Holding

The payments are not penalties or excise duties but additional levies under the licence, so Section 43B does not apply and the amounts are allowable as deductions.

Summary

The respondent, Mis Distillers Co. Ltd., a licensed arrack bottler under the Karnataka Excise Act, paid additional amounts to the Excise Department for bottling unmatured arrack and for non‑affixation of labels after failing to comply with a circular prescribing a 15‑day maturation period. It claimed these payments as deductions in its income‑tax return. The Assessing Authority disallowed the deduction, treating the payments as penalties and invoking Section 43B of the Income Tax Act, 1961. The Appellate Authority, Tribunal and Karnataka High Court held that the payments were neither penalties nor excise duties and that Section 43B was inapplicable. On appeal, the Supreme Court affirmed that the levies were additional charges under the licence, not taxes on manufacture, and therefore deductible; consequently, the appeal by the Commissioner of Income Tax was dismissed.

Issues considered

Whether the amount paid for non‑compliance with the excise circular (penalty for unmatured arrack and for non‑affixing labels) constitutes a penalty, excise duty, fee or merely an additional levy under the licence.
Whether Section 43B of the Income Tax Act, 1961 applies to disallow such amount when claimed as a deduction.

Legislation cited

Constitution of Indias. Article 265, s. Seventh Schedule List II Entry 51, s. Seventh Schedule List II Entry 8
Income Tax Act, 1961s. 260A, s. 43B
Karnataka Excise Act, 1965

Subjects

Income TaxSection 43BPenaltyExcise DutyArrackKarnataka Excise ActDeductionLevyLicenceConstitutional LawArticle 265

Judgment

-'.. '
A COMMISSIONER OF INCOME TAX AND ANR.
v.
. MIS DISTILLERS CO.LTD.

APRIL 5, 2007

B [S.B. SINHA AND MARKANDEY KA TJU, JJ.]
-r

c
Income Tax Act, I96I-s.43-B-Tax deduction-On the amount paid
for non-compliance of a Circular specifying process of bottling of arrack-
Assessing Authority denying the deduction holding that the amount was a
penalty and the same was not permissible in terms of s.43-B-Appellate
-
Authority, Tribunal and High Court held that the amount was neither a
penalty, nor a fee nor excise duty (tax) and s.43-B was not applicable in this
case-On appeal, held: The amount was not an excise duty as the same was
not for manufacturing of arrack-Tax could not have been levied in terms of
D executive circular-It was neither a penalty as the non-compliance was not
of a statutory provisiim-s.43-B is not applicable in this case-Assessee .....
entitled to tax deduction on the amount-Karnataka Excise Act, 1965-
Karnataka Excise (Manufacturing and Bottling of Arrack) Rules, I987-

E
Rule 14(3)-Constitution of India, I950-Article 265, Seventh Schedule List
II Entry 8 and 5I. ..
Respondent-assessee was in the business of arrack bottling,
manufacture of industrial alcohol and their marketing, under a licence in
terms ofKarnataka Excise Act, 1965. Karnataka Excise (Manufacturing and
Bottling of Arrack) Rules, 1987 stated that Arrack after blending would be
matured in the manner and for the period as would be specified by the
F Commissioner of Excise. The Commissioner, by a circular, specified a period "(
of 15 days for the arrack to be matured. If the directives of the circular could
not be carried out, due to circumstances beyond one's control, the unmatured
arrack could be bottled with the prior permission of the Officer-in-charge of
the bottling unit of paying cert:iin additional amount therefor.
G
When the respondent was not able to comply with the directives of the
circular, it obtained permission of the appropriate authority for the said
purpose on payment of certain additional amount. He also paid some amount ......
v
for non-fixation of labels on the bottles. Respondent in his income tax return·
claimed deduction for the said amount from his gross income. Assessing
H 960
COMMNR. OF INCOME TAX v. DISTILLERS CO. LTD. 961

Authority denied the deduction on the grounds that the amount was in the A
nature of penalty; and that since the same had not been paid during the period
relevant to the assessment year, it had to be disallowed in terms of Section
. 43-B oflncome Tax Act, 1961. Appellate Authority allowed the claim of the
assessee holding that the amount was neither excise duty nor a penalty and
therefore Section 43-B would not be attracted. Tribunal held that the amount
was in the nature of additional levy; and that section 43-B was not applicable. B
High Court held that the amount was not a penalty, neither a fee nor excise
duty; payment made fqr non-fixation of labels was also not a penalty. Hence,
the present appeal by Revenue.

Dismissing the appeal, the Court
c
HELD: 1. Penalty and Excise Duty vis-a-vis levies which are made on
manufacture of an excisable article stand on different footings. Ordinarily,
Excise Duty is a tax on manufacture. The same is in the Union List. An
exception, however, is made only in respect of the potable alcohol by reason of
Entry 51, List II of the Seventh Schedule of the Constitution of India. Thus, D
levy of excise duty on alcohol must have a source in a statute legislated in
terms of Entry 51, List II of the Seventh Schedule of the Constitution of India.
. It must have a direct relationship with manufacture of Arrack. By reason of
sub-rule (3) of Rule 14 of the Karnataka Excise (Manufacturing and Bottling

- of Arrack) Rules, 1987, no period of time has been specified. It has been so
done under an executive order issued by the Commissioner of Excise. The E
authority did not and in fact could not levy a tax on manufacture in terms of
the said circular or otherwise. As no time limit has been specified by reason
of a statute, the question of imposing any penalty for non-compliance of the
" statutory provisions does not arise. It contemplates an additional levy. Source
for such additional levy having regard to the nature of the circular must be p
found in the terms and conditions of the licence. Such terms and conditions
of licence are fixed by the State by reason of the provisions of the Karnataka
Excise Act, 1965 made in terms of Entry 8 of List II of the Seventh Schedule
of the Constitution of India. Such payments are, therefore, made in pursuance
of or in furthermore of the terms of the licence which is referable to Entry 8
and not as a tax on manufacture. A levy is imposed by the State in exercise of G
its monopoly power. Even such monopoly power of the State is restricted. An
excise duty which is in the nature of tax can be imposed only by a statute
which answers the description of Article 265 of the Constitution of India.
[Paras 14, 15, 16 and 19) [965-E-H; 966-A-C; 967-C-G]

State ofKera/a and Ors. v. Maharashtra Distilleries Ltd. and Ors., [2005] H
962 SUPREME COURT REPORTS (2007] 4 S.C.R.

A 11 sec 1, relied on.

Kera/a Samsthana Chethu Thozhi/a/i Union v. State ofKera/a and Ors.,
[2006) 4 sec 327, referred to.
~

2. The time period fixed for blending is not under a statute. 15 days'
B time is not Qecessary for the purpose of manufacture of excisable articles. It
is a time fixed by the Commissioner. Furthermore, levy is not on manufacture.
Blending even otherwise is not prohibited. Public health was not the subject ...,
matter of the said circular. It laid down only a process of bottling. It was, thus,
issued with a view to regulate the trade. It would, however, not be an additional •
duty and, therefore, not a tax on manufacture. [Para 17) [967-D-E]
c
Commissioner of Central Excise v. Mis. Indian Aluminium Co. Ltd,
(2006) 10 SCALE 34, referred to. '!i-

J. Tribunal and the High Court were correct in their views that section
43-B of the Act was no attracted in the case. [Para 18) [967-F]
D
CIVIL APPELLATE JURISDICTION : Civil Appeal No. l 813 of2007.

From the Final Judgment and Order dated 04.12.2003 of the High Court
ofKamataka at Bangalore in LT.A. No. 313 of2002.

E Mohan Parasaran, ASG., Chidananda D.L. and B.V. Balaram Das for the
Appellants.

Dhruv Mehta, Harsh Vardhan Jha and Yashraj Singh Deora (for K.L.
Mehta & Co.) for the Respondent.

F The Judgment of the Court was delivered by

S.B. SINHA, J. I. Leave granted.

2. Respondent carries on business of arrack bottling, manufacture of
industrial alcohol and their marketing. He obtained a licence from the State
G of Kamataka for the aforementioned purposes in terms of the provisions of
Kamataka Excise Act, 1965. Indisputably, the matter relating to manufacture
and bottling of arrack is governed by the said Act and the rules framed
thereunder by the State of Karnataka known as Karnataka Excise v
~

(Manufacturing & Bottling of Arrack) Rules, 1987 (for short "the Rules"). Rule
with which we are concerned herein is sub-Rule (3) of Rule 14 which reads
H
COMMNR. OF INCOME TAX v. DISTILLERS CO. LTD. [S.B. SINHA, J.] 963

as under:- A
"(3) Arrack after blending shall be matured in such manner and for
such period as may be specified by the Commissioner from time to
time."

3. The Commissioner of Excise, however, issued a circular stating: B
"It is hereby specified that the arrack shall be matured in wooden vats
for a minimum period of 15 days before bottling the same."

4. A period of 15 days, thus, had been prescribed for the aforementioned
purpose. A question, however, arose as to what would happen to the excise C
article, if for circumstances beyond one's control, said directives cannot be
carried. With a view to meet that contingency, it was stated:

"In case the bottling unit for any reason beyond his control is not
able to mature the arrack in the manner and to the extent specified
above, the unmatured arrack may be bottled with the prior permission D
of the officer in-charge of the bottling unit. The penalty for supplying
unmatured arrack as specified above would be 29 paise per bulk litre."

5. Indisputably, Respondent obtained permission of the appropriate
authority in terms thereof as he was not in a position to comply with the first
part of the said circular on paying certain additional amount therefor. He, in E
his income tax return, claimed deduction for the said amount from his gross
income.

6. The Assessing Authority was of the opinion that as the amount
payable by the assessee was in the nature of penalty, he was not entitled to
any deduction. It was further opined that even ifthe expenditure is deductible, F
in view of the fact that the amount in question had not been paid dw-ing the
period relevant to the assessment year, the same had to be disallowed in terms
of Section 43B of the Income Tax Act, 196 l (for short "the Act").

7. The Assessee paid certain amounts for not affixation of labels on the
bottles. He preferred an appeal against the order of assessment and the G
Appellate Authority, being the Commissioner of Income Tax (Appeals), allowed
the same opining that the amount claimed is neither in the nature of 'excise
v duty' nor a penalty.

8. In regard to the applicability of Section 43B of the Act, it was held H
964 SUPREME COURT REPORTS [2007] 4 S.C.R.

A that as the amount, in question, is neither penalty nor excise duty, Section
43B of the Act would not be attracted.

9. Appellant preferred an appeal thereagainst before the Income Tax
Appellate Tribunal. The Appellate Tribunal opined that the payments made
by the respondent were in the nature of an additional levy. In regard to the
B applicability of Section 43B of the Act, the Tribunal held it in the negative.

10. An appeal thereagainst preferred by the Revenue under Section
260A of the Act, has been dismissed by the High Court by reason of the
impugned judgment. Before the High Court, the following purported questions
of law were framed:
c
"(i) Whether the Appellate Tribunal were correct in holding that the
amount of Rs. 13,25,572/- levied by the Deputy Commissioner of
Excise (Breweries & Distilleries), Bangalore, for failing to affix adhesive
labels on arrack bottles and failing to mature the arrack for the
prescribed period as per Kamataka Excise (Manufacturing & Bottling
D
of Arrack) Rules, 1997 was an allowable deduction despite the penalty
levied having arisen due to infraction of law?

(ii) Whether the penalty of Rs. 13,25,572 levied by the Deputy
Commissioner of Excise (Breweries & Distilleries), Bangalore and not
E paid by the assessee during the assessment year could be disallowed
u/s 43 of the Act?"

11. Relying upon a decision of the said Court in Ugar Sugar Works Ltd
v. State of Karnataka, passed in Writ Petition No. 5008 of 1991 disposed of
on 5th September, 1991, the High Court held:
F (i) The amount in question was not a penalty;
(ii) It was also not to be treated either as a fee or excise duty.
(ili) The payment made for non-affixation of labels also is not a
penalty; stating:
G "10. Therefore, in the absence of labels not being available, if the
assessee was made liable to pay the amount to the Department towards
the cost of the la~els for getting the bottled arrack released, it is not
possible to take the view that such payment was made by way of fees v
as contended by Sri Seshachala. The language employed in the Rule
H makes it explicit that the amount required to be paid to get the bottled
COMMNR. OF INCOME TAX v. DISTILLERS CO. LTD. [S.B. SINHA, J.] 965
,.>
arrack released for sale without labels is by way of cost of labels to A
the Government. When the language in the Rule in explicit terms
provide that the amount required to be paid towards the cost of labels
and the Rule also impose an obligation on the licensee to get the
labels affixed at his cost in the presence of the Warehouse Officer, it
will not be correct to consider that the amount paid is not as a cost
towards the value of labels, but as a fee. Therefore, the third submission B
of Sri M.V. Seshachala is also liable to be rejected."

12. Mr. Mohan Parasaran, learned Additional Solicitor General appearing
on behalf of the appellants, submitted that the Tribunal and consequently the
High Court went wrong in passing the impugned Judgment insofar as they
failed to take into consideration that the amount in question having been
c
levied for non-compliance of certain statutory provisions, would amount to
penalty and in any event as Section 43B of the Act postulated that the
payments in respect whereof deduction are claimed must be the amount
actually paid during the assessment year, the impugned orders cannot be
sustained. D
13. Mr. Dhruv Mehta, learned counsel appearing on behalf of the .
respondent, however, supported the judgment.

14. Penalty and Excise Duty vis-a-vis levies which are made on
manufacture of an excisable article stand on different footings. Ordinarily, E
Excise Duty is a tax on manufacture. The same is in the Union List. An
exception, however, is made only in respect of the potable alcohol by reason
of Entry 51, List II of the Seventh Schedule of the Constitution oflndia which
reads as under:-

...,. "51. Duties of excise on the following goods manufactured or produced F
in the State and countervailing duties at the same or lower rates on
similar goods manufactured or produced elsewhere in India:

(a) alcoholic liquors for human consumption;

(b) opium, Indian hemp and other narcotic drugs and narcotics, but G
not including medicinal and toilet preparations containing alcohol or
any substance included in sub-paragraph (b) of this entry."

"" 15. Thus, levy of excise duty on alcohol must have a source in a statute
legislated in terms of Entry 51, List II of the Seventh Schedule of the
Constitution of India. It must have a direct relationship with manufacture of H
966 SUPREME COURT REPORTS (2007] 4 S.C.R.
.....
A Arrack. By reason of Sub-rule (3) of Rule 14 of the Rules, no period of time
has been specified. It has been so done under an executive order issued by
the Commissioner of Excise. The Authority did not and in fact could not levy
a tax on manufacture in tenns of the said circular or otherwise. As no time
limit has been specified by reason of a statute, the question of imposing any
B penalty for non-compliance of the statutory provisions does not arise. It
contemplates an additional levy. Source for such additional levy having
regard to the nature of the circular must be found in tenns and conditions of
the licence. Such tenns and conditions of licence are fixed by the State by
reason of the provisions of the Act made in tenns of Entry 8 of List II of the
Seventh Schedule of the Constitution of India. Such payments are, therefore,
c made in pursuance of or in furtherance ofthe.tenns of the licencel which is
referable to Entry 8 and not as a tax on manufacture. This aspect of the matter
has been considered by a Constitution Bench of this Court in State of Kera/a
and Ors. v. Maharashtra Distilleries Ltd and Ors., [2005] 11 SCC I stating:

"79. In this connection we may usefully refer to the decision of this
D Court in State of Punjab v. Devans Modern Breweries Ltd In that
case the State of Kerala was also a party. The State had imposed tax
on import of potable liquor manufactured in other States. The stand
of the State was that it was within the province of the State to impose
restriction on import of potable liquor by imposing import duty. The
aforesaid duty had not been imposed by the State in exercise of its
E statutory power conferred upon it in tenns of Entry 51 List II of the
Seventh Schedule to the Constitution but regulatory power as
envisaged in Entry 8 thereof. The contention raised on behalf of the
respondents was that the requirements of Articles 30 I and 304 of the
Constitution were to be complied with in view of the fact that the duty
F of import must confonn to the provisions of Entry 51 of List II. The
submission of the respondents was rejected and those advanced on
behalf of the State of Kerala were accepted. This Court observed that
the word fee is not used in the strict sense to attract the doctrine of
quid pro quo. This was the price or consideration which the State
Government had charged for parting with its privilege and granting
G the same to the vendors. Therefore, the amount charged was neither
a fee nor a tax but was in the nature of price of a privilege which the
purchaser had to pay in any trading and business in noxious article/
goods. This Court held that the pennissive privilege to deal in liquor
. .,
is not a right at all. The levy charged for parting with its privilege is
H neither a tax nor a fee. It is simply a levy for the act of granting
COMMNR. OF INCOME TAX v. DISTILLERS CO. LTD. [S.B. SINHA, J.] 967

permission or for the exercise of power to part with that privilege. This A
Court referred to numerous decisions of this Court which have clearly
held that the State has a right to exercise all forms of control in
relation to all aspects regarding potable alcohol and the State
Legislature has exclusive competence to frame laws in that regard. The
State has exclusive right in relation to potable liquor and there was
no fundamental right to do trade or business in intoxicants: The State
B
in its regulatory power has the right to prohibit absolutely every fotm
.,.. or activity in relation to intoxicants its manufacture, storage, export,
import, sale and possession and all these rights are vested in the State
<
~
and indeed without such vesting there can be no effective regulation
of various forms of activities in relation to intoxicants." c
16. A levy is imposed by the State in exercise of its monopoly power.
Even such monopoly power of the State is restricted. [See Kera/a Samsthana
Chethu Thozhilali Union v. State of Kera/a and Ors., [2006] 4, SCC 327]

17. There is another aspect of the matter. The time period fixed for D
blending is not under a statute. 15 days' time is not necessary for the purpose
of manufacture of excisable articles. It is a time fixed by the Commissioner.
Furthermore, levy is not on manufacture. Blending even otherwise is not
prohibited. No time limit was fixed under the statute. Public health was not
the subject matter of the said Circular. It laid down only a process of bottling.
It was, thus, issued with a view to regulate the trade. It would, however, not E
be an additional duty and, therefore, not a tax on manufacture. What would
be a tax on manufacture has recently been considered in Commnr. Of Central
Excise v. Mis. Indian Aluminium Co. Ltd, (2006) 10 SCALE 34.

18. We, therefore, are of the opinion that the Tribunal and the High
Court were correct in their views that Section 43B of the Act was not attracted
F
.., in the case .

----< 19. An excise duty which is in the nature of tax can be imposed only
by a statute which answers the description of Article 265 of the Constitution
of India.
G
20. We, therefore, are of the opinion that the Tribunal and the High
Court have not committed any error in passing the impugned judgment. The
~ appeal is dismissed with costs. Counsel's fee assessed at Rs. 25,000/-.
..,-
KKT. Appeal dismissed.
H