The Bullion and Grain Exchange Ltd.
& Ors Vs. The State of Punjab  INSC 150 (13 September 1960)
GUPTA, K.C. DAS DAS, S.K.
AYYANGAR, N. RAJAGOPALA
CITATION: 1961 AIR 268 1961 SCR (1) 668
Forward Contracts Tax-Validity of
enactment-Legislative competence-Severability of valid portion-Punjab Forward
Contracts Tax Act, 1951 (Punj). 7 of 1951), s. 2-Constitution of India, Seventh
Schedule, List II, Entry 62.
The appellants, who were carrying on the
business of commission agents in forward contracts, filed a petition before the
High Court of Punjab under Art. 226 of the Constitution of India challenging
the validity of the Punjab Forward Contracts Tax Act, 1951, on the ground that
it was ultra vires the powers conferred upon the State Legislature. The Act
provided for the levy of a tax on forward contracts which were defined, by. S.
2, as agreements, oral or written, for sale of goods on a future date but on
the basis of which actual delivery of goods was not made or taken but only the
difference between the price of the goods agreed upon and that prevailing on
the date mentioned in the agreement or any other date was paid or received by
the parties. The High Court took the view that the Act was one to tax
speculation in futures and fell within Entry 62 of the State List as an Act to
impose taxes on betting and gambling.
Held, that as the definition of the
expression " forward contract " in the Punjab Forward Contracts Tax
Act, 1951, does not set out all the elements which are necessary to render a
contract a wagering contract the legislature could not be considered to have
contemplated wagering contracts in defining " forward contracts " in
the way it did. The Act therefore does not fall within Entry 62, List II,
Seventh Schedule of the Constitution, and is beyond the legislative competence
of the State Legislature.
Held, further, that even if the definition
could be considered to be wide, enough to include certain contracts which may
be wagering contracts because of the fact that the parties to the contract had
no intention to deliver the goods, the portion of the Act which would then be
valid is so thin and truncated that the entire Act should be held invalid.
R. M. D. Chamarbaugwala v. The Union of
India,  S. C. R. 93o, relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 123/55 669 Appeal by special leave from the judgment and order dated
November 12, 1951, of the Punjab High Court in Writ Petition No. 116 of 1951.
N. C. Chatterjee, S. N. Andley, J. B.
Dadachanji and Rameshwar Nath, for the appellants.
S. M. Sikri, Advocate-General for the State
of Punjab, N. S. Bindra and D. Gupta, for the respondent.
1960. September 13. The Judgment of the Court
was delivered by DAs GUPTA J.-This appeal is against the judgment of the High
Court of Punjab rejecting the appellant's application under Art. 226 of the
Constitution. In this application the appellants who had been carrying on the
business of commission agents in Forward Contracts at Ludhiana alleged that the
Punjab Forward Contracts Tax Act, 1951 (Punjab Act No. VII of 1951), was ultra
vires the powers conferred upon the State Legislature and prayed for a
declaration that the Act and the notification made and the rules promulgated there
under by the respondent, State of Punjab, were void.
There was a further prayer for directing the
State of Punjab by a writ of mandamus or other appropriate writ to allow the
petitioners to carry on the business of Forward Contracts or as commission
agents in Forward Contracts unrestricted by the provisions of the
above-mentioned Act and the rules there under And not to enforce the Act.
The respondent's case as made in para. 5 of
its writtenstatement was that " the impugned Act is not ultra vires the
State Legislature. It is a law with respect to the matters enumerated in&
Entry 62 of the State List read with Entry No. 7 of the Concurrent List of the
7th Schedule." The High Court held that:"The impugned Act, is an Act
to tax speculation in futures, at least so far as dealers such as the present
applicants are concerned, falls within Item 62 of the State List as an Act to
impose taxes on betting and gambling, and to that extent at least is
valid." 670 In this view the High Court rejected the application.
The only question for our decision is as
regards the legislative competence of the State Legislature of Punjab to enact
this statute. Though a reference under Entry 7 of the Concurrent List of the
7th Schedule of the Constitution was made in the respondent's written statement
no reliance appears to have been placed on this entry in the High Court nor has
it been relied on before us by the learned counsel appearing on behalf of the
respondent and it is quite clear that the impugned Act cannot fall within Item
7 of the Concurrent List which is in these terms:" Contracts, including
partnership, agency, contracts of carriage, and other special forms of
contracts, but not including contracts relating to agricultural land ". It
is common ground before us that the Act must be held to be within the
legislative competence of the Punjab State Legislature only if in pith and
substance it fell within Item 62 of the State List and if it did not so fall it
must be held to be beyond the State Legislature's competence. Item 62 mentions
" taxes on luxuries, including taxes on entertainment, amusements, betting
and gambling." If the impugned Act provides for a tax on betting and
gambling then and then only it can come within Item 62. The Act provides for the
levy of a tax on forward contracts and it has defined " forward
contract" in s. 2 in these words:
"Forward contract" means an
agreement, oral or written, for sale of goods on a future date but on the basis
of which actual delivery of goods is not made or taken but only the difference
between the price of the goods agreed upon and that prevailing on the date
mentioned in the agreement or any other date is paid or received by the parties
". " Dealer " is defined in the same section to mean " any
person, firm, Hindu Joint family or limited concern, including an arhti or
" chamber " or association formed for the purpose of conducting
business in forward contracts, who conducts such business in the course of
trade in the State either on his own behalf or on behalf of any other person,
arhti, "chamber" or association". ,Sale" is defined to mean
671 "the final, settlement in respect of an agreement to sell goods
mentioned in a forward contract, and it shall be deemed to have been completed
on the date originally fixed in the forward contract for this purpose or any
other date on which the final settlement is made ". Section 4 is the
charging section and provides for a levy on the business in forward contracts
of a dealer a tax at such rates as the Government may by notification direct.
Section 5 lays down that every dealer shall be liable to pay tax under this Act
as long as he continues his business in forward contracts.
Section 6 prohibits any dealer from carrying
on business in forward contracts unless he has been registered and possesses a
registration certificate. Section 7 deals with the mode of payment of the tax
and for submission of returns while s. 8 provides for assessment of the tax.
As the term " forward contract "
has been defined in the statute itself we have to forget for the purpose of
deciding the present question any other notion about what a "forward
contract" means. For the purpose of this statute every agreement for sale
of goods on a future date is not a " forward contract ". It has to be
an agreement for the sale of goods on a future date and has to satisfy two
other conditions, viz., (1) actual delivery of the goods is not made on the
basis of the agreement and (2) the difference between the price of the goods
agreed upon and that prevailing on the date mentioned in the agreement or any
other date is paid by the buyer or received by the seller.
The test of a forward contract under this
definition is that delivery of goods is not made or taken but only the
difference between the price of the goods as agreed upon and that prevailing on
some other date is paid.. Is such a contract necessarily a wagering contract
and therefore gambling ? When two parties enter into a formal contract for the
sale and purchase of goods at a given price, and for their delivery at a given
time it may be that they never intended an actual transfer of goods at all, but
they intended only to pay or receive the difference according as the market
price should vary from the 86 672 contract price. When such is the intention it
has been held that is not a commercial transaction but a wager on the rise or
fall of the market, which comes within the connotation of " gambling
". It is the fact that though in form an agreement for sale purports to
contemplate delivery of the goods and the payment of the price, neither
delivery nor payment of the price is contemplated by the parties and what is
contemplated is merely the receipt and payment of the difference between the
contract price and the price on a later day that makes the contract a wagering
contract. In the definition of " forward contract in the impugned Act
there is no reference, directly or indirectly' to such an intention. It is only
by reading for the words " actual delivery of goods is not made or taken
" the words actual delivery of goods is not to be made or taken and by
substituting for the words " is paid or received by the parties " the
words " is to be paid or received by the parties " and also by
omitting the words " on the basis of which " that the word "
forward contract " as defined in the section can be held to refer to a
wagering contract. This however we are not entitled to do. The reason why the
Legislature did not use the words " to be made or taken " or "
to be paid or received " in the definition clause is not far to seek. An
agreement oral or written which in terms provides that actual delivery is not
to be made or taken and that the entire price of the goods is not to be paid
and only the difference between the price of the goods agreed upon and that prevailing
on some other date would be paid would be hit by s. 30 of the Contract Act and
would not be enforceable. Parties to a written agreement for sale of goods
would therefore take good care to see that the terms do not provide that
delivery should not be made but only the difference is to be paid. There might
be an oral understanding between the parties that no delivery should be
demanded or made, but that only difference should be paid.
But it will be next to impossible for a tax
being imposed on the proof of such intention, not expressed in the written
contract. When the agreement for sale of goods is oral, but the parties 673
agree as between themselves that no delivery would be made, but difference in
price would be paid, it would be equally impossible for a taxing authority to
discover in which of the contracts such an agreement has been made. The dispute
whether a particular contract is a wagering contract or not arises in civil
courts generally when the contract of sale is sought to be enforced and one of
the parties tries to avoid the contract by recourse to s. 30 of the Contract
When such a dispute comes before the Court,
it becomes necessary to consider all the circumstances to see whether they
warrant the legal inference that the parties never intended any actual delivery
but intended only to pay or receive the difference according as the market
price should vary from the contract price. It is therefore well nigh impossible
for any taxing authority to brand a particular forward con. tract as a wagering
contract ; nor is it to be expected that any party on whom the tax is sought to
be levied, will voluntarily disclose that in the particular contract or in a
number of contracts, the intention was not to deliver the goods but only to pay
or receive the difference in price. Aware of these difficulties in the
practical application of a law to levy tax on wagering contracts, the
legislature decided to levy tax on contracts for sale of goods in which actual
delivery is not factually made or taken, whatever be the intention at the time
when the agreement was made.
It appears clear therefore that the words
" forward contract " as defined in the Act do not set out all the
elements which are necessary to render a contract a wagering contract and so
the impugned legislation to tax forward contracts as defined does not come
within. Entry 62.
The learned Advocate-General for the State of
Pun. jab tried to convince us that even though the words used in defining
forward contract may include contracts which do not amount to wagering
contracts, they are wide enough to include certain contracts which may be
wagering contracts because of the fact that the parties to the contract, had no
intention to 674 deliver the goods. If the definition is wide enoughto include
contracts which are wagering contracts, he contends, the statute should not he
struck down as a whole but should be held to be valid in respect only of such
wagering contracts. On behalf of the appellants Mr. N. C. Chatterjee has drawn
our attention to the provisions of registration of " dealers " in s.
6 and has argued that the very fact that the Legislature was calling upon
persons dealing in " forward contracts " to register themselves and
to prohibit dealing in forward contracts by non-registered dealers, justifies
the conclusion that the Legislature was not thinking of wagering contracts at
all. As against this it is proper to note that the Constitution itself
contemplated taxation on gambling " by State Legislatures. It is however
one thing to tax gambling, and quite another thing for a Legislature to
encourage gambling by asking persons to register themselves for-this purpose.
The definition of a " dealer " it has to be noticed includes " a
limited concern, including, a Arhti, Chamber or association formed for the
purpose of conducting business in forward contracts ".
While it might happen in fact that an
association would be formed for the purpose of conducting business in wagering
contract, it is hardly likely that the Legislature would take upon itself the
task of openly permitting and recognizing such associations. These, in our
opinion, are good reasons for thinking that the Legislature did not contemplate
wagering contracts at all in defining " forward contract" in the way
Assuming however that the definition is wide
enough to include wagering contracts, the question arises whether the portion
of the Act which would then be valid is severable from the portion which would
remain invalid. One of the rules approved by this Court in R. M. D.
Chamarbaugwala v. The Union of India (1), for deciding this question was laid
down in these words:"In determining whether the valid parts of a statute
are separable from the invalid parts thereof, it (1)  S.C.R. 930.
675 is the intention of the legislature that.
is the determining factor. The test to be applied is whether the legislature
would have enacted the valid part if it had known that the rest of the statute
is invalid." A second rule was that if "the valid and invalid parts
of a statute are independent and do not form part of a scheme but what is left
after omitting the invalid portion is so thin and truncated as to be in
substance different from what it was when it emerged out of the legislature,
then also it will be rejected in its entirety. " Applying either of these
rules, we are bound to hold that the entire Act should in the present case be
It seems to us clear that if the Legislature
had been conscious that taxation on all forward contracts was not within its
legislative competence it would have at once seen that because of the
difficulty of finding out which among the contracts for sale of goods on a
future date are wagering contracts, it would not be worthwhile to enact any law
for taxing wagering contracts only. It is equally clear that once the law is
held to be invalid as regards forward contracts other than wagering contracts,
what is left is " so thin and truncated as to be in substance different
from what it was when it emerged out of the legislature ". The respondent's
contention that the statute should be hold to be valid in respect of wagering
contracts even though invalid as regards other forward contracts must therefore
also be rejected.
Our conclusion therefore is that the impugned
statute does not fall within Item 62 of the State List and that it is beyond
the legislative competence of the State Legislature.
The appellants were therefore entitled to
appropriate reliefs as prayed for in their petition under Art. 226 of the
We therefore allow this appeal, set aside the
order of the High Court and direct that the petition under Art. 226 of the
Constitution be allowed and declare that the Punjab Forward Contracts Tax Act
No. VII of 1951 is void and unconstitutional as it is ultra vires the powers of
the State Legislature, that the notification made under the rules promulgated
by the 676 respondent under this Act are also void and unconstitutional and
that a mandamus do issue directing the respondent to allow the petitioners to
carry on the business of forward contracts or as commission agents for forward
contracts unrestricted by the provisions of the said Punjab Forward Contracts
Tax Act No. VII of 1951 and the rules there under and not to enforce the
provisions of this Act and the rules.
The appellants will get their costs in this
Court as also in the court below.