The Co Operative Sugars Ltd v. Govt Of Kerala — 1994 DIGILAW 205 (KER)

JUDGMENT T.V. Ramakrishnan, J. 1. The petitioner, a Cooperative Society wherein Government is having more than 50% of its share capital is challenging the sustainability of Ext. P16 order whereby the Board of Revenue has found the Society liable to pay excise duty on liquor under various heads as per the provisions in the Abkari Act (for short "the Act") and the Kerala Distillery and Warehouse Rules (for short "the Rules"). 2. Petitioner - Society is having a distillery and has entered into an agreement for the manufacture and supply of arrack with the Government of Kerala, a true copy of which is produced as Ext. P1. As per the conditions contained in Ext. P1 the petitioner - Society is to act as a contractor for the manufacture and supply of arrack to vendees as directed by the Government from time to time. The entire quantity of arrack manufactured is intended for supply to the vendees on production of proof for payment of duty to the Government. The Society as a supply contractor is entitled to collect only the puce of arrack supplied to the vendees which price is also fixed by the Government from time to time. Thus as per the terms and conditions contained in Ext. P1 agreement, the Society has no liability to pay excise duty on the arrack manufactured and supplied to vendees, the same being the liability of the vendees, since the vendees have to pay such duty in advance so as to entitle them to get arrack from the Society as per the agreement. However, on the basis of certain objections noted by the Auditors at the time of audit,, demand notices were issued to the petitioner to pay excise duty under various heads of account on the basis that the Society was liable to pay such duty under the provisions of the Act and Rules and has illegally omitted to pay the same. Before issuing the demand notices based upon the audit objections, admittedly no attempt was made to make any assessment with notice to the Society. On receipt of the notices the Society submitted written representation raising various factual and legal objections against the demands made as per the notices before the Board of Revenue, Trivandrum. Ext. P16 is the common order passed with reference to such objection petitions referred to therein as Exts. On receipt of the notices the Society submitted written representation raising various factual and legal objections against the demands made as per the notices before the Board of Revenue, Trivandrum. Ext. P16 is the common order passed with reference to such objection petitions referred to therein as Exts. P4, P8, P10(c), (e), (f), (i), (k), (m) and (p). The petitioner has produced the copies of objection petitions disposed of as per Ext. P16 as Exts. P3, P8 (b), (d), (e), (i). (c), (g) and (h) respectively in this O. P. Even before the disposal of the objection petitions revenue recovery steps were, also taken against the petitioner. According to the allegations in the O. P., the total amount of excise duty covered by the demand notices comes to Rs. 1,04,18,309,70. Out of the said amount a total amount of Rs. 42,01, 471. 15 has already been paid on several occasions as conditions for the grand of slay of recovery proceedings initiated under the Revenue Recovery Act. It is relevant to note at this stage itself that Ext. P16 order was in fact passed on the basis of a direction from this Court contained in Ext. P15 Judgment in O. P. No. 6245 of 1987, an O. P. filed by the petitioner challenging the sustainability of the demands made and the revenue recovery notices issued for the recovery of the excise duty covered by such demand notice. 3. In Ext. P16 the second respondent has considered the points raised in the 9 petitions/representations submitted the by petitioner, separately. Most of the points raided in the several petitions/representations are common points as acted by the second respondent in his order itself and were disposed of by him on the basis of common reasoning also. All the objections have been rejected as per Ext. P16 and the order is under challenge in its entirety. 4. S.17 and 18 of the Act are the relevant section in the Act defiling with the levy of excise duty on liquor and luxury tax on intoxicating drugs. As the question raised in the O. P. relates only to excise duty on liquor, I am not referring to the provisions in the Act dealing with luxury tax. 4. S.17 and 18 of the Act are the relevant section in the Act defiling with the levy of excise duty on liquor and luxury tax on intoxicating drugs. As the question raised in the O. P. relates only to excise duty on liquor, I am not referring to the provisions in the Act dealing with luxury tax. S.17 empowers the Government to direct levy of excise duty on all liquor permitted to be imported or exported or transported or manufactured or issued or sold in any part of the State subject to the provisions in proviso to that Section. The provisions in the proviso are not very relevant as far as the point arising for consideration and as such are not being referred to specifically. S.18 specifically empowers the Government to adopt one of several alternative modes prescribed in that Section for the levy of duty on the class of liquors mentioned in that Section. Thus duty can be levied either on the quantity produced or passed out of or in accordance with the scale of equivalents calculated on the quantity of materials used or by the degree of attenuation of wash or wort as the case may be. The Section also prescribes the maximum rate of duty leviable under the Act. In exercise of the powers conferred under S.17 and is of the Act a levy of duty has to be made specifying the rate not exceeding the maximum prescribed in the Act in any of the modes known to law. Thus in the Rules which are framed under the Act different provisions have been made to levy duty under various accounts. As examples R.34 of part 1 of the Rules and R.55, 98 and 105 etc. of part II of the Rules can be referred to. Rules also contain provisions granting allowances from duty in almost all cases where duty has been levied as per the Rules. This in short is the scheme for levying duty contained in the Act and Rules. It may also be useful to note that almost all the demands under challenge in this case relate to duty alleged to have become due and payable before 1985 and as such the questions arising for consideration may have to be resolved with reference to the relevant provisions as they stood in 1985 in cases where provisions in the Rules stand amended after 1985. 5. 5. I may now proceed to consider the merits of the various objections raised by the petitioner against the levy of duty in the order in which they were considered and disposed of in Ext. P16 with reference to the contention raised by the parties and the relevant provisions of the Act and Rules. 6. Points raised in Ext. P3 petition: Duty on the wastage or shrinkage occurring during blending and reducing operation in the manufacture of arrack: The maximum duty claimed is under the above head of account. In fact the main point pressed at the time of arguments by the learned counsel was also about the sustainability of the levy of duty under the above head of account. 7. Petitioner has totally disowned liability for payment of any duty under this head. According to Sri. P. R. Raman learned counsel for the petitioner shrinkage or wastage occurring during blending and reducing operation is quite natural and practically unavoidable. It was submitted that during blending and reducing operation no loss of either spirit or alcohol occurs. What is lost is only water For mere shrinkage wastage no duty can be levied. R.98 and 99 would indicate that shrinkage at least,to the extent of 1% is considered as inevitable and that the petitioner is not even bound to submit explanation for such shortage in volume. As such the shrinkage at least to the extent of 1% is liable to be excluded altogether while calculating the quantity of arrack produced as unavoidable or necessary wastage in the process of recovery of arrack from spirit through blending and reducing operation. Further it was contented that even if the quantity of arrack actually obtained is less than what is expected, loss can be considered only as that of arrack and not of spirit. In that view duty even if leviable can only be at the rate prescribed for arrack and not of spirit as has been levied in this case. The petitioner has a further case that of the total amount claimed as duty for the waistage occurring during the blending and reducing operation an amount of Rs. 11,27,879,90 is a duplication and has to be excluded altogether. The petitioner has a further case that of the total amount claimed as duty for the waistage occurring during the blending and reducing operation an amount of Rs. 11,27,879,90 is a duplication and has to be excluded altogether. The petitioner has also a larger contention that levy of excise duty on wastage during the blending and reducing operation is totally illegal and without jurisdiction as there is no provision in the Act or Rules to make such a levy against it. 8. In answer to the above contentions learned Government Pleader Mr. A. A. Mohammed Nazir has reiterated with considerable force the reasoning contained in Ext. P16 order relying upon the provisions contained in S.17 and R.34 of Part 1 and R.98, 99 and 105 of Part II of the Rules apart from some other, relevant Rules. It was submitted that until R.98 was amended by Incorporating a provision for granting allowance to the extent of 1% of wastage during blending and reducing operation there was no provision for allowing deduction for such wastage. As the duty claimed is for a period prior to the amendment, the payment demand is fully legal and justifiable. It was also submitted that though shrinkage may occur during blending and reducing operation, the same can been made good by adding sufficient quantity of water to make up the deficiency in the bulk quantity of arrack produced. In the circumstances it was contended that the allowance granted for shrinkage in blending and reducing operation in accounts was unjustifiable and the Auditors are totally justified in pointing out the irregularity and the departmental authorities are also justified in making a demand for payment on the quantity of proof litres of spirit excluded from consideration as shrinkage in the process of manufacture of spirit and arrack. 9. Admittedly, arrack is manufactured or recovered in the distillery of the petitioner through blending and reducing operation. The arrack to be manufactured and supplied as Ext. P1 conditions has to be in the strength of 25 under proof (75 proof). For the purpose of manufacture of arrack spirit is mixed with water in the ratio of 1:1.2 so as to reduce the strength of spirit to the required proof level. The spirit imported or manufactured in the distillery and kept in different storage tanks has to be blended before reducing operation. For the purpose of manufacture of arrack spirit is mixed with water in the ratio of 1:1.2 so as to reduce the strength of spirit to the required proof level. The spirit imported or manufactured in the distillery and kept in different storage tanks has to be blended before reducing operation. The whole operation is shortly known as blending and reducing operation. Running of every activity in the distillery such as manufacture of spirit, production of arrack and their supply etc. are ail strictly regulated by the provisions of the Act and Rules. The whole operation of blending and reducing is controlled and carried out directly under the supervision of the excise officials as provided in the Rules. 10. One of the important aspects to be noted in connection with the blending and reducing operation is that when spirit and water is mixed for the purpose of manufacture of arrack in the required rate certain shrinkage in the volume occurs and the resultant volume of arrack will not normally be arithmetically equal to the volume of spirit and water mixed together in the beginning of the process. In the Technical Excise Manual by Lieut. Colonel Bedford, who was the Director, Central Excise Laboratory for India, which is approved as an authority on the subject by the Government the learned author has dealt with the above aspect in the following manner; "......in any series of reducing operations the total of, reduced. spirit is always less than the total found by adding together the strong spirit used and the water added to it. This shrinkage is due to the fact that when alcohol and water are mixed a combination of the two substances occurs accompanied by a distinct contraction or loss of volume .......................................................... spirit is always less than the total found by adding together the strong spirit used and the water added to it. This shrinkage is due to the fact that when alcohol and water are mixed a combination of the two substances occurs accompanied by a distinct contraction or loss of volume .......................................................... The practical results of this are that the bulk obtained is less than that calculated, but the spirit strength is correspondingly too high, and such abnormal results are undesirable in Excise control: It should be understood, however, that shrinkage losses, though inconvenient from the practical Excise point 'of view, are always losses of water, not of spirit." In Para.151 the author has further discussed how shrinkage loss can be removed by the use of reduction tables and the corrected Sike's tables : "It is very important to realise that shrinkage lessees are eliminated from the distillery stock account when the new reduction tables and the corrected Sike's tables are employed. The reduction tables show the true amount of water to be added, including that required to compensate for contraction, whilst the corrected Sike's tables give true spirit values for all indications of the hydrometer instead of the frequently erroneous values shown in the old tables. As a result, the bulk of the reduced spirit will be that calculated by the rule of three method, and the proof gallons before and after reduction will agree, if gauging and proving are carried out with due care and precision.'' After discussing the ways and means for eliminating " shrinkage loss the author has stated thus in Para.152 of the Manual: "Independent of errors in working, however, a small apparent loss, not exceeding 1 per cent of the proof gallon age, will frequently appear. This is referred to in the preface to the reduction tables and is due to the high temperatures prevalent in India ........." Apparently taking note of the natural phenomenon of shrinkage which occurs during the blending and reducing operation, the unamended R.98 (10) of Part I of the Rules provided that when spirit is blended or reduced to the authorised issue strength other than 60. U. P. any wastage exceeding 1% on the proof litres of spirit taking part in the operation should be explained by the officer. U. P. any wastage exceeding 1% on the proof litres of spirit taking part in the operation should be explained by the officer. The above provisions was amended with effect from 24-8-1985 to the following effect: "When spirits are blended or reduced to the authorised issue strength, waist age of not more than one per cent is the proof litres of spirit taking part in the operation shall be allowed." While the unamended Rule was to the effect that waist age more than 1% should be explained by the officer, the amended Rule provided for an allowance for wastage not exceeding 1% of the total quantity of spirit used at the beginning of blending and reduction. Though there is some difference in the legislative approach to the problem before and after the amendment of R.98 the basic assumption is one and the same, namely that during blending and reducing operation normally a wastage by way of shrinkage not exceeding 1% of the total quantity would necessarily occur. Practically it may be difficult to avoid such loss in volume, though taking extra care and caution it may be possible to avoid such loss by adding sufficient quantity of water using revised spirit tables as indicated in the excise Manual and R.99 of part II Rules. The observations of Bedford in the Technical Excise Manual and the provisions contained in the amended and unamended R.98(10) of the Rules would indicate that normally shrinkage or wastage of not more than 1% occurs during the blending and reducing operation. The provisions contained in R.99 which I may extract a little later would make position further clear : 11. In this case, it may be noted that the Department has not by itself levied the excise duty on shrinkage wastage which occurred during blending and reducing operation treating it as unexplained wastage on the basis of the details in the register (D8 Register) and statement (D11 statement) directed to be maintained as per the Rules and copies of which are to be furnished to the officers of the Excise Department. In fact depart mentally allowance was granted to the full extent of shrinkage which was found to be below 1%. The demand for excise duty on shrinkage occurred during blending and reducing operation was for the first time made only on the basis of the objections raised during audit. In Ext. In fact depart mentally allowance was granted to the full extent of shrinkage which was found to be below 1%. The demand for excise duty on shrinkage occurred during blending and reducing operation was for the first time made only on the basis of the objections raised during audit. In Ext. P2(d) inspection report, the Auditors have made the following observations regarding the wastage in blending and reducing, operation. "According to R.99 of the Kerala Distillery and Warehouse Rules Part 11 no allowance shall be given for losses in blending and reducing operations. It is however noticed that 14,217.3 proof litres of spirit have been allowed to the Chicops during 1973-74, as shrinkage in the process of manufacture of arrack. The short levy of Excise duly on this account is 2,20, 368.15 (duty at the rate of Rs. 15.50 per (PL) of Rectified Spirit)." The above observations would clearly Indicate that the Auditors have found the allowance granted to the petitioner for shrinkage as irregular only for the reason that R.99 of Part II of the Rules does not allow any allowance for shrinkage during blending and reducing operation. In fact it is for the same reason, the objections raised by the petitioner was overruled by the second respondent in Ext. P16 order. The learned GP while supporting Ext. P16 has also advanced the same reasoning. In (he circumstances "the question to be considered in this regard is whether the levy of duty on shrinkage or wastage occurred during blending and reducing operation in the course of manufacture of arrack from spirit of higher proof strength is justifiable in the light of the provisions in S.17 read along with R.34 of Part I of the Rules. Stated differently the question to be considered is whether wastage or shrinkage occurring at the time of blending and reducing operation is liable to be excluded totally or at least to the extent of 1% from consideration while levying duty as allowable deduction even in the absence of a specific provision permitting the grant of any allowance for such shrinkage or wastage. 12. 12. The specific case of the petitioner which has not been disputed by the respondents is that the shrinkage or wastage noted in the statutory registers and statements maintained by the petitioner as per the Rules and noted by the Auditors in their inspection report does not exceed 1% of the arithmetical total of the separate bulk quantities used in the blending and reducing operation. The learned Government Pleader has also not disputed the said claim specifically made by the petitioner to that effect in the O. P. The only contention put forward as already painted out is that so long as there is no provision permitting allowance for wastage to any extent" made in any of the provisions of the Act and "Rules, the allowance granted for wastage or shrinkage in blending and reducing operation in the accounts was unjustifiable. 13. R.34 of Part I and R.99(1) & (2) and 105 of Part II of the Rules strongly relied upon by the Government Pleader in justification of the impugned levy of excise duty on shrinkage are as follows : 34. "Distillers and Warehouse keepers to account for deficiency in stocks - An account shall be taken of the distiller's and warehouse keeper's stocks at such intervals, not exceeding three months, and in such manner as the Commissioner may direct: and the distillers and Warehouse -keepers shall pay to the Government, duty at the rate prescribed for rectified spirit on all spirit which are not forth coming and which could not be accounted for, to the satisfaction of the Commissioner, in excess of an allowance of one per cent which shall be made for wastage. Wastage for the purpose of collection of duty on the excess as aforesaid shall be calculated at the end of every quarter ending the last day of June, September, December and March of every year. If the licence is to expire earlier then the last day of the quarter the wastage shall be calculated at the end of such period': Provided that if it is proved to the satisfaction of the Commissioner or of such officer as he may appoint that any deficiency in excess of one percent could not have been prevented by the exercise of proper care and precaution, the payment of duty at the above rate on such deficiency shall not be required. ''99. ''99. Wastage in reducing and blending and in operations in general - (1) The reading of the dipping rod to the nearest wet tenth only tends to show in a large number of cases a smaller quantity in a vat than is really contained therein. This, in the case of large vats, may amount to three bulk litres or even slightly more. Further, the method of gauging by frustra tends to show either a large or a smaller quantity than the actual, and this depends upon whether the dip cuts below or above the middle line. Increases of temperature increases and decreases of temperature decreases the bulk of the liquid. When spirits of widely varying strengths are mixed together the resultant bulk quantity will be less than the arithmetical total or the separate bulk quantities' blended. The addition of water to spirits results in a contraction the amount of which depends upon the strength of the spirits reduced. All these causes operate either separately or together to create an apparent wastage in bulk but will effect the proof equivalent only to the extent represented by the bulk wastage; they have no effect upon the strength. But as all wastages are shown in proof the result of nearly every operation will be that some figure either an excess or a wastage will have to be carried into column (38) of D8 to enable a. correct arithmetical balance between columns (15) and (37) to be obtained (2). With the revised spirit tables and the blending and reducing tables of Major Bedford, the original proof quantity will be obtained in all blending and reducing operations and the only causes which can operate to produce excesses or wastages are those pointed out supra. ((Added as per amendment) However in blending and reducing operations, an allowance of wastage of not more than one percent shall be allowed.") "105. Wastage discovered at quarterly stock taking (1) In the case of wastage discovered at the quarterly stock taking the allowance under R.34 of Part I is one per cent and should be calculated on the actual balance in hand on the date of last stock taking plus the quantity since manufactured 'and received, excluding issues for rectification and filtration. Wastage discovered at quarterly stock taking (1) In the case of wastage discovered at the quarterly stock taking the allowance under R.34 of Part I is one per cent and should be calculated on the actual balance in hand on the date of last stock taking plus the quantity since manufactured 'and received, excluding issues for rectification and filtration. Any wastage that may be found to result in 'reducing or blending operations should be shown separately in column (20) of the DII statement and the percentage calculated only on the net wastage." (2) A further wastage of 3/4 percent will be allowed on all spirits issued for rectification. Any wastage in excess of this allowance will be treated as ordinary wastage. (3) A wastage of 3 percent will be allowed on all spirits issued for filtration (in a separate filtering plant). Any wastage in excess of this allowance will be treated as ordinary wastage. 14. A careful study of the provisions in R.34 of Part I of the Rules and R.97 to 99 and 102 to 107 of Part II of the Rules and the details to be included in the registers and statements required to be maintained as per the above Rules would in my view be helpful to find a solution to the question required to be decided in this case. These provisions would show that 1% allowance granted as per R.34 is over and above certain other allowances allowed as per several other Rules contained in the Rules and the liability to pay duty as provided in the Rule arises on quarterly stock taking. The provision in R.34 also specifically makes the distillers and warehouse keepers liable to pay duty only on all spirits which are not forthcoming and which could not be accounted for to the satisfaction of an allowance of 1% which shall be made for wastage under that Rule. The proviso to the Rule further empowers the Commissioner or such other officer appointed by him to waive duty on the deficiency in quantity in excess of 1% if it is proved that such deficiency could not have been prevented by the exercise of proper care and precaution. In other words, unexplained or unaccounted wastages alone is declared to be dutiable as per R.34 of Part I of the Rules. In other words, unexplained or unaccounted wastages alone is declared to be dutiable as per R.34 of Part I of the Rules. So the question is what all wastages should be excluded from the total wastages to find out the dutiable wastage. In cases where allowance for wastage is granted specifically as per the Rules, there is no difficulty and the dutiable wastage will have to be calculated only after deducting from the total wastages such quantity equal to the allowances granted towards the particular wastage, Balance wastages alone will be treated as excess wastages due to negligence and lack of care. 15. Further, in my view, the detailed provisions made in the above Rules statutorily recognises the indisputable fact that wastages of different kinds normally occur during the various activities and operations daily carried on in the distilleries and warehouses, The Rules, therefore, insist that the nature and results of the various activities and operations carried on daily in the distilleries and warehouses should be recorded on the spot with utmost care and caution by the officers concerned with special reference to different kinds of wastages occurring during the several operations separately, in different registers and statements. The various provisions in the above Rules specifically directs to note separately the quantum of wastage which takes place during several operations in the distilleries and warehouses. At the time of quarterly stock taking the officer in charge is directed to check and verify the various entries to be made daily in the various registers to be maintained at the distillery and to complete the columns in the statement in Form D11 with utmost care and caution. The following details in Form D11 require detailed consideration; In column 12 D11 statement the total wastages noted by the officer in charge in column 38 of D 8 register is to be entered. Wastages occurring in distilleries and warehouses while storing spirits in vats is to be entered in column 38 of D8 register. In column 14 actual balance found by the officer in charge of stock taking is expected to be entered. In column 13 balance according to officer's books have to be entered, in column 14 difference between columns 13 and 14 is directed to be entered. Wastages in Alteration and rectification is to be entered in columns 16 and 17. In column 14 actual balance found by the officer in charge of stock taking is expected to be entered. In column 13 balance according to officer's books have to be entered, in column 14 difference between columns 13 and 14 is directed to be entered. Wastages in Alteration and rectification is to be entered in columns 16 and 17. The sum total of the quantities shown in columns 12, 15, 16 and 17 has to be entered as total wastage in column 18. Column 19 is important and the direction contained in column 19 is thus; "Exclude shrinkage due to blending and reducing operations." The next two columns, namely 20 and 21 are also important and they are thus: "20. Exclude wastage in filtration not exceeding 3% of spirits rectified. 21. Exclude wastage in rectification not exceeding 3/4% of spirits rectified. " Total quantity of wastage, namely the sum total of the quantity shown in columns 19, 20, 21 is to be entered in column 22. Column 23 deals with net wastage which is described as the difference between the entries in column 18 and 22. Column 18 as already noted deals with total wastage and column 22 deals with the total quantity of wastages liable to be excluded altogether either as wastage allowed or shrinkage due to blending and reducing operation. Thus the net wastage is to be obtained after deducting the total quantum of wastage directed to be excluded as per columns 19, 20 and 21 from the total wastages arrived at by adding all kinds of wastages occurring during the various process including blending and reducing operation. From the details contained in Form D11 and discussed above it is evident that shrinkage due to blending and reducing operation is directed to be excluded altogether while arriving at the net wastage for the purpose of R.34 of Part I and R.105 of Part II of the Rules. 16. What is important to be noted in the analysis of the details shown in Form D 11 is that where ever allowance have been granted under various Rules towards particular wastages such percentage of allowance are directed to be excluded as per the entries in Form D 11 for the purpose of arriving at the net wastage. 16. What is important to be noted in the analysis of the details shown in Form D 11 is that where ever allowance have been granted under various Rules towards particular wastages such percentage of allowance are directed to be excluded as per the entries in Form D 11 for the purpose of arriving at the net wastage. It is also important to note that even though in the case of shrinkage in blending and reducing operation no allowance was granted under R.98(10) and 99 of the Rules before those rules were amended in 1985 : such shrinkage was specially directed to be excluded in its entirety or without any limit while arriving at the net wastage as per the entry in column 19 of Form D 11. In the other words, even though no allowance was granted towards shrinkage in blending and reducing operation, such shrinkage was treated on an equal footing with wastage in respect of which allowance has been specifically granted as per the Rules, Unlike in cases where a particular percentage of wastage is granted as allowance in the case of shrinkage in blending and reducing operation; the direction in column 19 is to exclude such shrinkage without any limit while arriving at the net wastage. The significance of the direction to exclude shrinkage without any limit as in the case of columns 20 and 21 while arriving at the net wastage in Form D11 cannot be omitted to be noted. In fact in this case it seems to be of decisive significance. 17. It is true that R.98 and 99 as it stood before 1985 amendment never provided for any allowance to be granted towards shrinkage or wastage in blending and reducing operation. In fact the unamended sub-r.(2) of R.99 is to the effect that no allowance is granted towards shrinkage. It is in spite of such absence of a specific provision allowing an allowance towards shrinkage in blending and reducing operation and the statement that no allowance is allowed for shrinkage that such shrinkage was directed to be excluded altogether while arriving at the net wastage. The provisions in R.97, 98 and 99 would clearly indicate that wastage or shrinkage during the blending and reducing operation is treated on a separate footing from other kinds of wastages which is likely to occur during the various other activities or operations. The provisions in R.97, 98 and 99 would clearly indicate that wastage or shrinkage during the blending and reducing operation is treated on a separate footing from other kinds of wastages which is likely to occur during the various other activities or operations. While in all other cases of wastages other than wastage in blending and reducing operation only a percentage of the total wastages is directed to be excluded in the case of shrinkage in blending and reducing operation, exclusion is granted without any restriction subject of course to the requirement of satisfactorily explaining the shrinkage if it is in excess of 1%. Such a special treatment was probably justified in view of the fact that, during blending and reducing operation there is no loss or wastage of spirit and what is lost is only water. The rule makers might have thought that it will not be reasonable to grant an allowance for something which is not actually lost and that may probably be the reason why no allowance was specifically granted as far as the shrinkage in blending and reducing operation is concerned but was treated as explainable wastage liable to be excluded along with other wastages to the extent allowed. 18. The reasoning contained in Ext. P16 to the effect that under R.34 of Part I of the Rules reference to wastage consequent on blending operation is actually shrinkage and no exclusion is permissible towards shrinkage or wastage consequent on shrinkage can be allowed, seems to be not sustainable since it is against the scheme for levy of duty contemplated under the various Rules referred to and discussed above. R.97, 98 and 99 itself refer in various places to shrinkage wastage to indicate the wastage due to shrinkage or deficiency in the quantity due to shrinkage. In D11 statement while calculating the total wastage, shrinkage also is taken into consideration as per entry Nos. 19 and 22. At the same time to arrive at the net wastage along with other admitted wastages, shrinkage wastage in blending and reducing operation is also directed to be excluded as per entry contained in column 23. In D11 statement while calculating the total wastage, shrinkage also is taken into consideration as per entry Nos. 19 and 22. At the same time to arrive at the net wastage along with other admitted wastages, shrinkage wastage in blending and reducing operation is also directed to be excluded as per entry contained in column 23. Thus, it is after excluding shrinkage due to blending and reducing operation, wastage in filtration not exceeding 3% of the spirit filtered and wastage in rectification not exceeding 3/4% of spirit rectified from the total wastage that net wastage is to be arrived at going by the directions contained in entry 23 of D11 statement. The various provisions in the Rules would clearly indicate that even though there is no loss or waste of spirit happening during blending and reducing operation, wastage occurs in the form, of shrinkage arid apparent loss in bulk quantity and such loss is practically difficult to avoid though by taking extreme care it would be avoided. It is for that reason, in my view, entry 19 in D11 statement directs exclusion of shrinkage along with other admitted wastages where actually wastage occurs. 19. Further, if the reason for deficiency in the bulk quantity occurring during the blending and reducing operation is only shrinkage and not loss of spirit and no spirit is actually lost during the operation there may not be any justification to treat such shrinkage as wastage and then to treat the same as unexplained wastage and levy duty under R.34 of Part I of the Rules. Even treating it as a wastage it can only be treated as an explainable wastage or accountable deficiency. If no quantity of spirit is actually lost or wasted there is no question of claiming any duty on such quantity representing shrinkage and as such the demand for payment of duty on the quantity of spirit noted as wastage during the blending and reducing operation cannot be sustained in law. 20. Even after taking note of the fact that deficiency can be made good by adding sufficient quantity of water the amended Rule grants 1% allowance towards shrinkage wastage also. This may be because as noted by Bedford in his Manual at Para.152, normally a shrinkage to the extent of 1% cannot be prevented even if reasonable care and caution is taken to add water. This may be because as noted by Bedford in his Manual at Para.152, normally a shrinkage to the extent of 1% cannot be prevented even if reasonable care and caution is taken to add water. As such after the amendment the resultant position will be that only 1% of the shrinkage wastage can be excluded while arriving at the net wastage and the net wastage in excess of 1% may become dutiable, though the direction in column 19 of Form D11 statement is to exclude shrinkage without any limit. Probably there is an omission on the part of the rule making authority to amend the direction to suit the change made in the rule by the amendment. In view of the amended provisions in R.98 and 99 of Part II of the Rules exclusion can now be had only to the extent of allowance granted as per those Rules as in the case of exclusions provided in columns 20 and 21 and not without limit. This is a matter for the rule making authority to take note of for the purpose of bringing in necessary amendments to Form D11. Incidentally, it may also be useful to note that the reference to column 20 of Form D11 in R.105 can only be a mistake for column 19 as what is referred to therein is the wastage which results from blending and reducing operation. This is also a matter for consideration by the rule making authority for amending the Rules suitably. 21. In the light of what is discussed above, the view, taken by the Auditors that in the absence of a provision granting specific allowance for wastage occurring during blending and reducing operation such wastage cannot be excluded while arriving at the dutiable wastage and the more or less same reasoning reiterated in Ext. P16 seems to be against the specific direction contained in column 19 of D11 statement and the entire scheme of levy of duty contained in R.34 of Part I of the Rules. 22. In the light of the finding that shrinkage wastage in blending and reducing operation is liable to be excluded and cannot be treated as unexplained deficiency, the sustainability of the contention that duty if at all leviable can be levied only at the rate applicable to alcohol instead of the rate applicable to spirit need not be considered in this case. 23. 23. As the petitioner - Society has been given full opportunity to substantiate their objection before passing Ext. P16, the contention that before raising the demand no notice was issued and as such the demand notices issued and the recovery proceedings initiated are to be quashed on that ground cannot be sustained in law. There is no reason to think that any substantial prejudice has been caused as a result of absence of notice prior to issuance of demand notices. 24. The larger contention that no duty on wastage in blending and reducing operation is leviable since there is no Rule or notification authorising such levy cannot be sustained, in view of the provisions m R.34 of Part I of the Rules making all unexplained wastages dutiable. Since under the unamended R.98 and 99 there was a duty cast on the officer concerned to explain the wastages in blending and reducing operation if it exceeds 1%, if the explanation offered is found to be not satisfactory, it may be possible to treat such shrinkage wastage as dutiable wastage. However, the effect of the direction contained in entry 19 of D11 statement is to exclude shrinkage without any limit while ascertaining the wastage and as such it may be open to contend that shrinkage wastage occurring in blending and reducing operation is not at all liable for duty. 25. In the light of what is discussed above the demand for duty on wastage in blending and reducing operation raised against the petitioner and objected to as per Ext. P3 petition is illegal and will stand set aside. Revenue recovery proceedings initiated for the recovery of such demand will also stand set aside, I may indicate here itself that the findings entered on this point and the reliefs granted based on such findings would be applicable to the similar demands for duty on wastage in blending and reducing operation in the other demand notices issued and dealt with in the other objection petitions filed by the petitioner and disposed of as per Ext. P16. 26. Duty on transit wastage of arrack: In the case of duty claimed on wastage of arrack during transit, the relevant Rule applicable is R.55 of Part 1 of the Rules. The entire demand for duty on transit wastage dealt within Ext. P3 is on wastage which took place prior to 1980. P16. 26. Duty on transit wastage of arrack: In the case of duty claimed on wastage of arrack during transit, the relevant Rule applicable is R.55 of Part 1 of the Rules. The entire demand for duty on transit wastage dealt within Ext. P3 is on wastage which took place prior to 1980. Before the Rule was amended with effect from 8-4-1980, only an allowance of 0.5% was granted towards wastage during transit. The duty claimed in this case is after granting allowance to the extent of 0.5%. As such, so long as the Rule stands, the levy of duty cannot be considered as illegal. In this O. P. there is no challenge against the constitutional validity of the Rule. As such, I do not find any sufficient ground to hold that the demand for duty on wastage of arrack during transit in i excess of 0.5% is in any way illegal or unsustainable. It is also worth noting that as the Rule stood originally, there was 110 power conferred for waiving the duty on wastage during transit in excess of 0.5% even if it is proved that the quantity lost was never utilised for human consumption. In the circumstances, it has to be found that they levy of duty under the above head is valid and sustainable. 27. Duty of spirit lost due to accident to lorry: In this case the petitioner's objection is that spirit was lost on transit due to a lorry accident out side the state while it was brought to the State and as such no duty is leviable under the Act and Rules. This aspect of the matter has not been considered in Ext. P16. As such I would set aside the demand for duty under this head and direct a fresh decision to be taken in this regard by the second respondent after giving nonce to the petitioner. 28. Duty on shortage in production: R.34, as i have already held, permits levy of duty on unexplained deficiency in quantity noticed at the time of quarterly stock taking. The scheme for levy of duty seems to be to make unexplained deficiencies in production dutiable subject to certain allowances being granted for wastages which cannot be avoided even if reasonable care and caution is taken in the various operations carried out in the distilleries and warehouses. The scheme for levy of duty seems to be to make unexplained deficiencies in production dutiable subject to certain allowances being granted for wastages which cannot be avoided even if reasonable care and caution is taken in the various operations carried out in the distilleries and warehouses. In this view, any unexplained deficiency in production is liable for duty subject to the allowances and exclusions provided specifically under the Rules and forms prescribed by the Rules. So long as the petitioner has no case that any of the allowances specifically granted as per any of the Rules have not been granted, there is no ground to interfere with the above demand also. The rejection, of the objection in this regard is only to be sustained for the above reason, 29. Duty on rectified spirit short accounted: As the duty has been claimed on the quantity of rectified spirit short accounted, the levy is perfectly justifiable and the rejection of the objection is only to be upheld. 30. Duty on storage wastages: The duty claimed under this head is admittedly on wastages in excess of 1% allowed as per R.34 Part I and R.105 of Part II of the Rules. As such, the levy is perfectly justified and no interference is called for in this regard also. 31. Duty on wastages Rs. 1,63,768,45 : The objection raised in this regard has been overruled on the ground that no justifiable reason has been made out by the petitioner against the sustainability of the levy. In the O. P. also, petitioner has not made out any sufficient reason justifying interference with the rejection of the objection, except stating that the claim itself is vague. No interference is, therefore, called for in this regard also. 32. Objections raised in the petition dated 31-10-1994 (Ext. P8 (b): a. Transit wastage: As regards the demand for duty raised on transit wastage occurred before 8-4-1980 I have already found that the levy is justifiable while considering the similar claim raised in Ext. P3 petition. No interference is, therefore, called for in this regard also. 32. Objections raised in the petition dated 31-10-1994 (Ext. P8 (b): a. Transit wastage: As regards the demand for duty raised on transit wastage occurred before 8-4-1980 I have already found that the levy is justifiable while considering the similar claim raised in Ext. P3 petition. However, in regard to 2 demands which relate to transit wastage which occurred subsequent to 8-4-1980, a reconsideration as to whether the petitioner is entitled to claim allowances either wholly or to the extent of 1% is required in view of the amended provisions of R.55 as the unamended provisions were applied to those cases also while in fact the amended provisions should have been applied. As such, I would direct a reconsideration of the objections raised by the petitioner in regard to the claim for duty on excess transit wastage during 1980-81 and 1983-84 in Ext. P8(b) Petition. As such the demand for duty on transit wastage during the period after 8-4-1980 will stand set aside with a further direction to reconsider the objections raised by the petitioner and pass appropriate orders in that behalf. b. Duty on short levy of arrack and wastage in blending and reducing operation: For the reasons already given above, while duty on short levy is to be upheld, duty claimed on wastage in blending and reducing operation has to be set aside, I do so. c. Petition dated 26-11-1984 produced as Ext. P8(d) : Being duty claimed on shortage in production, the levy is only to be sustained in the light of the provisions contained in R.34 Part I of the Rules for the reasons already stated. d. Duty on short levy of spirit lost by overflow from tank. The loss by overflow of spirit from tank is alleged to have occurred as a result of an accident. It is seen from Ext. P16 that no information was given to the Department about the accident in time. As such it may be difficult to establish satisfactorily that the loss occurred as a result of an accident for which the petitioner cannot be held responsible. In the circumstances, there is no scope for interference with the conclusion reached in Ext. P16 in this regard. e. Petition dated 12-3-1987 (Ext. P8 (e): The demand is to be declared as illegal and set aside for the reasons already discussed. In the circumstances, there is no scope for interference with the conclusion reached in Ext. P16 in this regard. e. Petition dated 12-3-1987 (Ext. P8 (e): The demand is to be declared as illegal and set aside for the reasons already discussed. f. Petition dated 19-6-1986 (Ext. P8 (f): Loss of spirit in this case cannot,be considered as satisfactorily explained and as such there is no scope to interfere with the conclusion reached in Ext. P16 in this regard. g. Petition dated 27-12-1985 (Ext. P8 (i): The levy is on shortage in production and has only to be sustained for the reasons already given. Petition dated 27-11-1985 (Ext. P8 (c): The levy is to be held as illegal and liable to be set aside, I do so. i. Petition dated 9-4-1985 (Ext. P8 (g): No ground has been made out to interfere with the levy and as such the rejection of the objection is only to be upheld. I do so. j. Petition dated 7-7-1987 (Ext. P8 (b): The levy and demand of duty is to be held illegal and as such liable to be set aside. I do so. 33. The result of the discussions contained can be summarised thus: 1. The duty levied and demanded on wastage during blending and reducing operation in all demand notices will stand set aside as illegal. As such the demand made for such duty in the various demand notices - revenue recovery notices has to be excluded from the total demand raised against the petitioner. Recovery proceedings initiated for the realisation of duty claimed on wastage in blending and reducing operation will also stand set aside. 2. Duty claimed on transit wastage occurred on and after 8-4-1980 will stand set aside with a direction to the second respondent to consider the objections raised against such levy and to take a fresh decision in the light of the amended provisions contained in R.55 of Part I of the Rules. The amount claimed as duty on transit wastage occurred after 8-4-1980 shall also be deducted from the total amount of duty now claimed against the petitioner subject to the direction issued for fresh consideration. Revenue recovery proceedings initiated for realisation of such amount will also stand set aside. - 3. The amount claimed as duty on transit wastage occurred after 8-4-1980 shall also be deducted from the total amount of duty now claimed against the petitioner subject to the direction issued for fresh consideration. Revenue recovery proceedings initiated for realisation of such amount will also stand set aside. - 3. Duty claimed for loss of spirit as a result of lorry accident occurred out side the State while spirit was being brought to the State will also stand set aside subject to the direction for reconsideration and passing fresh orders in the matter. The amount claimed towards duty for loss of spirit in this regard shall also be deducted from the total amount now raised against the petitioner subject to the direction regarding fresh consideration. 4. All other findings in Ext. P16 will stand. In other words the levy and demand for duty under other heads will stand confirmed. In the light of the findings and directions contained in this judgment, there will be a direction to the second respondent to redetermine the actual amount of duty if any recoverable from the petitioner after giving effect to the findings and directions contained in this judgment. It will be open to the second respondent to redetermine the total liability after passing fresh orders in the matters directed to be considered or even before such determination. On such redetermination, the petitioner may be informed of the result of such redetermination. If the amount already paid by the petitioner towards duty is in excess of the liability redetermined, the petitioner will be entitled to get such excess refunded at the earliest. If any further amount is found recoverable from the petitioner, the same can be realised from the petitioner in accordance with law. O. P. is disposed of in the manner indicated above. No order as to costs.