Gupta Modern Breweries Vs. State of Jammu & Kashmir & Ors  Insc 426 (19
H.K. SEMA & V.S. SIRPURKAR
(with Civil Appeal No.2702 of 2000) H.K. SEMA,J.
These appeals have a chequered history. We shall, however, notice few facts
leading to the filing of the present appeals, strictly for the purpose of
disposal of these appeals.
The Jammu and Kashmir Excise Act, 1901 (hereinafter the Act) was passed on
The Jammu and Kashmir Distillery Rules 1946 (hereinafter the Rules) were framed
On 5.9.1973, an order was passed by the Excise Commissioner under Rule 17 of
the Rules that charges on account of salary of Excise Department staff were to
be recovered from management at 50% of total expenses. This order was, however,
withdrawn on 1.4.1974. On 13.8.1981, the Excise Commissioner, withdrew the
exemption granted by an order dated 5-9-1973. By an order dated 10.9.1981, the
Excise Commissioner made a demand for payment of salaries of Excise personnel
posted at appellant's distillery. Notice of demand was issued on 6.10.1988. On
28.9.1981, the appellant filed first OWP No. 549 of 1981 challenging Rule 17 as
being ultra vires the Act. The High Court stayed the recovery proceedings. The
appellant has also filed Writ Petition No. 1208 of 1989 challenging the demand
made on October 6, 1989 on account of staff charges, which was dismissed by the
learned Single Judge by its order dated 27th September, 1990. Aggrieved
thereby, the appellant preferred LPA (W) No.159 of 1990, which was dismissed by
the Division Bench by the impugned order. Hence the present appeals.
Section 25 of the Act empowers the Government to frame rules. The relevant
portion for the present purpose reads:- "25. The Government may from time
to time frame rules- ..
(g) for the inspection and supervision of stills, distilleries, private
warehouses and breweries;
(o) generally to carry out the provisions of this Act or of any other law
for the time being in force and relating to the Excise revenue."
Rule 17 of the Rules is claimed to stream from Section 25, which has been
assailed as ultra vires the Act reads:- "The licensee shall, if required
by the Excise and Taxation Commissioner, make into the Government treasury such
payment as may be demanded on account of the salaries of the Government excise
establishment posted to the distillery, but he shall not make any direct
payment to any member of such establishment."
The validity of the Rules has been challenged before the learned Single Judge,
before the LPA Bench and before this Court on the grounds that (a) Rule does
not have the statutory backing; (b) Rule is in excess of the rule making power
in Section 25 of the Act and suffers from excessive delegation; (c) Rule seeks
to get breweries to pay for the salaries and costs of the government officials
involved in revenue collection and it is manifestly unjust and arbitrary;
(d) Rule imposes a tax not a fee without the authority of law and,
therefore, contrary to Article 265 of the Constitution; and lastly (e) The Rule
is unreasonable and arbitrary and hence contrary to Article 14 of the
Before we proceed further to answer the aforesaid questions, we may at this
stage, point out that this Court held that a trade in liquor is res extra
commercium and, therefore, not entitled to the protection of Article 19(1)(g),
but any licensing, regulation or imposition in respect of the liquor trade
cannot be arbitrary and discriminatory.
In Khoday Distilleries Ltd. vs. State of Karnataka, (1995) 1 SCC 574, it is
said that the State can adopt any mode of selling the licenses for trade or
business with a view to maximize its revenue so long as the method adopted is
In Khoday Distilleries Ltd. vs. State of Karnataka, (1996) 10 SCC 304, it is
said in paragraph 13:
".Although the protection of Article 19(1)(g) may not be available to
the appellants, the rules must, undoubtedly, satisfy the test of Article 14,
which is a guarantee against arbitrary action. However, one must bear in mind
that what is being challenged here under Article 14 is not executive action but
delegated legislation. The tests of arbitrary action which apply to executive
actions do not necessarily apply to delegated legislation. In order that
delegated legislation can be struck down, such legislation must be manifestly
arbitrary; a law which could not be reasonably expected to emanate from an
authority delegated with the lawmaking power"
(emphasis supplied) It is, therefore, clear that even in dealing with the
liquor trade, the government cannot be manifestly unjust or arbitrary.
Dr. Rajeev Dhawan, learned senior counsel, appearing for the appellants,
contended that the concept of reasonableness applicable to delegated
legislation and more generally to actions under Articles 14 and 21 is that the
action should not be manifestly unjust and arbitrary. According to him, Rule 17
suffers from excessive delegation and is manifestly unjust and arbitrary.
Per contra Mr.S.R. Singh, learned senior counsel, appearing for the
respondents, contended that such payment postulated under Rule 17 is neither
fee nor tax but such payment is being demanded in lieu of for parting with the
exclusive right and privileges granted to the appellant for the services
rendered to the appellant.
We may at this stage notice that both the learned Single Judge and the
Division Bench erroneously relied on the decision rendered by this Court in
Government of Andhra Pradesh vs. M/s Anabeshahi Wine and Distilleries Pvt.
Ltd., (1988) 2 SCC 25. In Anabeshahi's case (supra) the fee was imposed by
Section 28(2) of the A.P. Excise Act, 1968 itself. Section 28 reads as under:-
28. Form and conditions of licence etc.: (1) Every permit issued or licence
granted under this Act shall be issued or granted on payment of such fees, for
such period, subject to such restrictions and conditions, and shall be in such
form and shall contain such particulars, as may be prescribed.
(2) The conditions prescribed under Sub-section (1) may include provisions
of accommodation by the licensee to excise officers at the licenced premises on
the payment of rent or other charges for such accommodation at or near the
licensed premises and the payment of the costs, charges and expenses (including
the salaries and allowances of the excise officers) which the Government may
incur in connection with the supervision to ensure compliance with the
provisions of this Act, the rules made thereunder and the licence.
Similarly, Rule 15 was framed consistent with Section 28 of the Act. Rule 15
15. (a) The licensee shall, if required by the Commissioner provide within
the premises of the distillery or at such site as may be approved by the
Commissioner buildings for the office and residence of the staff posted under
(b) The licensee shall, if required by the Commissioner, deposit into the
Government Treasury such amount as may be demanded towards the salaries and
allowances of the Government establishment posted at the distillery, but he
shall not make any direct payment to any member of such establishment.
A perusal of the aforesaid provisions, it clearly appears that Sections and
Rules provides that the salary and allowances described as establishment
charges which were sought to be recovered as such under the impugned notice of
Admittedly, in the present case there is no such provision in the Act or
Rules. Therefore, the decision in Anabeshahi's case (supra) is not applicable
in the facts of the case at hand.
In the case of M/s Gujchem Distillers India Ltd.
supervisory charges is traceable to Section 58-A of the Bombay Prohibition
Act of 1949. There is no such provision in the J & K Excise Act.
Dr. Dhawan referring to Rule 17 contended that it suffers from excessive
delegation, as it is manifestly unjust and arbitrary. In this connection he
contended that Section 25(o) required that the rules should seek to carry out
the provisions of the Act or of any other law relating to the excise revenue.
It is his say, that a disjunctive reading would be violative of both the
grammar and the intent if the word 'generally' is given too wide an
interpretation and the word 'and' is read as 'or'. Section 25(o) would become
wholly and completely unguided and applicable to just about anything.
The restraining element in Section 25(o) is the fact that it must relate to
Excise revenue is defined in Section 3 of the Act. It reads:
"'Excise revenue' means revenue derived or derivable from any duty,
fee, tax, fine or confiscation imposed or ordered under the provisions of this
According to Dr. Dhawan, the term fee as defined in Section 3 is not the
kind of fee that falls under Rule 17 and therefore, the fee for the purpose of
Rule 17 is not authorised by the Act.
He also referred to various sections under the Act where the terms duty and
fee are mentioned and their collection is specifically authorised:
Section 5(a) Payment of duty for import Section 6 Payment of fee or duty for
export Sections 8-10 Permits for transport Sections 11-A 12-A Licenses for
possession Section 16 Imposition of duty Section 17(d) Imposition of duty by
fees for manufacture Section 18 Framing of duties Section 22(a) Fee or duty for
licenses Section 24 Recovery of duties Section 24-B Refund of duty, tax or fee
He, therefore, contended that when the legislation intended the Act itself
indicates where a fee or duty or tax may be charged. He, therefore, argued that
to include in Section 25(o) the power to impose any independent fee not
authorised by statute, makes Section 25(o) overbroad and without any guidelines
whatsoever. He further contended that Rule 17 is also traceable to Section
25(g), which deals with inspection and supervision of distilleries, private
warehouses and breweries and does not contain any provision for the imposition
of a duty, tax or fee.
It is now well settled principle of law that the regulatory powers are
generally to be widely construed. However, empowering the State Government to
impose taxes, fees or duties and such demands must be authorised by the Statute
and must contain sufficient guidelines.
In the case of A.N. Parasuraman vs. State of Tamil Nadu, (1989) 4 SCC 683,
this Court pointed out as under:- "The point dealing with legislative
delegation has been considered in numerous cases of this Court, and it is not
necessary to discuss this aspect at length. It is well established that
determination of legislative policy and formulation of rule of conduct are
essential legislative functions which cannot be delegated. What is permissible
is to leave to the delegated authority the task of implementing the object of
the Act after the legislature lays down adequate guidelines for the exercise of
(emphasis supplied) In the case of Kunj Behari Lal Butail vs. State of H.P.,
(2000) 3 SCC 40, it was pointed out in Paragraph 14 as under:
"14. We are also of the opinion that a delegated power to legislate by
making rules for carrying out the purposes of the Act" is a general
delegation without, laying down any guidelines; it cannot be so exercised as to
bring into existence substantive rights or obligations or disabilities not
contemplated by the provisions of the Act itself".
In the case of Devi Das Gopal Krishnan vs. State of Punjab, (1967) 3 SCR
557, it was pointed out at 565-566 as under:
"Under that section the Legislature practically effaced itself in the
matter of fixation of rates and it did not give any guidance either under that
section or under any other provisions of the Act-no other provision was brought
to our notice. The argument of the learned counsel;
that such a policy could be gathered from the constitutional provisions
cannot be accepted, for, if accepted, it would destroy the doctrine of
excessive delegation. It would also sanction conferment of power by Legislature
on the executive Government without laying down any guide-lines in the Act. The
minimum we expect of the Legislature is to lay down in the Act conferring such
a power of fixation of rates clear legislative policy or guide-lines in that
regard. As the Act did not prescribe any such policy, it must be held that
section 5 of the said Act, as it stood before the amendment, was void."
In the cases aforesaid where fees akin to Rule 17 were imposed were cases
where the imposition was specifically imposed by the statute. It is, therefore,
clear that Rule 17 has no statutory backing.
The case of the respondents is that Rule 17 intended that in lieu of parting
with exclusive right and privileges granted to the appellant and for the
services rendered and therefore it is neither fee nor tax. It is contended that
the Government was rendering service to the appellant by deputing excise staff
not only for the purpose of ensuring that the denaturing of spirit is done
properly by the manufacturer but also for the purpose of specifically seeing that
the de- natured spirit does not go out of the hands, either of the distillery
owner or a retail seller or any licensee or per holder contrary to law. It is
further argued that there was co- relationship between the services rendered
and the fee levied was essential.
The question as to whether the tax payers or license holders would have to
pay for the official staff of the State for supervising collection of the
revenue, has been set at rest by the Constitution Bench of this Court in the
case of Indian Mica Micanite Industries vs. The State of Bihar, 1971(2) SCC
236. It is held in paragraph 17 as under:
"..the only services rendered by the Government to the appellant and to
other similar licensees is that the Excise Department have to maintain an elaborate
staff not only for the purposes of ensuring that denaturing is done properly by
the manufacturer but also for the purpose of seeing that the subsequent
possession of denatured spirit in the hands either of a wholesale dealer or
retail seller or any other licensee or permit-holder is not misused by
converting the denatured spirit into alcohol fit for human consumption and
thereby evade payment of heavy duty. So far as the manufacturing process is
concerned, the appellant or other similar licensees have nothing to do with it.
They are only the purchasers of manufactured denatured spirit.
Hence the cost of supervising the manufacturing process or any assistance
rendered to the manufacturers cannot be recovered from the consumers like the
appellant. Further under Rule 9 of the Board's rules, the actual cost of
supervision of the manufacturing process by the Excise Department is required
to be borne by the manufacturer. There cannot be a double levy in that regard.
In the opinion of the High Court the subsequent transfer of denatured spirit
and possession of the same in the hands of various persons such as whole-sale
dealer, retail dealer or other manufacturers also requires close and effective
supervision because of the risk of the denatured spirit being converted into
palatable liquor and thus evading heavy duty. Assuming this conclusion to be
correct, by doing so, the State is rendering no service to the consumer. It is
merely protecting its own rights. Further in this case, the State which was in
a position to place material before the Court to show what services had been
rendered by it to the appellant and other similar licensees, the costs or at
any rate the probable costs that can be said to have been incurred for
rendering those services and the amount realised as fees has failed to do so.
On the side of the appellant, it is alleged that the State is collecting huge
amount as fees and that it is rendering little or no service in return. The
co-relationship between the services rendered and the fee levied is essentially
a question of fact. Prima facie, the levy appears to be excessive even if the
State can be said to be rendering some service to the licensees. The State
ought to be in possession of the material from which the co-relationship
between the levy and the services rendered can be established at least in a
general way. But the State has not chosen to place those materials before the
Therefore the levy under the impugned Rule cannot be justified."
(emphasis supplied) In the case of Commissioner of Central Excise vs. Chhata
Sugar Co.Ltd., (2004) 3 SCC 466, one of the issues was whether the state
government's administrative charges to collect a levy could be passed on to the
person from whom the tax, fee or levy was collected. This Court categorically
held that such an imposition would be a tax and not a fee and must be duly
authorized since it is a tax (at para 14), it is held:- "Hence,
administrative charge under the U.P. Act is a tax and not a fee."
It is, thus, clear from the aforesaid decisions that imposition of
administrative services is a tax and not a fee.
Such imposition without backing of statutes is unreasonable and unfair.
In the case of Corporation of Calcutta vs.
Liberty Cinema, (1965) 2 SCR 477, it was made clear that the nomenclature is
not important. In that case, the majority judgment took the view that although
the imposition under the Calcutta Municipality Act, 1951 was described as a
fee, it was nevertheless a tax by stating (at pp.SCR 483, 484 & 490):
" Now, on the first question, that is, whether the levy is in return
for services, it is said that it is so because section 548 uses the word
"fee". But, surely, nothing turns on words used. The word
"fee" cannot be said to have acquired a rigid technical meaning in the
English language indicating only a levy in return for services. No authority
for such a meaning of the word was cited... The Act, therefore, did not intend
to use the word fee as referring only to a levy in return for services..
Section 548 does not use the word "fee"; it uses the words
"licence fee" and those words do not necessarily mean a fee in return
for services. In fact in our Constitution fee for licence and fee for services
rendered are contemplated as different kinds of levy. The former is not
intended to be a fee for services rendered. This is apparent from a
consideration of Art. 110(2) and Art. 199(2) where both the expressions are
used indicating thereby that they are not the same.The conclusion to which we
then arrive is that the levy under section 548 is not a fee as the Act does not
provide for any services of special kind being rendered resulting in benefits
to the person on whom it is imposed. The work of inspection done by the
Corporation which is only to see that the terms of the licence are observed by
the licensee is not a service to him. No question here arises of correlating
the amount of the levy to the costs of any service.
The levy is a tax. It is not disputed, it may be stated, that if the levy is
not a fee, it must be a tax."
(emphasis supplied) In the case of M/s Lilasons Breweries (Pvt.) Ltd.
vs. State of Madhya Pradesh, (1992) 3 SCC 293, Rule 22 of the M.P. Breweries
Rules 1970 to meet the annual expenses of the officers was struck down as ultra
vires the Act and beyond the rule making power of the State.
WHY IT IS TAX AND NOT FEE Under the Constitutional scheme, taxes are
distinct from fees. Excise is a form of tax. It is self-evident from various
(i) The concept of a Money Bill in Articles 110(2) and 199(2) clearly
postulate that taxes should be voted on by Parliament See Corporation of
Calcutta, (1965) 2 SCR 477 at 483 (ii) The taxes and excise in the Union List
are to be found in List I, Entries 82-92B; and (iii) The taxes in the State List
are to be found in List II, Entries 42-63 (iv) Excise is specifically dealt
with in List I, Entry 84 and List II, Entry 51 (v) List II, Entry 51
specifically deals with excise on alcohol (vi) Fees are specifically dealt with
in both these lists (List I, Entry 96 and List II, Entry 66) and are a distinct
concept that has to be voted by Parliament Thus, taxes, excise and fees must be
voted by Parliament.
In the cases of State of Punjab vs. Devans Modern Breweries Ltd., (2004) 11
SCC 26 at para 25, K.T.
Moopil Nair vs. State of Kerala, (1961) 3 SCR 77 at paras 89 & 91,
Ahmedabad Urban Development Authority vs.
Sharadkumar Jayantikumar Pasawalla, (1992) 3 SCC 285 at paras 6-7, Hindustan
Times vs State of U.P., (2003) 1 SCC 591 at para 30 and Bimal Chandra Banerjee
vs. State of M.P., 1970 (2) SCC 467 at para 14, it has been held that a tax
under Article 265 can only be imposed by way of legislation and it is
impermissible to be imposed by way of bye- laws or rules.
WHETHER THERE IS A QUID PRO QUO BETWEEN THE FEE CHARGED AND THE SERVICE
We have already noted that the plea of the respondents is that it was
rendering service by deputing excise staff not only for the purpose of ensuring
that the denaturing of spirit is done properly by the manufacturer but also for
the purpose of specifically seeing that the de-natured spirit does not go out
of the hands, either of the distillery owner or a retail seller or any licensee
or permit holder contrary to law. It is, therefore, clear that there was no
co-relationship between the expenses incurred by the Government and the fee
sought to be raised under Rule 17. In other words, there is no quid pro quo
between the fee charged and the services rendered. A Constitution Bench of this
Court in the case of The Commissioner, Hindu Religious Endowments, Madras vs.
Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, (1954) SCR 1005 (at
1040, 1041 & 1044) held that a fee must be for a quid pro quo :- "..As
the object of a tax is not to confer any special benefit upon any particular
individual, there is, as it is said, no element of quid pro quo between the
taxpayer and the public authority. Another feature of the taxation is that as
it is a part of the common burden, the quantum of imposition upon the taxpayer
depends generally upon his capacity to pay.
Coming now to fees, a "fee" is generally defined to be a charge
for a special service rendered to individuals by some governmental agency. The
amount of fee levied is supposed to be based on the expenses incurred by the
Government in rendering the service, though in many cases the costs are
arbitrarily assessedbut in this case there is total absence of any co- relation
between the expenses incurred by the Government and the amount raised by
contribution under the provision of section 76 and in these circumstances the
theory of a return or counter-payment or quid pro quo cannot have any possible
application to this case. In our opinion, therefore, the High Court was right
in holding that the contribution levied under section 76 is a tax and not a fee
and consequently it was beyond the power of the State Legislature to enact this
(emphasis supplied) For the reasons aforestated we hold that:
(a) Rule 17 has no statutory backing and it is in excess of the Act.
(b) It is manifestly unjust and arbitrary.
(c) Provision of Rule 17 is clearly a tax and not a fee.
(d) Imposition of tax or fee on the citizens for the services that the State
renders to itself and not the tax payers is clearly impermissible, arbitrary and
This takes us to the last leg of submission of the counsel for the
respondents. It is strenuously urged by the counsel for the respondents that in
the event this Court struck down Rule 17 being ultra vires the Act, such
decision must be prospective and the State should inter alia be permitted to
retain the fees paid by the appellant in the interregnum.
In support of his contention, counsel for the respondents, relied on the
judgment of this Court rendered in Federation of Mining Associations of
Rajasthan vs. State of Rajasthan, 1992 Supp.(2) SCC 239, where this Court held
that the declaration of the act unconstitutional will take effect only from the
date of judgment. The ruling cited above is not applicable in the facts of this
case for the following reasons:
Firstly, the interim order dated 11.9.2000 passed by this Court clearly
provided for refund in the following terms:- "No stay. In case the appeals
are ultimately allowed, the respondents shall pay, on the refund ordered,
interest at the statutory rate".
Secondly, Section 24-B of the Act itself provides as under:
"Any amount of duty, tax, fine or fee paid by any person which was not
payable under this Act shall be refunded to such person along with interest for
the period of default at the rate of 2% per month."
We, accordingly, direct the respondents to refund the payment so made in the
interregnum with interest calculated at the statutory rate.
In the result, the order of the learned Single Judge and the Division Bench
passed in LPA No.159 of 1990 are set aside. Appeals are allowed. In the facts
and circumstances of the case, parties are asked to bear their own costs.