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Report No. 158

2.2.1. Nature of problems created in pursuance to the decision in Synthetics & Chemicals Ltd. case (supra).-

The decision of the Constitution Bench created several practical problems. As is explained in the later decisions of the Supreme Court, to be referred to presently, there is no such thing as "industrial alcohol". What is manufactured is alcohol, namely, of 95% and above purity which, it appears, is known as "ethyl alcohol" and also as 'rectified spirit'. This rectified spirit can be used for both industrial and non-industrial purposes. (In the following paragraphs wherever reference is made to "industrial" purposes, it means purposes of industries other than those engaged in the manufacture of intoxicating liquors/IMFL and wherever the expression 'non-industrial' purpose is used, it means the use of alcohol for obtaining country liquor/arrack by mixing water therein or by industries engaged in manufacture of intoxicating liquors/ IMFL).

Rectified spirit can be used both for industrial purposes and non┬Čindustrial purposes. What is very often done and insisted upon by the State governments is to denature the rectified spirit meant for industrial purposes. This is done because once the rectified spirit/alcohol is denatured by adding denaturants, the alcohol/rectified spirit becomes unfit for obtaining country liquor or for manufacturing intoxicating liquors/IMFL. It can be used only for industrial purposes like manufacture of paints, varnishes and other industrial purposes. But what is important to notice to repeat - is that even without mixing denaturants, rectified spirit/alcohol can be used for industrial purposes.

Now, a plant producing alcohol/rectified spirit may remove it (according to the Central Excise and Salt Act, 1944 and the rules made thereunder, it may be remembered, duty is payable at the stage of "removal". Though the duty of excise is leviable and levied on the manufacture or production of the goods, it is collected at the stage of removal from the place of production or the bonded warehouse, as the case may be. This position is well established by the several decisions of the Federal Court and the Supreme Court) and sell it either for industrial purposes or for non-industrial purposes as may be directed by the appropriate regulating authority. There are also units which manufacture rectified spirit for their own consumption i.e., for manufacturing intoxicating liquors /IMFL.

The difficulty, however, arises (particularly in view of the indisputable fact that for obtaining the country liquor /arrack, all one has to do is to mix water with the rectified spirit) in the matter not only of levy of duty, tax and fees but more so in the matter of regulating and controlling the manufacture, possession, sale and transportation of the rectified spirit which is not denatured. According to the aforesaid judgment of the Constitution Bench, as interpreted and understood by one section of lawyers, States have no power either to levy any duty/tax/fees on the rectified spirit or to regulate its manufacture, possession, sale or transport it being the exclusive domain of the Union - and that they come in only when the potable liquors including country liquor is manufactured or obtained, as the case may be.

The other interpretation and understanding of the aforesaid decision of the Constitution Bench is that the said decision is confined only to industrial alcohol i.e., denatured spirit or the denatured rectified spirit, as the case may be, and is not relevant to non-denatured spirits and that so far as non-denatured alcohol/rectified spirit is concerned, the States alone have the exclusive power to levy duty, tax and fee thereon and to regulate their manufacture, possession, sale and transportation.

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