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Report No. 158

2.2.2. The horizon of the decision in Synthetics case (supra) considered by the Supreme Court.-

In a judgment of Allahabad High Court rendered on 9-9-91 in Vam Organic Chemicals Ltd. v. State of Uttar Pradesh, in C.M.W.P. No. 16782 of 1990, the latter view (second of the two views mentioned above) was affirmed. This judgment has been approved in its totality by the Supreme Court in Vam Organic Chemicals Ltd. v. State of Uttar Pradesh, (1997) 2 SCC 715. This was a case, where the Govt. of U.P. made a rule requiring the distilleries in the State holding PD2 and persons holding FL 16, 39, 40, 41 or PD2 to obtain a new licence from the Collector and pay a denaturation fee of Rs. 7 per litre in advance.

This rule and the said levy was challenged by the petitioner-distillery on the ground that the State of U.P. was not competent to make any rule or levy any fees on the denaturing of alcohol. In other words, their contention, based upon Synthetics, was that the State has no power to make any law respecting alcohol and industrial alcohol or to levy any fees/tax thereon. This contention was rejected both by the High Court and the Supreme Court. Before, however, setting out the grounds on which the power of the State was upheld, it is necessary to notice the following opening observations in the judgment rendered by A.M. Ahmadi, C.J. on behalf of Bench:

"Before proceeding further, it will be proper to understand the difference between industrial alcohol, denatured spirit and potable liquor. Ethyl alcohol is rectified spirit of 95% v/v in strength. Rectified spirit is highly toxic and unfit for human consumption. However, rectified spirit diluted with water is country liquor. Rectified spirit, as it is, can be used for manufacture of various other products like chemicals etc. Rectified spirit, produced for industrial use is required by a notification issued under the Act to be denatured in order to prevent the spirit from being directed to human consumption. Rectified spirit is denatured by adding denaturants which make the spirit unpalatable and nauseating. As such rectified spirit can be converted to potable liquor but once denatured, it can be used only as industrial alcohol."

Now coming to the grounds on which the power of the State to make the impugned rule and to levy the impugned fee was upheld, they are the following, in the words of the Bench itself:-

(a) "Thus, the power under section 18G can be exercised only so far as is permitted by sub-section (1) viz. for securing the equitable distribution and availability at a fair price of any article or class of articles relatable to any scheduled industries. To this extent, the State Legislature cannot make any law. The High Court concludes that in other respects the field is still open to the State Legislature.

The High Court goes on to say that the impugned notification is issued to ensure that rectified spirit sought to be used for industrial purposes is not diverted for obtaining country liquor or other forms of potable liquor and that it is not concerned with equitable distribution and availability at a fair price of either rectified spirit or the denatured spirit. The notification was, thus, justified under Entry 6 of List II Public Health; and Entry 8 of List II - Possession and Sale of Intoxicating liquor."

(b) "This Court dealt with the question of legislative competence of the State to impose tax or levy on industrial alcohol in the case of Synthetics and Chemicals Ltd. v. State of U.P., and ruled in the negative. The High Court took the view that the distinction between ethyl alcohol/rectified spirit as such and denatured spirit was not in issue, nor was it considered in that judgment and held that this Court cannot be said to have ruled that every rectified spirit/ethyl alcohol is industrial alcohol.

The High Court reiterated that once denatured, the alcohol becomes exclusively industrial alcohol since it cannot be used for obtaining country liquor or for manufacturing IMFLs and said that it is to ensure that ethyl alcohol meant for industrial use is not misused or diverted for human consumption that impugned regulation is provided for by the State and further that the regulation being part of general regulation of the trade in alcohol in the interest of public health is relatable to Entries 6 and 8 of List II."

(c) "It is to be noticed that the States under Entries 8 and 51 of List II read with Entry 84 of List I have exclusive privilege to legislate on intoxicating liquor and alcoholic liquor for human consumption. Hence, so long as any alcoholic preparation can be diverted to human consumption, the States shall have the power to legislate as also to impose taxes etc. In this view, denaturation of spirit is not only an obligation on the States but also within the competence of the States to enforce."

(d) The Bench also relied upon a recent decision of the Supreme Court in State of Andhra Pradesh v McDowell, (1996) 3 SCC 709, and quoted the following holding therein with approval:

"It follows from the above discussion that the power to make a law with respect to manufacture and production and its prohibition (among other matters mentioned in Entry 8 in List II) belongs exclusively to the State Legislatures. Item 26 in the First Schedule to the IDR Act must be read subject to Entry 8 - and for that matter, Entry 6 - in List II. So read, the said item does and cannot deal with manufacture, production of intoxicating liquors. All the petitioners before us are engaged in the manufacture of intoxicating liquors. The State Legislature is, therefore, perfectly competent to make a law prohibiting their manufacture and production - in addition to their sale, consumption, possession and transport - with reference to Entries 8 and 6 in List II of the Seventh Schedule to the Constitution read with Article 47 thereof."



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