2003 (9) TMI 759 - SC - Indian Laws

Whether the State of Bihar can levy penalty for loss or wastage of molasses? - Whether such loss can be directed to be recovered from the respondents? Held that - The statutory authorities must act within the four-corners of a statute. They could take recourse to the proceeding for levy of penalty and the recovery thereof from the respondents only in the event there existed any agreement or statutory provision therefor.The statutory authorities also could not have sought to levy penalty relying on or on the basis of the audit report only. They were required to apply their own independent mind for the purpose of finding out as to whether the respondents in law had committed any breach of the terms and conditions of licence or the provisions of 1947 or 1915 Acts so as to make them liable for levy of penalty. The concerned authorities acting in terms of the statutory provisions, therefore, without any further investigation could not have acted mechanically on the audit report. State legislature has no power to enact law levying duty on the spirit, which is not meant for human consumption thus no penal duty could have been imposed on rectified spirit. So far as the third submission of Mr. Ray to the effect that the penalty was in the nature of compensation for the breach of condition No. 8 of the tender notice is concerned, the same has no merit. The tender notice does not provide for imposition of any penalty and in the absence of any opportunity to the distillers the penalty could not be realized nor could it be adjusted against the statutory price for rectified spirit.Mr. Ray, is not correct when he submits that such demand was made in terms of the condition of the contract in respect whereof the writ petitions of the respondents were not maintainable. Appeal dismissed.

Issues Involved:
1. Levy of penalty for loss or wastage of molasses by the State of Bihar.
2. Legislative competence of the State of Bihar to impose such penalties.
3. Procedural fairness in the imposition of penalties.
4. Validity of the demand notices issued based on the audit report.
5. Applicability of the Bihar Molasses (Control) Act, 1947, and Bihar Excise Act, 1915.

Detailed Analysis:

1. Levy of Penalty for Loss or Wastage of Molasses:
The primary issue was whether the State of Bihar could levy a penalty for the loss or wastage of molasses. The respondents, engaged in the manufacture of spirit from molasses, were penalized based on an audit report by the Comptroller and Auditor General, which identified potential revenue loss due to wastage. The penalty was justified by the appellants based on condition no. 8 of a tender notice issued under the Bihar Excise Act. However, the High Court found that the penalty was imposed without issuing any show-cause notice to the respondents, which violated principles of natural justice.

2. Legislative Competence of the State of Bihar:
The High Court examined the legislative competence of the State to impose such penalties. It concluded that the State had no jurisdiction to levy the penalty, referencing the Supreme Court's decision in Synthetics and Chemicals Ltd. v. State of U.P., which held that the State could not levy duty on spirit not meant for human consumption. The State's power was limited to imposing duties on spirit intended for human consumption under Entry 51 of List II of Schedule VII.

3. Procedural Fairness in the Imposition of Penalties:
The High Court noted that no opportunity was given to the respondents to be heard before the penalty was imposed. There was no adjudication of any breach of condition no. 8 of the tender notice. The Supreme Court affirmed this, emphasizing that the imposition of penalties without a fair hearing and proper adjudication was against the principles of natural justice and thus illegal and void.

4. Validity of the Demand Notices Issued Based on the Audit Report:
The demand notices were issued solely based on the audit report without independent verification by the statutory authorities. The Supreme Court held that statutory authorities must act within the statutory framework and could not rely solely on the audit report without conducting their own investigation. The penalty imposed was therefore deemed invalid.

5. Applicability of the Bihar Molasses (Control) Act, 1947, and Bihar Excise Act, 1915:
The High Court found that neither the 1947 Act nor the 1915 Act provided for the imposition of such penalties. The respondents did not participate in the tender process or possess the necessary licenses under the tender notice, making the penalty clause inapplicable. The Supreme Court concurred, stating that the statutory provisions did not support the imposition of penalties for shortfall in spirit production from molasses.

Conclusion:
The Supreme Court upheld the High Court's judgment, dismissing the appeals and confirming that the imposition of penalties was illegal. The State lacked legislative competence to levy such penalties, and the procedural fairness was violated as no opportunity for a hearing was provided. The demand notices based on the audit report were invalid, and the applicable laws did not support the penalties imposed. The appeals were dismissed with no order as to costs.

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