Supreme Court of India
KESAR ENTERPRISES LTD.versusSTATE OF U.P. & ORS.
- Citation
- 2011 INSC 467
- Decided
- 6 July 2011
- Disposal
- Appeal(s) allowed
- Bench
- D K JAIN
Holding
The Court held that the State cannot levy excise duty on rectified spirit and that, before imposing any penalty under Rule 633(7), a show‑cause notice and opportunity of hearing are mandatory; thus the demand for penalty and interest is void.
Summary
Kesar Enterprises Ltd., a handling agent for an export consignment of rectified spirit, was served notice to pay excise duty and interest after one of fifteen tank wagons failed to reach the port. The State argued that penalty could be imposed under Rule 633(7) of the Uttar Pradesh Excise Manual despite the High Court’s finding that the State could not levy excise duty on industrial alcohol under Section 28 of the U.P. Excise Act, 1910. The Supreme Court examined whether the State had jurisdiction to levy duty, and whether the penalty provision required a show‑cause notice and hearing in accordance with natural‑justice principles. It held that the State lacks power to tax rectified spirit and that any penalty under Rule 633(7) must be preceded by a notice and opportunity to be heard; otherwise, the action violates Article 14. Consequently, the demand for penalty and interest was set aside and the appeal allowed, with the matter remitted to the Excise Commissioner for proper adjudication.
Issues considered
- The State's jurisdiction to levy excise duty on high‑strength rectified spirit under Section 28 of the U.P. Excise Act, 1910
- Whether Rule 633(7) of the U.P. Excise Manual authorises imposition of penalty without a prior show‑cause notice and hearing
- Whether a penalty can be levied in lieu of excise duty when the duty itself is beyond the State's competence
- Whether the recovery of penalty and interest without adjudication violates the principles of natural justice and Article 14
Legislation cited
Subjects
Excise dutyIndustrial alcoholU.P. Excise ActRule 633Natural justicePenaltyShow‑cause noticeArticle 14Administrative lawExport bond
Judgment
[2011] 9 S.C.R. 19
' KESAR ENTERPRISES LTD.
v.
STATE OF U.P. & ORS.
A
(Civil Appeal No. 6896 of 2002)
JULY 06, 2011
B
[D.K. JAIN AND H.L. DATIU, JJ.]
U.P. Excise Manual - rule 633 - Imposition of penalty-
Company consigned rake of tank wagons, loaded with
rectified spirit under PD-25 pass for export - However, out of c
15 tank wagons only 14 tank wagons reached the Port -
Export consignment routed through appellant (handling agent
'(
as also owner of the bonded warehouse at the Port), who ·
executed an indemnity bond in favour of the Governor of Uttar
Pradesh in relation to permission for removal of rectified spirit D
- Issuance of notice to the appellant to deposit excise duty
on the rectified spirit along with interest since the appellant
failed to furnish PD-25 pass, certified by the Collector -
Explanation furnished by appellant not found satisfactory -
Excise Commissioner directed the Excise Officer to issue E
recovery certificate and take appropriate steps against the
appellant for the recovery of excise duty and interest - Writ
petition - High Court holding that although the State
Government had no authority to levy excise duty u/s. 28 on
1 rectified spirit (industrial alcohol) but it could impose penalty
F
on the appellant ulr. 633(7) - On appeal, held: Show-cause
notice should be issued and an opportunity of hearing should
be afforded to the person concerned before an order ulr.
633(7) is made, notwithstanding the fact that the said Rule
· does not contain any express provision in this regard - Before
• G
raising any demand and initiating any step to recover from
the executant of the bond any amount by way of penalty, there
has to be an adjudication as regards the breach of condition
of the bond or the failure to produce the discharge certificate
19 H
20 SUPREME COURT REPORTS [2011] 9 S.C.R.
A within the stipulated time as also quantification of the penalty
amount but there was absolutely no adjudication by any
authority, except the a/legation that the appellant had failed
to furnish the PD-25 pass certified by the Collector - Thus,
the action of the State for the recovery of penalty and interest,
B being violative of principles of natural justice, is null and void
- Matter remitted to the jurisdictional Excise Commissioner
- U.P. Excise Act, 1910- s. 28- Principles of natural justice.
U.P. Excise Act, 1910 - S. 28 - High strength rectified
spirit (industrial alcohol) - Levy of excise duty - Power of
C State - Held: High strength rectified spirit (industrial alcohol)
is a Central subject, thus, the State is not empowered to levy
excise duty- Under s. 28, excise duty or a countervailing duty,
as the case may be, can be imposed by the State on
alcoholic liquor only when it reaches the stage of human
D consumption.
Administrative law - Natural 1ustice - Principle of - Held:
Is to check arbitrary exercise of power by the State or its
functionaries - Thus, the principle implies a duty to act fairly.
E
'D' Company consigned a rake of 15 tank wagons,
loaded of rectified spirit under PD-25 pass for export
against an order of the Excise Commissioner. The export
consignment was to be routed through the appellant, as
handling agent as also the owner of the bonded
F warehouse at 'K' Port, where the spirit was to be stored
before export. The appellant executed an indemnity bond
in favour of the Governor of Uttar Pradesh in relation to
permission for removal of rectified spirit. The said
consignment was dispatched through Railway to 'K' Port.
G However, out of 15 tank wagons only 14 tank wagons
reached the 'K' Port and tiie 15th tank wagon was lying
empty at the Railway Station. The Excise Commissioner
issued notice to the appellant that they were liable to
deposit excise duty amounting to Rs. 8,71,744/- on the
H
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 21
_, ORS.
rectified spirit -along with interest since the appellant A
failed to furnish PD-25 pass, certified by the Collector for
due delivery. The appellant failed to deposit the amount
and another notice was issued. The appellant furnished
an explanation but the Excise Commissioner not being
satisfied with the same, directed the Excise Officer to B
issue recovery certificate and take appropriate steps
against the appellant for the recovery of the excise duty.
The appellant filed a writ petition seeking quashing of the
demand notice. The High Court holding that although the
State Government had no authority to levy Excise duty C
under Section 28 of the Act on rectified spirit (industrial
alcohol) but could impose penalty on the appellant under
Rule 633(7) of the Excise Manual, quashed the demand
notice. Therefore, the appellant filed the instant appeal.
All.owing the appeal and remitting the matter to the D
Excise Commissioner, the Court
• HELD: 1.1 The State was not empowered to levy
Excise duty on the high strength rectified spirit in 15 tank
wagons. Under Section 28 of the U.P. Excise Act, 1910 the E
charging Section, an Excise duty or a Countervailing
duty, as the case may be, can be imposed by the State
on alcoholic liquor only when it reaches the stage of
human consumption and not on high strength rectified
. spirit (industrial alcohol), a Central subject. Therefore, the F
High Court is correct in law in holding that the State did
not have the jurisdiction to levy Excise duty on rectified
spirit, loaded in 15 tank wagons.[Para 13] [30-E-H; 31-A]
Synthetics and Chemicals Ltd. and Ors. vs. State of U.P.
and Ors. (1990) 1 SCC 109: 1989 (1) Suppl. SCR 623 - G
Relied on.
1.2 It is manifest that Rule 633. of the Uttar Pradesh
Excise Manual made in exercise of the rule-making power
H
22 SUPREME COURT REPORTS [2011] 9 S.C.R.
A of the State under the Act, would apply only in relation
to manufacture, import, export and transport of potable
liquor, i.e. the liquor which is caRable of being consumed
by human beings. Precisely for the said reason in order
to bring appellant's case within the scope of Rule 633, the
B High Court went on to observe that it could be presumed
that rectified spirit in the missing tank wagon was
diverted for conversion into potable alcohol. Rule 633 is
of regulatory character meant to ensure that the liquor
being exported under a bond reaches its destination and
c is not misused or misutilized in transit. It contemplates
that if the bond along with certificate signed by the
Collector or other named officers of the importing district,
certifying due arrival or otherwise of the liquor at its
destination, is not furnished to the Collector of the
exporting district, he would be entitled to presume that
0
the liquor has been disposed of otherwise than by export
and can proceed to take necessary steps as postulated
in sub-rule (7) of Rule 633 of the Excise Manual. The said
Rule provides for imposition of penalty, which may be
E equivalent to the Excise duty, leviable under the charging
Section 28 of the Act on potable liquor. [Para 15] (33-G-
H; 34-A-D]
2.1 Rules of 'natural justice' are not embodied rules.
The phrase 'natural justice' is also not capable of a
F precise definition. The underlying principle of natural
justice, evolved under the common law, is to check
arbitrary exercise of power by the State or its
functionaries. Therefore, the principle implies a duty to
act fairly i.e. fair play in action. [Para 17] [34-E-F]
G A.K. Kraipak and Ors. vs. Union of India and Ors. (1969)
2 SCC 262:1970 (1) SCR 457; Income Tax Officer and Ors.
vs. Mis Madnani Engineering Works Ltd. Calcutta (1979) 2
SCC 455: 1979 (2) SCR 905; Swadeshi Cotton Mills vs.
Union of India (1981) 1 SCC 664: 1981 (2) SCR 533; Canara
H
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 23
ORS.
-
I
Bank vs. V.K. Awasthy (2005) 6 SCC 321: 2005 (3 ) SCR 81;
Sahara India (Firm}, Lucknow vs. Commissioner of Income
Tax, Central-I and Anr. (2008) 14 SCC 151: 2008 (6) SCR
427 - referred to.
A
2.2 Keeping in view the nature, scope and
8
consequences of direction under sub-rule (7) of Rule 633
of the Excise Manual, the principles of natural justice
demand that a show-cause notice should be issued and
an opportunity of hearing should be afforded to the
person concerned before an order under the said Rule
is made, notwithstanding the fact that the said Rule does C
not contain any express provision for the affected party
being given an opportunity of being heard. The action
under the said Rule is a quasi-judicial function which
involves due application of mind to the facts as well as
to the requirements of law. Therefore, it is plain that D
before raising any demand and initiating any step to
- '
recover from the executant of the bond any amount by
way of penalty, there has to be an adjudication as regards
the breach of condition(s) of the bond or the failure to
produce the discharge certificate within the time E
mentioned in the bond on the basis of the explanation as
also the material which may be adduced by the person
concerned denying the liability to pay such penalty.
Moreover, the penalty amount has also to be quantified
before proceedings for recovery of the amount so F
determined are taken. Therefore, if the requirement of an
opportunity to show-cause is not read into the said Rule,
an action thereunder would be open to challenge as
violative of Article 14 of the Constitution of India on the
ground that the power conferred on the competent G
authority under the provision is arbitrary. [Para 21) [38-
8-G)
2.3 In the instant case, the Excise Commissioner
called upon the appellant to deposit an amount of Rs. H
24 SUPREME COURT REPORTS [2011) 9 S.C.R.
A 14,20,943/- towards Excise duty and interest on account
of default on their part to furnish PD-25 pass duly certified
by the competent authority at 'K' Port. The letter /notice
did not indicate the exact quantity of rectified spirit on
which duty @ Rs. 40/- per alcoholic litre had been
B charged, though the total amount of duty payable was
mentioned. Similarly, in the final show-cause notice
threatening action for black listing for future exports on
account of non-payment of the aforenoted amount, there
was not even a whisper as to how and why rectified spirit
c in question was being subjected to Excise duty by the
State. [Para 22] (38-H; 39-A-C]
2.4 The State Legislature had no legislative
competence to impose Excise duty on rectified spirit
(industrial alcohol), the Commissioner of Excise could not
0 demand Excise duty on rectified spirit contained in the
tank wagon which, later on, was found to be empty,
without returning a finding that the said spirit had been .·
diverted/converted into potable alcoholic liquor fit for
human consumption, on which the State was
E empowered to impose duty. Such a finding could not be
recorded by the Commissioner without affording due
opportunity to the appellant to explain its stand in this
regard for which, the onus lay on them as transporter and
the executant of the bond. In the absence of any
F reasonable explanation regarding disappearance of
..
rectified spirit, the Commissioner would have reason to
presume that the same has been disposed of otherwise
than by way of export outside the country, for which
purpose it was being transported. In the instant case,
G before imposing the impugned demand of penalty and
interest, there was absolutely no adjudication by any
authority as regards the breach committed by the
appellant, except the allegation that the appellant had
failed to furnish the PD-25 pass certified by the Collector.
H Therefore, the action of the respondents for the recovery
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 25
ORS.
of penalty and interest, being violative of principles of A
natural justice, was null and void. [Para 22) [39-8-G]
Synthetics and Chemicals Ltd. and Ors. vs. State of U.P.
and Ors. (1990) 1 sec 109: 1989 (1) Suppl. SCR 623 -
Relied on. B
3. The impugned demand raised · by the
Commissioner of Excise vide notice dated 2nd October
1992, as well as the judgment of the High Court,
sustaining the demand by invoking Rule 633 of the
Excise Manual are set aside and the matter is remitted to C
the jurisdictional Excise Commissioner to decide the
question of levy of Excise duty and/or penalty and
interest on the subject consignment of rectified spirit, after
affording adequate opportunity of hearing to the
appellant. [Para 23) [40-A-B] D
Case Law Reference:
1989 (1) Suppl. SCR 623 Relied on Para 13, 22
1970 (1) SCR 457 Referred to Para 17 E
1979 (2) SCR 905 Referred to Para 17
1981 (2 ) SCR 533 Referred to Para18
2005 (3 ) SCR 81 Referred to Para 19
F
2008 (6) SCR 427 Referred to Para 20
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
6896 of 2002.
From the Judgment & Order dated 18.01.1996 of the High G
Court of Judicature at Allahabad in CMWP 599 of 1994.
D.K. Agarwal, Sudhir Kumar Gupta, Manish Gupta for the
/\ppellant.
H
26 SUPREME COURT REPORTS [2011) 9 S.C.R.
A Ravi Prakash Mehrotra, Mukesh Verma for the
Respondents.
The Judgment of the Court was delivere by
D.K. JAIN, J.: 1. Challenge in this appeal, by special
B leave, is to the judgment and order dated 18th January, 1996,
delivered by the High Court of Judicature at Allahabad in
C.W.P. No.599of1994. By the impugned judgment, the High
Court has come to the conclusion that although the State
Government had no authority to levy Excise duty under Section
C 28 of the U.P. Excise Act, 1910 (for short "the Act") on rectified
spirit (industrial alcohol) in question but it could impose penalty
on the appellant under Rule 633(7) of the Uttar Pradesh Excise
Manual, (for short "the Excise Manual").
D 2. The background facts, essential for disposal of the
instant appeal, in brief, are that on 15th October, 1988, the
Excise Commissioner, Uttar Pradesh, issued an order
authorising nine distilleries in the State, including M/s Daurala
Sugar Works, to export rectified spirit (industrial alcohol),
E outside India. Since the export consignment was to be routed
through the appellant, as handling agent as also the owner of
the bonded warehouse at Kandla Port, where the spirit was to
be stored before export, the appellant was required to furnish
an indemnity bond, in the prescribed form, in favour of the
F Excise Commissioner as the authorised nominee of the
exporter. On 20th December 1988, the appellant executed an
indemnity bond in favour of the Governor of Uttar Pradesh in
relation to permission for removal by rail 67.77 lac bulk litres
of rectified spirit of any strength ranging between 91.68% VN
@ 15.60C to 95% VN@ 15.60C. One of the conditions in the
G indemnity bond was that if the said quantity of rectified spirit,
after deducting such allowance for dryage and wastage, as
may be sanctioned, is not delivered at the warehouse at Kandla,.
the authorised nominee, the appellant herein, shall indemnify
the Governor for any loss of duty, which the Governor may suffer
H by reason of such non delivery or short delivery, by paying him
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 27
.j
ORS. [D.K. JAIN, J.]
on demand the duty @ Rs.40/- per alcoholic litre, on spirit not A
so delivered, after making the allowances aforesaid.
3. On 8th January, 1989, Mis Daurala Sugar Works
consigned a rake of 15 tank wagons, loaded with 3,54,413
bulk litres of rectified spirit under PD-25 pass for export against
~ B
order dated 15th October, 1988. The said. consignment was
dispatched through the Northern Railway to Kandla Port.
However, out of 15 tank wagons only 14 tank wagons reached
the Kandla Port. On 16th January, 1989, it was discovered that
the 15th tank wagon was lying empty at Gandhi Dham Railway
Station.
c
4. On 2nd October, 1992, a notice was issued by the
Excise Commissioner to the appellant alleging that since the
pass in form PD-25, issued to the appellant by the concerned
Collector in terms of Rule 633 of the Excise Manual had not D
been received back along with certificate from the Collector for
due delivery, they were liable to deposit in the Government
Treasury, Excise duty on the rectified spirit @ Rs.40/- per
alcoholic litre, which amounted to· Rs. 8,71,744/- along with
interest at the rate of 18% per annum (Rs.5,49,199/-). E
5. The appellant having failed to deposit the said amount,
another notice was issued by the Commissioner requiring them
to show cause as to why their name be not black-listed and in
future, permission for export may not be granted, on account
F
of default on their part in not depositing Excise duty as
demanded earlier.
6. The appellant responded to the said show cause notice
by their letter.dated 11th February, 1993, in which it was stated
that since the reason for non receipt of the said rectified spirit G
was being investigated, the matter may be deferred till 30th
June, 1993. Finally, vide their letter dated 29th April, 1994, the
appellant replied to the show cause notice, contesting Excise
Commissioner's claim for payment of Excise duty on account
of non-receipt of full quantity of rectified spirit at the Kandla Port. H
28 SUPREME COURT REPORTS [2011] 9 S.C.R.
A It was pleaded that since the entire rake of 15 tank wagons was
handed over to the Railway authorities at Daurala station for
its delivery at Kandla Port, it was the responsibility of the
Railways to make safe delivery of the goods at the destination
and, therefore, the appellant was in no way responsible for the
B disappearance of rectified spirit contained in one of the tank
wagons. It was, thus, urged that no Excise duty was payable
by the appellant as the State Government had not suffered any
loss of duty by reason of non delivery or short delivery of the
rectified spirit.
c 7. Not being satisfied with the explanation furnished by the
appellant, vide letter dated 6th April, 1994, the Excise
Commissioner directed the District Excise Officer, Bareilly to
issue recovery certificate and take appropriate steps against
the appellant for the recovery of Excise duty amounting to Rs.
D 8,71,744/- and interest thereon. By letter dated 22nd June,
1994, the Bank of Baroda, Mandwi Branch, informed the
appellant that pursuant to an order dated 22nd June, 1994,
issued by the Sub-Divisional Magis·.rate, their bank account had
been attached and a sum of Rs. 12,00,000/- had been
E earmarked from their account for payment of Excise duty.
8. Being aggrieved, the appellant filed a writ petition before
the High Court, seeking quashing of notice of demand dated
6th April, 1994. Relying on the decision of a Bench of seven
F Judges in Synthetics And Chemicals Ltd. & Ors. Vs. State of
U.P. & Ors. 1, wherein it was held that the States are not
competent to impose a tax or charge imposts in respect of
rectified spirit for industrial purposes, having a strength not less
than 95% by volume of ethyl alcohol, the High Court held that
G though the State of U .P. did not have jurisdiction to levy and
demand Excise duty on the rectified spirit (industrial alcohol),
which disappeared during transit, but Rule 633 of the Excise
Manual empowered the State to impose penalty at the same
rate at which the Excise duty was payable for breach of
H 1. (1990) 1 sec 109.
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 29
ORS. [D.K. JAIN, J.]
conditions in the Bond. The High Court also held that it could A
be presumed that the appellant had diverted the rectified spirit
into potable alcohol on which penalty and penal interest could
be levied and, therefore, it was not a fit case where it should
exercise its jurisdiction under Article 226 of the Constitution of
India and quash demand notice dated 6th April, 1994. B
Accordingly, the writ petition was dismissed. Being dissatisfied,
the appellant is before us in this appeal.
9. We have heard learned counsel for the parties.
10. Assailing the decision of the High Court, Mr. D.K. C
Agarwal, learned senior counsel appearing for the appellant,
strenuously urged that in light of decision of this Court in
Synthetics And Chemicals (supra), which was duly noticed in
the impugned judgment, the High Court exceeded its
jurisdiction in converting the levy of Excise duty into penalty and D
interest under Rule 633 of the Excise Manual. It was argued
that the High Court misread the Rule inasmuch as Rule 633(7)
contemplates recovery of penalty under the bond in order to
indemnify the Governor of the State for loss of Excise duty but
when admittedly no Excise duty could be levied by the State E
Excise Commissioner on the entire consignment of rectified
spirit, covered under the bond, there was no question of loss
of Excise duty on that account, for which the Governor was to
be indemnified. It was asserted that in any event imposition of
penalty under the said Rule was ex-facie illegal as neither any F
show-cause notice was issued to the appellant before such levy
nor any amount by way of penalty on account of the alleged non-
compliance with the conditions of the bond was quantified and
communicated to the appellant. It was thus, asserted that since
an order under Rule 633, entails serious consequences the G
elementary principles of natural justice and fair play are required
to be observed and consequently, an opportunity of hearing
has to be afforded before an order under the said Rule is made,
which was admittedly not done in the instant case. In fact, the
said Rule was invoked for the first time by the High Court.
H
30 SUPREME COURT REPORTS [2011) 9 S.C.R.
A 11. Mr. Ravi Prakash Mehrotra, learned counsel appearing
for the State, on the other hand, supporting the view taken by
the High Court, submitted that Rule 633, does not postulate a
show-cause notice before levy of penalty or interest because
penalty or interest being compensatory in nature because of
B infringement of condition of an indemnity bond furnished by the
appellant to the Collector or the Excise Inspector, the liability
under the Bond is absolute. It was argued that since in the
present case, admittedly, the discharge certificate in terms of
Rule 633 had not been furnished by the appellant within the
c stipulated time, penalty under the said Rule was clearly exigible.
12. The precise question at issue is whether sub-rule (7)
of Rule 633 of the Excise Manual postulates the requirement
of hearing before steps for recovery of penalty under the said •
Rule are initiated?
D
13. Before addressing the issue, it is necessary to bear
in mind the fact that in so far as the question of levy of Excise
duty on the high strength rectified spirit in 15 tank wagons is
concerned, parties are ad-idem that in view of the judgment of
E this Court in Synthetics And Chemicals (supra), the State was
not empowered to levy Excise duty on the said consignment.
In the said decision, while interpreting Entry 84 of List I, Entry
8 and 51 of List II and Entry 33 of List Ill of the Seventh Schedule
to the Constitution of India, it was held that the State legislature
•
F has no power to enact law levying duty on the spirit, which is
not meant for human consumption. It was also held that the
State has the power to impose duty only on spirit, which is
meant for human consumption under Entry 51 of List II of the
Seventh Schedule. In light of the said decision, it is clear that
G
under Section 28 of the Act, the charging Section, an Excise
duty or a Countervailing duty, as the case may be, can be
imposed by the State on alcoholic liquor only when it reaches
the stage of human consumption and not on high strength
rectified spirit (industrial alcohol), a Central subject. Therefore,
the High Court is correct in law in holding that the State did not
H
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 31
ORS. [D.K. JAIN, J.]
have the jurisdiction to levy Excise duty on rectified spirit, A
loaded in 15 tank wagons.
14. However, Rule 633 of the Excise Manual, which has
been pressed into service by the High Court to sustain the
demands raised against the appellant, reads as follows :
B
"633. Any person may export in bond foreign liquor
manufactured at a distillery in Uttar Pradesh to any place
in India under a pass in form P.D.25 granted as provided
in the following rules:
c
(1) When any person desires to export in bond spirit
manufactured at a distillery in Uttar Pradesh, he shall
present a written application in form P.O. 58 to the
Collector of the district in which the distillery of manufacture
is situate. D
The application must specify-
(i) the name of the consignor;
(ii) the name of the consignee; E
(iii) the description, quantity and strength of the spirit to
be exported.
(2) Every application must be accompanied by-
F
(i) a permit from the Collector, Deputy Commissioner,
or other officer specially appointed in this behalf of
the district to which the spirits are to be exported
authorizing the import of spirit; and
(ii) a duly executed special bond in form P.O. 16 or a G
reference to a general bond in form P.O. 15.
(3) The pass granted by the Collector of the exporting
district or the Excise Inspector to whom the
Collector may have delegated his power vide H
32 SUPREME COURT REPORTS [2011] 9 S.C.R.
A paragraph 58(c) of this Manual, shall be in triplicate
in form P.D.-25.
One copy of the pass shall be delivered to the
exporter, the second forwarded to the Collector, Deputy
8 Commissioner, or *other* officer specially appointed in this
behalf of the district to which the spirits are to be taken,
and the third retained for record.
*NOTE-This will usually be the officer-in-charge of the
bonded warehouse to which the spirit is consigned.
c
An advance in form P.O. 26 must also be sent by
the officer-in-charge direct to the authority granting the
import permit who will return the same duly filed in as soon
•
as possible after receipt and verification of the
D consignment.
Within a reasonable time to be fixed by the Collector
of the exporting district and specified in the bond or pass
the importer shall produce before the Collector of the
exporting district his copy of the pass endorsed with a
E certificate signed by the Collector, Deputy Commissioner
or other officer specially appointed in this behalf, of the
importing district certifying the due arrival or otherwise of
the spirit at its destination;
F (4) On each cask or other vessel containing spirit for export •
there shall be legibly cut or painted:
(i) the name and mark of the exporting distillery;
(ii) the number of the cask or other vessel and its capacity;
G
(iii) the nature, quantity and strength of its contents.
These particulars shall correspond with those entered in
the pass.
H (5) On a written application being made to the Collector
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 33
ORS. [D.K. JAIN, J.]
of the exporting district establishing sufficient cause for the A
grant of an extension of time, or on the production before
him of a certificate from the Collector, Deputy
Commissioner, or other officer specially appointed in this
behalf, of the district of destination, to the effect that there
are good and sufficient reasons for extending the currency B
of the pass or bond, it shall be competent for the Collector
of the exporting district, if he thinks fit, to extend the time
specified in the pass or bond for the due arrival of the spirit
at its destination.
(6) In the case of spirit exported under special bond the C
Collector of the exporting district shall discharge the bond
on receipt of the pass in form P.D.-25 and certificate
mentioned in clause (3), provided that none of the
conditions of the bond have been infringed. The duty on
consignment issued under a general bond shall be written D
off on receipt of the pass and certificate mentioned in
clause (3), provided that none of the conditions of the bond
have been infringed.
(7) If the certificate be not received within the time E
mentioned in the bond or pass, or if on receipt of the
certificate it appears that any of the conditions of the bond
have been infringed the Collector of the exporting district
or the Excise Inspector who granted the pass shall forthwith
take necessary steps to recover from executant or his F
surety the penalty due under the bond."
15. It is manifest that the said Rule, made in exercise of
the rule-making power of the State under the Act, would apply
only in relation to manufacture, import, export and transport of
potable liquor, i.e. the liquor which is capable of being G
consumed by human beings. Precisely for the aforesaid
reason, in order to bring appellant's case within the scope of
Rule 633, High Court went on to observe that it could be
presumed that rectified spirit in the missing tank wagon was
.diverted for conversion into potable alcohol. Rule 633 is of H
34 SUPREME COURT REPORTS [2011] 9 S.C.R.
A regulatory character meant to ensure that the liquor being
exported under a bond reaches its destination and is not
misused or mis utilized in transit. It contemplates that if the bond
along with certificate signed by the Collector or other named
officers of the importing district, certifying due arrival or
B otherwise of the liquor at its destination, is not furnished to the I
Collector of the exporting district, he would be entitled to
presume that the liquor has been disposed of otherwise than
by export and can proceed to take necessary steps as
postulated in sub-rule (7) of Rule 633 of the Excise Manual.
c The said Rule provides for imposition of penalty, which may
be equivalent to the Excise duty, leviable under the charging
Section 28 of the Act on potable liquor. Bearing in mind the
scope of Rule 633, we may now advert to the moot question,
viz. whether the principles of natural justice demand that an
0 opportunity of hearing should be afforded before an order
under Rule 633(7) of the Excise Manual is made?
16. Before we deal with the question, it would be
necessary to understand and appreciate the concept of natural
justice and the principles governing its application.
E
17. Rules of "natural justice" are not embodied rules. The
phrase "natural justice" is also not capable of a precise
definition. The underlying principle of natural justice, evolved
under the common law, is to check arbitrary exercise of power
F by the State or its functionaries. Therefore, the principle
implies a duty to act fairly i.e. fair play in action. As observed
by this Court in A. K. Kraipak & Ors. Vs. Union of India & Ors. 2
the aim of rules of natural justice is to secure justice or to put
it negatively to prevent miscarriage of justice. These rules can
G operate only in areas not covered by any law validly made.
They do not supplant the law but supplement it. (Also see
Income Tax Officer & Ors. Vs. Mis Madnani Engineering
Works Ltd., Calcutta 3 ).
2. (1969) 2 sec 262.
H 3. (1979) 2 sec 455.
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 35
ORS. [D.K. JAIN, J.]
18. In Swadeshi Cotton Mills Vs. Union of lndia 4 R.S. A
Sarkaria, J., speaking for the majority in a three-Judge Bench,
lucidly explained the meaning and scope of the concept of
"natural justice". Referring to a catena of decisions, his Lordship
observed thus:
B
·"Rules of natural justice are not embodied rules. Being
means to an end and not an end in themselves, it is not
possible to make an exhaustive catalogue of such rules.
- But there are two fundamental maxims of natural justice viz.
(i) audi alteram partem and (ii) nemo judex in re sua. The
audi alteram partem rule has many facets, two of them
being (a) notice of the case to be met; and (b) opportunity
C
to explain. This rule cannot be sacrificed at the altar of
administrative convenience or celerity. The general
principle-as distinguished from an absolute rule of
uniform application-seems to be that where a statute D
does not, in terms, exclude this rule of prior hearing but
contemplates a post-decisional hearing amounting to a full
review of the original order on merits, then such a statute
would be construed as excluding the audi alteram partem
rule at the pre-decisional stage. Conversely if the statute E
conferring the power is silent with regard to the giving of
a pre-decisional hearing to the person affected and the
administrative decision taken by the authority involves
civil consequences of a grave nature, and no full review
or appeal on merits against that decision is provided, F
courts will be extremely reluctant to construe such a
statute as excluding the duty of affording even a minimal
hearing, shorn of all its formal trappings and dilatory
features at the pre-decisional stage, unless, viewed
1 pragmatically, it would paralyse the administrative process G
or frustrate the need for utmost promptitude. In short, this
rule of fair play must not be jettisoned save in very
exceptional circumstances where compulsive necessity so
demands. The court must make every effort to salvage this
4. (1981) 1 sec 664. H
36 SUPREME COURT REPORTS [2011] 9 S.C.R.
A cardinal rule to the maximum extent possible, with
situational modifications. But, the core of it must, however,
remain, namely, that the person affected must have
reasonable opportunity of being heard and the hearing
must be a genuine hearing and not an empty public
8 relations exercise."
(Emphasis added)
19. In Canara Bank Vs. V.K. Awasthy5 the concept, scope,
history of development and significance of principles of natural
C justice have been discussed in extenso, with reference to
earlier cases on the subject. Inter alia, observing that the
principles of natural justice are those rules which have been laid
down by the courts as being the minimum protection of the
rights of the individual against the arbitrary procedure that may
D be adopted by a judicial, quasi-judicial and administrative
authority while making an order affecting those rights, the court
said:
"Concept of natural justice has undergone a great deal of
change in recent years. Rules of natural justice are not
E rules embodied always expressly in a statute or in rules
framed thereunder. They may be implied from the nature
of the duty to be performed under a statute. What
particular rule of natural justice should be implied and what
its context should be in a given case must depend to a
F great extent on the fact and circumstances of that case,
the framework of the statute under which the enquiry is
held."
20. The question with regard to the requirement of an
G opportunity of being heard in a particular case, even in the
absence of provisions for such hearing, has been considered
by this Court in a catena of cases. However, for the sake of
brevity, we do not propose to refer to all these decisions.
Reference to a recent decision of this Court in Sahara India
H 5. (2005) s sec 321.
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 37
ORS. [D.K. JAIN, J.]
(Firm), Lucknow Vs. Commissioner of Income Tax, Central-I A
& Anr. 6 would suffice. In that case, the question for adjudication
was whether in the absence of a provision in the Income Tax
Act, 1961, an opportunity of hearing was required to be given
to an assessee before an order under Section 142(2-A) of the
said Act, directing special audit of his accounts was passed? B
A Bench of three Judges, speaking through one of us (D.K.
Jain, J.), explaining the concept of "natural justice" and the
principles governing its application, summed up the legal
position as under :
"Thus, it is trite that unless a statutory provision either C
specifically or by necessary implication excludes the
application of principles of natural justice, because in that
, event the court would not ignore the legislative mandate,
the requirement of giving reasonable opportunity of being
heard before an order is made, is generally read into the D
provisions of a statute, particularly when the order has
adverse civil consequences for the party affected. The
principle will hold good irrespective of whether the power
conferred on a statutory body or tribunal is administrative
or quasi-judicial. E
We may, however, hasten to add that no general rule of
universal application can be laid down as to the applicability
of the principle audi alteram partem, in addition to the
language of the provision. Undoubtedly, there can be F
exceptions to the said doctrine. Therefore, we refrain from
giving an exhaustive catalogue of the cases where the said
principle should be applied. The question whether the
principle has to be applied or not is to be considered
bearing in mind the express language and the basic G
scheme of the provision conferring the power; the nature
of the power conferred and the purpose for which the
power is conferred and the final effect of the exercise of
that power. It is only upon a consideration of all these
a. (2ooa) 14 sec 1s1. H
38 SUPREME COURT REPORTS [2011] 9 S.C.R.
A matters that the question of application of the said
principle can be properly determined."
21. Having considered the issue, framed in para 12 supra,
on the touchstone of the afore-noted legal principles in regard
to the applicability of the principles of natural justice, we are of
B
the opinion that keeping in view the nature, scope and
consequences of direction under sub-rule (7) of Rule 633 of the
Excise Manual, the principles of natural justice demand that a
show-cause notice should be issued and an opportunity of
hearing should be afforded to the person concerned before an
C order under the said Rule is made, notwithstanding the fact that
the said Rule does not contain any express provision for the
affected party being given an opportunity of being heard.
Undoubtedly, action under the said Rule is a quasi-judicial
function which involves due application of mind to the facts as
D well as to the requirements of law. Therefore, it is plain that
before raising any demand and initiating any step to recover
from the executant of the bond any amount by way of penalty,
there has to be an adjudication as regards the breach of
condition(s) of the bond or the failure to produce the discharge
E certificate within the time mentioned in the bond on the basis
of the explanation as also the material which may be adduced
by the person concerned denying the liability to pay such
penalty. Moreover, the penalty amount has also to be quantified
before proceedings for recovery of the amount so determined
F are taken. In our view, therefore, if the requirement of an
opportunity to show-cause is not read into the said Rule, an
action thereunder would be open to challenge as violative of
Article 14 of the Constitution of India on the ground that the
power conferred on the competent authority under the provision
G is arbitrary.
22. Thus tested, in the instant case, vide his letter dated
2nd October 1992, the Excise Commissioner called upon the
appellant to deposit an amount of Rs. 14,20,943/- towards
Excise duty and interest on account of default on their part to
H
KESAR ENTERPRISES LTD. v. STATE OF U.P. & 39
ORS. [D.K. JAIN, J.)
furnish PD-25 pass duly certified by the competent authority at A
Kandla Port. The letter /notice does not indicate the exact
quantity of rectified spirit on which duty @ Rs. 40/- per alcoholic
litre has been charged, though the total amount of duty payable
is mentioned. Similarly, in the final show-cause notice dated
6th April 1994, threatening action for black listing for future B
exports on account of non-payment of the aforenoted amount,
there is not even a whisper as to how and why rectified spirit
in question was being subjected to Excise duty by the State.
As stated above, this Court having categorically held in
Synthetics And Chemicals (supra) and in catena of c
subsequent decisions that the State Legislature had no
. legislative competence to impose Excise duty on rectified spirit
(industrial alcohol), the Commissioner of Excise could not
demand Excise duty on rectified spirit contained in the tank
wagon which, later on, was found to be empty, without returning
0
a finding that the said spirit had been diverted/converted into
potable alcoholic liquor fit for human consumption, on which the
State was empowered to impose duty. It bears repetition that
such a finding could not be recorded by the Commissioner
without affording due opportunity to the appellant to explain its E
stand in this regard for which, the onus lay on them as
transporter and the executant of the bond .. We may, however,
add that in the absence of any reasonable explanation regarding
disappearance of rectified spirit, the Commissioner would have
reason to presume that the same has been disposed of
otherwise than by way of export outside'the country, for which F
purpose it was being transported. We are convinced that in
the present case, before imposing the impugned demand of
penalty and interest, there was absolutely no adjudication by
any authority as regards the breach committed by the appellant,
i. except the allegation that the appellant had failed to furnish the G
PD-25 pass certified by the Collector. In our opinion, therefore,
the action of the respondents for the recovery of penalty and
interest, being violative of principles of natural justice, is null and
void.
H
40 SUPREME COURT REPORTS [2011) 9 S.C.R.
A 23. In the afore-said premises, we allow the appeal; set
aside the impugned demand raised by the Commissioner of
Excise vide notice dated 2nd October 1992, as well as the
judgment of the High Court, sustaining the demand by invoking
Rule 633 of the Excise Manual and remit the matter to the
B jurisdictional Excise Commissioner to decide the question of
levy of Excise duty and/or penalty and interest on the subject
consignment of rectified spirit, after affording adequate
opportunity of hearing to the appellant.
C 24. In the facts and circumstances of the case, the parties
are left to bear their own costs throughout.
N.J. Appeal allowed.
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