Supreme Court Upholds Excise Duty on Liquor Destroyed in Fire Due to Negligence: State of UP vs. M/S McDowell and Company Limited (2022)

Introduction

Date of the Judgment: January 5, 2022

Citation: 2022 INSC 13

Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J., Krishna Murari, J. (authored by Dinesh Maheshwari, J.)

When a fire destroys a large quantity of liquor in a distillery, who bears the cost of the lost excise duty? The Supreme Court of India recently addressed this question, clarifying the responsibilities of distilleries and the extent of their liability under the Uttar Pradesh Excise Act, 1910 and related rules. This case revolves around a fire incident at a distillery that led to a significant loss of liquor and a subsequent demand for excise duty by the state government.

Case Background

M/S McDowell and Company Limited operated a distillery in Shahjahanpur, Uttar Pradesh, licensed to produce and bottle Indian Made Foreign Liquor (IMFL). On April 10, 2003, a fire broke out in one of their godowns, destroying 35,642 cases of IMFL. The initial reports suggested a short circuit as the possible cause of the fire. The Excise Department, citing the loss of excise revenue, sought to recover the duty from the company. The company, however, claimed no negligence on their part, arguing that the fire was an “act of God.”

Timeline

Course of Proceedings

The Excise Commissioner, on July 11, 2006, ordered M/S McDowell and Company Limited to pay Rs. 6,39,32,449.44, citing their failure to maintain safety standards and their insurance coverage for the liquor but not for the excise duty. Aggrieved, the company filed a writ petition before the High Court of Judicature at Allahabad, Lucknow Bench. The High Court initially stayed the recovery proceedings, requiring the company to deposit Rs. 3 crores. Subsequently, on April 10, 2017, the High Court allowed the writ petition, quashing the demand for excise duty. The High Court reasoned that Rule 7(11)(a) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969, did not apply as there was no wastage in handling operations but a total loss due to fire. It held that Rule 709 of the Uttar Pradesh Excise Manual was applicable, requiring proof of negligence, which the High Court found lacking. It also concluded that the fire was an “act of God.”

Legal Framework

The Supreme Court examined the following key legal provisions:

• ✓ Article 265 of the Constitution of India: This article mandates that no tax shall be levied or collected except by authority of law.
• ✓ Entry 51 of List II of the Seventh Schedule to the Constitution of India: This entry grants the State the power to impose duties of excise on alcoholic liquors for human consumption manufactured or produced in the State.
• ✓ Section 3 of the U.P. Excise Act, 1910: Defines “excise revenue,” “excise duty,” “spirit,” “liquor,” and “excisable article.”
• ✓ Section 17 of the U.P. Excise Act, 1910: Prohibits the manufacture of intoxicants without a license.
• ✓ Section 18 of the U.P. Excise Act, 1910: Authorizes the Excise Commissioner to establish and license distilleries and warehouses.
• ✓ Section 19 of the U.P. Excise Act, 1910: Prohibits the removal of intoxicants from distilleries without payment of duty or execution of a bond.
• ✓ Section 28 of the U.P. Excise Act, 1910: Empowers the State to impose excise duty on excisable articles.
• ✓ Section 29 of the U.P. Excise Act, 1910: Specifies the manner in which duty may be levied.
• ✓ Rule 708 of the Excise Manual: States that the Government is not liable for loss of spirit in distilleries due to fire, theft, or any other cause.
• ✓ Rule 709 of the Excise Manual: Holds distillers responsible for the safe custody of stock and liable for loss of revenue caused by their negligence.
• ✓ Rule 813 of the Excise Manual: Provides wastage allowances for different kinds of spirit, excluding bottled spirit.
• ✓ Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969: Allows a 1% wastage allowance on stored spirit and holds the licensee responsible for duty on excess wastage.

Arguments

Appellants (State of Uttar Pradesh):

• ✓ The fire was not an act of God but resulted from the company’s negligence in maintaining electrical installations and not providing fire-proof equipment.
• ✓ The company is liable to pay excise duty on the destroyed liquor under Rule 7(11)(a) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969, and Rules 708 and 709 of the Excise Manual.
• ✓ The company’s insurance claim for the value of liquor is akin to a sale, and therefore, the State should receive the corresponding excise duty.
• ✓ The distillery was responsible for the safety and security of the premises, and the presence of Excise Officers did not shift this responsibility.

Respondent (M/S McDowell and Company Limited):

• ✓ The fire was an act of God, beyond human control, and not due to any negligence on their part.
• ✓ Excise duty is applicable only at the point of issuance of liquor from the distillery, and since the liquor was destroyed before that point, no duty is payable.
• ✓ They had taken all necessary precautions, including obtaining fire safety and electrical safety certificates.
• ✓ The distillery was under the control and supervision of the Excise Department, and thus, they cannot be held liable for the fire.
• ✓ The insurance claim was not a sale; hence, excise duty cannot be levied.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. A. Whether the demand for excise duty on the liquor lost in fire is authorized by law under the U.P. Excise Act, 1910, the Excise Manual, and the Rules of 1969?
2. B. Whether the fire incident was an event beyond human control, and no negligence could be imputed to the respondent company?
3. C. What is the effect of the respondent company having taken insurance coverage only for the value of liquor and not for the excise duty and then receiving the insurance claim towards the value of liquor?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on State of U.P. & Ors. v. Delhi Cloth Mills & Anr. [(1991) 1 SCC 454]* and State of U.P. and Ors. v. M/s Mohan Meakin Brewery Ltd. and Anr. [(2011) 13 SCC 588]* to establish that excise duty is leviable at the point of manufacture or production of liquor and not merely at the point of sale. The Court also followed Har Shankar and Others v. Deputy Excise & Taxation Commissioner and Others [(1975) 1 SCC 737]* to emphasize that a licensee cannot escape the conditions of the license. The Court also relied on Somaiya Organic (India) Pvt. Ltd. and Anr. v. State of U.P. and Anr. [(2001) 5 SCC 519]* to reiterate that both levy and collection of tax must be authorized by law. The Court referred to 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 Limited v. Birla Yamaha Limited [(2000) 4 SCC 91]* to explain the concept of “act of God” and to distinguish it from negligence. The Court further referred to Shyam Sunder and Ors. v. The State of Rajasthan [(1974) 1 SCC 690]* and Pushpabai Purshottam Udeshi and Ors. v. M/s. Ranjit Ginning & Pressing Co. (P) Ltd. and Anr. [(1977) 2 SCC 745]* to explain the application of the principle of res ipsa loquitur. The Court also referred to State of Maharashtra and Ors. v. Kanchanmala Vijaysing Shirke and Ors. [(1995) 5 SCC 659]* to explain the definition of “negligence”. The Court also referred to Dharampal Satyapal v. Commissioner of Central Excise, Noida [(2004) 167 ELT 291]* to discuss the effect of insurance claims on duty liability. The Court considered Section 3, Section 17, Section 18, Section 19, Section 28 and Section 29 of U.P. Excise Act, 1910*, Rule 708, Rule 709 and Rule 813 of Excise Manual* and Rule 7(11) of Uttar Pradesh Bottling of Foreign Liquor Rules, 1969* to explain the legal framework.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was heavily influenced by the factual aspects of the case, particularly the evidence of faulty electrical installations and the company’s failure to take adequate safety measures. The Court emphasized the distillery’s responsibility for safe custody of the liquor and its liability for negligence. The Court also considered the fact that the company had insured the value of the liquor but not the excise duty, which indicated a lack of due diligence.

Fact:Law Ratio

The Court’s reasoning was more influenced by the factual aspects of the case (70%) than by legal considerations (30%).

Logical Reasoning

ISSUE: Whether the fire incident was due to negligence of the respondent company?

Reasoning of the Court

The Supreme Court methodically addressed each issue. First, it established that the excise duty was leviable at the point of manufacture, not just sale, relying on previous judgments like *State of U.P. v. Delhi Cloth Mills*. This meant that the liquor was already subject to duty when it was destroyed. Second, the Court examined whether the fire was an “act of God.” It noted that the fire was likely caused by a short circuit, which could have been prevented with proper maintenance and safety measures. The Court emphasized that the company had been warned about the faulty electrical installations. Therefore, the Court concluded that the fire was not an “act of God” but was a consequence of the company’s negligence. The Court also applied the principle of *res ipsa loquitur* to infer negligence. Third, the Court considered the insurance coverage. The fact that the company had insured the liquor but not the excise duty was seen as an admission that the company was aware of its liability. The Court also held that the insurance claim was akin to a sale, which further fortified the State’s claim for excise duty. The Court rejected the High Court’s view that Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969, was inapplicable, stating that the rule was relevant to determine the company’s liability. The Court also dismissed the argument that the distillery was under the control of the Excise Department, stating that the responsibility for safety remained with the company.

Final Decision

The Supreme Court allowed the appeal filed by the State of Uttar Pradesh. The High Court’s order was set aside, and the Excise Commissioner’s order demanding excise duty from M/S McDowell and Company Limited was upheld. The Supreme Court held that the distillery was liable to pay the excise duty on the liquor destroyed in the fire due to their negligence.

Conclusion

This judgment underscores the responsibility of distilleries to maintain safety standards and their liability for excise duty on liquor lost due to negligence. The Supreme Court clarified that excise duty is leviable at the point of manufacture and not just at the point of sale. The Court also emphasized that the “act of God” defense is not applicable in cases where negligence is evident. This case serves as a crucial reminder for distilleries to take all necessary precautions to prevent accidents and ensure compliance with excise laws.