 90936 of 2019, whereby the High Court directed the
1
Hereinafter also referred to as ‘the High Court’. H
906 SUPREME COURT REPORTS [2022] 3 S.C.R.

A appellant No. 2 (Excise Commissioner, Uttar Pradesh 2) to expeditiously
take a final decision on theapplication for refund of the amount that was
deposited by the writ petitioner pursuant to the interim order passed in
the said writ petition.
3. Before dilating on the issues raised in this case, we may draw
B a brief outline of the matter to indicate the contours of forthcoming
discussion.
3.1. The genesis of the present litigation had been in a fire incident
that took place in a godown of the distillery of the respondent company
on 10.04.2003. As many as 35,642 cases of Indian Made Foreign Liquor 3
C of different brands got destroyed in this fire. After receiving the initial
reports that the fire possibly took place due to short circuit of electricity,
the department proposed to recover the amount of excise duty lost, due
to such destruction of liquor, from the respondent company. The
respondent maintained that there was no negligence on its part and,
therefore, no case for recovery of the alleged loss of excise duty was
D made out under Rule 7(11) of the Uttar Pradesh Bottling of Foreign
Liquor Rules, 19694 and Rule 709 of the Uttar Pradesh Excise Manual5.
3.4. However, the Excise Commissioner, by his order dated
11.07.2006, rejected the submissions of the respondent and raised a
demand to the tune of Rs. 6,39,32,449.44 towards loss of excise revenue
E on account of destruction of liquor. Accordingly, the District Magistrate,
Shahjahanpur asked the respondent to deposit the amount within one
week.
3.3. Assailing the demand and recovery steps aforesaid, the
respondent-company preferred a writ petition6 wherein, the High Court,
F by way of an interim order dated 25.07.2006, stayed the recovery
proceedings, subject to the respondent company (writ petitioner)
depositing an amount of Rs. 3 crores. A petition seeking special leave to
appeal against this interim order was rejected by this Court on 14.08.2006.
Thereafter, on 21.08.2006, the respondent company deposited the said
G amount of Rs. 3 crores with the District Magistrate, Shahjahanpur.

2
Hereinafter also referred to as ‘the Excise Commissioner’.
3
‘IMFL’ for short
4
Hereinafter also referred to as ‘the Rules of 1969’.
5
Hereinafter also referred to as ‘the Excise Manual’.
6
H Misc. Bench No. 4493 of 2006
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 907
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

3.4. The writ petition so filed by the respondent company was A
allowed by the High Court in its impugned order dated 10.04.2017,
essentially with findings that Rule 7(11)(a) of the Rules of 1969 was not
applicable in the matter because there was no wastage in handling
operations of bottling and storage of IMFL; that Rule 709 of the Excise
Manual was attracted for which negligence was required to be shown;
B
that the order passed by the Excise Commissioner was based on
conjectures and without any cogent evidence about negligence on the
part of the writ petitioner; and that the ‘incident was nothing but an
act of God. The High Court, accordingly, set aside the impugned orders
of demand and recovery towards the alleged loss of excise revenue.
Thereafter, for the department having failed to refund the amount C
deposited pursuant to the interim order in the writ petition, the respondent
company moved an application before the High Court whereupon, by
the order dated 06.11.2019, the High Court directed the Excise
Commissioner to take a decision on the application for refund within
four weeks. D
3.5. As noticed, the aforesaid orders dated 10.04.2017 and
06.11.2019 passed by the High Court are questioned in these appeals.
The appellants maintain that the High Court was not justified in its findings
that the incident in question was an act of God and not that of negligence
on the part of the respondent. The appellants rely upon Rule 7(11)(a) E
of the Rules of 1969 and Rules 708 and 709 of the Excise Manual to
contend that the respondent company is absolutely liable to pay the
excise duty payable on the stock of IMFL destroyed in fire. An ancillary
aspect relating to the effect of insurance coverage, only of the value
of liquor, and receiving of insurance claim by the respondent company
F
have also been raised. Per contra, it submitted that the claim of excise
duty in the present case cannot be enforced, for being not authorised
by law; and that the respondent is not liable to pay excise duty on the
IMFL destroyed in fire, particularly when there was no negligence on
its part.
G
4. The foregoing outline would indicate that the focal point in this
case is, as to whether the appellants are entitled to levy, and
correspondingly, the respondent is liable to pay, the excise duty on the
liquor destroyed in fire? As regards this focal point, three principal
questions would require determination, as noticed infra.
H
908 SUPREME COURT REPORTS [2022] 3 S.C.R.

A Relevant factual aspects and background: The fire incident
and demand of excise duty on the liquor destroyed
5. Having regard to the questions involved, we may briefly take
note of the relevant factual and background aspects, particularly those
relating to the functioning of the respondent company and setup of the
B distillery and godown in question as also the fire incident and the demand
of excise duty, leading to the present litigation.
Before the fire
6. The respondent company had been engaged in the business of
distillation, bottling and vending of different brands of IMFL. For the
C purpose of these activities, the respondent was granted license in Form
PD-2 to establish and run a distillery for distillation and manufacture of
potable alcohol at Distillery Unit Rosa, Shahjahanpur; and was also
granted license for wholesale vend of IMFL in Form FL-3 and FL-3A
under the Rules of 1969. The respondent company had been functioning
at the licensed premises since the year 1994.
D
7. We need not elaborate on various features of the processes of
distillation, bottling and storage but, a few facts placed on record by the
parties, relating to the electrical installations and firefighting measures in
the premises in question could be usefully noticed.
7.1. On 19.09.2002, the Assistant Electricity Inspector, Government
E
of Uttar Pradesh, Shahjahanpur Zone, Shahjahanpur, after having
conducted a periodical inspection of the said premises of the respondent
company, made the following observations pertaining to the electrical
installations: -
“(a) Except the endorsement made herein the relevant rules of
F Indian Electricity Rules, 1956 was being complied with.
(b) The details mentioned in the subsequent page are not according
to Indian Electricity Rules, 1956
Hence, in the interest of Safety, you are requested that you
should rectify the deficiency by engaging any of the authorized
G
electrician and sent a report within one month after compliance in
accordance with the Indian Electricity Rules,1956.
xxx xxx xxx
Rule 35: It is found that CAUTION place is not placed at certain
H prominent places. The same should be placed/installed.
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 909
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Rule 61(2): At one point of Turbine’s Distribution Board Panel, A
earth wiring has been done with a thin wire. Hence the same
should be removed and strip earthing should be done.”
(underlining supplied)
In response to the aforesaid, the respondent company stated, in
its letter dated 23.09.2002, that the work pointed out in the report had B
been completed.
7.2. Apart from the above, it appears that certain modification/
upgradation work was undertaken at the production plant in the distillery
and in that regard, the Excise Inspector, Production Section, Rosa
Distillery, Shahjahanpur, in his letter dated 26.12.2002, advised the C
respondent that electrical and gas wielding jobs be performed carefully
with full safety, while ensuring standard methods of fire safety and the
required firefighting devices. The said Excise Inspector cautioned the
respondent that “You will be responsible for any loss of revenue/
other loss if that occurs due to your carelessness.”
D
7.3. On 01.03.2003, the office of Fire Brigade Officer, Shahjahanpur
issued a No Objection Certificate of Fire Fighting Department for the
period between 06.02.2003 to 30.09.2003 after carrying out inspection
of the premises in question. In this inspection, the Fire Brigade Officer
took note of the fact that different types of fire extinguishers and other
E
firefighting instruments were at the right place and were in working
condition, which were refilled by the Chief Engineer of the respondent
company. However, a direction was given with regard to the refilling
and testing of the instruments; and Foam Installation was also suggested
for better firefighting arrangements in the following terms: -
“You are directed that, in future Fire Fighting Instruments (Fire F
Extinguisher) should be tested in Fire Station Shahjahanpur before
refilling. It is also suggested that, for better management of fire
fighting arrangements, Foam Installation should be done in
Distillation Plant. With this suggestion, NO objection Certificate
of Fire Fighting Department is granted for a period between G
06.02.2003 to 30.09.2003, because the said firm has deposited
the Testing Fee to the Fire Brigade Department on 06.02.2003.”
The fire incident and relevant reports
8. The aforesaid had been the position of record in relation to the
electrical installations and firefighting measures in the premises in H
910 SUPREME COURT REPORTS [2022] 3 S.C.R.

A question. However, on 10.04.2003, a fire incident did take place in a
godown of the respondent company, which resulted in 35,642 cases of
manufactured IMFL getting destroyed.
8.1. It has been the case of the respondent company that the
godown in question was locked for lunch at 12:00 noon on 10.04.2003
B under joint lock and key of the Excise Inspector in-charge of the distillery
and the company’s representative and at that time, nothing objectionable
was noticed and the stocks were in safe condition. However, at about
12:55 p.m., smoke was noticed emitting from the godown. Thereupon,
the Excise Inspector in-charge of the distillery was immediately informed
and the joint locks were opened; and it was noticed that the stocks of
C
IMFL were on fire. The information about this fire was given to the
Police Department and also to the Fire Department and other Excise
Authorities. As per the averments and the material on record, it appears
that the firefighters could bring the fire under control only by 5:00 a.m.
on 11.04.2003.
D
9. It is borne out that upon receiving information about the incident
in question, the Deputy Excise Commissioner, Bareilly, reached the
distillery at about 06:30 p.m. on 10.04.2003 and carried out spot inspection
with other officers of the department and the Manager Personnel of the
respondent company. In his initial report drawn on spot inspection, the
E said Deputy Excise Commissioner took note of the efforts being made
for controlling and dousing the fire as also damage to a substantial quantity
of liquor; and also indicated that upon enquiring about the possible reasons
of this fire, he was informed that the same took place, probably, due to
short circuit in the electricity supply. According to the appellants, even
the Station House Officer concerned opined in his investigation report
F
dated 11.04.2003 that the reason for fire was short circuit of electricity.
10. On 13.04.2003, the Fire Brigade Officer of Uttar Pradesh
Fire Service also drew up the report about the incident and the efforts
made for controlling the fire. He, however, indicated that the reason of
fire was unknown. The relevant part of this report, counter signed by
G
the Deputy Superintendent of Police, as placed on record by the
respondent, reads as under: -
“ON receiving information about Fire, Fire Service Unit rushed to
the Place of Incident. On arriving, it was seen that the front part
of Godown of Indian Made Foreign Liquor was burning in fire
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 911
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

badly, which is situated in Rosa Kothi, M/s Mcdowell Company A
Ltd. Thana- R. , District- Shahjahanpur, and fire was in a horrible,
which was being doused by the Staff of M/s Mcdowell & Company
Ltd. with the help of available instrument but the fire was out of
control for them. After seeing the horrible condition of fire,
immediately started the work to control fire by laying two lines in
B
one motor fire engine, immediately thereafter second motor fire
engine was brought from Kasba- Tilhar. In dousing the Fire other
unit Oswal Chemical Fertilizer and O.C.F. also helped, and after
enough hard work, process of dousing was started and after putting
the life at risk and after several hours, fire was doused/controlled.
On investigation/inspection of fire, it was found that, due to fire, C
Liquor kept in Go-down was destroyed. Hence, in this fire after
adding building and Liquor, in total, according to station officer,
approximately a damage worth Rs. 2 crore has been assessed
and Rs. 1 crore value of property was saved. Reason of fire was
unknown.
D
Therefore, after finishing the entire work, the fire Service unit
returned to the Fire Station after giving instructions that in case
again the Fire shows up again, the Fire Station should be informed
immediately. We came back to the Fire Station.”
(underlining supplied) E
11. Another report dated 02.08.2003 was submitted by the Assistant
Excise Commissioner, Rosa Distillery, Shahjahanpur to the Excise
Commissioner, detailing out the statements of stock of liquor saved as
also the stock destroyed in fire and his comments on the cause of fire.
The relevant part of this report could be usefully extracted as under: - F
“(f) Cause of Fire : A detailed enquiry and Investigation was
done by me in the distillery after the fire incident. All the Officers
mentioned in para (d) have also made inquiries and investigated
the matter in detail. All the Investigating Officers have also reached
to the conclusion that undisputedly the cause of fire was unknown. G
During my Investigation and calculation work also, no fact or
evidence came to my knowledge, which indicates that there was
any negligence either on the part of Distiller or on the part of
Excise Staff deputed in the Distillery. It also does not appear that
the said incident was deliberately done by any of them. In fact,
H
912 SUPREME COURT REPORTS [2022] 3 S.C.R.

A the Distiller and the Excise Staff have worked jointly with great
efficiency and hard work during and after the fire Incident. Thereby
stock was saved from the damaged stock.
This fact was confirmed by, Joint Excise Commissioner
Investigation dated 30.04.2003, Deputy Excise Commissioner,
B Bareilly Incharge, Bareilly , investigation dated 10.04.03, Fire
Brigade Officer, Investigation report dated 13.04.03 and Station
House Officer’s Final Report dated 11.04.03, also with copies
annexed. In the report of Station House Officer reason of incident
is possibly due to short circuit in Electricity. I had also seen the
burned cable in debris, but in my opinion Nothing can be confirmed.
C
It can be such an incident, in which reason is Unknown.
On the Distiller level, in the month of December, Instrument
according to Fire safety standard, were installed and safety orders
were ordered in respect of Letter No. 39/ dated 26.12.02 by the
distillery Fire Brigade Officer, Shahjahanpur; Letter No. Memo/
D
F.S./ date 1.03.03, and received the certificate regarding the
Instrument in good condition. The Distillery also produced certificate
by U.P. Electricity Department, regarding Electricity cabel
Establishment.
In accordance, with letter sent by me dated 14.04.03 and
E 21.04.03 in view of the aforementioned points before the Fire
Incident, during the Fire Incident and after that, the calculation of
the damaged stock and possible reason of Fire incident was
discussed.”
(underlining supplied)
F
Demand of excise duty on the liquor lost in fire
12. In view of the fact that a substantial quantity of the stored
liquor got destroyed in the fire and that had the consequence, inter alia,
of loss of excise revenue, the Excise Department proposed to recover
G this loss from the respondent company.
12.1. In the first place, on 24.09.2003, a show-cause notice No.
463/CAA/Rosa Distillery/Shahjahanpur was issued by Assistant Excise
Commissioner, Rosa distillery to the respondent company seeking
explanation regarding the recovery of excise duty in view of Rule 7(11)
H of the Rules of 1969, as the respondent allegedly failed in its responsibility
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 913
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

to keep the stock of liquor safe and secure. In its response letter dated A
01.10.2003, the respondent company stated that there was no negligence
on its part in regard to the said fire incident; that Rule 7(11) of Rules of
1969 was of no application; and that Rule 709 of the Excise Manual
would apply only in case of negligence, which was not proved.
12.2. The Excise Commissioner, however, proposed to recover B
excise duty from the respondent company and sent a letter dated
27.11.2003 to the Principal Secretary to the Government seeking
directions. The said Principal Secretary, in his response letter dated
17.02.2004, stated that the provision regarding imposition of excise duty
on the stock of IMFL destroyed in fire was laid down in Rule 709 of the
Excise Manual and on the basis thereof, the Excise Commissioner was C
competent enough to proceed. The Principal Secretary, inter alia, stated
as under: -
“Please refer to your letter No. G-43/9-alcohol/Rosa- Fire incident
dated 27th November, 2003 regarding directions to be given to the
District Magistrate Shahjahanpur with regard to imposition of D
excise duty on the stock of IMFL destroyed in fire incident dated
10.04.2003 at M/s McDowell & Co. Ltd., Rosa, Shahjahanpur.
1. In this Connection I have been advised to ask you that the
provision regarding imposition of excise duty involved in the
stock of IMFL destroyed in the above fire incident at McDowell E
& Co Ltd., Rosa Shahjahanpur on 10.04.2003 is laid down in
rule 709 of Excise Manual, on the basis of which you are
competent enough to proceed in the matter.
2. Your proposal regarding levy of excise duty on the stock of
IMFL destroyed in the above fire incident is in Order. Please F
take necessary steps at the earliest and inform the same to the
Government within 15 days.”
12.3. Proceeding on the letter so received from the Principal
Secretary, the Excise Commissioner, on 23.02.2004, asked the District
Magistrate to quantify the excise duty leviable under Rule 7(11) of the G
Rules of 1969. Having noticed such steps on the part of the authorities,
the respondent company remonstrated in its letter dated 08.06.2004
addressed to the Excise Commissioner and requested that the competent
authority must first determine as to whether excise duty could at all be
levied on IMFL destroyed due to fire before the point of issue of liquor
H
914 SUPREME COURT REPORTS [2022] 3 S.C.R.

A for sale was reached. It was also submitted that the directions may be
given only to proceed in terms of Rule 709 of the Excise Manual and not
Rule 7(11) of the Rules of 1969. The Excise Commissioner, in his letter
dated 12.05.2005, sought a point-wise reply from the respondent company
and this letter was replied on 16.05.2005, wherein the respondent company
maintained that fire incident was due to the reasons beyond human control
B
and there was no negligence on the part of the company.
12.4. Yet further, the respondent company stated in its letter dated
05.06.2005 that they had a certificate issued by Fire Department, valid
up to 03.09.2003; that appropriate fire protection equipments were
installed; that electricity safety certificate was also given on 19.09.2002;
C that MCBs were installed; that there was no material to show that it
was an accident due to negligence on part of the company; and that
there was no compulsion to get insurance with respect to excise duty.
The aforesaid reply was forwarded by the Excise Commissioner to the
Principal Secretary, Excise with his letter dated 29.06.2005. Thereafter,
D the State Government, in its letter dated 27.12.2005, observed that excise
duty on the rates prevailing should be imposed on the respondent company
in the interest of revenue.
13. The aforesaid exchange of communications culminated in the
impugned order dated 11.07.2006 by the Excise Commissioner, seeking
E to recover a sum of Rs. 6,39,32,449.44 from the respondent company
towards the loss of excise revenue. The Excise Commissioner, inter
alia, relied upon the inspection reports and held that the respondent was
responsible for the safety of the alcohol but failed to ensure such safety;
had been careless in not providing fire-proof electric equipments of good
quality; and had taken insurance of liquor but not of excise duty. This
F order dated 11.07.2006, being the bone of contention in the present matter,
could be reproduced in extenso as under:
“OFFICE OF EXCISE COMMISSIONER, UTTAR PRADESH,
ALLAHABAD

G No. 7244/9-Alcohol/131/Rosa/Fire Incident Allahabad
Dated – 11.07.2006
ORDER
M/s McDowell & Company Ltd., Rosa, District Shahjhanpur
is a PD-2 Licensed distillery. The abovementioned distillery has
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 915
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

been granted FL-3 and FL 3A license under the Uttar Pradesh A
Bottling of Foreign Liquor Rules, 1969 and has been doing the
bottling of Indian Made Foreign Liquor of their brand and brand
of Harbartsons Ltd. respectively. On 10.04.2003, due to fire
incident in the FL-3 and FL3A godown of the distillery, 35,642
(Thirty five thousand six hundred forty two) cases of Indian Made
B
Foreign Liquor of different brands got destroyed. During
investigation, it is revealed that the McDowell and company ltd.
had taken the insurance of the Indian Made Foreign Liquor kept
in the sealed godown. The distillery has also received the claim
for that. A Show cause Notice no. 463/CAA/Rosa Distillery/
Shahjahanpur dated 24.09.2003 was given to the M/s. McDowell C
and Company ltd. in relation to the burning of the alcohol kept in
the sealed godown. It has been stated by the M/s Mcdowell and
Company Ltd. in its explanation dated 01.10.2003 to the
abovementioned Show Cause Notice that the fire incident is an
act of god and they have no control over this. On 10.04.2003,
D
during the spot inspection conducted by Deputy Excise
Commissioner Bareilly, Manager Personnel Shri Anurag Dhawan
who was present has stated that possibly fire took place due to
short circuit in the electricity supply. The Station officer Shri Ram
Chandra Mishan, District Shahjahanpur has stated in his
investigation report dated 11.04.2003 that the reason for fire is E
the short circuit of electricity. The inspection of the M/s McDowell
and Company Ltd. was conducted by Joint Excise Commissioner
(Task Force) and Deputy Excise Commissioner (Law). It has
been found in the inspection that the godown is very old and its
repair has also not been done. It is also necessary to mention that
F
M/s Mcdowell and Company Ltd. in the distillery from the time of
British period and the distillery & sealed godown has been running
in the old building. The roof of the godown was made of asbestos
sheet. The short circuit can take place due to old electric wiring in
the godown.
In this relation District Officer, Shahjahanpur vide his letter G
no. 689/OSD/Camp/2004 dated 01.04.2004 has requested for
guidance/instruction on the incident. The Excise Commissioner,
Uttar Pradesh, vide his letter no. G-43/9-alcohol/Rosa fire incident
dated 17.11.2003 has referred this incident to the government in
which the government vide letter no. 3763 E-2/13-03 dated H
916 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 17.02.2004 has directed that the excise duty may be charged on
the class of alcohol prevalent at that time on the class of alcohol
destroyed and it was also directed that Excise Commissioner is
capable to act in this incident.
In perspective to the direction made by Government, the case
B is that the M/s Mcdowell and Company Ltd., Rosa Shahjhanpur
had taken license of FL-3 and FL 3A under UP Bottling of Foreign
Liquor Rules, 1969. According to Rule 7 (11) (a) of the
abovementioned rules, the licensee is liable to pay excise duty on
the wastage of more than 1%. It was responsibility of the license
holder to take remedy /precautions for the safety of the alcohol
C kept in the godown but proper safety of the alcohol kept in the
godown was not taken up. The licensee had taken the insurance
of the price of alcohol, bottle, label, etc. but insurance of the excise
duty imposed on the alcohol was not done. In this way, the licensee
has secured his
D value of alcohol. The licensee has not suffered any loss in this
incident and whatever loss has taken place has been recovered
from the insurance. Therefore, perhaps the licensee was careless
regarding the electric equipments. The licensee was aware about
the terms and conditions while taking license that he is to pay the
excise duty on the wastage of stocked alcohol greater than 1 %
E
of the quantity. Inspite of having knowledge, the licensee has not
arranged the fire proof electric equipments of good quality due to
which questioned incident has taken place. The carelessness taken
by the distiller in the safety of the stock of alcohol cannot be
considered as Act of God. The license is granted to him under the
F UP Bottling of Foreign Liquor Rules, 1969. There is provision of
charging excise duty on the wastage more than 1 % under Rule
7(11) (a) of those Rules. The Licensee cannot deny the conditions
of the license. It has been clearly stated by the Constitution Bench
of the Hon’ble Supreme Court in judgment Har Shankar and Anr.
Vs. Deputy Excise and Taxation Commissioner and Anr. (1997)
G
1 SCC 737 that the licensee has taken the license after carefully
reading the questioned rules of 1969 and now he cannot wriggle
out from the conditions of the license. The licensee has received
the license after reading the Uttar Pradesh Bottling of Foreign
Liquor Rules 1969 with open eyes, therefore he cannot wriggle
H out to follow the Rules.
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 917
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

It has been mentioned in Khode Distilleries Ltd. and Ors. vs. A
State of Karnataka and Ors. (1975) SCC 576 at point (h) “The
State can adopt any mode of selling the licences for trade or
business with a view to maximize its revenue so long as the method
adopted is not discriminatory”.
It is clear from the Rule 7(11)(a) of UP Bottling of Foreign B
Liquor Rules, 1969 are made to secure the revenue. The State
has special privilege on manufacturing of liquor, custody, transport,
import - export. The State in public interest to increase the revenue
strictly monitor the business of alcohol so that neither it can be
misused and nor it can cause loss of revenue to be received from
it. In respect to the abovementioned according to Rule 7(11)(a) of C
UP Bottling of Foreign Liquor Rules, 1969, the excise duty of Rs.
6,39,32,449.44/- (Rupees Six Crore Thirty Nine Lakh Thirty Two
Thousand Four Hundred Forty Nine and Forty Four Paise Only)
is leviable on M/s Mcdowell and Company Ltd., Rosa, district
Shahjahanpur as per prevalent rate at the time of incident for D
year 2003-2004 on different brands of alcohol.
Gejendra Pal
Excise Commissioner
Uttar Pradesh.”
(underlining supplied) E
13.1 Pursuant to the order so passed by the Excise Commissioner,
District Magistrate, Shahjahanpur commenced recovery proceedings and
directed the respondent company to deposit the aforesaid sum of Rs.
6,39,32,449.44 within one week.
Writ petition in the High Court and interim order therein F
14. Aggrieved by the demand so raised by the Excise
Commissioner and the recovery proceedings so adopted by the District
Magistrate, the respondent company filed the writ petition, being Misc.
Bench No. 4493 of 2006, before the High Court of Judicature at
Allahabad, Lucknow Bench, Lucknow, with the following prayers: - G
“i. Issue, a writ order, or direction in the nature of Certiorari calling
for the records and quashing the impugned order dated 11th July,
2006 passed by the Excise Commissioner, U.P. and letter dated
17th July, 2006 of the District Magistrate Shahajahanpur, U.P. de-
manding Rupees 6,39,32,449.44. H
918 SUPREME COURT REPORTS [2022] 3 S.C.R.

A ii. Issue, a writ order, or direction in the nature of mandamus
com- manding the respondents not to recover any amount from
the peti- tioner towards the alleged demand with regards to the
quantity of Indian Made Foreign Liquor destroyed due to fire
accident at Shahjhanpur on 10th April, 2003.
B iii. Issue a writ/order or directions in the nature of mandamus de-
claring Rule 7 (11) of the UP Bottling of Indian Made Foreign
Liquor Rules, 1969 as null and void and ultra vires of the UP
Excise Act.
iv. Issue a writ/order or directions in the nature of Certiorari calling
C for the records and quashing the Impugned Order of the State
Gov- ernment which was conveyed through letter dated
17.02.2004 of the Principal Secretary (Excise), Government of
UP to Excise Commissioner.”
14.1. In the said writ petition, an interim order was passed by the
D High Court on 25.07.2006 staying the recovery proceedings subject to
the respondent company depositing an amount of Rs. 3 crores with the
Excise Commissioner. The respondent company attempted to challenge
this interim order dated 25.07.2006 by way of SLP(C) No. 12902 of
2006 but, this Court declined to interfere with the interim order and the
special leave petition was dismissed on 14.08.2006. Thereafter, the
E respondent company deposited the said sum of Rs. 3 crores with the
District Magistrate, Shahjahanpur on 21.08.2006. The appellants filed
their counter affidavit in the writ petition on 08.09.2006 and the writ
petition was finally heard and decided by the High Court by its impugned
judgment dated 10.04.2017.
F Impugned orders dated 10.04.2017 and 06.11.2019: High
Court allowed the writ petition and passed consequential orders
15. The High Court, in its impugned order dated 10.04.2017, after
taking note of the aforesaid background aspects as also the Rules of
1969 and the Excise Manual, in the first place noted the fact that though
G the validity of Rule 7(11) of Rules of 1969 was questioned in the writ
petition but while arguing the matter, learned counsel for the company
confined his challenge to the impugned orders of recovery of excise
duty essentially on the grounds that the company could have been held
guilty only if there was any negligence on its part in causing loss of
excise revenue but, in the present case, there was no negligence on the
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 919
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

part of the company; and that it was an act of God and, therefore, no A
liability could be imposed on the company. The High Court observed
that Rule 7(11)(a) of the Rules of 1969, dealing with wastage, in the
operation of bottling and storage of IMFL was of no application because
in the present case, there was no wastage in handling operations of
bottling and storage but there was loss of spirit due to fire. The High
B
Court pointed out that Rule 709 of the Excise Manual would apply and in
that regard, if the company was shown to have caused loss to excise
duty on account of any negligence, it would be liable to make good the
loss. The High Court, inter alia, observed as under: -
“26. Rule 7(11)(a) of Rules, 1969 talks of wastage which occurred
in the operation of bottling & storage of IMFL, but here is not a C
case where there is any wastage in handling operations of bottling
& stor- age of IMFL but there is total loss of spirit due to fire and
this in turn has caused loss to excise duty.
27. In our view, it is Rule, 709 of U.P. Excise Manual which applies
and if petitioner can be shown to have caused loss to excise duty D
on account of any negligence, it is liable to make good the said
loss. The condition precedent, therefore, is the factum of
“negligence” on the part of petitioner. We have no manner of
doubt that in the pre- sent case Rule 7(11)(a) of Rules, 1969 has
no application and it is Rule 709 of U.P. Excise Manual which is E
attracted.”
16. The High Court, thereafter, proceeded to analyse the impugned
order dated 11.07.2006 and observed that the inferences drawn therein
were lacking in material foundation and were only of conjectures and
surmises. The High Court found that there was no apparent negligence
F
on the part of the company and also recorded its conclusion that the
incident was nothing but an act of God. The High Court further observed
that negligence being the condition precedent for the fiscal liability in
question, no such liability could be fixed unless negligence was found on
the basis of some material; and held that in absence of any material to
show that the loss was caused on account of any negligence on the part G
of the company, the demand in question was wholly illegal and
unsustainable. The High Court proceeded to set aside the demand in
question with the following observations and findings: -
“29. In order to hold petitioner guilty of negligence, ECUP vide
im- pugned order dated 11.7.2006 while admitting that police H
920 SUPREME COURT REPORTS [2022] 3 S.C.R.

A officials as well as joint inspection report, possible reason has
been given as “short circuit” from electrical supply, but having
said so, it has further said that (i) godown is very old and has not
been properly repaired; (ii) Distillery is of British period, Distillery
and Warehouse both are running in old buildings; (iii) roof of godown
is made of abestos sheets and there is possibility of short circuit
B
due to old electrical wire in the godown; (iv) Insurance of excise
duty was not obtained, though spirit was insured; (v) licensee was
probably neg- ligent in maintenance of electrical equipments; (vi)
licensee did not insure electrical equipments; (vii) fire proof of
electrical equipments were not of good quality, and this resulted in
C the incident. Therefore, it is not an act of God. When we asked
from learned counsel for respondents as to wherefrom
respondents got information that fire equipments were not of good
quality and have caused incident or that Distillery was negligent
in maintenance of electrical equiments, he could not point out any
material on record, wherefrom the afore- said inference drawn
D
by ECUP could have been substantiated or to be justified. In fact,
the aforesaid inference is nothing but conjec- tures and surmises
on part of ECUP without having any material foundation.
30. On the contrary, various authorities from time to time, who
have visited site, have clearly reported that there was no apparent
E negli- gence on the part of petitioner. The incident was nothing
but an act of God. When a fiscal liability is founded on certain
condition prec- edent, i.e. “negligent” on the part of the person
whom we have to hold responsible, then no responsibility can be
fixed unless such negligence is shown to be founded on the basis
F of some material. Factum that building was old or the wirings
were old have pointed out to be dangerous or prone to fire either
by Electricity Department or Fire Department or even by Excise
Authorities, who were In charge of bonded Distillery, storage and
godown.
G 31. Further, electrical equipments installed at the Distillery were
not of good quality is also conjectures and surmises as no material
was shown to fortify the same. In absence of any material to
show that loss was caused on account of any negligence on the
part of petitioner, we find that demand made in this writ petition is
wholly illegal and cannot sustain.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 921
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

32. The writ petition is accordingly allowed. Impugned orders dated A
11.7.2006 and 17.7.2006 are hereby set aside. No costs.”
(underlining supplied)
17. After the decision aforesaid, the respondent company sought
directions for refund/adjustment of the sum of Rs. 3 crores deposited in
compliance of the interim order. The said application, being C.M. No. B
90936 of 2019, was considered and allowed by the High Court by its
order dated 06.11.2019 requiring the Excise Commissioner to decide the
application moved by the company while keeping in view of the fact that
the money was deposited pursuant to the interim order and subsequently,
the writ petition was allowed. C
Rival submissions
18. While assailing the orders passed by the High Court, learned
counsel for the appellants has advanced essentially two-fold contentions:
one, that it had been clearly a case of negligence on the part of the
respondent company where the fire incident cannot be termed as an act D
of God; and second, that as per the applicable provisions of U.P. Excise
Act, 19107, the Excise Manual and the Rules of 1969, the demand of
excise duty on the liquor lost in fire has rightly been raised. The learned
counsel has also addressed the Court on another facet of the case, as
regards the effect of insurance claim received by the respondent company E
towards the cost of IMFL destroyed in fire.
19. Learned counsel has submitted that an act of God is an
inevitable, unpredictable and unreasonably severe event caused by natural
forces without any human interference, such as earthquake, lightning,
flood etc.; it is a natural hazard outside the human control for which, no F
person could be held responsible. It is submitted that for the fire in distillery
to be an act of God, there must have been some such incident like
earthquake or lightning but no such natural forces were in operation at
the time of the incident; and this incident cannot be attributed to any
such force of nature but only to some human fault. Learned counsel
would submit that when operation of natural forces is ruled out and the G
incident had, in fact, taken place, it would obviously be referred to the
elements of negligence on the part of the respondent company. The
learned counsel has elaborated on the submissions that negligence is a

7
Hereinafter also referred to as ‘the Act of 1910’. H
922 SUPREME COURT REPORTS [2022] 3 S.C.R.

A specific tort and essentially refers to a failure to exercise that care which
circumstances demand. To support the contentions that the present one
has not been an act of God, learned counsel has referred to and relied
upon the decisions in Divisional Controller, KSRTC v. Mahadeva Shetty
and Ors.: (2003) 7 SCC 197, Vohra Sadikbhai Rajakbhai & Ors. v.
State of Gujarat and Ors: (2016) 12 SCC 1 and Patel Roadways
B
Limited v. Birla Yamaha Limited: (2000) 4 SCC 91.
19.1. Learned counsel for the appellants would submit that the
incident of fire in the present case, on account of short-circuit in the
godown storing large quantity of highly inflammable IMFL, was clearly
an incident which was avoidable, if proper and necessary care was taken
C by the respondent company. It is submitted that distilleries are even
otherwise susceptible to fire due to large amount of alcoholic vapour
being in the air and the respondent company was required to take all
care and precautions to avoid any such incident. With reference to the
inspection reports, learned counsel has contended that even before the
D incident in question, the defects and deficiencies in electrical installations
and wiring had been indicated and when the incident of fire took place
due to short-circuit, the company cannot avoid its liability by merely
suggesting that they had followed all preventive measures or had taken
a certificate from the Fire Department.
E 20. As regards the entitlement of appellants to demand and recover
the excise duty on IMFL lost in fire and corresponding liability of the
respondent company to make such payment, learned counsel for the
appellants has made elaborate reference to the relevant statutory
provisions and has submitted that the demand in question has been
squarely in conformity with law and deserves to be upheld.
F
21. With reference to entries 8 and 51 of List II of the Seventh
Schedule to the Constitution of India, learned counsel would submit that
the entire field of legislation on the subject relating to intoxicating liquors
as also the matters concerning duties of excise and countervailing duties
is in the domain of the State legislature; and for the present purpose, the
G matter is governed by the provisions contained in the Act of 1910, the
Excise Manual and the Rules of 1969. With reference to Sections 17,
18, 19, 28, 29 and 30 of the Act of 1910 the learned counsel has submitted
that no intoxicant can be manufactured and no liquor can be bottled for
sale except under the authority and subject to the terms and conditions
H of a licence granted in that behalf (Section 17); and, as per Section 18,
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 923
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

the Excise Commissioner may grant a licence for establishment of distillery A
and warehouse in which spirit may be manufactured under a licence
granted under Section 17. Further, as per Section 19, no intoxicant can
be removed from any distillery, brewery, warehouse or the place of
storage, unless duty has been paid or a bond has been executed for
payment thereof. It is thus submitted that the condition precedent for
B
removal of any intoxicant is actual payment of the duty payable or
execution of bond for such payment. Learned counsel has referred to
the bond executed in favour of the Governor of Uttar Pradesh by the
respondent for bottling of IMFL and has submitted that the licencee has
been under obligation to observe all the provisions of the Act of 1910
and the rules made thereunder. C
21.1 The learned counsel would submit that the distillery having
been established under PD-2 licence, the respondent was under obligation
to follow the terms and conditions of the licence and correspondingly,
has always been under obligation to deposit the duty demanded under
the provisions of the Act of 1910, particularly when all the operations, D
including that of transfer of the liquor from PD-2 licensed area to the
bottling hall and to the godown and then, dispatch are covered by the
terms of licence and the bond executed by the distiller. Yet further, learned
counsel would submit that in terms of Rule 7(11) (a) of the Rules of
1969, the respondent company was responsible for payment of duty on
E
wastage in excess of 1 per cent and cannot avoid this obligation. With
reference to Rule 813 of the Excise Manual, the learned counsel has
submitted that in terms thereof, free wastage allowance for different
kinds of spirits stored in a distillery is provided but with the specific
exclusion of bottled spirit; and it is clear that once the spirit is bottled and
stored, the licencee remains liable to make payment of excise duty in F
case of wastage of bottled spirit in terms of Rule 7(11)(a) of the Rules
of 1969 read with Rule 709 of Excise Manual. With reference to the
decision of this Court in the case of Har Shankar and Others v. Deputy
Excise & Taxation Commissioner and Others: (1975) 1 SCC 737,
the learned counsel would submit that when the licencee has taken the G
licence after carefully reading the Rules of 1969, it cannot wriggle out of
the conditions of licence.
22. On the question as to when IMFL became exigible to excise
duty, learned counsel has contended that in the scheme of the Act of
1910 and Rules thereunder, excise duty is leviable right from the point of
H
924 SUPREME COURT REPORTS [2022] 3 S.C.R.

A entry of spirit into the distillery for manufacturing of alcohol and on every
point including the points of blending, manufacturing and bottling; and
thereafter on the bottled spirit. It is thus contended that the respondent
company is incorrect in its assertion that the goods having been destroyed
in the godown, excise duty did not become leviable. It is submitted that
the moment spirit has been stored in the bottle, excise duty is leviable on
B
the bottle, even if the same is not taken out of the warehouse.
22.1. With reference to Sections 28 and 29 of the Act of 1910,
learned counsel would submit that these provisions, respectively
empowering the State to impose excise duty and providing for the manner
in which the duty is to be levied, clearly show that the excise duty, which
C in real terms is price of exclusive privilege of the State, may be imposed
on the liquor manufactured in the distillery and it is wrong to contend
that excise duty cannot be levied on bottled spirits or is liable to be
quantified and collected only at the point of issuance of liquor from
godown. Learned counsel has particularly referred to the decision of
D this Court in the case of State of U.P. and Others v. M/s Modi
Distillery Etc.: (1995) 5 SCC 753, as regards various features of
the demand of excise duty at different stages and different events.
The learned counsel has also referred to the decision in the case of
State of U.P. and Ors. v. M/s Mohan Meakin Brewery Ltd. and
Anr.: (2011) 13 SCC 588.
E
23. As regards another facet of the stand of respondent that there
being regular deployment of the staff of Excise Department at the
distillery; the entire operation being under the control and supervision of
the Excise Department; the bonded warehouse being always under the
joint lock of Excise Department and the respondent; and liquor being
F issued only upon the Excise Inspector opening the department’s lock,
learned counsel would submit that such deployment of Excise Officers
is necessary to ensure the implementation of the rules and to safeguard
the revenue interests of the State but for the matter, the safety and
security of the distillery and prevention of any mishap by proper
G maintenance of the building and installations cannot be shifted on the
Excise Department; and such safety and security had been the sole
responsibility of the licencee. Thus, according to the learned counsel, for
the fire incident in question, which could only be attributed to want of
proper maintenance and upkeep of installations and/or equipment, the
respondent company alone remains liable and responsible.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 925
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

24. In another limb of submissions, learned counsel has referred A
to the fact that the respondent company had taken insurance coverage
of the value of liquor and hence, was compensated by the insurer. The
learned counsel has contended that when the respondent company got
reimbursement of value of liquor from the insurance company, the event
was akin to that of the sale of liquor; and on the principles of equity and
B
fair play, the State cannot be put to loss in the manner that even when
the distiller has received value of liquor, the corresponding excise duty
would not be made available to the State. The learned counsel has also
contended that omission on the part of the respondent company to take
insurance coverage of the value of excise duty, while taking insurance
coverage of the value of the liquor, itself amounts to negligence on the C
part of the respondent and for this reason too, the respondent is liable to
make payment of the excise duty on the value of liquor recovered from
the insurance company. In support of these contentions, the learned
counsel has referred to an order passed by the Customs, Excise and
Service Tax Appellate Tribunal, Northern Bench, New Delhi8 in the case
D
of Dharampal Satyapal v. Commissioner of Central Excise, Noida:
(2004) 167 ELT 291, wherein remission of duty on account of damage
of goods (pan masala) in rain water was disallowed, when it was found
that the assessee had been compensated by the insurance company
with an amount which was much more than the duty involved.
25. Per contra, the learned counsel for the respondent has E
supported the order passed by the High Court allowing the writ petition
and has contended that there had not been any negligence on the part of
the respondent company in relation to the incident of fire and no liability
could be fastened on it towards excise duty on the liquor destroyed in
fire. This apart, the learned counsel would contend, with reference to F
Article 265 of the Constitution of India, that levy and collection of tax
must be authorized by law and in the scheme of the Act of 1910, the
Excise Manual and the Rules of 1969, the excise duty could have been
collected only at the point of issuance of IMFL from distillery and there
was no question of demand of excise duty on the stock of IMFL destroyed
due to fire in the godown. The learned counsel has also submitted that in G
regard to the stock of IMFL destroyed in fire, there was no transfer of
property to anyone else and therefore, there was no sale so as to occasion
recovery of excise duty.
8
‘CESTAT’ for short H
926 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 26. While asserting that the respondent had taken all precautions
of safe maintenance/storage of the stock of IMFL in the godown of
distillery, learned counsel has submitted that the fire extinguishing
equipments were installed in the distillery premises and the Fire
Department issued No Objection Certificate dated 01.03.2003 on being
fully satisfied with the precautions taken by the distillery in respect of
B
the safety against fire; that the Assistant Electrical Inspector issued the
certificate dated 19.09.2002 after inspection and on being satisfied that
the electrical wiring equipments etc. were in accordance with Indian
Electricity Act, 1966; that the distillery had obtained license to work on
06.10.1994 which was renewed annually and was valid on the date of
C incident; that it was specifically stated in the report of the Assistant
Excise Commissioner dated 02.08.2003 that the cause of fire could not
be ascertained and there was nothing to show that distillery was, in any
manner, negligent or had caused the fire deliberately; that even in the
report submitted by the police department, it was stated that the cause
of fire could not be ascertained and there was absolutely no mention of
D
any negligence on the part of the respondent; that in the report of the
Fire Department too, it was pointed out that the cause of fire could not
be ascertained; that the District Magistrate, Shahjahanpur, in his letter
dated 21.10.2003 to the Principal Secretary(Excise) similarly stated that
the reason of fire was unknown and there was no proof with regard to
E the negligence of distillery. With these facts and factors, learned counsel
for the respondent would submit that the fire incident due to which IMFL
got destroyed was not caused by any negligence of the respondent and
coupled with this remains the fact that complete control and supervision
of the distillery was exercised by the State Excise Department. Thus,
according to the learned counsel, there being no negligence on the part
F
of the respondent, no liability of excise duty on the liquor destroyed in
fire could be fastened on it.
27. While maintaining that there was no negligence on the part of
the respondent, the learned counsel has assailed the legality and validity
of the demand of duty against the respondent. In this regard, learned
G counsel has referred to Article 265 of the Constitution of India, the
provisions of the Act of 1910 and the Rules thereunder as also the Excise
Manual and has submitted that Rule 708 of the Excise Manual absolves
the State Government from the responsibility for the destruction, loss or
damage of any spirit stored in distillery by fire or theft or by gauging or
H proof or by any other cause, for the reason that the entire distillery
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 927
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

(including godown) is under the lock and key of Excise Department. A
Learned counsel has referred to Rule 709 of the Excise Manual to submit
that in the event of loss, the distilleries are made liable to make good any
loss of revenue to the Government only in the event of such loss having
been caused due to their negligence. Learned counsel has emphatically
argued that in terms of Rule 709, if a distillery has not been negligent in
B
safe custody of the stock of spirit, it cannot be held liable to make payment
towards loss of excise duty, if any, due to accident or reasons beyond
the control of human agency.
27.1. Yet further, learned counsel has submitted that entire bottling
operations including the storage of bottled liquor are done under the
strict supervision of the Excise Inspector and the stocks are maintained C
in separate rooms under joint lock and key of the department and the
company. With reference to the Rules of 1969, particularly Rule 7 thereof,
the learned counsel would submit that the stock so maintained under the
joint lock and key is issued for the purpose of export outside the state of
UP or for the purpose of wholesale vend within the state of UP; and it is D
only at the point of issuance of liquor from the bottling rooms/godowns
when the excise duty is liable to be quantified and collected with reference
to the date, time and place of issuance. In this regard, learned counsel
has also referred to the provisions contained in Sections 28 and 29 of the
Act of 1910 and has re-emphasised that in exercise of powers thereunder,
the State Government has chosen the point of issue for sale as being the E
point for quantification, calculation and collection of excise duty under
its notification dated 30.03.1962 which makes it clear that the rate of
duty is linked to the point of time to the date of issue for sale and not to
the date of manufacture. Learned counsel would submit that IMFL in
question having been destroyed on account of fire before its issuance F
from the godown for sale, there arise no question of collecting any excise
duty on the said destroyed stock of IMFL. Learned counsel has further
submitted that under the Excise Act though the duty is levied at the point
of manufacture but the point of collection of the duty is only at the time
of issuance for sale and hence, to cover the eventuality in between post-
manufacturing and before sale, Rule 7(11) of the Rules 1969 allows 1% G
of wastage and mandates to charge full rate if wastage occurs beyond
1%; and in case of destruction or loss due to fire or theft etc., the distillery
is made liable for loss of revenue only if there is negligence on its part.
Thus, according to the learned counsel, in the present case, where the
liquor had not been issued from the godown for sale and had not been H
928 SUPREME COURT REPORTS [2022] 3 S.C.R.

A lost due to any negligence on the part of distiller, the levy of excise duty
deserves to be disapproved, for being not the one authorized by law and
being hit by the requirements of Article 265 of the Constitution of India.
Learned counsel has referred to the decision in Somaiya Organic (India)
Pvt. Ltd. and Anr. v. State of U.P. and Anr.: (2001) 5 SCC 519 to
submit that both the levy and collection of tax must be authorised by law.
B
According to the learned counsel, the High Court has correctly held that
Rule 709 of the Excise Manual would be applicable and no duty could be
imposed on the respondent as there was no negligence on its part.
28. As regards the effect of insurance and reimbursement of the
value of IMFL by the insurance company, learned counsel has referred
C to the definition of sale in the Sale of Goods Act, 1930 as also in the U.P.
Trade Tax Act, 1948, and has submitted that in the stock of IMFL
destroyed due to fire, neither there was any transfer of property nor
there was a sale; and the claim received from the insurer on account of
loss of goods in a fire cannot be termed as consideration. It is also submitted
D that not taking insurance cover for the excise duty was an irrelevant and
immaterial fact because liability to pay excise duty would have arisen
only when there was negligence on the part of the respondent company
and not otherwise. The learned counsel has also submitted that in fact,
the insurance company itself would not have cleared the insurance claim
if there was any negligence on the part of the respondent and clearance
E of insurance claim itself fortifies that there was no negligence on the
part of the respondent. It is also submitted that the respondent company
had not earned any profit in the matter and in fact, it pays the excise
duty when the same is recovered from the ultimate consumer but in the
present case, when the respondent did not pass on and did not recover
excise duty from any consumer, the question of levying the same on the
F
respondent does not arise.
29. We have heard learned counsel for the parties at sufficient
length and have examined the material placed on record with reference
to the law applicable
G Questions for determination
30. In view of rival submissions, the following three major questions
arise for determination in this case:
A. As to whether demand of excise duty on the liquor lost in fire
is authorised by law and has rightly been raised as per the applicable
H provisions of the Act of 1910, the Excise Manual and the Rules of 1969?
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 929
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

B. As to whether the fire incident in question had been an event A
beyond human control and no negligence could be imputed on the
respondent company?
C. What would be the effect of the fact that the respondent
company had taken insurance coverage only of the value of liquor (and
not that of excise duty thereupon) and then, had received the insurance B
claim towards the value of liquor?
Relevant statutory provisions
31. Having regard to the questions involved, we may take note of
the constitutional and statutory provisions, which do carry their own C
relevance in the present case.
32. The fundamental constitutional mandate that no tax shall be
levied or collected except by authority of law is contained in Article 265
of the Constitution of India, which reads as under: -
“265. Taxes not to be imposed save by authority of law.- No D
tax shall be levied or collected except by authority of law.”
32.1. The relevant Entries 8 and 51 in List II (State List) of the
Seventh Schedule to the Constitution of India could also be usefully
reproduced as under: -
E
“8. Intoxicating liquors, that is to say, the production, manufacture,
possession, transport, purchase and sale of intoxicating liquors.
51. Duties of excise on the following goods manufactured or
produced in the State and countervailing duties at the same or
lower rates on similar goods manufactured or produced elsewhere F
in India: -
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics,
but not including medicinal and toilet preparations containing
G
alcohol or any substance included in sub-paragraph (b) of this
entry.”
33. The law relating to intoxicating liquors and intoxicating drugs
in the State of Uttar Pradesh is principally governed by the provisions
contained in the U.P. Excise Act, 1910. A few of the relevant definitions
H
930 SUPREME COURT REPORTS [2022] 3 S.C.R.

A contained in Section 3 as also the relevant provisions, which are of direct
bearing in the present case, as contained in Sections 17, 18, 19, 28 and
29 read as under:-
3. Interpretation.- In this Act, unless there is something
repugnant in this subject or context -
B (1) “excise revenue” means revenue derived or derivable from
any duty, fee, tax, fine (other than a fine imposed by a court of
law), or confiscation imposed or ordered under the provisions of
this Act, or of any other law for the time being in force relating to
liquor or intoxicating drugs;
C *** *** ***
(3a) “excise duty” and “countervailing duty” means any such
excise duty or countervailing duty, as the case may be, as is
mentioned in entry 51 of List II in the Seventh Schedule to the
Constitution;
D *** *** ***
(8) “spirit” means any liquor containing alcohol obtained by
distillation, whether it is denatured or not;
*** *** ***
(11) “liquor” means intoxicating liquor and includes spirits of wine,
E spirit, wine, tari, pachwai, beer and all liquid consisting of or
containing alcohol, also any substance which the State Government
may by notification declare to be liquor for the purposes of this
Act;
*** *** ***
F (22-a) “excisable article” means -
(a) any alcoholic liquor for human consumption; or
(b) any intoxicating drug;
*** *** ***
G 17. Manufacture of intoxicants prohibited except under the
provisions of this Act. - (1) (a) No intoxicant shall be
manufactured;
(b) no hemp plant (cannabis sativa) shall be cultivated;
(c) no portion of the hemp plant (cannabis sativa) from which
H any intoxicating drug can be manufactured shall be collected;
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 931
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

(d) no liquor shall be bottled for sale; and A
(e) no person shall use, keep or have in his possession any
materials, still, utensil, implement or apparatus whatsoever for the
purpose of manufacturing any intoxicant other than tari.
Except under the authority and subject to the terms and
conditions of a licence granted in that behalf by the Collector. B

(2) No distillery or brewery or manufactory shall be constructed
or worked except under the authority and subject to the terms
and conditions of a licence granted in that behalf by the Excise
Commissioner under Section 18.
C
18. Establishment or licensing of distilleries and
warehouses.-
The Excise Commissioner may-
(a) establish a distillery in which spirit may be manufactured
under a licence granted under Section 17 on such conditions as D
the State Government deems fit to impose;
(b) discontinue any distillery so established;
(c) licence, on such conditions as the State Government deems
fit to impose the construction and working of a distillery or brewery
or manufactory; E

(d) establish or licence a warehouse wherein any intoxicant
may be deposited and kept without payment of duty; and
(e) discontinue any warehouse so established.
19. Removal of intoxicants from distillery, etc.- No intoxicant F
shall be removed from any distillery, brewery, manufactory,
warehouse or other place of storage established under this Act
unless the duty (if any) payable under Chapter V has been paid or
a bond has been executed for the payment thereof.
*** *** *** G
28. Duty on excisable articles – (1) An excise duty or a
countervailing duty, as the case may be at such rate or rates as
the State Government shall direct may be imposed, either generally
or for any specified local area, on any excisable article -
H
932 SUPREME COURT REPORTS [2022] 3 S.C.R.

A (a) imported in accordance with the provisions of Section 12(1);
or
(b) exported in accordance with the provisions of Section 13; or
(c) transported; or
B (d) manufactured, cultivated or collected under any licence
granted under Section 17; or
(e) manufactured in any distillery established, or any distillery
or brewery licensed, under Section 18 :
Provided as follows-
C
(i) duty shall not be so imposed on any article which has been
imported into India and was liable on such importation to duty
under the Indian Tariff Act, 1894, or the Sea Customs Act, 1887.
Explanation. - Duty may be imposed under this section at
different rates according to the places to which any excisable
D
article is to be removed for consumption, or according to the varying
strength and quality of such article.
(2) The State Government shall, in imposing an Excise duty or
a countervailing duty as aforesaid and in fixing its rate, be guided
by the directive principles specified in Article 47 of the Constitution
E of India.
“29. Manner in which duty may be levied.-Subject to such
rules as the Excise Commissioner may prescribe to regulate the
time, place and manner of payment, such duty may be levied in
one or more of the following ways as the State Government may
F by notifi- cation direct :
(a) In the case of excisable articles imported under Section 12 (1)-
(i) by payment either in the province of import or in the prov-
ince or territory of export; or
G (ii) by payment upon issue for sale from a warehouse estab-
lished or licensed under Section 18 (d);
(b) in the case of excisable articles exported under Section 13-by
payment either in the province of export or in the province or
terri- tory of import ;
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 933
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

(c) in the case of excisable articles transported- A
(i) by payment in the district from which the excisable article
is to be transported or
(ii) by payment upon issue for sale from a warehouse estab-
lished or licensed under Section 18 (d) ;
B
(d) in the case of intoxicating drugs manufactured under any
licence granted under Section 17 (1) -
(i) by a rate charged upon the quantity manufactured under a
licence granted under the provisions of Section 17 (1) (a), or
issued from a warehouse established or licensed under Sec- C
tion 18 (d) ;
(ii) where the intoxicating drug is manufactured from hemp
plant (cannabis sativa) cultivated or collected under a licence
granted under the provisions of Section 17 (1) (b) and (c), by
an acreage rate levied on the cultivation, or by a rate charged D
upon the amount collected ;
(e) in the case of spirit or beer manufactured in any distillery
estab- lished or any distillery brewery or manufactory licensed
under Sec- tion 18-
(i) by a rate charged upon the quantity produced or issued E
from the distillery brewery or manufactory, as the case may
be, or issued from a warehouse established or licensed under
Section 18 (d) ;
(ii) by a rate charged in accordance with such scale or equiv-
alents, calculated on the quantity of materials used or by the F
degree of attenuation of the wash or wort, as the case may be,
as the State Government may prescribe :
Provided that, where payment is made upon issue of an ex-
cisable article for sale from a warehouse established or licensed
under Section 18(d), it shall be at the rate of duty which is in G
force on the article on the date when it is issued from the
warehouse.”
34. Rules 708, 709 and 813 of the Excise Manual, dealing with the
issues pertaining to loss of spirit in distilleries and wastage allowance,
read as under: - H
934 SUPREME COURT REPORTS [2022] 3 S.C.R.

A “708. Government not liable for loss, of spirit in
distilleries.- Government shall not be liable for the destruction,
loss or damage of any spirit stored in distilleries by fire or theft, or
by gauging, or proof, or by any other cause whatsoever. In case
of fire or other accident officers in-charge of distilleries shall
immediately attend, to open the premises at any hour by day or
B
nights.
709. Distillers responsible for loss etc. of spirit in distilleries.
- Distillers shall be responsible for the safe custody of stock of
spirit in their distilleries and shall be liable to make good any loss
of revenue caused to Government by their negligence.
C
*** *** ***
813. Wastage allowance. – The free wastage allowances for
different kinds of spirit (excluding bottled spirit) stored in a distillery
shall be as follows:
D

E

If the total wastage on any kind of spirit does not exceed 3 per
cent duty will be charged on the net wastage in excess of the free
allowances. But if the total wastage exceeds 1.5 per cent duty
shall be liable to be charged on the whole wastage without allowing
F for the free allowances at the following rates :
(1) Plain and rectified sprits. - At the highest rate of duty
leviable on country spirit in the case of plain spirit and at
the highest rate of duty leviable on I.M.F.L., in the case of
Rectified sprit.
G
(2) Sophisticated spirits including spiced Country spirit. -
At the rate of duty leviable on that spirit.
(3) Denatured spirit. - A penalty at the highest rate of purchase
tax leviable on such spirit :
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 935
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Provided that if it is proved to the satisfaction of the Excise A
Commissioner that the deficiency or wastage in excess of the
prescribed limit has been caused by an accident or other
unavoidable cause, the payment of duty on such deficiency or
wastage shall be not be required.
When the wastage does not exceed the prescribed limit, no action B
need be taken by the officer-incharge, but when an excess is
found in any case at the time of monthly stock-taking, the officer
incharge must obtain a written explanation from the distillers and
forward the same together with a full report of the circumstances
to the Assistant Excise Commissioner/Deputy Excise
Commissioner. The Assistant Excise Commissioner/Deputy Excise C
Commissioner shall charge the duty on excess wastage if he is
satisfied that the wastage in excess of the prescribed limit is not
on account of an accident or any unavoidable cause. In case the
excess wastage is due to an accident or unavoidable cause, the
matter will be referred to the Excise Commissioner for orders.” D
35. One major activity concerning one of the intoxicating liquors,
namely, bottling and storage of foreign liquor, is regulated in the State of
Uttar Pradesh by the Rules of 1969 which, inter alia, provide for grant
of bottling licence in Form FL-3 to a distiller to bottle spirits; to a brewer
to bottle beer; and to a vintner to bottle wines. Various general conditions E
of such a licence are contained in Rule 6 of these Rules and then,
additional special conditions in relation to bottling of IMFL in bond under
FL-3 licence are contained in Rule 7. Elaborate provisions have been
made in Rule 7 concerning the actual operations of bottling and storage
as also supervision thereof. For the present purpose, only sub-clause
(11) of Rule 7 needs to be noticed and the same is reproduced hereunder F
(while omitting other sub-clauses, being not relevant): -
“7. Following additional special conditions will be applicable to
bot- tling of Indian Made Foreign Liquor in bond under F.L.-3
licence :
G
*** *** ***
(11) (a) An allowance up to one per cent. may be made on the
total quantity of spirit stored during a month for actual loss in
bottling and storage. The licensee shall be responsible for the
payment of duty on wastage in excess of one per cent.
H
936 SUPREME COURT REPORTS [2022] 3 S.C.R.

A (b) When the wastage does not exceed the prescribed limit, no
ac- tion need be taken by the Excise Inspector incharge but if an
excess is found at the time of monthly stock taking the Excise
Inspector shall submit a statement to the Collector by fifth day of
the month in Form F.L.B.-10 showing the quantity of actual
wastage and the duty to be paid by the licensee on the excess
B
wastage. On receipt of the statement, the Collector shall recover
the duty from the licensee at the full rate of duty leviable on Indian
made foreign spirit.
*** *** ***”
C 36. Before proceeding further we may, at once, summarise that
IMFL destroyed in fire in this case undoubtedly answered to the
description of “spirit”, “liquor” and “excisable article” within the meaning
of Clauses (8), (11) and (22-a) of Section 3 of the Act of 1910, for being
an intoxicating liquor containing alcohol obtained by distillation; and the
D same was manufactured under a licence granted in terms of Section 17
in the distillery of the respondent and was kept in the warehouse
established in terms of Section 18 of the Act of 1910. Thus, this liquor
(IMFL) could not have been removed from the place of storage unless
excise duty payable thereupon had been paid or a bond was executed
for the payment thereof. The duty was payable in terms of Section 28
E and its rate was to be that as applicable on the date of its issue from the
warehouse in terms of Section 29. An allowance upto 1% was admissible
on the total quantity of liquor stored during a month for actual loss in
bottling and storage and else, no wastage allowance as such was
admissible thereupon. Moreover, the Government was not to be liable
F for any loss in the quantity of this stored liquor for whatever reason; and
on the other hand, the distillery, i.e., the respondent was to be responsible
for the safe custody thereof and also liable to make good any loss of
revenue including owing to any loss during storage beyond permissible
one per cent of the total quantity. Considering that mandate, the
respondent was solely liable for payment of excise duty on wastage of
G stored total quantity with allowance only upto one per cent, as specified.
While keeping in view these salient features emerging from a combined
reading of the above quoted provisions of the Act of 1910, the Excise
Manual and the Rules of 1969, we may take up the questions calling for
determination in this case.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 937
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Whether the demand in question is authorised by law? A
37. With reference to the provisions above-mentioned, the main
plank of submissions on behalf of the respondent company has been that
the point of quantification and calculation of excise duty being the point
of issue from the bonded warehouse and that point/stage having not
reached in relation to the liquor destroyed in fire, the question of demand B
of excise duty would not arise. It has also been submitted that Rule
7(11) of the Rules of 1969 has no application and only Rule 709 of the
Excise Manual could apply for which, negligence on the part of the
distillery is required to be proved. Before taking up the issue relating to
the applicable rule, we may deal with the fundamental question raised
on behalf of the respondent, i.e., as to whether the demand is unauthorised C
for the reason that the point/stage of quantification and calculation of
duty had not reached and liquor got destroyed while lying in warehouse.
38. As noticed, such an argument, that the demand of duty remains
unauthorised for the point of issue of liquor having not reached, was not
raised as such before the High Court nor the High Court had proceeded D
on that basis. Be that as it may, the submission even otherwise remains
untenable and is required to be rejected.
39. It remains a fundamental constitutional mandate, and needs
no elaboration, that in terms of Article 265 of the Constitution, both levy
and collection of tax must be authorised by law, as held by this Court in E
the case of Somaiya Organics (supra). It remains equally trite that by
virtue of Entry 51 of List II, the State has been authorised to impose
duty of excise on alcoholic liquors for human consumption manufactured
or produced in the State. The question raised on behalf of the respondent
company, about the authority of the appellant-State to levy excise duty F
on the liquor in question that was destroyed in fire and had not reached
the point of issue, could be adequately answered with reference to the
principles concerning the event and the point where entitlement of the
State to levy excise duty, and corresponding liability of the respondent to
make payment thereof, comes into existence.
G
39.1. In the case of State of U.P. & Ors. v. Delhi Cloth Mills &
Anr.: (1991) 1 SCC 454, this Court dealt with the question as to whether
excise duty could have been levied on the wastage of liquor in transit
and held that the levy of differential duty, which was charged upon
reporting of excess wastage, did not cease to be an excise duty even if
it was levied upon declaration of excess wastage because, ‘the taxable H
938 SUPREME COURT REPORTS [2022] 3 S.C.R.

A event was production or manufacture of liquor.’ This Court further
made it clear that the excise duty remained a single point duty which
could be levied at one of the points mentioned in Section 28 of the Act of
1910. The relevant observations and declaration of law by this Court
could be usefully reproduced as under: -
B “8. The original Section 28 of the Act now re-numbered as sub-
section (1) thereof, and sub-sections (2) and (3) inserted by Section
2 of the U.P. Act 7 of 1970 clearly covers Indian made foreign
liquors. There can be no dispute as to military rum being one of
the Indian made foreign liquors excisable under the Act. A duty of
excise under Section 28 is primarily levied upon a manufacturer
C or producer in respect of the excisable commodity manufactured
or produced irrespective of its sale. Firstly, it is a duty upon
excisable goods, not upon sale or proceeds of sale of the goods. It
is related to production or manufacture of excisable goods. The
taxable event is the production or manufacture of the liquor.
D Secondly, as was held in A.B. Abdulkadir v. State of Kerala:
AIR 1962 SC 922, an excise duty imposed on the manufacture
and production of excisable goods does not cease to be so merely
because the duly is levied at a stage subsequent to manufacture
or production. That was a case on Central Excise, but the principle
is equally applicable here. It does not cease to be excise duty
E because it is collected at the stage of issue of the liquor out of the
distillery or at the subsequent stage of declaration of excess
wastage. Legislative competence under entry 51 of List II on
levy of excise duty relates only to goods manufactured or produced
in the State as was held in Bimal Chandra Banerjee v. State of
F M.P.: 1970 (2) SCC 467. In the instant case there is no dispute
that the military rum exported was produced in the State of U.P.
In State of Mysore v. D. Cawasji &Co.: 1970 (3) SCC 710,
which was on Mysore Excise Act, it was held that the excise duty
must be closely related to production or manufacture of excisable
goods and it did not matter if the levy was made not at the moment
G of production or manufacture but at a later stage and even if it
was collected from retailer. The differential duty in the instant
case, therefore, did not cease to be an excise duty even if it was
levied on the exporter after declaration of excess wastage. The
taxable event was still the production or manufacture.
H *** *** ***
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 939
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

17. …. If out of the quantity of military rum in a consignment, a A
part of 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 to be construed in light
B
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.”
(underlining supplied)
39.2 In the case of M/s Mohan Meakin Brewery Ltd. (supra), C
the question of exigibility of beer to excise duty arose in respect of excess
wastage in the brewery. With reference to the aforesaid decision in the
case of Delhi Cloth Mills as also several other decisions and upon
interpretation of Section 29(e)(i) of the Act of 1910, this Court reaffirmed
that exigibility of the liquor (beer in that case) to excise duty occurred at
the stage of manufacture or production in the following words:- D

“33. Section 29(e)(i) of the U.P. Excise Act makes it clear that in
the case of beer manufactured in a brewery, excise duty may be
levied, by a rate charged upon the quantity produced or issued
from the brewery or issued from a warehouse. This means that in
respect of beer that undergoes the process of filtration, the E
exigibility to excise duty will occur either at the end of the filtration
process when it is received in storage/bottling tanks or when it is
issued from the brewery. In regard to draught beer drawn directly
from fermentation vessels, without further processing or filtration,
the exigibility to excise duty will occur either at the end of the F
fermentation process or when it is issued from the brewery.”
(underlining supplied)
40. The very same provision [i.e., Section 29(e)(i) of the Act of
1910], which has been interpreted by this Court in the aforesaid decision
of M/s Mohan Meakin in relation to beer manufactured in a brewery, G
applies with necessary variations to the case of spirit manufactured in a
distillery established under Section 18. Undoubtedly, the liquor in question
was manufactured by the respondent company in its distillery established
under Section 18. Thus, the liquor that had been produced, became exigible
to excise duty at the end of the distillation process when it was received
H
940 SUPREME COURT REPORTS [2022] 3 S.C.R.

A in storage/bottling tanks or when it was issued from the distillery. To put
it differently, the taxable event was production or manufacture of this
liquor, for it being a duty upon the goods and not upon sale or proceeds
of sale of the goods.
41. As per Section 19, no intoxicant (and that obviously includes
B the liquor manufactured by the respondent) can be removed from the
distillery or the place of storage unless the duty leviable thereupon has
been paid or a bond has been executed for the payment thereof.
Considering the overall scheme of the Act and the Rules, it may not be
out of place to interpret the expression “removal” in Section 19 to include
wastage in excess of permissible limit of total quantity of spirit produced
C
or manufactured and stored. A comprehensive look at the scheme of
Sections 17 to 19 and 28 and 29 of the Act of 1910 and the enunciations
of this Court leave nothing to doubt that in respect of the liquor that had
undergone the process of distillation, exigibility to excise duty had occurred
at the end of the distillation process or when it was issued from the
D distillery. The point of quantification of this duty, even if linked in point of
time to the date of issue for sale in terms of proviso to Section 29, does
not relate to the ‘event of chargeability’ that had occurred as soon as the
liquor was distilled and received in the bottling tank or had been otherwise
issued from distillery. In other words, the liquor that was lying stored in
the bonded warehouse had already become subject to the excise duty,
E
with postponement of actual charging of the duty as per the rate applicable
on the date and time of issue for sale from the warehouse. It gets perforce
reiterated that taxable event was production or manufacture, and not
sale, of the liquor. In this view of the matter, the submission that the levy
in question is not authorised by law, and is hit by Article 265 of the
F Constitution of India, remains untenable and is required to be rejected.
42. As regards the applicable rules for the demand in question,
the High Court has proceeded on the reasoning that the present one had
not been the case of wastage in handling and therefore, Rule 7(11) of
the Rules of 1969 would not be applicable. The respondent company
G has also submitted that Rule 7(11) of the Rules of 1969 is inapplicable
and it is pointed out that even the State Government had directed the
Excise Commissioner to proceed under Rule 709 of the Excise Manual
and not Rule 7(11) of the Rules of 1969, which deals only with wastage
in normal course of bottling operation and storage. It has further been
contended that only Rule 709 of the Excise Manual could be taken
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 941
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

recourse of by the Government, but in that case, the distillery could be A
made liable only if it could be shown that the loss had been caused to the
Government by any negligence on part of the distillery.
43. In regard to the above submissions, though the demand in
question would be essentially referable to Rule 709 of the Excise Manual,
but Rule 7(11) of the Rules of 1969 provides for an allowance up to 1% B
on the total quantity of spirit stored during a month towards actual loss in
bottling and storage; and the licencee is responsible for payment of duty
on the wastage in excess of 1%. This Rule 7(11) makes it clear that
even in relation to the wastage in storage, the allowance is only up to 1%
of total quantity of spirit stored during a month. This provision may also
C
be read with Rule 813 of the Excise Manual, which provides for free
wastage allowance for different kinds of spirit in a distillery with the
specified percentage, namely the plain and spiced spirit (0.7%), rectified
and sophisticated spirit (0.4%), and denatured spirit (0.5%). The
significant aspect of the matter is that though wastage allowance is
provided for different kinds of spirit but, the bottled spirit is specifically D
excluded therein.
44. A comprehensive look at the relevant provisions of law makes
it clear that so far as IMFL is concerned, no provision is made in the
Excise Manual for any wastage allowance in relation to the bottled sprit,
but, in terms of Rule 7(11) of the Rules of 1969, an allowance up to 1% E
on the total quantity of spirit stored during a month may be allowed for
actual loss in bottling and storage. Any allowance for any wastage or
loss beyond the same remains, obviously, impermissible. The logic is not
far to seek. As noticed, in respect of the liquor that had undergone the
process of distillation, exigibility to excise duty had occurred at the end
F
of the distillation process or when it was issued from the distillery. Thus,
any loss or wastage of the bottled spirit would be directly a loss of excise
duty it had already become exigible to. The rule making authority has
taken abundant care to ensure that there is no pilferage of the excise
revenue available to the Government on the bottled spirit by any act of
wastage, while making the licencee responsible for payment of duty on G
wastage in excess of 1% on the total quantity of spirit stored during the
month. Thus, neither the submissions on behalf of the respondent company
nor the observations of the High Court about the total inapplicability of
Rule 7(11) could be accepted. In other words, Rule 7(11) of the Rules of
1969 is required to be taken into account for the legal consequences that
H
942 SUPREME COURT REPORTS [2022] 3 S.C.R.

A so far as the bottled spirit is concerned, the licencee remains responsible
for payment of duty on any kind of wastage in excess of 1%. Coupled
with this provision, Rule 709 of the Excise Manual makes it clear that
the distillery remains responsible for safe custody of the stock of spirit
and remains liable to make good any loss of revenue caused to the
Government by their negligence.
B
45. Therefore, a plain answer to the legal issue raised on behalf
of the respondent company is that the demand in question cannot be said
to be unauthorised but, its validity would depend on answer to the question
as to whether negligence could be imputed on the respondent company
in terms of Rule 709 of the Excise Manual. We shall examine various
C features related with this question in the next segment of discussion.
Whether respondent company remains liable to pay excise
duty on the liquor lost in fire
46. As noticed, the fire incident in question led the Excise
D Commissioner to propose recovery of excise duty on the stock of IMFL
destroyed in fire from the respondent company and the respondent
company maintained that the incident was due to the reasons beyond
human control and there was no negligence on its part. However,
ultimately, the Excise Commissioner passed the order dated 11.07.2006
holding, inter alia, that the respondent company had not arranged the
E fire proof electric equipments of good quality due to which the incident
had taken place; and the carelessness of the distillery for the safety of
stock cannot be attributed to an act of God. The High Court has, however,
held that the inference drawn by the Excise Commissioner was nothing
but of conjectures and surmises without any material foundation. The
F High Court has also observed that when a fiscal liability was founded on
a condition precedent, i.e., negligence on the part of the person concerned,
no responsibility could be fixed unless such negligence was shown to be
founded on some material. According to the appellants, the incident in
question is attributable only to some negligence on the part of the
respondent company and it had not been an act of God for having occurred
G on account of fault in the electrical installation and short circuit; and the
incident was avoidable if proper and necessary care was taken by the
respondent company. On the other hand, on behalf of the respondent,
though the principles relating to an “act of God” have not been invoked
as such before us but the contention has been that the fire was not
H caused by the negligence of the respondent company in maintaining safe
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 943
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

custody of the stock of spirits; and the incident had been the one which A
occurred for the reasons beyond the control of human agency. It has
also been contended that the entire distillery (including the godown) has
been under lock and key of the department; and the department had
been exercising complete control and supervision over the distillery and,
therefore, no negligence could be imputed on the respondent.
B
Control of Department over the distillery and godown: effect of
47. In view of rival submissions, we may begin with the issue
relating to supervision and control of State Excise Department over the
distillery and the godown. The submissions made in this regard on behalf
of the respondent company remain baseless and have only been noted C
to be rejected. In the scheme of the Act of 1910, the Rules of 1969 and
the Excise Manual, it is evident that the Government is not liable for
destruction, loss or damage of any spirit stored in distillery by fire or
theft or any other cause (as per Rule 708 of the Excise Manual). On the
other hand, distillery is made responsible for safe custody of the stock of
spirit and is also made liable to make good any loss of revenue caused to D
the Government by their negligence.
47.1. It has rightly been contended on behalf of the appellants
that the purpose of posting Excise Officers in the distillery is for securing
the interest of the State by collection of revenue and to put a check over
any act of theft, wastage, illegal sale as also to ensure proper E
implementation of rules. Rule 736 of the Excise Manual makes it clear
that the doors of buildings or rooms which are used for storage of spirit
are under double locks, where one of the locks is of the Excise Department
and other of the distillery. The other provisions of the Rules of 1969 and
the Excise Manual further make it clear that as regards general F
arrangement and management of distilleries, elaborate provisions have
been made like as to how the pipes would be laid, fixed and painted, as
to how lock fastening would be constructed etc. Even a minor alteration
in the distillery arrangement requires previous sanction of the Excise
Commissioner (Rule 771) and repairs etc. are to be reported (Rule 772).
The rules in their conspectus provide for strict supervision and control of G
the Excise Department over the working of distillery at every stage but
that supervision and control does not correspondingly absolve the distillery
of its duty and responsibility towards safe custody of the stock of spirit
and towards avoidance of wastage. Any doubt in that regard is effectively
quelled by a combined reading of Rules 708 and 709 of the Excise Manual H
944 SUPREME COURT REPORTS [2022] 3 S.C.R.

A as also Rule 7(11) of the Rules of 1969. The contentions in this regard as
urged on behalf of the respondent company are, therefore, rejected.
Negligence
48. Now, for entering into the core of this matter, i.e., as to whether
the loss of revenue caused to the Government by destruction of liquor in
B fire could be attributed to any negligence on the part of the respondent
company, we may take note of the legal principles related with the liability
arising out of, or due to, negligence as also the exceptions and defences
in relation to any claim based on negligence.
49. “Negligence” is one such class of “wrongs” that leads to
C liability. The fundamental jurisprudential principle of “liability” is crisply
defined in Salmond on Jurisprudence9 thus: -
“Liability or responsibility is the bond of necessity that exists
between the wrongdoer and the remedy of the wrong.”
“Liability” arises from breach of duty, which may be in the form
D of an act or omission. We need not delve, for the present purpose, on the
classification of liability into civil or criminal and remedial or penal and
various other jurisprudential features of liability. In the present case, we
are primarily concerned with the question of liability arising out of
negligence. Having regard to the questions involved and the provisions
applicable, it would be appropriate to take into comprehension the meaning
E
and connotation of the term “negligence” with reference to the
dictionaries, lexicons and decided cases.
49.1. In Concise Oxford English Dictionary10, the term “negligence”
is defined and explained as under: -
F “negligence n. failure to take proper care over something.
Law breach of a duty of care which results in damage.”
The adjective of this expression is “negligent” and its adverb form
is ‘negligently’. These expressions, for deeper understanding need to be
correlated with the verb ‘neglect’ that has been defined and explained in
the same dictionary as under: -
G
“neglect v. fail to give proper care or attention to. fail to do
something. n. the state or process of neglecting or being
neglected. failure to do something.”
9
12th Edition, p. 349.
10
H 11th Edition, p. 958.
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 945
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

49.2. In Webster’s Third New International Dictionary,11 the terms A
“neglect” and “negligence” are defined and explained as under: -
“ne•glect 1 a : to give little or no attention or respect to : consider
or deal with as if of little or no importance : DISREGARD,
SLIGHT <some of the most significant issues have been ~ed -
Bruce Payne> <~ed the real needs of the students> b : to fail to B
attend to sufficiently or properly : not give proper attention or
care to ….. 2 : to carelessly omit doing (something that should be
done) either altogether or almost altogether : leave undone or
unattended to through carelessness or by intention : pass lightly
over <~ing their obvious duty> <~ed to mention that he was a
convict –Bernard Smith>. C

“neg•li•gence 1 a : the quality or state of being negligent b : a
failure to exercise the care that a prudent person usu. exercises –
opposed to diligence;”
49.3. In Black’s Law Dictionary12, “negligence” and several of D
its forms and features have been explained. For the present purpose, we
may usefully extract the relevant parts as under: -
“negligence, n. (14c) 1. The failure to exercise the standard of
care that a reasonably prudent person would have exercised in a
similar situation; any conduct that falls below the legal standard E
established to protect others against unreasonable risk of harm,
except for conduct that is intentionally, wantonly, or willfully
disregardful of others’ rights; the doing of what a reasonable and
prudent person would not do under the particular circumstances,
or the failure to do what such a person would do under the
circumstances….. F
active negligence. (1875) Negligence resulting from an affirmative
or positive act, such as driving through a barrier. Cf. passive
negligence.
advertent negligence. (1909) Negligence in which the actor is
G
aware of the unreasonable risk that he or she is creating;
RECKLESSNESS. – Also termed willful negligence; supine
negligence.

11
1976 Edition Vol. II p. 1513
12
10th Edition pp. 1196-1198 H
946 SUPREME COURT REPORTS [2022] 3 S.C.R.

A casual negligence. (1812) A plaintiff’s failure to (1) pay
reasonable attention to his or her surroundings, so as to discover
the danger created by the defendant’s negligence, (2) exercise
reasonable competence, care, diligence, and skill to avoid the
danger once it is perceived, or (3) prepare as a reasonable person
would to avoid future dangers.
B
gross negligence. (16c) 1. A lack of even slight diligence or
care.
• The difference between gross negligence and ordinary
negligence is one of degree and not of quality. Gross negligence
C is traditionally said to be the omission of even such diligence as
habitually careless and inattentive people do actually exercise in
avoiding danger to their own person or property. – Also termed
willful and wanton misconduct. 2. A conscious, voluntary act or
omission in reckless disregard of a legal duty and of the
consequences to another party, who may typically recover
D exemplary damages. – Also termed reckless negligence; wanton
negligence; willful negligence; willful and wanton negligence;
willful and wanton misconduct; hazardous negligence; magna
neglegentia.
inadvertent negligence. (18c) Negligence in which the actor is
E not aware of the unreasonable risk that he or she is creating, but
should have foreseen and avoided it. – Also termed simple
negligence.
passive negligence. (18c) Negligence resulting from a person’s
failure or omission in acting, such as failing to remove hazardous
F conditions from public property. Cf. active negligence.”
49.4. In P. Ramanatha Aiyar’s Advanced Law Lexicon13, various
connotations of the expression “negligence” are stated, inter alia, in the
following terms: -
“Negligence. Failure to use the care that a reasonable and prudent
G
person would have used under the same or similar circumstances.
Negligence in law signifies a coming short of the performance of
duty.

13
H 5th Edition, Vol. 3, p. 3435
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 947
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Failure to use the care that a reasonably prudent and careful person A
would use under similar circumstances.
Negligence is “the absence of proper care, caution and diligence;
of such care, caution and diligence, as under the circumstances
reasonable and ordinary prudence would require to be exercised.”
50. Salmond on Jurisprudence14 refers to a terse exposition in B
Grill v. General Iron Screw Colliery Co.: (1866) L.R. 1 C.P., that
negligence is “the absence of such care as it was the duty of the
defendant to use”; and further explains the subtle distinction of
inadvertent and advertent negligence in the following: -
“It is to be observed, in the second place, that carelessness C
or negligence does not necessarily consists in thoughtfulness or
inadvertence. This is doubtless the commonest form of it, but it is
not the only form. If I do harm, not because I intended it, but
because I was thoughtless and did not advert to the dangerous
nature of my act, or foolishly believed that there was no danger, I D
am certainly guilty of negligence. But there is another form of
negligence, in which there is no thoughtlessness or inadvertence
whatever. If I drive furiously down a crowded street, I may be
fully conscious of the serious risk to which I expose other persons.
I may not intend to injure any of them, but I knowingly and
intentionally expose them to the danger. Yet if a fatal accident E
happens, I am liable, at the most, not for wilful, but for negligent
homicide. When I consciously expose another to the risk of
wrongful harm, but without any wish to harm him, and harm actually
ensues, it is inflicted not wilfully, since it was not desired, nor
inadvertently, since it was foreseen as possible or even probable, F
but nevertheless negligently (c).
Negligence then is failure to use sufficient care, and this
failure may result from a variety of factors…..”
51. Without multiplying the case law on the topic, sufficient it
would be to refer to the connotation of the term “negligence” explained G
succinctly by this Court in the case of State of Maharashtra and Ors.
v. Kanchanmala Vijaysing Shirke and Ors.: (1995) 5 SCC 659 as
follows: -

14
Ibid p. 380 H
948 SUPREME COURT REPORTS [2022] 3 S.C.R.

A “9.…‘Negligence’ is the omission to do something which a
reasonable man is expected to do or a prudent man is expected to
do...”
52. Therefore, it could be reasonably summarised for the present
purpose that failure to exercise that care which a reasonably prudent
B person would usually exercise under similar circumstances would amount
to negligence; it is not necessary that negligence would always be
advertent one where the wrongdoer is aware of unreasonable risk being
created but it may be inadvertent or passive too, arising for want of
foresight or because of some omission. However, the question as to
whether the liability because of negligence could be fastened on the
C respondent company or not cannot be determined without dealing with
the other aspects related with exceptions and defence to the allegation
of negligence.
Act of God

D 53. In its assertions before the Department as also before the
High Court, the respondent company attempted to rely upon the principles
related with “act of God” and it was sought to be suggested that if the
fire had taken place despite the company having taken all care, it was
nothing but an act of God of which, no human agency had any control.
The High Court has accepted this part of submissions. Though in the
E argument before us, learned counsel for the respondent has not laid
much stress on this theory but looking to the relevant background, it
would be apposite to take note of a few features related with “act of
God” and its connotations on the jurisprudential principles of liability.
54. In P. Ramanatha Aiyar’s Advanced Law Lexicon15, variegated
F connotations of the term “act of God” or Vis major are specified with
reference to the treatise and citations. A few relevant aspects for the
present purpose could be usefully extracted as under: -
“All natural agencies, as opposed to human activities, constitute
acts of God, and not merely those which attain an extraordinary
G degree of violence or are of very unusual occurrence. The
distinction is one of kind and not one of degree. The violence or
rarity of the event is relevant only in considering whether it could
or could not have been prevented by reasonable care : if it could

15
H 5th Edition, p. 83
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 949
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

not, then it is an act of God which will relieve from liability, A
howsoever trivial or common its cause may have been. If this be
correct, then the unpredictable nature of the occurrence will go
only to show that the act of God in question was one which the
defendant was under no duty to foresee or provide against. It is
only in such a case that the act of God will provide a defence.”
B
R.F.V. HEUSTON. Salmond on the Law of Torts 330 (17th ed.
1977).
“A natural act such as a storm, floods or an earthquake which
cannot be foreseen and usually absolves a person from liability if
damage occurs as a result.
C
Any event so out of the ordinary that it could not have been
prevented by any amount of human care and forethought, e.g.
lightning, freak tidal waves or floods etc., which relieves a
contractor, such as a freight carrier, of any liability for losses
suffered as a result of it.”
D
“…..The expression ‘act of God’ signifies the operation of natural
force free from human intervention, such as lightning. It may be
thought to include such unexpected occurrences of nature as
severe gale, snowstorms, hurricanes, cyclones and tidal-bures and
the like. But every unexpected wind and storm does not operate
as an excuse from liability, if there is a reasonable possibility of E
anticipating their happening. An act of God provides no excuse,
unless it is so unexpected that no reasonable human foresight
could be presumed to anticipate the occurrence, having regard to
the conditions of time and place known to be prevailing at…..”
54.1 The case of Mahadeva Shetty (supra) related to the loss F
suffered by the claimant due to the injuries sustained in a vehicular
accident that rendered him paraplegic. The bus in which he was a
passenger plunged into a pit after rolling down from a great height. The
stand of the appellant Corporation in opposition to his claim petition was
that the accident was not due to rash and negligent driving but was an G
act of God. In that context, this Court explained the essential features
concerning an act of God in contradistinction to an act or omission of
human beings in the following words: -
“9. The expression “act of God” signifies the operation of natural
forces free from human intervention, such as lightening, storm
H
950 SUPREME COURT REPORTS [2022] 3 S.C.R.

A etc. It may include such unexpected occurrences of nature as
severe gale, snowstorms, hurricanes, cyclones, tidal waves and
the like. But every unexpected wind and storm does not operate
as an excuse from liability, if there is a reasonable possibility of
anticipating their happening. An act of God provides no excuse
unless it is so unexpected that no reasonable human foresight
B
could be presumed to anticipate the occurrence, having regard to
the conditions of time and place known to be prevailing. For
instance, where by experience of a number of years, preventive
action can be taken, Lord Westbury defined the act of God
(damnum fatale in Scotch Laws) as an occurrence which no
C human foresight can provide against and of which human prudence
is not bound to recognize the possibility. This appears to be the
nearest approach to the true meaning of act of God. Lord
Blancaburgh spoke of it as “an irresistible and unsearchable
providence nullifying our human effort”.
D 54.2. In the case of Vohra Sadikbhai Rajabhai (supra), the water
released from a dam constructed by the respondents flooded the land of
the appellants and destroyed the plantation therein. As per the respondents,
the water had to be released from the dam as it reached alarming level
because of heavy rains and non-release would have breached the dam;
and that the action was taken in public interest and it was occasioned
E
because of the rains, which was an act of God. The appellants, on the
other hand, contended that it was sheer negligence on the part of the
respondents in not maintaining low level of the water keeping in mind
the ensuing monsoon season and, therefore, the damage which the
appellants suffered had direct nexus or causal connection with the
F aforesaid act of negligence and it could not be attributed to the rains;
and hence, the respondents could not term it as an act of God and excuse
themselves from tortious liability. The Trial Court and the High Court
accepted the case of respondents that they were forced to release the
water due to the heavy rains; and that the land of the appellants was
G situated adjacent to the river bank and, therefore, due to heavy rain, the
river could have overflown resulting in entering of the water into the
fields of the appellants in any case.
54.2.1. In appeal, this Court, while examining the question as to
whether it were a case of gross negligence, observed that the respondents
did not properly controvert the allegations of the appellants that water
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 951
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

was not maintained at an appropriate level to take care of ensuing A
monsoons. They had also not supported their plea to the effect that had
the water been not released, it would have breached the dam and that
act would have caused more public harm. This Court held that since the
dam was constructed and maintained by the respondents and the
appellants suffered losses as a result of release of water from the said
B
dam, onus was on the respondents to prove that they had taken proper
care in maintaining appropriate level of water in the dam. This Court
further held that the respondents were the owners of the dam in question;
and they were expected to keep the dam in such a condition which
avoided any loss or damage of any nature to the neighbours or passersby.
This Court observed that merely by saying that the level of water in the C
dam increased because of monsoon rains and that the water was released
in public interest could not be treated as discharging the burden on the
part of the respondents in warding off the allegation of negligence. While
rejecting the defence of an “act of God”, this Court explained thus: -
“22. …. An act of God is that which is a direct, violent, sudden D
and irresistible act of nature as could not, by any amount of ability,
have been foreseen, or if foreseen, could not by any amount of
human care and skill have been resisted. Generally, those acts
which are occasioned by the elementary forces of nature,
unconnected with the agency of man or other cause will come
under the category of acts of God. Examples are: storm, tempest, E
lightning, extraordinary fall of rain, extraordinary high tide,
extraordinary severe frost, or a tidal bore which sweeps a ship in
mid-water. What is important here is that it is not necessary that
it should be unique or that it should happen for the first time. It is
enough that it is extraordinary and such as could not reasonably F
be anticipated……”
54.3. The case of Patel Roadways (supra) essentially related to
a common carrier’s liability when goods entrusted to it were destroyed
in a fire that took place in the godown of the appellant. As regards the
question of negligence vis-a-vis a common carrier’s liability, this Court
G
referred to a passage from Sarkar on Evidence (15th Edn., 1999) at p.
1724 and observed that as a rule, negligence is not to be presumed; it is
rather to be presumed that ordinary care has been used but that this rule
does not apply in the case of common carriers, who, on grounds of
public policy, are presumed to have been negligent if goods entrusted to
their care have been lost or damaged or delayed in delivery. H
952 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 55. The present one had not been a case where anything related
with the forces of nature like storm, floods, lightning or earthquake had
been in operation or caused the fire. When nothing of any external natural
force had been in operation in violent or sudden manner, the event of the
fire in question could be referable to anything but to an act of God in
legal parlance. The observations of High Court in this regard do not
B
appear sound and are required to be disapproved.
Inevitable accident
56. The submissions before this Court on behalf of the respondent
company had been that the company had taken all precautions which
C was expected of it and yet if the fire incident took place, it was something
beyond human control for which respondent company cannot be held
liable. This line of submission, at best, could be taken into another
exception to the rules governing liability, where inevitable accident is
generally recognised as a ground of exception. Again, we may refer to
the principles stated by Salmond16 thus: -
D
“Accident, like mistake, is either culpable or inevitable. It is culpable
when due to negligence, but inevitable when the avoidance of it
would have required a degree of care exceeding the standard
demanded by the law. Culpable accident is no defence, save in
those exceptional cases in which wrongful intent is the exclusive
E and necessary ground of liability. Inevitable accident is commonly
a good defence, both in the civil and in the criminal law.
To this rule, however, there are, at least, in the civil law, important
exceptions. These are cases in which the law insists that a man
shall act at his peril, and shall take his chance of accidents
F happening. If he desires to keep wild beasts (f), or to construct a
reservoir of water (g), or to accumulate upon his land any
substance which will do damage to his neighbours if it escapes
(h), he will do all these things suo periculo (though none of them
are per se wrongful), and will answer for all ensuing damage,
G notwithstanding consummate care…..”
57. To accept the case of respondent company about it being an
“inevitable accident”, it is to be seen if preventing of the fire in question
would have required a degree of care from the respondent company

16
H Ibid p. 399
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 953
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

beyond or exceeding the standard demanded by law. The question would A
thus be as to what had been the normal and reasonable requirement for
safe custody of the liquor in question and if the respondent company,
despite having attended on all such normal and reasonable requirements,
could not have prevented the fire in question. While looking for an
appropriate answer to this question, we shall have to take an overall
B
view of the material available on record as also all the surrounding factors
and circumstances. In this regard, before proceeding further, we could
profitably refer to a significant guiding principle embodied in the maxim
res ipsa loquitur whereby negligence may be presumed from the mere
fact of accident; of course, the presumption depends upon the nature of
the accident and the surrounding factors. C
Res ipsa loquitur
58. In order to understand the operation of the maxim res ipsa
loquitur, we may usefully refer to a couple of the decisions of this Court.
Of course, these decisions related with vehicular accidents but the
principles therein remain fundamental in operation of res ipsa loquitur. D

58.1. Shyam Sunder and Ors. v. The State of Rajasthan:
(1974) 1 SCC 690 had been a case where the victim was travelling in
a truck whose engine got fire and while jumping from the vehicle, he
struck against a stone on the side of the road and died on the spot. The
High Court in that case held that merely for the truck catching the fire E
would not be evidence of negligence on part of the driver; and that res
ipsa loquitur had no application. However, this Court, inter alia, pointed
out and held as under:-
“9.… The maxim res ipsa loquitur is resorted to when an
accident is shown to have occurred and the cause of the accident F
is primarily within the knowledge of the defendant. The mere fact
that the cause of the accident is unknown does not prevent the
plaintiff from recov- ering the damages, if the proper inference to
be drawn from the cir- cumstances which are known is that it
was caused by the negli- gence of the defendant. The fact of the G
accident may, sometimes, constitute evidence of negligence and
then the maxim res ipsa loquitur applies.”
58.1.1. This Court then quoted the following passage from the
case of Scott v. London & St. Katherine Docks: (1865) 3 H&C 596,
601: -
H
954 SUPREME COURT REPORTS [2022] 3 S.C.R.

A “... where the thing is shown to be under the management of the
defendant or his servants, and the accident is such as in the ordi-
nary course of things does not happen if those who have the man-
agement use proper care, it affords reasonable evidence, in the
ab- sence of explanation by the defendants, that the accident arose
from want of care.”
B
58.1.2. This Court further explained the operation of this maxim
for importing strict liability into negligence cases and observed: -
“The mere happening of the accident may be more consistent
with the negligence on the part of the defendant than with other
C causes. The maxim is based on commonsense and its purpose is
to do justice when the facts bearing on causation and on the care
exercised by defendant are at the outset unknown to the plaintiff
and are or ought to be within the knowledge of the defendant (see
Barkway v. S. Wales Transo [(1950) 1 All ER 392, 399]).”
D 58.2. In Pushpabai Purshottam Udeshi and Ors. v. M/s. Ranjit
Ginning & Pressing Co. (P) Ltd. and Anr. (1977) 2 SCC 745, this
Court again explained the application of the principle of res ipsa loquitur
and explained various features thereof in the following words: -
“6. The normal rule is that it is for the plaintiff to prove negligence
E but as in some cases considerable hardship is caused to the plaintiff
as the true cause of the accident is not known to him but is solely
within the knowledge of the defendant who caused it, the plaintiff
can prove the accident but cannot prove how it happened to
establish negligence on the part of the defendant. This hardship is
sought to be avoided by applying the principle of res ipsa loquitur.
F
The general purport of the words res ipsa loquitur is that the
accident “speaks for itself” or tells its own story. There are cases
in which the accident speaks for itself so that it is sufficient for
the plaintiff to prove the accident and nothing more. It will then be
for the defendant to establish that the accident happened due to
G some other cause than his own negligence. Salmond on the Law
of Torts (15th Ed.) at p. 306 states: “The maxim res ipsa loquitur
applies whenever it is so improbable that such an accident would
have happened without the negligence of the defendant that a
reasonable jury could find without further evidence that it was so
caused”. In Halsbury’s Laws of England, 3rd Ed., Vol. 28, at p.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 955
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

77, the position is stated thus: “An exception to the general rule A
that the burden of proof of the alleged negligence is in the first
instance on the plaintiff occurs wherever the facts already
established are such that the proper and natural inference arising
from them is that the injury complained of was caused by the
defendant’s negligence, or where the event charged as negligence
B
‘tells it own story’ of negligence on the part of the defendant, the
story so told being clear and unambiguous”. Where the maxim is
applied the burden is on the defendant to show either that in fact
he was not negligent or that the accident might more probably
have happened in a manner which did not connote negligence on
his part…..” C
The respondent company remains liable
59. For what has been discussed hereinabove, this much is
apparent that in this case, the warehouse in question indeed got engulfed
in fire and that led to destruction of the liquor stored therein. Here, the
respondent company could be held liable to pay the excise duty on the D
liquor destroyed in fire only if it could be held negligent in not ensuring
safe custody of the stored liquor. As regards this aspect, the fact that
Department had control and supervision over the distillery and godown
would not absolve the respondent of its liability. Further, the fire incident
in question cannot be termed as an “act of God”. E
60. The matter then boils down to the question if the fire incident
could be said to be an inevitable accident. For that matter, we need to
examine as what had been the normal and reasonable requirement for
safe custody of the liquor in question and as to what could be deduced
from the surrounding factors. F
60.1. One of the basic factors to be noticed is that the goods in
question were not ordinary goods but had been containing alcohol which,
by its very nature, is highly inflammable. Therefore, a particular nature
of care which might be sufficient as regards ordinary goods may not be
adequate or sufficient for the goods in question. G
60.2. On 19.09.2002, the Assistant Electricity Inspector who
conducted periodical inspection of the premises in question made two
observations. One of them was a minor aspect that ‘Caution’ plate was
not placed at certain prominent place but the other observation was a
significant one that at one point of distribution panel, earth wiring was
H
956 SUPREME COURT REPORTS [2022] 3 S.C.R.

A found with thin wire; and it was suggested that same should be removed
and strip earthing should be done.17 On 01.03.2003, while issuing No
Objection Certificate, the Fire Brigade Officer, inter alia, observed that
firefighting equipments were at right place and were in working condition
but in future, they should be tested in fire station Shahjahanpur before
refilling; and it was also suggested that Foam Installation should be
B
provided for better management of firefighting arrangements.18
60.2.1. From the material placed on record, it is not forthcoming if
strip earthing had indeed been carried out, though the respondent company
generally stated in its letter dated 23.09.2002 that what was pointed out
by the Assistant Electricity Inspector had been carried out. As to when
C strip earthing was done and in what manner is not forthcoming. Further,
it is also not forthcoming if Foam Installations were provided, as suggested
by the Fire Brigade Officer. In view of extra care required of the highly
inflammable material, significance of none of these aspects could be
gainsaid.
D 60.3. Though it is true that as per the suggestions made in the
reports relating to the fire incident in question, exact cause of fire could
not be ascertained but there had been indications that the officers, including
the Excise Officer and Station House Officer had seen burnt wires; and
it was reported that the fire ‘possibly’ took place because of short circuit.
E Taking note of these facts as also the other facts that godown was an
old one and the roof of the godown was made of asbestos sheets, the
Excise Commissioner, in his order dated 11.07.2006, inferred that short
circuit could have taken place in old electric wiring in the godown and in
that context, observed that the licencee had not arranged the fire proof
electric equipments of good quality, which led to the incident in question.
F
61. A few words as regards ‘short circuit’ would also be apposite
at this juncture.
61.1. Short circuit is explained in the Dictionary of Technical
Terms19 by F.S. Crispin as follows :-
G “Short circuit (elec.): A path of low resistance placed across an
electrical circuit causing an abnormal flow of current.”

17
vide paragraph 7.1 supra
18
vide paragraph 7.3 supra.
19
H 11th Edition, p. 369.
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 957
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

61.2. In McGrow-Hill Encyclopedia of Science and Technology20, A
the relevant features of short circuit are stated as under: -
“An abnormal condition (including an arc) of relatively low
impedance, whether made accidentally or intentionally, between
two points of different potential in an electric network or system.
SEE CIRCUIT (ELECTRICITY); ELECTRICAL IMPEDANCE. B
Common usage of the term implies an undesirable condition arising
from failure of electrical insulation, from natural causes (lightning,
wind, and so forth), or from human causes (accidents, intrusion,
and so forth). From an analytical viewpoint, however, short circuit
represent a severe condition that the circuit designer must consider C
in designing an electric system that must withstand all possible
operating conditions. The short circuit thus is important in dictating
circuit design parameters (wire size and so on) as well as protective
systems that are intended to isolate the shorted element. SEE
ELECTRIC PROTECTIVE DEVICES; ELECTRICAL
INSULATION; LIGHTNING AND SURGE PROTECTION.” D

61.3. In the present case, even when the exact cause of fire could
not be ascertained, the indications in the reports like that of Assistant
Excise Commissioner dated 02.08.200321 that burnt cables were seen in
the debris and possibility had been of short circuit, the only inference
could be about some fault or shortcoming in electric installations E
(equipments and/or wiring) which led to the abnormal flow of current
and thereby, to the fire incident in question.
62. As noticed, the fire incident in question had not taken place
due to operation of any forces of nature. It has also not been the case
that the fire was a result of any mischief by any person. Noticeably, the F
fire that started around 12:55 p.m. on 10.04.2003 could be brought under
control by the firefighters only by 5:00 a.m. on 11.04.2003. When all the
relevant factors are cumulatively taken into account, we find it difficult
to accept that the fire and the resultant loss had been beyond the control
of human agency so as to be termed as inevitable accident. Obviously, G
the fire had not generated on its own and, with appropriately laid fire
proof electrical installations as also firefighting measures, the incident
was an avoidable one or at least the loss could have been minimised.
20
6th Edition, volume 16, p 387.
21
vide paragraph 11 supra. H
958 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 63. As noticed, the fault of “negligence” need not always be of
active negligence or of gross negligence, but it may also be of an
inadvertent negligence or of a passive negligence. It does not require
much of discussion to say that the goods in question, being highly
inflammable, required extra and excessive care for their safe custody;
and any laxity or slackness in that regard was impermissible. To put it
B
differently, what was required for ensuring safe custody of the goods in
question was that of heightened safeguard measures with foresight. When
the respondent had not been able to protect the goods in question from
fire within the warehouse and when all other factors, as noticed above,
are taken into account, the negligence as contemplated in Rule 709 of
C the Excise Manual is directly attributable to the respondent company. In
other words, even if the present case is taken to be that of inadvertence
or of unintentional omission on the part of the respondent company, it
would fall within the definition of “negligence” for the purpose of Rule
709 of the Excise Manual.
D 63.1. In the given set of facts and circumstances, we are unable
to endorse the approach and views of the High Court, where it had
basically proceeded on the premise as if the incident in question was
referable to an ‘act of God’. As noticed, the incident in question had not
been because of any forces of nature and cannot be said to be an ‘act of
E God’. The criticism of Excise Commissioner’s order dated 11.07.2006
by the High Court, while taking the observations and findings therein
being of surmises and conjectures, is also required to be disapproved.
What the Excise Commissioner had observed in the order dated
11.07.2006 had been of his inferences, which were deduced out of the
facts and circumstances of the case and in true application of the
F principles of res ipsa loquitur.
64. Hence, we have no hesitation in disapproving the order of the
High Court and in endorsing the views of the Excise Commissioner in
the order dated 11.07.2006.

G Insurance coverage only of the value of liquor: effect of
65. Before concluding on the matter, it would also be appropriate
to deal with yet another feature of this case relating to the insurance
coverage taken by the respondent company only of value of liquor and
not that of excise duty payable thereupon.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 959
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

66. Admittedly, the respondent company had taken insurance A
coverage of the value of liquor and indeed received such value of liquor
from the insurer. However, respondent company did not take insurance
coverage of the excise duty payable over such value of liquor. The
appellants contend that when the distiller has received value of liquor, on
the principles of equity and fair play, the corresponding excise duty ought
B
to be made available to them. It has also been contended that omission
on the part of the respondent company to take insurance coverage of
value of excise duty, while taking coverage of the value of liquor, itself
amounts to negligence. On the other hand, the respondent would submit
that the claim received from the insurer cannot be termed as consideration
because there was no transfer of property in goods and there was no C
sale. It has also been submitted that there was no such requirement in
law that the respondent company was to take insurance coverage of the
excise duty too. Yet further, it has also been submitted that clearance of
insurance claim by the insurer itself shows that there was no negligence
on the part of the respondent. The Excise Commissioner in its order
D
dated 11.07.2006 has observed that the distiller had taken insurance of
the value of goods and for this reason too, it remained rather lax in
taking all care against fire.
67. Having examined the matter in its totality, we are clearly of
the view that the liability of the respondent company in this matter is
rather fortified from the facts that it had taken insurance coverage of E
the value of liquor and indeed received such claim from the insurer.
Further, failure to insure the risk of excise duty liability cannot extricate
the respondent from that liability.
68. As noticed, in the scheme of law applicable, when duty of
excise is upon the goods and the taxable event is the production or F
manufacture of the liquor, the liability to pay excise duty had arisen as
soon as the liquor was manufactured. Thereafter, when the liquor got
destroyed in fire but its value was recovered from the insurer, in our
view, these events shall answer to the broad expression “issue of an
excisable article for sale from a warehouse” for the purpose of proviso G
to Section 29(e) of the Act of 1910. Putting it differently, receiving of
insurance claim over the value of goods by the respondent related back
to the date of fire and the respondent became liable to pay excise duty at
the rate which was in force on the date of fire, which would be deemed
to be the date of “issue” from the warehouse.
H
960 SUPREME COURT REPORTS [2022] 3 S.C.R.

A 68.1 In the given set of facts and circumstances, we are not dilating
on the decision of CESTAT in the case of Dharampal Satyapal (supra)
wherein remission of duty on account of damage of pan masala in rain
water was disallowed, when it was found that the assessee had been
compensated by the insurance company with an amount which was
much more than the duty involved but, the submissions in the present
B
case that the goods had not been sold and duty has not been recovered
from consumers, do not take the case of respondent company any further.
It was for the respondent company to take necessary measures and
care to ensure that payable excise duty would reach the appellants once
the goods had been manufactured.
C
69. Another facet of this part of matter remains, and we agree
with the appellants, that not taking of insurance coverage of the excise
duty while taking such coverage on the value of liquor itself amounts to
negligence on the part of the respondent company. As noticed,
“negligence” has different connotations and any particular act or omission,
D which may not be negligence in a particular set of facts may still amount
to negligence in another set of facts. In the facts of the present case,
where excise duty became payable on manufacture of liquor, it was
obviously expected of the respondent company, as a reasonable and
prudent distiller, to take all necessary steps to safeguard not only the
E liquor and value thereof but also the corresponding interest of the
Government, i.e., the excise revenue. The Excise Commissioner had
been rather justified in drawing inference that the respondent company,
after having secured the value of goods for its purpose, might not have
been conscious and alert in taking all the necessary care to guard against
any loss to the Government due to any mishap like fire.
F
70. The submission, that insurer would not have made payment of
insurance claim if there was any negligence on the part of the respondent
company, has its own shortcomings. The terms of fire insurance policy
have not been placed on record and it cannot be deduced as to what
were the terms and conditions of that policy under which insurer had
G acted in accepting the claim of the respondent company. Secondly, what
was not treated as negligence by the insurer for the purpose of insurance
claim would not ipso facto become a proposition binding on the appellants
as regards loss of revenue because of loss of liquor in fire. Such a
contention of the respondent could only be rejected.
H
STATE OF UP THROUGH SECRETARY (EXCISE) & ORS. v. M/S 961
MCDOWELL AND COMPANY LTD. [DINESH MAHESHWARI, J.]

Summation A
71. In summation of what has been discussed hereinabove, we
hold, -
(i). The demand raised by the appellants against the respondent
company, of excise duty on the liquor lost in fire, is authorised by law
and has rightly been raised as per the applicable provisions of the Act of B
1910, the Excise Manual and the Rules of 1969.
(ii). The fire incident in question cannot be said to be that of an
event beyond human control and the High Court has been in error in
holding that no negligence could be imputed on the respondent company.
C
(iii). The fact that the respondent company had taken insurance
coverage only of the value of liquor (and not that of excise duty thereupon)
and then, had received the insurance claim towards the value of liquor
also operates against the respondent company and fortifies the conclusion
about negligence of the respondent company.
D
71.1. Upshot of the discussion foregoing is that this appeal deserves
to succeed and the writ petition filed by the respondent company deserves
to be dismissed. As a necessary corollary, the miscellaneous application
filed by the respondent company, for consideration of its refund
application, is rendered redundant and deserves to be dismissed as such.
E
Conclusion
72. Accordingly, and in view of the above, this appeal is allowed;
the impugned orders dated 10.04.2017 in Misc. Bench No. 4493 of 2006
and dated 06.11.2019 in C.M. Application No. 90936 of 2019 are set
aside; and the writ petition as also the miscellaneous application filed by
F
the respondent company are dismissed but with no order as to costs.

Devika Gujral Appeal allowed.
(Assisted by : Shevali Monga, LCRA)

G

H