http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

CASE NO.: Appeal (civil)  1813 of 2007

PETITIONER: Commnr. of Income Tax & Anr

RESPONDENT: M/s. Distillers Co. Ltd.

DATE OF JUDGMENT: 05/04/2007

BENCH: S.B. Sinha & Markandey Katju

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO. 1813 OF 2007 (Arising out of SLP (C) No.  11380 of 2006)  

S.B. SINHA, J.

       Leave granted.

       Respondent carries on business of arrack bottling, manufacture of  industrial alcohol and their marketing.  He obtained a licence from the State  of Karnataka for the aforementioned purposes in terms of the provisions of  Karnataka 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  (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 as under:-

"(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."

       The Commissioner of Excise, however, issued a circular stating:

       "It is hereby specified that the arrack shall be matured in  wooden vats for a minimum period of 15 days before  bottling the same."

       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  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 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."

       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  his income tax return, claimed deduction for the said amount from his gross

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

income.

       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 if the expenditure is  deductible, in view of the fact that the amount in question had not been paid  during the period relevant to the assessment year, the same had to be  disallowed in terms of Section 43B of the Income Tax Act, 1961 (for short  "the Act").   

       The Assessee paid certain amounts for not affixation of labels on the  bottles.  He preferred an appeal against the order of assessment and the  Appellate Authority, being the Commissioner of Income Tax (Appeals),  allowed the same opining that the amount claimed is neither in the nature of  ’excise duty’ nor a penalty.                  In regard to the applicability of Section 43B of the Act, it was held  that as the amount, in question, is neither penalty nor excise duty, Section  43B of the Act would not be attracted.

       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  applicability of Section 43B of the Act, the Tribunal held it in the negative.

       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:

"(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 Karnataka Excise (Manufacturing  & Bottling 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 paid by the assessee during  the assessment year could be disallowed u/s 43 of the Act?                  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:

(i)     The amount in question was not a penalty; (ii)    It was also not to be treated either as a fee or excise duty. (iii)   The payment made for non-affixation of labels also is not a penalty;  stating:

"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 labels for  getting the bottled arrack released, it is not possible to take  the view that such payment was made by way of fees as  contended by Sri Seshachala.  The language employed in  the Rule makes it explicit that the amount required to be  paid to get the bottled arrack released for sale without  labels is by way of cost of labels to the Government.   When the language in the Rule in explicit terms provide  that the amount required to be paid towards the cost of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

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 of Sri  M.V. Seshachala is also liable to be rejected."

       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  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.   

       Mr. Dhruv Mehta, learned counsel appearing on behalf of the  respondent, however, supported the judgment.

       Penalty and Excise Duty vis-‘-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  which reads as under:-

"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 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 alcohol or any substance included in sub- paragraph (b) of this entry."

       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  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 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 found  in terms and conditions of  the licence.  Such terms and conditions of licence are fixed by the State by  reason of the provisions of the Act  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 furtherance of the terms of the licence  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 Kerala and Others v. Maharashtra Distilleries Ltd. and Others [(2005) 11  SCC 1] stating:  "79. In this connection we may usefully refer to the  decision of this 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

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 statutory power  conferred upon it in terms 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 301 and 304 of the Constitution  were to be complied with in view of the fact that the duty  of import must conform 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 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 permissive privilege to deal in  liquor is not a right at all. The levy charged for parting  with its privilege is neither a tax nor a fee. It is simply a  levy for the act of granting permission or for the exercise  of power to part with that privilege. This 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 in  its regulatory power has the right to prohibit absolutely  every form 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."         A levy is imposed by the State in exercise of its monopoly power.   Even such monopoly power of the State is restricted.  [See Kerala  Samsthana Chethu Thozhilali Union v. State of Kerala and Others, (2006) 4  SCC 327]

       There is another aspect of the matter.  The time period fixed for  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 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. M/s. Indian Aluminium Co.  Ltd. [2006 (10) SCALE 34].

       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 in  the case.   

       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.   

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

       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/-.