Chaturbhai M. Patel vs The Union Of India And Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 9 of 1957

Decision Date: 2 December 1959

Coram: J.L. Kapur, Syed Jaffer Imam, S.K. Das, A.K. Sarkar, M. Hidayatullah

In this case the Supreme Court of India recorded that the petition was filed by Chaturbhai M. Patel, who was engaged in the wholesale and retail trade of tobacco. The petition was dated 2 December 1959 and was heard before a Bench consisting of Justice J.L. Kapur, Justice Syed Jaffer Imam, Justice S.K. Das, Justice A.K. Sarkar and Justice M. Hidayatullah. The citation of the judgment appears in the 1960 volume of the All India Reports as AIR 424 and in the Supreme Court Reports as SCR (2) 362. Subsequent citator references include R 1962 SC 922 (13), RF 1967 SC 1512 (63). The substantive dispute centered on the legislative competence of the Central Legislature to levy excise duty on tobacco under the Central Excises and Salt Act, 1944 (Act 1 of 1944), particularly sections 6 and 8 and the rules made thereunder. The petitioner was charged with violating Rules 151(C) and 226 of the Central Excise Rules, 1944, which were framed under the said Act. The Collector of Excise found the charges proved, ordered the confiscation of tobacco goods stored in the petitioner’s warehouse, levied a duty in lieu of confiscation and imposed a penalty of Rs 2,000. The petitioner challenged the legality of these orders, contending that sections 6 and 8 of the Act and the corresponding rules exceeded the Central Legislature’s competence because, while the provisions relating to the levy of excise duty fell within entry 45 of List 1 read with section 100 of the Government of India Act, 1935, the same Act also touched upon entries 27 and 29 of List 11, which pertain to the possession and trade of tobacco, and thus was ultra vires. The Court held that the provisions of the Central Excises and Salt Act, 1944 and the rules made thereunder were essentially connected with the levy and collection of excise duty. In its true character the Act fell squarely within entry 45 of List 1, and any incidental intrusion into the provincial field of entries 27 or 29 of List 11 did not affect its constitutionality. The Court further explained that the Central Legislature may enact provisions that are otherwise within provincial competence when such provisions are necessarily incidental to effective central legislation on a subject within its explicit power. The judgment relied on earlier authorities such as State of Rajasthan v G. Chawla (AIR 1959 SC 544), Cooverjee Bharucha v Excise Commissioner of Ajmer ([1954] SCR 873), and the Canadian decisions Attorney‑General for Canada v Attorney‑General for British Columbia ([1930] AC 111) and Attorney‑General for Canada v Attorney‑General for Quebec ([1947] AC 33). The judgment was delivered in original jurisdiction as Petition No. 9 of the original filing.

In 1957 a petition was filed under article 32 of the Constitution of India seeking enforcement of fundamental rights. Counsel for the petitioner was B. D. Sharma, while the Solicitor‑General of India, C. K. Daphtary, and counsel for the respondents, R. H. Dhebar and T. M. Sen, appeared for the Union. The judgment was delivered by Justice Kapur. The petitioner was a wholesale and retail dealer in tobacco based in Banaras and also owned a private bonded warehouse for tobacco, holding the licences required for such storage. He challenged the legality of several orders issued by the Collector of Excise in Allahabad, orders that had been affirmed on appeal and whose revisions had been dismissed by the Central Government. The factual background began when Inspector Das inspected the petitioner’s bonded warehouse and discovered an irregularity. On 8 December 1953 the inspector sealed the warehouse and took possession of all registers and stock cards. A few weeks later, on 22 December 1953, the inspector removed eleven and a half bags of “kandi”, meaning stems of tobacco, from the warehouse and placed them in another location. The petitioner submitted representations to the Collector of Excise and corresponded on the matter. On 15 June 1954 the Collector issued a notice requiring the petitioner to show cause why a penalty should not be imposed for contravention of rules 151(C) and 226 of the Central Excise Rules, 1944, and why the bags of kandi should not be confiscated. The petitioner answered the notice and also filed written arguments. After hearing the petitioner, the Collector found the charges proved. Consequently the Collector ordered that the bags of kandi be confiscated, imposed a fine of rupees 150, and levied the duty that would have been payable on the confiscated tobacco. In addition the Collector imposed a penalty of rupees 2,000 under rules 151(C) and 226. The petitioner appealed this order to the Central Board of Revenue, but the appeal was dismissed because the petitioner refused to deposit the penalty of rupees 2,000. A revision petition before the same Board was likewise dismissed for the same reason. This order formed one of the matters challenged in the present petition. Subsequently, on 29 July 1954 the Collector requested that the petitioner provide a new surety because the previous surety, Mohammad Satar, was unwilling to act. The petitioner responded by furnishing two bonds in forms B‑4 and B‑5 for rupees 7,000 and rupees 10,000 respectively. At that time an outstanding excise duty of rupees 15,263‑8‑0 was due from the petitioner. The Excise Department therefore attached three hundred and seventy‑three hundredweight of tobacco, which were later sold by public auction for rupees 6,878‑5‑0, leaving a balance of rupees 8,385‑3‑0. When the Department demanded recovery of the balance, the petitioner instituted a civil suit before the First Additional Civil Judge in Banaras. That court granted an interim injunction restraining the Department from recovering the amount. On 25 January 1956 the Superintendent of Excise called upon the petitioner to deposit a cash

On February 13, 1956, the Deputy Collector directed that the petitioner must furnish a cash security of ten thousand rupees; otherwise the licence would be deemed cancelled pursuant to rule one hundred eighty‑one sub‑rule (1) of the Central Excise Rules. The petitioner objected to this demand, and because the outstanding excise duty remained unpaid, the Deputy Collector ordered that the petitioner’s licence should remain inoperative pending the deposit of the security. The petitioner subsequently appealed against this order before the Central Board of Revenue, but the Board dismissed the appeal. In addition, the petitioner instituted a petition under article two hundred twenty‑six in the Punjab High Court; that petition was also dismissed. The petitioner further sought a revision of the Deputy Collector’s order that rendered the licence inoperative, but on December twenty, 1956, the Central Board of Revenue rejected the revision. The dismissal of the revision constituted the second order that the petitioner now challenged before this Court.

The petitioner filed the present petition on January twenty‑first, 1957, seeking three principal remedies. First, the petitioner asked that sections six, eight, nine and ten of the Central Excises and Salt Act, 1944 (hereinafter referred to as “the Act”), together with rules one hundred forty to one hundred forty‑eight, one hundred fifty, one seventy‑one to one hundred eighty‑one, two hundred fifteen and two hundred twenty‑six of the Central Excise Rules made thereunder, be declared ultra vires, and that a writ of certiorari or any other appropriate writ be issued to set aside the orders passed by the Collector, which had subsequently been confirmed on appeal and revision by the Central Board of Revenue and the Central Government. These orders had already been referenced earlier in the proceedings. Second, the petitioner requested a writ of mandamus directing the respondents not to interfere with the petitioner’s fundamental right to carry on the trade in tobacco or to store tobacco. Third, the petitioner sought an order directing the respondents to return the goods that had been confiscated by the authorities.

The petitioner advanced three distinct points of contention. The first point asserted that sections six and eight of the Act, and the rules formulated under the Act, exceeded the legislative competence of the Central Legislature as delineated in the Constitution Act of 1935. The second point contended that, even assuming the provisions fell within legislative competence, they nevertheless imposed an excessive and unreasonable restriction on the petitioner’s fundamental right to engage in the tobacco trade and were not justified by the public interest; consequently, the provisions could not be protected under article nineteen sub‑six of the Constitution. The third point argued that the orders issued by the authorities were beyond the powers granted by the Act and the Rules made thereunder, rendering them ultra vires and therefore void.

Before addressing the petitioner’s arguments, the Court found it necessary to examine the overall scheme of the Act. The preamble of the Act declares its purpose to “consolidate and amend the law relating to central duties of excise on goods manufactured or produced in British India and to salt.” Section two of the Act provides the necessary definitions, while Chapter eleven deals specifically with the levy and collection of duty. The two principal provisions at issue, sections six and eight, are situated within this chapter. Section six prescribes that certain operations shall be subject to licences, and it empowers the Central Government, by way of a notification in the official Gazette, to specify the date from which the licensing requirement shall take effect. The provision, when quoted in full, reads: “The Central Government may, by notification in the official Gazette, provide that, from such date as may be specified…” This framework sets the legislative context within which the petitioner’s challenges are to be evaluated.

The Act authorized the Central Government, by notification in the official Gazette, to prescribe that no person could, except under a licence issued pursuant to the Act, engage in (a) the production, manufacture or any process of production or manufacture of any specified excisable goods, of saltpetre, of any specified component parts or ingredients of such goods, or of specified containers of such goods, and (b) the wholesale purchase or sale, whether on his own account or as a broker or commission agent, or the storage of any excisable goods that were listed in Part A of the Second Schedule. Section 8 of the Act imposed a further restriction on possession, providing that from the date specified by the Central Government in a Gazette notification, no person could, except as permitted by rules made under the Act, hold in his possession any excisable goods listed in Part B of the Second Schedule in excess of the quantity that the Government might prescribe as the maximum amount of such goods, or of any variety of such goods, that could be possessed at any one time. Section 9 set out the offences and the penalties that would attach to breaches of the provisions. Section 10 conferred upon the courts the power to order forfeiture of goods contravening the Act, while Section 11 made provision for the recovery of duties that were due to the Government. Chapter VI dealt with the adjudication of confiscation and penalties, specifying the powers of the Collector of Central Excise, the procedure for appeals against the Collector’s orders, and the avenue for revision to the Central Government. Chapter VII contained supplementary provisions; under Section 37 the Central Government was empowered to make rules, and the Schedule listed the rates or duties leviable on each class of goods, with tobacco appearing as item 9.

The central question before the Court was whether the Act fell within the legislative competence granted by item 45 of List I read with Section 100 of the Government of India Act. The petitioner argued that even though the imposition of excise duties might be covered by item 45 of List I, the Act also encroached upon the subjects listed in items 27 and 29 of List III of the Constitution Act, because it regulated trade and commerce in addition to levying a duty. The petitioner submitted that a statute could have a pith and substance that spanned two fields, and relied on an observation of Chief Justice Mahajan in Cooverjee B. Bharucha v. The Excise Commissioner and The Chief Commissioner, Ajmer & Ors., which held that the substance of the regulation was to raise excise revenue by imposing duties on liquor and intoxicating drugs, while also regulating the import, export, transport, manufacture, sale and possession of intoxicating liquors. The Court noted, however, that the cited case had not been decided on the question of legislative competence; instead, its focus had been on whether the statute infringed the right to carry on the trade in liquor and whether auction money constituted a fee or a tax. The petitioner further argued that if the true purpose and object of the Act were solely the levying of excise duty, the Act could not validly provide for regulation of trade. In support of this view, reliance was placed on the decision in King v. Barger, where the majority held that the issue was not an exercise of the power of taxation and, consequently, the statute would be invalid as it contravened Section 55 of the Constitution Act of Australia, while the minority opinion contended that the reserved powers of the States were those that remained after the full effect of the powers granted to the Commonwealth had been given.

The Court observed that the earlier decision discussed the transport, manufacture, sale and possession of intoxicating liquors, but that case did not consider the question of legislative competence. Instead, the issue before the earlier court was whether the challenged statute infringed the right to carry on the liquor trade and whether the money collected from auctions constituted a fee or a tax. The quoted passage read, “transport, manufacture, sale and possession of intoxicating liquors.” Counsel further argued that if the purpose and object of the present Act is solely the levy of excise duty, it cannot simultaneously provide for regulation of trade. To support this argument, counsel relied on King v. Barger (1) [1954] S.C.R. 873, 877, 882, where the majority held the substantive question was not an exercise of taxation power and, if it were, the statute would be invalid under section 55 of the Constitution Act of Australia. The minority in that case, however, expressed the view that the reserved powers of the States are those that remain after the full effect of the powers granted to the Commonwealth has been given. In further support of the contention that the Act also regulates trade, counsel referred to Rules 174 to 182 of the Central Excise Rules, which deal with licensing matters. Particular reliance was placed on Rule 176(2), which imposes a licence fee of up to Rs 100 in the case of tobacco. Counsel also highlighted Rule 181, which provides for revocation and suspension of licences and empowers the Licensing Department to act where the licence holder or any employee breaches conditions, violates any provision of the Act or Rules, or has been convicted of an offence under section 161 read with sections 109 or 116 of the Indian Penal Code. The text of Rule 181 reads: “(1) Any licence granted under these Rules may be revoked or suspended by the licensing authority if the holder, or any person in his employ, is found to have committed a breach of the conditions thereof, or any of the provisions of the Act or these Rules (or has been convicted of an offence under s. 161, read with s. 109 or with s. 116 of the Indian Penal Code).” Counsel then directed the Court’s attention to Rule 182, which, although limited to matches, imposes a restriction on the issuance of licences for the manufacture of matches. Further rules relied upon included Rules 140 to 148, concerning warehousing, and Rules 210 to 215, dealing with penalties, confiscation and appeals. Regarding the latter set, counsel submitted that they contain no procedural safeguards, such as notice to licencees or an opportunity to be heard with witnesses before penalties are imposed. From all this (1) (1908) 6 C.L.R. 41, counsel urged the Court to conclude that, when read together with the Rules, the Act’s pith and substance is not merely the levying of excise duty but also the regulation of possession and trade in tobacco.

In this matter the Court observed that the subject matter of the Act did not fall solely within the legislative field described in List 1 of the Constitution. Rather, the Act also intruded upon the provincial field of legislation and therefore had to be regarded as falling within List 11 as well. The Court explained that whenever the legislative competence of a legislature is challenged by reference to the entries in the various constitutional lists, it is necessary to examine the pith and substance of the impugned enactment. If, after such examination, the matter is found to come substantially within an item in the Central List, it is not deemed to fall within an entry in the Provincial List even though “the classes of subjects looked at singly overlap in many respects.” The Court further held that the Central legislature may make provisions for matters that might otherwise be within the competence of a Provincial legislature, provided those provisions are necessarily incidental to effective legislation by the Central legislature on a subject that is expressly within its power. The Court cited the authorities Attorney‑General for Canada v. Attorney‑General for British Columbia (1) and Attorney‑General for Canada v. Attorney‑General for Quebec (2) in support of this principle.

The Court also referred to Gallagher v. Lynn (3), where it was held that when the true nature and character of an Act is to protect the health of the inhabitants, the Act is not to be said to be enacted “in respect of” trade even though it may incidentally affect trade. Moreover, the Court affirmed the fundamental constitutional principle that everything necessary for the exercise of a power is included in the grant of that power, citing Edward Mills Co. Ltd. v. The State of Ajmer (4). The specific item under consideration in the present case was Item 45 of List 1, which reads: “Duties of excise on tobacco and other goods manufactured or produced in India except (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics; non‑narcotic drugs; (c) medical and toilet preparations containing alcohol, or any substance included in sub‑paragraph (b) of this entry.” The Court noted the accompanying citations to the authorities reported in [1930] A.C. 111, 118; [1947] A.C. 33, 43; [1937] A.C. 863; and [1955] 1 S.C.R. 735, 749.

The Court then identified the other relevant constitutional entries that had to be examined, namely Items 27, 29 and 31 of List 11. Item 27 concerns “Trade and commerce within the Province; markets and fairs; money‑lending and money lenders.” Item 29 deals with “Production, supply and distribution of goods; development of industries, subject to the provisions in List 1 with respect to the development of certain industries under Federal control.” The question posed for decision was whether the Act in issue was a law made with respect to the matters enumerated in Item 45 of List 1, or whether it pertained to the matters enumerated in Items 27 and 29 of List 11. In other words, the Court had to determine whether, in its pith and substance, the Act related to duties of excise on tobacco as described in Item 45, or whether it fell within the provincial jurisdiction of Items 27 and 29, and if the former, whether its validity was affected by any incidental trespass into the domain reserved for provincial legislation.

In dealing with the question of whether the legislation in issue intrudes upon the field that is reserved for provincial law, the Court observed that the enactment does so only by an incidental trespass into that territorial domain. The Court stressed that, when interpreting the scope of the items listed in the constitutional schedules, the broadest possible meaning must be given to the words employed, and each generic term should be understood to extend to ancillary or subsidiary matters that can fairly be said to be encompassed within it. The Court referred to the authority of United Provinces v. Mst. Atiqa Begum & Ors. (1), Navinchandra Mafatlal v. The Commissioner of Incometax (2) and The State of Madras v. Gannon Dunkerley & Co. (5) to illustrate this principle. It further cited the observation of Sir Maurice Gwyer, C.J., in Subramanyan Chettiar v. Muthuswamy Goundan (4), where it was remarked that legislation, although ostensibly dealing with a subject placed in one list, will from time to time touch upon a subject that lies in another list. The Chief Justice warned that the various provisions of such an enactment may be so closely intertwined that a rigid, literal construction would result in a large number of statutes being declared invalid because the legislature would appear to have acted in a prohibited sphere. The Court affirmed, in line with the Privy Council decision in Prafulla Kumar Mukherjee and Ors. v. Bank of Commerce Ltd. (1) and the earlier decision of this Court in State of Rajasthan v. G. Chawla (2), that the quoted passage accurately sets out the foundation of the rule and represents a proper method for construing the language of the various items in the Lists when read together with section 100 of the Constitution Act. Justice Hidayatullah, speaking in State of Rajasthan v. G. Chawla (2) at page 546, reiterated that it is well‑settled that the power to legislate on a particular topic inevitably includes the power to legislate on ancillary matters that can be reasonably said to fall within the scope of the granted authority. Having laid down this interpretative framework, the Court turned to ascertain the true nature, character and pith‑and‑substance of the Act under challenge. It concluded that the Act is essentially a fiscal measure intended to impose and collect excise duty on tobacco. The manner in which the duty is to be collected, the Court observed, must be left to the wisdom of the legislature, which must take into account the particularities of each trade, as well as the peculiar difficulties that arise therein. The Court noted that various provisions of the Act and the accompanying Rules demonstrate that the authorities are tracking the movement of tobacco from the moment it is cultivated, through its processing, to its eventual manufacture and sale in the market. These provisions, together with the Rules made under the Act, have been regarded as necessary to give effect to the purpose of the legislation. The Court further explained that Chapter IV of the Rules deals with unmanufactured tobacco products. For example, Rule 15 obliges growers to submit a declaration concerning all land on which tobacco is to be cultivated, and Rule 17 requires that the curing of tobacco be carried out only on premises that have been duly declared and approved, thereby constituting an additional step in the regulatory scheme.

In the same direction, Rule 18 permits the authorities to require a security deposit from both the tobacco grower and the curer. Rules 19, 20 and 21 respectively govern the liability for excise duty, the exemption of certain varieties of tobacco intended for personal consumption, and the maintenance of registers by growers and curers. The manner of making entries in those registers is further described in the cited authorities (1) [1947] L.R. 74 I.A. 23, 41 and (2) A.I.R. 1959 S.C. 544. Rule 31 prescribes the procedures for moving tobacco from the grower’s field to the curer’s premises and subsequently from the curer’s premises to either a public warehouse or a private storage facility. Chapter V of the Rules addresses manufactured tobacco and specifies the conditions under which such tobacco must be stored in warehouses. At each stage of the tobacco chain, whether the product remains unmanufactured or has been processed, the Rules contain provisions designed to monitor and control the movement of the commodity. Collectively, these Rules demonstrate that the primary purpose of the Act is to ensure the effective collection of excise duties on tobacco, while the imposition of fee charges serves merely to fund the supervisory mechanisms required for that collection. The licensing system for bonded warehouses has historically been regarded as an essential element of tax‑evasion control in England, and it is therefore reasonable to infer that Parliament intended to incorporate such a power within the present legislation. Moreover, the levying of licence fees constitutes a form of taxation in its own right. The case of Cooverji B. Bharucha v. The Excise Commissioner of Ajmer (1) supports the view that these licensing fees fall within the legislative competence of the Central legislature, whose taxing authority should not be limited so as to preclude revenue generation through such fees. In the judgment of State of Madras v. Gannon Dunkerley & Co. (2) the court quoted, with approval, a passage from Broken Hill South Ltd. v. Commissioner of Taxation (N.S.W.) (3) stating that courts should not deprive a legislature of the freedom to resolve taxation matters without being constrained by preconceived legal categories. The opinion of Justice Venkatarama Aiyar, therefore, suggests that a mere fee cannot be attacked on constitutional grounds under item 69, which concerns fees listed in List I. The petitioner’s counsel cited rule 181, arguing that the rule could indirectly strip a bonded‑warehouse owner of the privilege to operate such a facility, as indicated by authorities (1) [1954] S.C.R. 873, 877, 822, (2) [1959] S.C.R. 379, 391, 393, and (3) (1936‑37) 56 C.L.R. 337, 379. Nevertheless, this possibility does not alter the essential character and purpose of the Act, which remains the imposition, collection and realisation of excise duty. Consequently, the rule functions as a necessary means to render the realisation of duty effective and is necessarily incidental to sound legislation aimed at duty collection. The principle articulated in Attorney‑General for Canada v. Attorney‑General for British Columbia (1) further reinforces this approach. Looking at

In examining the scheme of the Act, the Court considered its object, purpose, true nature and character, and its pith and substance. From this comprehensive assessment, the Court concluded that the Act fell within the legislative competence of the Central legislature. The Court noted that, although certain matters might otherwise lie within the competence of the provincial legislature, those matters were necessarily incidental to the effective exercise of the Central legislature’s powers. Accordingly, the various provisions of the Act and the Rules made thereunder were, in the Court’s opinion, essentially connected with the levying and collection of excise duty. In its true nature and character, the Act therefore remained an enactment that fell under item 45 of List 1. The Court held that any incidental intrusion upon the provincial field covered by items 27 or 29 did not affect the Act’s constitutionality, because the extent of such intrusion is merely a circumstance to be considered when determining the true pith and substance. Once that determination was made, the Act was seen to lie in the Central field rather than in the provincial field, as reflected in the citation of Prafulla Kumar Mukherjee v. Bank of Commerce Ltd. (”).The petitioners then contended that the restrictions imposed by the Act were unreasonable and therefore not saved by Article 19(6). Their argument was based on the claim that the provisions did not lay down any procedure for levying penalties, nor did they provide for notice, the taking of evidence, or a neutral authority for confiscation. The Court observed that, for a tribunal to act judicially, it must adhere to the principles of natural justice, particularly the rule of audi alteram partem. The Court found no breach of that rule in the present case. Moreover, the petitioners had availed themselves of both the right of appeal and the remedy of revision, which were expressly provided under the law. The Court also referred to the authorities (1) [1930] A.C. 111, 118 and (2) [1947] L.R. 74 I.A. 23, 41, noting that the argument of unreasonable restriction on this ground therefore failed.Finally, the petitioners argued that two principal orders issued by the authorities were ultra ves. The first order required the petitioner to deposit the penalty before his appeal or revision could be heard, citing Himmatlal Harilal Mehta v. State of Madhya Pradesh (1). The Court held that the cited case was not applicable, as there was no illegal imposition on the petitioner and no threat of enforcement without legal authority. Regarding the second order, the petitioner’s surety, Mohammad Satar, had ceased to be the surety. The Court therefore examined the proviso to Rule 140 of the Excise Rules, which states: “Provided that in the event of death, insolvency or inefficiency of the surety or where the amount of the bond is inadequate, the collector may in his discretion demand a fresh bond; and may, if the security furnished for a bond is not adequate, demand additional security.” The Court concluded that the Collector was acting within his powers when he asked for the required security.

The Collector had ordered the petitioner to provide cash security amounting to ten thousand rupees. The Court observed that, given the facts of the case, it could not intervene in that specific requirement. The petition also contended that the orders were passed with dishonest intent. However, the Court noted that the petition itself did not contain any specific allegation of dishonest intent. Moreover, the petition failed to demonstrate any reason why the orders might be considered dishonest. In the Court’s view, the lack of a clear allegation meant that the claim of dishonest intent could not be entertained. Consequently, the Court concluded that the petition did not present a substantive ground for relief. As a result, the Court ordered that the petition be dismissed. The dismissal was accompanied by an order that the petitioner bear the costs of the proceedings. The judgment was recorded as a dismissal of the petition. The citation for this decision was recorded as (1) [1954] S.C.R. 1122.