The Bullion And Grain Exchange Ltd. And Others vs The State Of Punjab

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 123/55

Decision Date: 13 September 1960

Coram: K.C. Das Gupta, S.K. Das, M. Hidayatullah, J.C. Shah, N. Rajagopala Ayyangar

In this matter, the petitioner identified as The Bullion and Grain Exchange Ltd. and others filed a petition before the Punjab High Court under Article 226 of the Constitution of India, contending that the Punjab Forward Contracts Tax Act, 1951 (Punjab Act No. VII of 1951) was beyond the legislative authority of the State Legislature. The petitioners, who carried on the business of commission agents in forward contracts, argued that the Act, which imposed a tax on forward contracts, was ultra vires because the definition of “forward contract” contained in Section 2 of the Act did not include all the essential elements of a wagering contract. The Act defined a forward contract as an oral or written agreement for the sale of goods on a future date, where the parties did not actually deliver the goods but instead paid or received only the difference between the price agreed upon and the market price prevailing on the date specified in the agreement or on any other date. The High Court concluded that the purpose of the legislation was to tax speculative activities in futures and therefore placed the Act within Entry 62 of List II of the Seventh Schedule of the Constitution, which empowers a State to impose taxes on betting and gambling. The Supreme Court, however, examined the issue with a bench consisting of Justices K.C. Das Gupta, S.K. Das, M. Hidayatullah, J.C. Shah and N. Rajagopala Ayyangar, and reached a different conclusion. The Court observed that the definition of “forward contract” in the Punjab Forward Contracts Tax Act did not set out every element required to characterize a contract as a wagering contract, and consequently the legislature could not be deemed to have contemplated wagering contracts when it framed the definition. For that reason, the Court held that the Act did not fall within the ambit of Entry 62 of List II and was therefore outside the legislative competence of the State. The Court further examined the possibility that, even if the definition were interpreted broadly enough to encompass certain wagering contracts because the parties had no intention to deliver the goods, the portion of the Act that would remain valid would be so narrow and truncated that it would be appropriate to hold the entire Act invalid. In arriving at this determination, the Court relied on the precedent set in R. M. D. Chamarbaugwala v. Union of India, reported in 1957 S.C.R. 930. The judgment was recorded as Civil Appeal No. 123 of 1955, appealed by special leave against the Punjab High Court’s judgment and order dated 12 November 1951, and was reported in 1961 AIR 268 and 1961 S.C.R. (1) 668.

In Writ Petition No. 116 of 1951, counsel for the appellants appeared on behalf of the commission agents engaged in forward‑contract business at Ludhiana, while counsel for the State of Punjab represented the respondent; the matter was heard on 13 September 1960 and the judgment was delivered by Justice D Gupta. The appeal challenged the judgment of the Punjab High Court that had dismissed the appellants’ application filed under Article 226 of the Constitution. In that application the appellants contended that the Punjab Forward Contracts Tax Act, 1951 (Punjab Act No VII of 1951) exceeded the constitutional powers of the State Legislature and therefore sought a declaration that the Act, together with the notification issued and the rules made thereunder by the State, were void. They further prayed that the Court issue a writ of mandamus or any other appropriate writ directing the State of Punjab to permit them to continue carrying on forward‑contract transactions or to act as commission agents in such contracts without being restrained by the provisions of the impugned Act and its rules, and that the Act should not be enforced against them. The respondent, in paragraph 5 of its written statement, argued that the impugned Act was not ultra vires the State Legislature because it dealt with matters enumerated in Entry 62 of the State List read in conjunction with Entry 7 of the Concurrent List of the Seventh Schedule. The Punjab High Court, however, held that the Act was essentially a law imposing a tax on speculation in futures, at least with respect to dealers such as the present applicants, and that it fell within Item 62 of the State List as a tax on betting and gambling; consequently the Court upheld the validity of the Act to that extent and rejected the appellants’ application. The sole issue before this Court is whether the Punjab State Legislature possessed the legislative competence to enact the statute. Although the respondent’s written statement referred to Entry 7 of the Concurrent List, neither the High Court nor the learned counsel for the respondent relied upon that entry, and it is evident that the Act cannot be classified within Item 7 of the Concurrent List, which is defined as “Contracts, including partnership, agency, contracts of carriage, and other special forms of contracts, but not including contracts relating to agricultural land.” It is therefore common ground that the Act can be held within the legislative competence of the Punjab State Legislature only if, in its pith and substance, it falls within Item 62 of the State List; if it does not, the Act must be regarded as beyond the competence of the State Legislature.

Item 62 of the State List mentioned taxes on luxuries, including taxes on entertainment, amusements, betting and gambling. Accordingly, the impugned Act could fall within Item 62 only if it imposed a tax on betting and gambling. The Act, however, imposed a tax on forward contracts. It defined “forward contract” in section 2 as follows: “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.” The same section defined “dealer” as “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.” The term “sale” was defined to mean “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 was the charging provision and authorized the government, by notification, to levy a tax on the business of forward contracts carried out by a dealer at rates to be specified. Section 5 provided that every dealer remained liable to pay the tax for as long as he continued his forward‑contract business. Section 6 prohibited any dealer from carrying on forward‑contract business unless he was registered and possessed a registration certificate. Section 7 dealt with the mode of payment of the tax and the filing of returns, while section 8 dealt with assessment of the tax. Because the meaning of “forward contract” was expressly set out in the statute, the Court held that any other external notion of the term must be disregarded for the purpose of deciding the present question. Under the statute, an agreement for the sale of goods on a future date qualified as a “forward contract” only if it satisfied two additional conditions: (1) actual delivery of the goods was not made on the basis of the agreement, and (2) the difference between the agreed price and the price prevailing on the date mentioned in the agreement or any other date was paid by the buyer or received by the seller. The test for a forward contract, therefore, was that delivery of goods was not made or taken, but only the price differential was exchanged.

The Court explained that the definition of a forward contract requires that the goods are not actually delivered or taken, and that only the difference between the price fixed in the agreement and the price prevailing on some other date is paid. The Court then asked whether such an arrangement must be treated as a wagering contract and therefore as gambling. It observed that when two parties execute a formal contract for the sale and purchase of goods at a specified price and for delivery at a specified time, they may have no intention of effecting any real transfer of the goods. Instead, they may intend merely to pay or receive the price difference that arises because the market price varies from the contract price. The Court noted that where this intention exists, the transaction is not a commercial trade but a wager on the rise or fall of the market, which falls within the meaning of “gambling”. The Court pointed out that although the agreement, in form, appears to contemplate delivery of the goods and payment of the full price, the parties actually contemplate neither delivery nor full payment; they contemplate only the receipt and payment of the difference between the contract price and the later market price. That intention, the Court said, renders the contract a wagering contract.

The Court then turned to the definition of “forward contract” in the impugned Act. It observed that the definition contains no reference, either directly or indirectly, to the intention to avoid delivery and to pay only the price difference. The Court stressed that to read the definition as covering such a situation would require substituting the words “is not to be made or taken” for “is not made or taken”, substituting “is to be paid or received by the parties” for “is paid or received by the parties”, and omitting the phrase “on the basis of which”. The Court rejected the possibility of making those substitutions, stating that it was not entitled to rewrite the legislation in that manner. The Court further explained that the Legislature’s decision not to use the words “to be made or taken” or “to be paid or received” was intentional.

The Court noted that any oral or written agreement that provides that actual delivery will not be made or taken and that the whole price of the goods will not be paid, but that only the price difference will be paid, would fall foul of section 30 of the Contract Act and would be unenforceable. Consequently, parties to a written sale agreement would be careful to ensure that the terms do not stipulate that delivery will not occur and that only the price difference will be paid. The Court acknowledged that there might be an oral understanding between the parties that no delivery will be demanded or made and that only the difference will be paid, but it observed that it would be virtually impossible for a taxing authority to discover, from the written contract alone, whether such an oral understanding existed.

In this case the Court observed that imposing a tax on the basis of an unstated intention in a written contract was impracticable. When a contract for the sale of goods was oral and the parties agreed that no actual delivery would occur and that only the difference between the contract price and the prevailing market price would be paid, a taxing authority could not realistically determine which contracts contained such an agreement. The Court noted that disputes about whether a particular contract was a wagering contract usually arose in civil courts when a party sought to enforce a sale contract and the other party attempted to avoid performance by invoking section 30 of the Contract Act. Whenever such a dispute appeared before the Court, it became necessary to examine all surrounding circumstances to decide whether the parties had intended no real delivery and merely intended to pay or receive the price differential as the market fluctuated. Consequently, the Court held that it was virtually impossible for any tax authority to label a specific forward contract as a wagering contract, nor could it expect a taxpayer to voluntarily disclose that the contract was intended solely for the price difference rather than for delivery. Recognising these practical difficulties, the legislature chose to levy tax on contracts for the sale of goods in which actual delivery was not made or taken, irrespective of the parties’ original intention. The Court therefore concluded that the term “forward contract” as defined in the Act did not encompass all the elements required to make a contract a wagering contract, and consequently the challenged provision imposing tax on forward contracts did not fall within the definition of a wagering contract. In Entry 62 the learned Advocate‑General for the State of Punjab argued that although the definition of forward contract might include some contracts that were not wagering contracts, it was sufficiently broad to cover certain contracts that were wagering because the parties lacked any intention to deliver the goods. The Advocate‑General further suggested that, if the definition were indeed wide enough to embrace wagering contracts, the statute should not be entirely struck down but should be upheld only insofar as it applied to those wagering contracts. In response, counsel for the appellants referred to the registration provisions for “dealers” in section 6 and contended that the very fact that the legislature required persons dealing in forward contracts to register and prohibited unregistered persons from dealing in such contracts demonstrated that the legislature had not intended to address wagering contracts at all.

The Court observed that the Legislature had not intended to address wagering contracts at all when it enacted the statute. Contrary to that view, the Court noted that the Constitution itself expressly permits State Legislatures to tax gambling activities. Nevertheless, the Court distinguished between merely imposing a tax on gambling and a legislature encouraging gambling by requiring participants to register for that purpose. The definition of a “dealer” under the Act, the Court pointed out, includes a limited concern such as an Arti, a Chamber or any association created specifically to conduct business in forward contracts. While it is conceivable that an association could be formed to deal in wagering contracts, the Court found it improbable that the Legislature would openly permit and recognise such bodies. These considerations, in the Court’s opinion, provide strong reasons to conclude that the Legislature did not contemplate wagering contracts when it defined “forward contract”. Assuming, however, that the definition were sufficiently wide to encompass wagering contracts, the next issue becomes whether the portion of the Act that would remain valid could be severed. The question also requires determining if the remaining portion could stand independently from the part that would be declared invalid. The Court referred to the rule articulated in R. M. D. Chamarbaugwala v. Union of India, which states that the intention of the legislature is the decisive factor in deciding separability. That rule further requires asking whether the legislature would have enacted the valid portion had it known that the remainder of the statute was invalid. A second principle the Court cited holds that when the valid and invalid parts are independent and do not form a coherent scheme, the analysis continues. If, after removing the invalid portion, the remainder is so thin and truncated that it is substantively different from the legislation as originally enacted, the entire Act must be rejected. Applying either of these rules, the Court concluded that the whole Act must be held invalid in the present case. The Court observed that, had the Legislature been aware that taxing all forward contracts exceeded its competence, it would have recognised the difficulty of distinguishing wagering contracts from genuine contracts for future sale of goods. Consequently, the Legislature would not have found it worthwhile to enact a law that taxed only wagering contracts. The Court further noted that once the statute is declared invalid with respect to forward contracts that are not wagering contracts, the remaining provisions are so thin and truncated. Such a reduced scheme, the Court held, differs in substance from the legislation as it originally emerged from the Legislature. The respondent’s argument that the statute should be upheld as valid insofar as it dealt with wagering contracts was therefore rejected.

In the matter of wagering contracts, the Court held that even though such contracts were invalid with respect to other forward contracts, they must also be rejected. The Court concluded that the statute challenged did not fall within Item 62 of the State List and therefore exceeded the legislative competence of the State Legislature. Accordingly, the appellants were deemed entitled to the reliefs they had sought in their petition filed under Article 226 of the Constitution. The Court allowed the appeal, set aside the order of the High Court, and directed that the petition under Article 226 be allowed. It declared that the Punjab Forward Contracts Tax Act No. VII of 1951 was void and unconstitutional because it was ultra vires the powers of the State Legislature. The Court further held that the notifications made under the rules promulgated by the respondent pursuant to that Act were also void and unconstitutional. Consequently, the Court issued a mandamus directing the respondent to permit the petitioners to carry on the business of forward contracts, or to act as commission agents for forward contracts, without being subject to the provisions of the Punjab Forward Contracts Tax Act No. VII of 1951 and the rules made thereunder, and ordered that the provisions of that Act and its rules not be enforced. The Court also ordered that the appellants be awarded costs in this Court as well as in the court below. The appeal was therefore allowed.