State of U.P. & Ors. v. M/s Lalta Prasad Vaish and sons

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In the First Schedule to the said Act, Item 26 reads as under: “26. Fermentation Industries: (1) Alcohol. (2) Other products of fermentation industries.” Item 26 of the First Schedule to the Act was amended on 14.05.2016 by Act 27 of 2016 with retrospective effect from 08.05.1952 and it reads as under: “26. Fermentation Industries (Other than Potable Alcohol): (1) Alcohol. (2) Other products of fermentation industries.” 7.1 Section 3 of the IDRA is the definition clause and the relevant definitions read as under: “3. Definitions. – In this Act, unless the context otherwise requires,- xxx (d) “industrial undertaking” means any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government; (dd) “new article”, in relation to an industrial undertaking which is registered or in respect of which a licence or permission has been issued under this Act, means— (a) any article which falls under an item in the First Schedule other than the item under which articles ordinarily manufactured or produced in the industrial undertaking at the date of registration or issue of the licence or permission, as the case may be, fall; (b) any article which bears a mark as defined in the Trade Marks Act, 1940 (5 of 1940), or which is the subject of a patent, if at the date of registration or issue of the licence or permission,

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as the case may be, the industrial undertaking was not manufacturing or producing such article bearing that mark or which is the subject of that patent; (e) “notified order” means an order notified in the Official Gazette; xxx (g) “prescribed” means prescribed by rules made under this Act; (h) “Schedule” means a Schedule to this Act; (i) “scheduled industry” means any of the industries specified in the First Schedule; xxx (k) words and expressions used herein but not defined in this Act and defined in the Companies Act, 1956 (1 of 1956), have the meanings respectively assigned to them in that Act.” 7.2 Chapter II of the Act deals with the Central Advisory Council and Development Councils while Chapter III speaks of regulation of scheduled industries. The headings of Sections 10 to 18 are noted within Chapter III. The said provisions deal with, inter alia, registration of existing industries, issuance of licence for producing or manufacturing of new articles, conducting investigation to be made into scheduled industries. Chapter IIIA speaks of direct management or control of industrial undertakings by Central Government in certain cases while Chapter IIIAA speaks of management or control of industrial undertakings owned by companies in liquidation. Chapter IIIAB deals with the power to provide relief to certain industrial undertakings while Chapter IIIAC speaks of liquidation or reconstruction of companies. Chapter IIIB deals with control of supply, distribution, price, etc., of certain articles was inserted by Act 26 of 1953. 7.3 Section 18G which is in the said Chapter is relevant for the purpose of this case, reads as under: “18G. Power to control supply, distribution, price, etc., of certain articles.—(1) The Central

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Government, so far as it appears to it to be necessary or expedient for securing the equitable distribution and availability at fair prices or any article or class of articles relatable to any scheduled industry, may, notwithstanding anything contained in any other provisions of this Act, by notified order, provide of regulating the supply and distribution thereof and trade and commerce therein. (2) Without prejudice to the generality of the powers conferred by sub-section (1), a notified order made thereunder may provide— (a) for controlling the prices at which any such article or class thereof may be bought or sold; (b) for regulating by licences, permits or otherwise the distribution, transport, disposal, acquisition, possession, use or consumption of any such article or class thereof; (c) for prohibiting the withholding from sale of any such article or class thereof ordinarily kept for sale; (d) for requiring any person manufacturing, producing or holding in stock any such article or class thereof to sell the whole or part of the articles so manufactured or produced during a specified period or to sell the whole or a part of the articles so held in stock to such person or class of persons and in such circumstances as may be specified in the order; (e) for regulating or prohibiting any class of commercial or financial transactions relating to such article or class thereof which in the opinion of the authority making the order are, or if unregulated are likely to be, detrimental to public interest; (f) for requiring persons engaged in the distribution and trade and commerce in any such article or class thereof to mark the articles exposed or intended for sale with the sale price or to exhibit at some easily accessible place on the

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premises the price-lists of articles held for sale and also to similarly exhibit on the first day of every month, or at such other time as may be prescribed, a statement of the total quantities of any such articles in stock; (g) for collecting any information or statistics with a view to regulating or prohibiting any of the aforesaid matters; and (h) for any incidental or supplementary matters, including, in particular, the grant or issue of licences, permits or other documents and the charging of fees therefor. (3) Where, in pursuance of any order made with reference to clause (d) of sub-section (2), any person sells any article, there shall be paid to him the price therefor— (a) where the price can consistently with the controlled price, if any, be fixed by agreement, the price so agreed upon; (b) where no such agreement can be reached, the price calculated with reference to the controlled price, if any, fixed under this section; (c) where neither clause (a) nor clause (b) applies, the price calculated at the market rate prevailing in the locality at the date of sale. (4) No order made in exercise of any power conferred by this section shall be called in question in any court. (5) Where an order purports to have been made and signed by an authority in exercise of any power conferred by this section, a court shall, within the meaning of the Indian Evidence Act, 1872 (1 of 1872), presume that such order was so made by that authority. Explanation.— In this section, the expression “article or class of articles” relatable to any scheduled industry includes any article or class of articles imported into India which is of the same nature or description as the

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article or class of articles manufactured or produced in the scheduled industry.” 7.4 The reason as to why Section 18G was inserted to the IDRA must be noted. In paragraph 3 of the Statement of Objects and Reasons, it has been stated as under: “At present, the power to control prices and distribution of various goods under this Act is confined to industrial undertakings registered or licensed under the Act. In all other cases, it is necessary to have recourse to powers derived from the Essential Supplies (Temporary Powers) Act, 1946 and the Supply and Prices of Goods Act, 1950. Both these enactments have a limited period of life. It is proposed to add a chapter taking power to control the distribution and price of goods produced in scheduled industries and of similar goods even, though they may be of imported origin.” The aforesaid reflects that the IDRA has brought under Central control the development and regulation of a number of important industries, the activities of which affect the country as a whole and the development of which must be governed by economic factors of all-India import. Similarly, in the Statement of Objects and Reasons of Amendment Act 72 of 1971, it has been stated as under: “The industries included in the First Schedule to the Industries (Development and Regulation) Act, 1951 are those the control of which by the Union has been considered to be expedient in the public interest. The proper development of these industries is vital to the economic development of the country. These industries not only substantially contribute to the Gross National Product of the country, but also afford gainful employment to millions of people.” 7.5 Section 29E was inserted with effect from 14.05.2016 by Act 27 of 2016. As already noted, Item 26 of the First Schedule deals with “Fermentation Industries” and after amendment by Act 27 of 2016 with retrospective effect from 08.05.1952, “Fermentation Industries” have been clarified as “other than

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potable alcohol”. Therefore, alcohol and other products of “Fermentation Industries” would refer to products which are “other than potable alcohol”.

Article 47: Directive Principle of State Policy:

8. Since we are trying to ascertain the true meaning of “intoxicating liquors” in Entry 8 – List II, Article 47 of the Constitution of India, which is a Directive Principle of the State Policy, is relevant as the said Article deals, inter alia, with intoxicating drinks. The same reads as under: “47. Duty of the State to raise the level of nutrition and the standard of living and to improve public health The State shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and, in particular, the State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health.” What is significant are the words “the State shall endeavour to bring about prohibition of the consumption, except for medicinal purposes of intoxicating drinks which are injurious to health”. It is on the basis of the said Directive Principle that several prohibition and excise laws have been enacted in several States as a constitutional goal to improve the health of the people of India in the context of prevention and prohibition of consumption of “intoxicating liquors”. The manufacture, export, import, transport or sale of “intoxicating liquors” is prohibited except in accordance with a licence, permit or pass granted in that behalf. The State legislations confer power on State Governments in matters concerning liquor licensing and also with regard to imposition of excise duty. 8.1 The following decisions of this Court could be considered at this stage as they are of relevance to the controversy under consideration: a) In Cooverjee B. Bharucha vs. Excise Commissioner and the Chief Commissioner, Ajmer, AIR 1954 SC 220 (“Cooverjee B. Bharucha”), the right of a citizen to carry on trade and business in liquor under Article 19(1) (g) of the Constitution was considered. The impact of

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liquor on a person who consumes it as well as on the society was discussed. With reference to an American decision in Crowley vs. Christensen (1890) 34 Law Ed. 620 (“Crowley”) at p. 623, it was observed that when liquor is consumed, first of all it affects the person who consumes it, and subsequently, it affects those who are immediately connected and dependent upon him. Hence, there is a need to regulate the business of manufacture and trade in liquor. It was observed that no citizen has an inherent right to sell “intoxicating liquors” in retail. This is because the business of liquor is attended with danger to the community. It can, therefore, be entirely prohibited or regulated as per the discretion of the Government and the Authority concerned. It was held that Regulation could also be in the form of issuance of licences to eligible persons under a particular legislation. The provisions of regulation of liquor, which permit certain eligible persons to carry on the trade to the exclusion of the general public and thereby possibly create a monopoly, is also permissible in law. b) In State of Assam vs. Sristikar Dowerah, AIR 1957 SC 414 (“Sristikar Dowerah”), it was observed as under: “no person has any absolute right to sell liquor and that the purpose of the Act and the rules is to control and restrict the consumption of intoxicating liquors, such control and restriction being obviously necessary for the preservation of public health and morals, and to raise revenue.” The above observation is in line with Article 47 of the Constitution of India which is a Directive Principle. c) The constitutional validity of the Bombay Prohibition Act, 1949 was challenged in FN Balsara. One of the arguments raised was that the said Act could be justified under Entry I -List II which relates to public order. This was by placing reliance on a tendency in Europe and America with regard to alcoholism as a menace to public order. However, the said submission was not pursued further before this Court as there were other express provisions under the pertinent Entry which dealt with “intoxicating liquors”. The short question considered was whether the

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Bombay Prohibition Act, 1949 in pith and substance was a law relating to possession and sale, etc. of “intoxicating liquors” or whether it related to import and export of “intoxicating liquors”. Dealing with the validity of the aforesaid Act, this Court noted the word “liquor” ordinarily means “a strong drink as opposed to soft drink” but it must in any event be a beverage which is ordinarily drunk as noted by the Bombay High Court. The High Court further noted that although the State Legislature may prevent the consumption of non-intoxicating beverages and also prevent the use as drinks of alcoholic liquids which are not normally consumed as drinks, it cannot prevent the legitimate use of alcoholic preparations which are not beverages nor the use of medicinal and toilet preparations containing alcohol. This view was challenged before this Court. Noting the several meanings of “liquor” from the Oxford English Dictionary, it was observed that as a general meaning it is a liquid but as a special meaning it means a drink or beverage produced by fermentation or distillation. It was observed that this is the popular and most widely accepted meaning and the basic idea of beverage prominently ran through the main provisions of the various Acts of this country as well as America and England, relating to “intoxicating liquor”. Reference was made to the definition of “intoxicating liquors” in various overseas jurisdiction and also Bombay Abkari Act, 1878 as well as other provincial Acts such as the Punjab Excise Act, 1914; the UP Excise Act, 1910; Madras Abkari Act, 1886, etc. It was observed that the framers of the Government of India Act, 1935 could not have been entirely ignorant of the acceptance in which the word “liquor” covers not only those alcoholic liquids which are generally used for beverage purposes and produce intoxication, but also all liquids containing alcohol. It may be that the latter meaning is not the meaning which is attributed to the word “liquor” in common parlance especially when that word is prefixed by the qualifying word “intoxicating”, but in my opinion having regard to the numerous statutory definitions of that word, such a meaning could not have been intended to be excluded from the scope of the term “intoxicating liquor” as used in Entry 31 – List II. Consequently, on analysing

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the provisions of the impugned Act, it was observed that only those provisions which affected the possession, selling and consumption of any medicinal and toilet preparations and commendation of any intoxicant or hemp were invalid. d) In Nagendra Nath vs. Commissioner of Hills Division, AIR 1958 SC 398 (“Nagendra Nath”), it was reiterated that there is no inherent right in a citizen to sell liquor and that the control and restriction over the consumption of “intoxicating liquors” was necessary for the preservation of public health and morals and to raise revenue. e) The question, whether Section 43 of the Bengal Excise Act, 1909, under which the licence of a liquor contractor was withdrawn, violated Articles 14 and 19 of the Constitution of India was considered in Amar Chandra Chakraborty vs. Collector of Excise, Government of Tripura, AIR 1972 SC 1863 (“Amar Chandra Chakraborty”). It was observed that in view of the injurious effect of excessive consumption of liquor on health, the trade or business must be treated as a class by itself and it cannot be treated on par with other trades while testing the matter from the angle of Article 14 of the Constitution. f) In State of Orissa vs. Harinarayan Jaiswal, AIR 1972 SC 1816 (“Harinarayan Jaiswal”), it was observed that one of the important purposes of selling the exclusive right to vend liquor was to raise revenue and since the Government had the power to sell exclusive privileges, there was no basis for contending that the owner of the privileges could not decline to accept the highest bid if it thought that the price offered was inadequate. g) Similarly, in Nashirwar vs. State of Madhya Pradesh, AIR 1975 SC 360 (“Nashirwar”), it was observed that there was no fundamental right of citizens to carry on trade or to do business in liquor. It was observed in the said case as under: “There are three principal reasons to hold that there is no fundamental right of citizens to carry on trade or to do business in liquor. First, there is the police power of the State to enforce public morality to prohibit trades in noxious or

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dangerous goods. Second, there is power of the State to enforce an absolute prohibition of manufacture or sale of intoxicating liquor. Article 47 states that the State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health. Third, the history of excise law shows that the State has the exclusive right or privilege of manufacture or sale of liquor.” h) In Har Shankar vs. The Deputy Excise and Taxation Commissioner, AIR 1975 SC 1121 (“Har Shankar”), this Court, speaking through Y.V. Chandrachud, C.J, observed that the State has the power to prohibit trades which are injurious to the health and welfare of the public, that elimination and exclusion from business is inherent in the nature of liquor business as no person has an absolute right to deal in liquor. Also, all forms of dealings in liquor have, due to their inherent nature, been treated as a class by themselves by all civilized communities. Therefore, the contention that the persons who carry on trade or business in liquor have an unrestricted fundamental right as such was rejected. Thus, it was observed that while a citizen has a right to do business in liquor, the State can make law imposing reasonable restrictions on the said right in public interest. Summarising the aforesaid judgments in Har Shankar, it was observed that there is no fundamental right to carry out trade or business in intoxicants. The State, under its regulatory powers, has the right to prohibit absolutely every form of activity in relation to intoxicants, its manufacture, storage, export, import, sale and possession. In all their manifestations, these rights are vested in the State and indeed without such vesting there can be no effective regulation of various forms of activities in relation to intoxicants. Therefore, the States’ right to regulate activities in relation to intoxicants to the extent of prohibiting would imply that even when permission to deal with intoxicants is granted, the same can be regulated. This is because the rights in regard to intoxicants belong to the State and

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it is open to the Government to part with those rights for a consideration. The power of the Government to charge a price for parting with its rights and not the mode of fixing that price is what constitutes the essence of the matter. It was also held that neither does the label affixed to the price determine the true nature of the charge levied by the Government nor its right to levy the same. By use of the expression “licence fee” or “fixed fee”, what is meant is the price or consideration which the Government charges to the licencees for parting with its privileges and granting them the licences. That the object of imposing licence fee is for the purpose of regulation so that the number of persons who wish to engage in liquor trade are kept under check and within reasonable limits. It was also observed that the Government can, on its own, trade in its own rights or privileges and can deal with liquor or grant leases of its rights and issue requisite permits or licences or passes on payment of such fees as may be prescribed. Ultimately, it was observed that the amount payable by the licencees on the basis of the bids offered by them in auctions is neither a fee in the technical sense, nor a tax, but is in the nature of the price of a privilege. It was also held that the State has the power to grant liquor licences on payment of such fees as the consideration for parting with the privileges that the State has. That the payment demanded is in the form of excise revenue, which could be in the form of any payment, duty, fee, tax or fine ordered under the provisions of a particular enactment or Rules made thereunder relating to liquor or intoxicating drugs but would not include a fine imposed by a Court of law. That such an imposition could be recovered in the manner authorised by law. Consequently, in Har Shankar, this Court repelled the contention of the retailed vendors of country liquor holding licences for the sale of liquor in specified vends. i) In Khoday Distilleries Ltd. vs. State of Karnataka (1995) 1 SCC 574 (“Khoday Distilleries”), the Constitution Bench of this Court summarised the law on the subject relating to right to carry on trade or business in “potable liquor” as under:

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“(a) The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are, therefore, to be read along with the said qualifications. Even the rights guaranteed under the Constitutions of the other civilized countries are not absolute but are read subject to the implied limitations on them. Those implied limitations are made explicit by clauses (2) to (6) of Article 19 of our Constitution. (b) The right to practise any profession or to carry on any occupation, trade or business does not extend to practising a profession or carrying on an occupation, trade or business which is inherently vicious and pernicious, and is condemned by all civilised societies. It does not entitle citizens to carry on trade or business in activities which are immoral and criminal and in articles or goods which are obnoxious and injurious to health, safety and welfare of the general public, i.e., res extra commercium, (outside commerce). There cannot be business in crime. (c) Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is res extra commercium being inherently harmful. A citizen has, therefore, no fundamental right to do trade or business in liquor. Hence the trade or business in liquor can be completely prohibited. (d) Article 47 of the Constitution considers intoxicating drinks and drugs as injurious to health and impeding the raising of level of nutrition and the standard of living of the people and improvement of the public health. It, therefore, ordains the State to bring about prohibition of the consumption of intoxicating

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drinks which obviously include liquor, except for medicinal purposes. Article 47 is one of the directive principles which is fundamental in the governance of the country. The State has, therefore, the power to completely prohibit the manufacture, sale, possession, distribution and consumption of potable liquor as a beverage, both because it is inherently a dangerous article of consumption and also because of the directive principle contained in Article 47, except when it is used and consumed for medicinal purposes. (e) For the same reason, the State can create a monopoly either in itself or in the agency created by it for the manufacture, possession, sale and distribution of the liquor as a beverage and also sell the licences to the citizens for the said purpose by charging fees. This can be done under Article 19(6) or even otherwise. (f) For the same reason, again, the State can impose limitations and restrictions on the trade or business in potable liquor as a beverage which restrictions are in nature different from those imposed on the trade or business in legitimate activities and goods and articles which are res commercium. The restrictions and limitations on the trade or business in potable liquor can again be both under Article 19(6) or otherwise. The restrictions and limitations can extend to the State carrying on the trade or business itself to the exclusion of and elimination of others and/ or to preserving to itself the right to sell licences to do trade or business in the same, to others. (g) When the State permits trade or business in the potable liquor with or without limitation, the citizen has the right to carry on trade or business subject to the limitations, if any, and the State cannot make discrimination between the citizens who are qualified to carry on the trade or business.

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(h) The State can adopt any mode of selling the licences for trade or business with a view to maximise its revenue so long as the method adopted is not discriminatory. (i) The State can carry on trade or business in potable liquor notwithstanding that it is an intoxicating drink and Article 47 enjoins it to prohibit its consumption. When the State carries on such business, it does so to restrict and regulate production, supply and consumption of liquor which is also an aspect of reasonable restriction in the interest of general public. The State cannot on that account be said to be carrying on an illegitimate business. (j) The mere fact that the State levies taxes or fees on the production, sale and income derived from potable liquor whether the production, sale or income is legitimate or illegitimate, does not make the State a party to the said activities. The power of the State to raise revenue by levying taxes and fees should not be confused with the power of the State to prohibit or regulate the trade or business in question. The State exercises its two different powers on such occasions. Hence the mere fact that the State levies taxes and fees on trade or business in liquor or income derived from it, does not make the right to carry on trade or business in liquor a fundamental right, or even a legal right when such trade or business is completely prohibited. (k) The State cannot prohibit trade or business in medicinal and toilet preparations containing liquor or alcohol. The State can, however, under Article 19(6) place reasonable restrictions on the right to trade or business in the same in the interests of general public. (l) Likewise, the State cannot prohibit trade or business in industrial alcohol which is not used as a beverage but used legitimately for

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industrial purposes. The State, however, can place reasonable restrictions on the said trade or business in the interests of the general public under Article 19(6) of the Constitution. (m) The restrictions placed on the trade or business in industrial alcohol or in medicinal and toilet preparations containing liquor or alcohol may also be for the purposes of preventing their abuse or diversion for use as or in beverage.” (underlining by me)

Survey of Judicial Precedents: Synthetics and Chemicals (7J):

9. Since the main controversy in this case turns on the correctness of the decision in Synthetics and Chemicals (7J), it is necessary to advert to the same in some detail. 9.1 In the said case, the main contour of the controversy was whether vend fee in respect of “industrial alcohol” under different legislations and rules in different States was valid. In this context, the following three questions were considered: "(i) whether the power to levy excise duty in case of industrial alcohol was with the State Legislature or the Central Legislature? (ii) what is the scope and ambit of Entry 8 of List II of the Seventh Schedule of the Constitution? (iii) whether, the State Government has exclusive right or privilege of manufacturing, selling, distributing, etc. of alcohols including industrial alcohol. In this connection, the extent, scope and ambit of such right or privilege has also to be examined.” 9.1.1 In this background, the expressions “intoxicating liquors” and “alcoholic liquors for human consumption” were considered and also Article 47 of the Constitution which deals with the State’s duty regarding the improvement of public health and to bring about prohibition of the consumption except for medicinal purposes of

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intoxicating drinks and of drugs which are injurious to health. Reference was also made to Entry 52 – List I which deals with industries, the control of which by the Union is declared by Parliament by law to be expedient in public interest. 9.1.2 It was the contention of the petitioners therein that the IDRA was enacted with a view to developing and controlling various important industries. Section 2 of the IDRA declares that it is expedient in the public interest that Union should take under its control the industries specified in the First Schedule. 9.1.3 The said case did not concern primarily with potable alcohol for the purpose of human consumption but with ethyl alcohol (rectified spirit) as an industrial raw material for manufacture of downstream products. This Court concerned itself with the taxing power of the States to impose and levy excise duty on “industrial alcohol” and/or imposts such as vend fees. “Power Alcohol” was defined as ethyl alcohol containing not less than 95.5 per cent volume of ethanol measured at 60°F, corresponding to 74.4 over proof strength. That rectified spirit was ethyl alcohol or ethanol with 96 per cent alcohol. On dehydration, ethyl alcohol with 99.5 per cent volume of ethanol is produced. 9.1.4 This Court noted that on 08.05.1952, the Parliament enforced the IDRA which contains, inter alia, Section 18G which was inserted w.e.f. 01.10.1953, whereby the Central Government was empowered for securing equitable distribution and availability at fair prices of any article or class of articles relatable to any scheduled industry to provide for regulating the supply and distribution thereof, and trade and commerce therein by a notified order. The notified order was also to provide for controlling the prices at which such article or class of articles could be bought or sold. The said Act was amended in 1956. Item 26 was inserted in the First Schedule to the said Act and empowered the Central Government to control the “Fermentation Industries” including alcohol industries.

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Under the UP Licences for the Possession of Denatured Spirit and Specially Denatured Spirit Rules, 1976, special licence for possession of denatured spirit for industrial purposes was required. “Special denatured spirit” was defined as spirit rendered “unfit for human consumption”. As per the Rules, licences for possession of denatured spirit including specially denatured spirit for industrial purposes were to be of three kinds – (i) Form FL 39; (ii) Form FL 40; and (iii) Form FL 41. 9.1.5 In that background, it was submitted on behalf of the Union of India that the legislative competence of the State enactments in various States will have to be determined with reference to following Entries in List I – 7, 52, 59, 84, 96, 97 and Entries in List II - 8, 24, 26, 27, 51, 52, 54, 56, 62 and Entries in List III - 19 and

33. That there is a dichotomy between Entry 84 – List I and Entry 51 – List II but this would not control the interpretation of other Entries. It was urged that there was no such dichotomy as regards Entry 8 – List II as it is not subject to Entry 52 – List I as the subject matters of these two Entries are different. That Entry 52 – List I deals with industries while Entry 8 – List II deals with “intoxicating liquors”. The power to levy taxes is to be read from the Entry relating to taxes and not from the general Entry. That industry is a topic of legislation left to the Parliament and to the State. Identifying of Entries is by reference to a declaration under Entry 7 – List I and Entry 52 – List I. The aspect of legislation with regard to subject matter of Entries is the topic “industry”. On the other hand, the subject matter of legislation under Entry 8 – List II is the topic “intoxicating liquors”. Therefore, according to the Union of India, there was no conflict. 9.1.6 In view of the above submission on behalf of the Union of India, the only question which was to be determined was, whether, “intoxicating liquors” in Entry 8 – List II is confined to potable liquor or includes all liquors. That the State Legislature had no power to levy excise duty on “industrial alcohol” as the latter is “not fit for human consumption” and the State Legislature will have

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power to levy fee in respect of all alcohol (see Entry 66 read with Entry 6 - List II). The State Legislature has power to legislate on the topic “intoxicating liquors” under Entry 8 - List II. It being a general Entry, will not comprehend a power of taxation but will comprehend a power to levy fee read with Entry 66 – List II. 9.1.7 According to the Union of India, with regard to industries the control of which by the Union is declared by Parliament by law to be expedient in public interest, Parliament will have exclusive legislative competence vide Entry 52 - List I. This power includes the power to declare by Parliament that control by the Union of industries relating to all types of alcohol is expedient in public interest. Once Parliament makes such a declaration, the State Legislature will be denuded of its power under Entry 24 - List II on the aspect “industry” with respect to all subject matters. 9.1.8 It was also contended that the power to collect the lump sum amount by way of auction by any right or otherwise conferring the right to sell alcohol is neither a power to levy tax nor a power to levy fee but it will fall within the legislative competence of the State Legislature under Entry 8 – List II. But this power will extend only to alcohol for human consumption. Also, there can be a complete prohibition with regard to manufacture and sale of alcohol fit for human consumption because there is no fundamental right to carry on business in alcohol even for human consumption (see Article 47 of the Constitution and other judgments already discussed). The State can, therefore, collect an amount called vend fee, shop rent etc. for conferring on a citizen the right to manufacture and sell alcoholic liquors if it is fit for human consumption. This power cannot extend to “industrial alcohol” or “alcohol contained in the medicinal or toilet preparations”. According to the Union of India, there was no power to levy such rent or fee with regard to “industrial alcohol” because (a) “industrial alcohol” and “alcoholic liquors for medicinal and toilet preparations” cannot be completely prohibited; (b) as there is a right to carry on business in “industrial

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alcohol”, any prohibition on manufacture of “industrial alcohol”, would be violative of Article 19(1)(g) of the Constitution. Therefore, in the absence of a power to completely prohibit, there will be no power to collect sums for conferring rights to manufacture or sell except the levy of taxes and fees. 9.1.9 On behalf of the State of UP, it was submitted that in order to appreciate the controversy, it was necessary to realise that the real problem arises from the fact that the denaturants can be converted into renaturants through an illicit process. Therefore, they supported the levy. It was submitted that the vend fee on denatured alcohol or denatured spirit or what is known as “industrial alcohol” has been challenged on mainly two grounds, namely, (a) States lack legislative competence, and (b) after the enactment of the IDRA, the States’ power is completely lost. 9.1.10 The contention of the State was that there is no dichotomy between ethyl alcohol to be used for beverages and to be used for “industrial purposes”. The levy, in any case, was on manufacture of ethyl alcohol and not on its use. The levy was stipulated jointly or severally both under Entries 8 and 51 - List II; Entry 33 - List III, and as per police powers, regulatory and other incidental charges were collected. That levy was a regulatory power under Articles 19(6) and 19(6)(ii) of the Constitution. 9.1.11 According to the State, Parliament has no power to legislate on “industrial alcohol”, since “industrial alcohol” was also “alcoholic liquors for human consumption”. It was contended that Entry 84 - List I expressly excludes alcoholic liquors for human consumption and therefore, the residuary Entry 97 - List I will not operate as against its own legislative interest. The aforesaid submissions were made on the assumption that “industrial liquor” or “ethyl alcohol” is fit for human consumption. 9.1.12 This Court stated that the expression must be understood in its common and normal sense. “Industrial alcohol” as it is, is incapable of being consumed by a normal human being. The expression ‘consumption’

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must also be understood in the sense of direct physical intake by human beings in this context. That utilisation in some form or the other is consumption for the benefit of human beings if “industrial alcohol” is utilised for production of rubber tyres, etc. It was held that the utilisation of those tyres in the vehicles used by human beings cannot, in the context in which the expression has been used in the Constitution, be understood to mean that alcohol has been for human consumption. 9.1.13 This Court observed that when the framers of the Constitution used the expression “alcoholic liquors for human consumption”, they meant and still the expression means, that “liquor which as it is consumable in the sense capable of being taken by human beings as such as a beverage or a drink” and Entry 84 - List I must be understood in that sense. It was contended that denatured spirit could also be by appropriate cultivation or application or admixture with water etc., transformed into ‘alcoholic liquors for human consumption’ and as such, transformation would not entail any process of manufacture as such. There is no organic or fundamental change in this transformation. However, this aspect was not examined, the reason being that the Constitutional provisions specially dealing with the delimitation of powers in a federal polity must be understood in a broad commonsense point of view as understood by common people for whom the Constitution is made. Alcoholic or “intoxicating liquors” must be understood as these are, not what these are capable of or able to become. Consequently, in paragraph 86 it was concluded as follows: “86. The position with regard to the control of alcohol industry has undergone material and significant change after the amendment of 1956 to the IDR Act. After the amendment, the State is left with only the following powers to legislate in respect of alcohol: (a) It may pass any legislation in the nature of prohibition of potable liquor referable to Entry 6 of List II and regulating powers.

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(b) It may lay down regulations to ensure that non-potable alcohol is not diverted and misused as a substitute for potable alcohol. (c) The State may charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol in the present case, because under the Ethyl Alcohol (Price Control) Orders, sales tax cannot be charged by the State on industrial alcohol. (d) However, in case State is rendering any service, as distinct from its claim of so-called grant of privilege, it may charge fees based on quid pro quo. See in this connection, the observations of Indian Mica case [(1971) 2 SCC 236 : 1971 Supp SCR 319 : AIR 1971 SC 1182].” 9.1.14 Oza, J. gave a concurring separate opinion wherein he considered the question relating to validity of the levies made by the States on alcohol which is utilised by the industries for manufacturing the products where alcohol is a raw material. Some of these industries themselves (i) manufacture alcohol as they have their own distilleries and from their distilleries through pipelines it goes to their industrial units where this is used as a raw material (ii) whereas some are industries which purchase alcohol or denatured spirit on being allotted by the Government. 9.1.15 On a comparison of the language of Entry 84 – List I and Entry 51 – List II, it was observed by Oza, J. that the powers of taxation on alcoholic liquors have been based on the way in which they are used, as admittedly alcoholic liquors is a very wide term and may include variety of types of alcoholic liquors but the Constitution- makers distributed them into two heads: (a) for human consumption (b) other than for human consumption

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9.1.16 Alcoholic liquors which are for human consumption were put in Entry 51 - List II authorising the State Legislature to levy tax on them whereas alcoholic liquors other than for human consumption have been left to the Central Legislature under Entry 84 – List I for levy of duty of excise. This scheme of the Entries in two Lists clearly indicates the line of demarcation for purposes of taxation of alcoholic liquors. What has been excluded in Entry 84 has specifically been put within the authority of the State for purposes of taxation. 9.1.17 Speaking about Entry 8 – List II, it was observed that this Entry talks about “intoxicating liquors” and further it refers to production, manufacture, possession, transport, purchase and sale of “intoxicating liquors”. From the scheme of Entries in the three Lists, it is clear that taxing Entries have been specifically enacted conferring powers of taxation whereas other Entries pertain to the authority of the Legislature to enact laws for purposes of regulation. That the declaration is made by the Parliament and this industry, i.e., industry based on fermentation and alcohol has been declared to be an industry under the IDRA and, therefore, is directly under the control of the Centre, and in respect of regulation the authority of the State Legislature in Entry 8 - List II could only be subject to the IDRA or Rules made thereunder by the Centre. 9.1.18 It was observed that high concentration of ethyl alcohol which is a product of distillation after fermentation is extracted in various concentrations and can also be extracted in a very high concentration above 90 per cent which is generally termed as rectified spirit. It is used as raw material for various industries. It is often supplied after being mixed with methylated alcohol or being denatured by other processes only to safeguard against its use for conversion into alcoholic beverages for human consumption. Ethyl alcohol is diluted by water and its percentage is brought to 40 or 45 or below then it becomes fit for human consumption. 9.1.19 The contention of the States was that various duties for purposes of regulation were imposed to prevent

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the conversion of rectified spirit or methylated alcohol to be diverted from industrial to potable use. In other words, the contention was that these levies had been imposed in order to prevent the conversion of alcoholic liquors which are not fit for human consumption to those which are fit for human consumption. Therefore, the levies could be justified as regulatory fees. 9.1.20 The said contention was repelled and it was concluded that Entry 8 – List II could not be invoked to justify the levy by the State in respect of alcoholic liquors which are not made for human consumption. Thus, the Court held that alcoholic liquors which are made for human consumption would not include alcoholic liquors not made for human consumption or “industrial alcohol”.

Synthetics and Chemicals (2J): 9.2 In State of U.P. vs. Synthetics and Chemicals Ltd. (1991) 4 SCC 139 (“Synthetics and Chemicals (2J)”), a two-Judge Bench of this Court (speaking through Sahai J. who also wrote the concurring judgment along with Thommen, J.) observed that the High Court relied upon the observations in paragraph 86 of the judgment of the Constitution Bench in Synthetics and Chemicals (7J), namely, “sales tax cannot be charged on “industrial alcohol” and, therefore, held that due to operation of the Ethyl Alcohol (Price Control) Orders, sales tax cannot be charged by the State on “industrial alcohol” and struck down the levy. 9.2.1 In Synthetics and Chemicals (2J), it was categorically argued by the learned Advocate General appearing for the State of Uttar Pradesh that the reference to “sales tax” in the judgment of this Court between the same parties (before seven-Judge Bench) was accidental and did not arise from the judgment. This was because the levy of sales tax was not in question at any stage of the arguments nor was the question considered as it was not in issue. In fact, the question which arose for consideration in the earlier litigation was in regard to the validity of “vend fee and other fees” charged by the States. This Court held that vend fee or transport

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fee and similar fees, unless supported by quid pro quo, interfered with the control exercised by the Central Government under IDRA and the various orders made thereunder with respect to prices, licences, permits, distribution, transport, disposal, acquisition, possession, use, consumption, etc., of articles related to a controlled industry, “industrial alcohol” being one of them. The casual reference to sales tax in the concluding portion of the judgment was accidental and per incuriam was the submission. 9.2.2 While considering the said plea, this Court observed that, the only question which had to be determined between the same parties in Synthetics and Chemicals (7J) was, “whether “intoxicating liquors” in Entry 8 - List II was confined to potable liquor or includes all liquors.” Answering this question, this Court categorically held that “intoxicating liquors” within the meaning of Entry 8 - List II was confined to “potable liquor” and did not include “industrial liquor”. 9.2.3 Therefore, the only question that was considered by the seven-Judge Bench of this Court was whether the State could levy “excise duty” or “vend fee” or “transport fee” and the like by recourse to Entry 51 or 8 - List II in respect of “industrial alcohol”. This Court by a detailed discussion in the seven-Judge Bench decision had observed that the impugned statutory provisions purportedly levying fees or enforcing restrictions in respect of “industrial alcohol” were impermissible in view of the control assumed by the Central Government in exercise of its power under Section 18G of the IDRA in respect of a declared industry falling under Entry 52 - List I, read with Entry 33 - List III. 9.2.4 In this decision, it was observed that the aforesaid decision of this Court was not an authority for the proposition canvassed by the assessee in challenging the provision. This Court could not have intended to say that the Price Control Orders made by the Central Government under the IDRA imposed a fetter on the legislative power of the State under Entry 54 - List II

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to levy taxes on the sale or purchase of goods. The reference to sales tax in paragraph 86 of that judgment was merely accidental or per incuriam and therefore, had no effect. 9.2.5 In the earlier litigation of Synthetics and Chemicals (7J), the question was whether the State Legislature could levy vend fee or excise duty on “industrial alcohol”. The seven-Judge Bench answered in the negative as “industrial alcohol” being unfit for human consumption, the State Legislature was incompetent to levy any duty of excise either under Entry 51 or Entry 8 - List II of the Seventh Schedule. The judgment of this Court in Synthetics and Chemicals (7J) has been considered in later decisions and they could be adverted to at this stage itself.

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any imposition of fee where there were circumstance, to establish that there was quid pro quo for the fee nor it will affect any regulatory measure.” 9.4 It was further observed that the principle of occupied field precluded States from trenching on any power which was already covered by a Central legislation. But in absence of any provision in IDRA touching upon regulation or ensuring that “industrial alcohol” was not diverted the State was competent to legislate on it under Entry 33 – List III.

Gujchem Distillers: 9.5 In Gujchem Distillers India Ltd. vs. State of Gujarat (1992) 2 SCC 399 (“Gujchem Distillers”), the judgment in Synthetics and Chemicals (7J) was followed and the fee of 7 paise per litre was held to be a regulatory measure, namely, for denaturation of spirit and supervision of the said process.

Modi Distillery: 9.6 In State of UP vs. Modi Distillery (1995) 5 SCC 753 (“Modi Distillery”), the facts were that the Allahabad High Court had allowed the writ petitions filed by the respondents therein who are manufacturers of Indian-made foreign liquor and quashed the orders impugned demanding excise duty from them. Referring to the provisions of the UP Excise Act, 1910 and the definitions therein on the different types of liquor, this Court speaking through Bharucha, J. (as he then was) observed in paragraphs 9, 10 and 11 as under: “9. It is convenient now to note the judgment of a Bench of seven learned Judges of this Court in Synthetics and Chemicals Ltd. v. State of U.P. [(1990) 1 SCC 109] This Court stated that it had no doubt that the framers of the Constitution, when they used the expression “alcoholic liquors for human consumption”, meant, and the expression still means, that liquor which, as it is, is consumable in the sense that it is capable of being taken by human beings as such as a beverage or drink. Alcoholic or intoxicating liquors had to be understood as they were, not what they were

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capable of or able to become. Entry 51 of List II was the counterpart of Entry 84 of List I. It authorised the State to impose duties of excise on alcoholic liquors for human consumption manufactured or produced in the State. It was clear that all duties of excise save and except the items specifically excepted in Entry 84 of List I were generally within the taxing power of the Central Legislature. The State Legislature had limited power to impose excise duties. That power was circumscribed under Entry 51 of List II. It had to be borne in mind that, by common standards, ethyl alcohol (which had 95 per cent strength) was an industrial alcohol and was not fit for human consumption. The ISI specifications had divided ethyl alcohol (as known in the trade) into several kinds of alcohol. Beverages and industrial alcohols were clearly and differently treated. Rectified spirit for industrial purposes was defined as spirit purified by distillation having a strength not less than 95 per cent by volume of ethyl alcohol. Dictionaries and technical books showed that rectified spirit (95 per cent) was an industrial alcohol and not potable as such. It appeared, therefore, that industrial alcohol, which was ethyl alcohol (95 per cent), by itself was not only non-potable but was highly toxic. The range of potable alcohol varied from country spirit to whisky and the ethyl alcohol content thereof varied between 19 to about 43 per cent, according to the ISI specifications. In other words, ethyl alcohol (95 per cent) was not an alcoholic liquor for human consumption but could be used as a raw material or input, after processing and substantial dilution, in the production of whisky, gin, country liquor, etc. In the light of experience and development, it was necessary to state that “intoxicating liquor” meant only that liquor which was consumable by human beings as it was.

10. What the State seeks to levy excise duty upon in the Group ‘B’ cases is the wastage of liquor

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after distillation, but before dilution; and, in the Group ‘D’ cases, the pipeline loss of liquor during the process of manufacture, before dilution. It is clear, therefore, that what the State seeks to levy excise duty upon is not alcoholic liquor for human consumption but the raw material or input still in process of being rendered fit for consumption by human beings. The State is not empowered to levy excise duty on the raw material or input that is in the process of being made into alcoholic liquor for human consumption.

11. That the measure of excise duty upon alcoholic liquor for human consumption is the alcoholic strength thereof does not make any difference in this behalf. It is only the alcoholic strength of the final product which is relevant.” In paragraph 14, it was further observed as under:

14. … The demand for excise duty is not a regulatory measure. The power of the State to levy excise duty cannot be expanded with reference to its power to regulate manufacture. We are not required to and do not express any opinion in regard to the power of the State to regulate the manufacture of alcoholic liquors for human consumption. 9.6.1 Consequently, the appeals were allowed with regard to levy of excise duty upon wastage of Indian-made foreign liquor exported outside the State of Uttar Pradesh. Rest of the appeals were dismissed.

Shree Krishna Gyanoday Sugar Ltd.: 9.7 In Shree Krishna Gyanoday Sugar Ltd. vs. State of Bihar (1996) 10 SCC 11, (“Shree Krishna Gyanoday Sugar Ltd.”), the question was whether Rule 9 of the Bihar & Orissa Excise Rules, 1990, framed under the Bihar and Orissa Excise Act, 1915, was ultra vires the said Act. In the alternative, the question was whether the said Rule covered the appellants’ distilleries which were manufacturing not only denatured spirit but also potable liquor.

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9.7.1 It was contended that the distilleries of the appellants therein were having composite licences to manufacture not only denatured spirit and other spirits for industrial use but were also manufacturing potable spirit or country liquor and that for these distilleries the State had no power or jurisdiction to invoke Rule 9 of the Rules. The High Court repelled the contention of the appellants therein. It was held that Rule 9 was not ultra vires the provisions of the aforesaid Act. It was cautioned that if a distillery which manufactures denatured spirit attempts to alter any denatured spirit with the intention that such spirit may be used for human consumption, whether as a beverage or internally as a medicine, it would be committing an offence which is punishable under Section 49 of the aforesaid Act. Therefore, it was permissible for the Excise Authorities under the Act to supervise the working of such distilleries so that they may not commit such offences and to oversee their manufacturing activities. This was because the denatured spirit, if illegally altered and made fit for human consumption, would have a devastating effect on the health of consumers and may even result in fatal consequences or loss of vision and other pernicious physical handicaps. Therefore, supervision was provided at the cost of distilleries and the licencees of the distilleries will have to bear the cost of maintenance of such supervision. The same would squarely fall within the regulatory powers for framing Rules with a view to see that the provisions of the aforesaid Act are not stifled or tinkered with by such licencee distilleries. 9.7.2 It was observed that the expression “commercial” would fall in the same category as denatured spirit, meaning thereby those spirits which are not fit for human consumption. They would not cover potable spirits even assuming that they are commercial spirits. That, the expression “other commercial spirits” as contemplated by the Rule are those spirits which are unfit for human consumption and they do not cover potable liquor which cannot fall in line with denatured spirit. Thus, it was observed that the expression “or any other commercial

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spirit” must mean those spirits which fall in the category of spirits unfit for human consumption like denatured spirits which are used for “industrial purposes” or any other purpose other than for human consumption. It was held that Rule 9 of the aforesaid Rule would apply to only those distilleries which were licenced solely and wholly for the purpose of manufacturing either denatured spirit or any other commercial spirit unfit for human consumption but would not include those distilleries which are licenced for manufacturing along with denatured spirit or other industrial spirits unfit for human consumption, also potable liquor which is fit for human consumption. Hence, it was observed that the appellant therein, who had composite and multiple licences to manufacture potable liquor, was outside the sweep of second part of Rule 9 of the aforesaid Rules. That to such distilleries the first part of the Rule may apply wherein the State will have to bear the cost of providing supervisors and establishments for that purpose but the cost of such establishment cannot be foisted on such distilleries.

Bihar Distillery: 9.8 In Bihar Distillery, narrating the history with regard to the legislations on rectified spirit and in the context of the IDRA, and the incorporation of Item 26 in the First Schedule of the said Act which deals with “Fermentation Industries”: (i) Alcohol, (ii) other products of “Fermentation Industries”, this Court, speaking through Jeevan Reddy, J., noted that the decision in Synthetics and Chemicals (7J) called for demarcation of the spheres of the Union and the States, particularly in the matter of alcoholic liquors. 9.8.1 This Court observed that insofar as “intoxicating liquors”/potable liquors are concerned, it is the exclusive province of the States. But for manufacturing “intoxicating liquors”, or for manufacturing “industrial alcohol”, as the case may be, one must have to manufacture or purchase alcohol. It is only thereafter that the alcohol is either converted into “industrial alcohol” (by denaturing it) or into “potable liquors” by

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reducing the strength of alcohol (which is normally of 95% purity or above). Alcohol can however be used for industrial purposes even without denaturing it. To say that the States step in only when alcohol becomes potable and not before it, creates a doubt and enough room for abuse apart from difficulties of supervision and regulation, such as, in the matter of licensing such industries — whether the Centre alone or the States or both should do it. Therefore, notices were issued to all the State Governments as well as Union of India and the interplay between the Entries of Lists I, II and III which are under consideration here and which are extracted above, were discussed. 9.8.2 It was opined that Entry 51 - List II and Entry 84 - List I complement each other inasmuch as both provide for duties of excise. However, Entry 51 - List II empowers the State to levy duties of excise on alcoholic liquors for human consumption, which is expressly excluded from Entry 84 - List I. Therefore, alcoholic liquors may be used for several purposes, one of which is meant for human consumption. It was further observed that Entry 8 – List II does not use the expression “alcoholic liquors for human consumption” but employs the expression “intoxicating liquors” and significantly, the words “for human consumption” is conspicuous by its absence. According to Jeevan Reddy, J., this is for the obvious reason that the very word “intoxicating” signifies “for human consumption”. Thus, Entry 8 - List II emphasizes all aspects of “intoxicating liquors” within the State’s sphere, i.e., to say production, manufacture, possession, transport, purchase and sale of “intoxicating liquors”. In this context, Entry 6 - List II was relied upon to observe that the said Entry, which, inter alia, deals with “public health”, has a close nexus to prohibiting or regulating consumption of “intoxicating liquors”. 9.8.3 It was next opined that clause (a) in Entry 33 – List III is also significant. That though the control of certain industries may have been taken over by the Union by virtue of a declaration made by Parliament in terms of

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Entry 52 - List I, yet the “trade and commerce in, and the production, supply and distribution of the products of such industry” is placed in the Concurrent List. According to Jeevan Reddy, J., this would mean that it could be regulated by both by the Union as well as by the States, subject, of course, to Article 254 of the Constitution. 9.8.4 It was observed that insofar as the field is not occupied by the laws made by the Union, the States are free to legislate. It was further observed that Entry 24 - List II is in the nature of a general Entry. It deals with industries but is made expressly subject to Entries 7 and 52 - List I. That by making a declaration in terms of Entry 52 - List I in Section 2 of the IDRA, the Union has taken control of the several industries mentioned in the Schedule to the Act. As a result, the States have been denuded of their power to legislate with respect to those industries on that account. It was further observed that a three-Judge Bench in McDowell had held that Entry 52 overrides only Entry 24 - List II and no other Entry in List II. That Entry 8 – List II is not overborne in any manner by Entry 52 – List I, which means that so far as “intoxicating liquors” are concerned, they are within the exclusive sphere of the States. 9.8.5 Referring to the judgment of Sabyasachi Mukharji, J. ( as he then was) in Synthetics and Chemicals (7J), particularly paragraph 85, it was observed that the expression “both potable and” is an accidental error as the judgment in its earlier paragraphs had stated that so far as potable alcohol is concerned, they are governed by Entry 8 – List II and are within the exclusive domain of the States. The said judgment did not intend to convey that the industries engaged in the manufacture or production of potable liquors have been controlled by the Union by virtue of Item 26 of the First Schedule to the IDRA. So far as potable liquors are concerned, their manufacture, production, possession, transport, purchase and sale are within the exclusive domain of the States and the Union of India has no say in the matter.

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9.8.6 In this case, the Court further noted the contentions urged on behalf of the State to the effect that rectified spirit is “intoxicating liquors” within the meaning of Entry 8 - List II and hence outside the purview of Entry 24 - List II, which would in turn mean that the Union cannot take over its control by making a declaration in terms of Entry 52 - List I. Further Item 26 of the Schedule to the IDRA is ineffective and invalid insofar as it seeks to regulate the production and manufacture, etc. of rectified spirit. The State submitted that the decision to the contrary in Synthetics and Chemicals (7J) is not correct and requires reconsideration. 9.8.7 The State next contended that Entry 51 - List II and Entry 84 - List I speak of “alcoholic liquors for human consumption” and not “alcoholic liquors “fit” for human consumption”. That the judgment in Synthetics and Chemicals (7J), read the word “fit” in the Entries and thus curtailed the legislative power of the States. It was further contended that rectified spirit is really and essentially “intoxicating liquors” and by the process of “reduction of liquor” by adding water and spices (optional) does not cease it to be “intoxicating liquors”. In the State of U.P., bulk of the rectified spirit is used for the purpose of obtaining country liquor or IMFLs and a small quantity is used for industrial purposes. Therefore, the expression “intoxicating liquors” must include rectified spirit. It was further submitted that during the course of manufacture of rectified spirit, potable liquor comes into existence and the main raw material for rectified spirit is molasses. 9.8.8 However, on behalf of the distilleries, it was contended that there is no good reason for doubting the correctness of the decision in Synthetics and Chemicals (7J) or for referring the issue to a larger Constitution Bench of nine or more Judges. This was because if the States’ submission were to be accepted, then Item 26 in the Schedule to the IDRA would become superfluous and meaningless. Therefore, this Court in Synthetics and Chemicals (7J) speaking through Sabyasachi Mukharji, J., drew a line between the respective spheres of the

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Union and the States. It was also contended that despite the insertion of Item 26 in the IDRA, the State was not totally denuded of any power to make a law with respect to rectified spirit or for that matter “industrial alcohol”. In this regard, Entry 33 - List III and Section 18G read with other provisions of the IDRA were considered and by placing reliance on Tika Ramji, it was observed that “the possibility of an order under Section 18G being issued by the Central Government would not be enough. The existence of such an order would be the essential prerequisite before any repugnancy could ever arise”. 9.8.9 On a conspectus consideration, this Court held that the decision in Synthetics and Chemicals (7J), did not deal with the aspects which arose for consideration in this case and that it was mainly concerned with “industrial alcohol”, i.e., denatured rectified spirit. While holding that rectified spirit is “industrial alcohol”, it recognised at the same time that it can be utilised for obtaining country liquor (by diluting it) or for manufacturing Indian Made Foreign Liquor (“IMFL”). When the decision says that rectified spirit with 95% alcohol content v/v is “toxic”, what it meant was that if taken as it is, it is harmful and injurious to health. By saying “toxic”, it did not mean that it cannot be utilised for potable purposes either by diluting it or by blending it with other items. The Court in Bihar Distillery noted that the undeniable fact is, that rectified spirit is both “industrial alcohol” as well as a liquor which can be converted into country liquor just by adding water. It is also the basic substance from which IMFL are made. Denatured rectified spirit, of course, is wholly and exclusively “industrial alcohol”. It was observed that this basic factual premise which was not and could not be denied by any one raised certain aspects for consideration therein which were not raised or considered in Synthetics and Chemicals (7J). 9.8.10 It was noted that Synthetics and Chemicals (7J) did not deal with rectified spirit which could be converted into potable alcohol and was merely concerned with “industrial alcohol” which could not be so converted,

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i.e., denatured rectified spirit. A distinction was drawn between industries engaged in manufacturing rectified spirit meant exclusively for supply to industries (industries other than those engaged in obtaining or manufacturing of potable liquor), whether after denaturing it or without denaturing it, and industries engaged in manufacturing rectified spirit exclusively for the purpose of obtaining or manufacturing potable liquor. In the first case, the industry was to be under “the total and exclusive control of the Union and be governed by the IDRA and the rules and regulations made thereunder”. As far as the second case is concerned, it was noted that “they shall be under the total and exclusive control of the States in all respects and at all stages including the establishment of the distillery”. 9.8.11 It was thus noted that Synthetics and Chemicals (7J) was mainly concerned with “industrial alcohol”, i.e., denatured rectified spirit. This Court raised several questions with regard to the supervision of the manufacture of country liquor or IMFL, which is not the concern of the Union but the bulk of the rectified spirit produced in many States is meant for and is utilised for obtaining or manufacturing potable liquors. The question was then at what stage, would the State intervene in the process of manufacture of potable liquor - whether until the stage of potable liquor is reached, or whether there has to be supervision even at a stage prior thereto by the States. This Court took into consideration the fact that under Entry 33(a) - List III, the States do have the power to legislate on this field, provided the field is not occupied by any law made by the Union. Further, in the interests of law, public health, public revenue and also in the interests of proper delineation of the spheres of the Union and the States, it was noted that there has to be a clear line of demarcation drawn at the stage of clearance or removal of rectified spirit. In the matter of the levies, when the removal or clearance is for industrial purpose, the levy of duties of excise and all other control is with the Union but when the removal/clearance is for obtaining

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or manufacturing potable liquors, the levy of duties and all other control is with the States. It was observed that there is a need for joint control and supervision of the process of manufacture of rectified spirit and its use and disposal. Hence, certain observations were made by way of elaboration by taking into consideration the nature of the product and its use, namely supply for industries or “industrial alcohol” or use for potable purposes and the circumstances of misuse of rectified spirit (for industrial purposes) by diverting it for potable purposes, which are as under: (1) (a) So far as industries engaged in manufacturing rectified spirit meant exclusively for supply to industries (industries other than those engaged in obtaining or manufacture of potable liquors), whether after denaturing it or without denaturing it, are concerned, they shall be under the total and exclusive control of the Union and be governed by the IDR Act and the rules and regulations made thereunder. In other words, where the entire rectified spirit is supplied for such industrial purposes, or to the extent it is so supplied, as the case may be, the levy of excise duties and all other control including establishment of distillery shall be that of the Union. (b) The power of the States in the case of such an industry is only to see and ensure that rectified spirit, whether in the course of its manufacture or after its manufacture, is not diverted or misused for potable purposes. They can make necessary regulations requiring the industry to submit periodical statements of raw material and the finished product (rectified spirit) and are entitled to verify their correctness. For this purpose, the States will also be entitled to post their staff in the distilleries and levy reasonable regulatory fees to defray the cost of such staff. (2) So far as industries engaged in the manufacture of rectified spirit exclusively for the purpose of

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obtaining or manufacturing potable liquors — or supplying the same to the State Government or its nominees for the said purpose — are concerned, they shall be under the total and exclusive control of the States in all respects and at all stages including the establishment of the distillery. In other words, where the entire rectified spirit produced is supplied for potable purposes — or to the extent it is so supplied, as the case may be — the levy of excise duties and all other control shall be that of the States. (3) So far as industries engaged in the manufacture of rectified spirit, both for the purpose of (a) supplying it to industries (other than industries engaged in obtaining or manufacturing potable liquors/ intoxicating liquors) and (b) for obtaining or manufacturing or supplying it to Governments/ persons for obtaining or manufacturing potable liquors are concerned, the following is the position: (a) The power to permit the establishment and regulation of the functioning of the distillery is concerned, it shall be the exclusive domain of the Union. But so far as the levy of excise duties is concerned, the duties on rectified spirit removed/ cleared for supply to industries (other than industries engaged in obtaining or manufacturing potable liquors), shall be levied by the Union; b) the duties of excise on rectified spirit cleared/ removed for the purposes of obtaining or manufacturing potable liquors shall be levied by the State Government concerned. The disposal, i.e., clearance and removal of rectified spirit in the case of such an industry shall be under the joint control of the Union and the State concerned to ensure evasion of excise duties on rectified spirit removed/cleared from the distillery. c) It is obvious that in respect of these industries too, the power of the States to take necessary steps to ensure against the misuse or diversion of

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rectified spirit meant for industrial purposes (supply to industries other than those engaged in obtaining or manufacturing potable liquors) to potable purposes, both during and after the manufacture of rectified spirit, continues unaffected. d) Any rectified spirit supplied, diverted or utilised for potable purposes, i.e., for obtaining or manufacturing potable liquors shall be supplied to and/or utilised, as the case may be, in accordance with the State excise enactment concerned and the rules and regulations made thereunder. If the State is so advised, it is equally competent to prohibit the use, diversion or supply of rectified spirit for potable purposes. (4) It is advisable and necessary that the Union Government makes necessary rules/regulations under the IDR Act directing that no rectified spirit shall be supplied to industries except after denaturing it save those few industries (other than those industries which are engaged in obtaining or manufacturing potable liquors) where denatured spirit cannot be used for manufacturing purposes. (5) So far as rectified spirit meant for being supplied to or utilised for potable purposes is concerned, it shall be under the exclusive control of the States from the moment it is cleared/removed for that purpose from the distillery — apart from other powers referred to above. (6) The power to permit the establishment of any industry engaged in the manufacture of potable liquors including IMFLs, beer, country liquor and other intoxicating drinks is exclusively vested in the States. The power to prohibit and/or regulate the manufacture, production, sale, transport or consumption of such intoxicating liquors is equally that of the States. 9.8.12 The aforesaid decision in Bihar Distillery was doubted in Deccan Sugar and Abkari Co. Ltd. vs.

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Commissioner of Excise (1998) 3 SCC 272 (“Deccan Sugar and Abkari Co. Ltd.”), and the appeals were referred to a larger Bench which followed Synthetics and Chemicals (7J) and Modi Distillery without expressly overruling the decision in Bihar Distillery. Opining that Synthetics and Chemicals (7J) continued to hold the field, it was noted that the State’s power was limited to regulation of non-potable alcohol for the limited purpose of preventing its use as alcoholic liquors. Ultimately, the appeal filed by the state was dismissed as the levies could not be treated as a regulatory measure.

McDowell: 9.9 In McDowell, the State of Andhra Pradesh had prohibited the manufacture of liquor by an amendment in the Andhra Pradesh Prohibition Act, 1995. The appellants therein who were manufactures of “intoxicating liquors” challenged the constitutional validity of the Act by which the Prohibition Act was amended to include Section 7-A by which the manufacture of liquor came to be prohibited. This was owing to the lack of legislative competence in view of Item 26 in the First Schedule of the IDRA, which according to the writ petitioners therein, vested the control of alcohol industries exclusively in the Union and denuded the State Legislature of its power to licence or regulate the manufacture of liquor. This argument was further based on the fact that “Fermentation Industries” were included in the Schedule of the IDRA and hence the State was denuded of its power to licence and regulate manufacture of liquor which industry and its product were within the exclusive province of the Union and hence the State lost its competence to grant, refuse or renew the licences The position of law was reiterated as under: - “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 not and cannot,

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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.” The Civil Appeals were dismissed by this Court.

Vam Organic I: 9.10 In Vam Organic I, the Notification dated 18.05.1990 issued by the Excise Commissioner, Uttar Pradesh, was assailed before the High Court and the writ petition was dismissed. By the said Notification, certain amendments were made to the Rules published vide Notification dated 26.09.1910. Section 41 of the UP Excise Act, 1910 gave power to the Excise Commissioner to make Rules, inter alia, for regulating the manufacture, supply, storage or sale of any intoxicant. The earlier Rule 2 was substituted by a new Rule 2 titled “Denaturation of Spirit”. The amended Rule provided for a new licence for denaturation of spirit in a prescribed form to be issued by the Collector to all distilleries situated within his district holding licence PD-1 or PD-2 and persons holding licences FL-16, FL-39, FL-40 and FL-41 to denature the spirit. A licence fee for denaturation of spirit at the rate of 7 paise per litre was levied in advance. The appellants in this case who were manufacturers of vinyl acetate monomer (a basic organic chemical for which “industrial alcohol” was the main feed stock being produced in the distillery) contended that the entire “industrial alcohol” produced was denatured as per the method approved by the State Excise Authorities and was being used in their factory for manufacturing vinyl acetate monomer. The appellants held licences in the form of FL-39 to enable them to use the “industrial alcohol” as the main raw material for their product. The notification was challenged on two grounds: firstly, that the State of Uttar Pradesh has no power to legislate in respect of “industrial alcohol” or to levy taxes in respect thereof. Secondly, that the levy being not based on quid pro quo was otherwise bad.

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9.10.1 In this case, before considering the legal contentions, this Court highlighted the difference between “industrial alcohol”, denatured spirit and potable liquor. Ethyl alcohol was noted to be rectified spirit of 95% v/v in strength. Rectified spirit was highly toxic and unfit for human consumption. However, rectified spirit diluted with water was noted to be country liquor. Rectified spirit, as it was, can be used for manufacture of various other products like chemicals, etc. Rectified spirit, produced for industrial use was 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 was denatured by adding denaturants which made the spirit unpalatable and nauseating. As such rectified spirit could be converted to potable liquor but once denatured it could be used only as “industrial alcohol”. 9.10.2 It was observed that in Synthetics and Chemicals (7J) the question of legislative competence of the State to impose tax or levy on “industrial alcohol” was ruled in the negative, so far as ethyl alcohol/ rectified spirit is concerned. Further, even if the State had the regulatory power to prevent misuse of “industrial alcohol” for potable purposes, such power did not include power to levy any impost. It was further observed that denaturation is a statutory duty imposed by a notification under the U.P. Excise Act and as no service by the State was being provided for the same, no fee could be charged and even if the State had to incur any expenses for enforcement of the requirement of denaturation, there is no quid pro quo between the expenses incurred and the fees charged. This Court noted that the term “industrial alcohol” is not used in any of the Lists and whether alcoholic liquors other than “alcoholic liquors for human consumption” or “intoxicating liquors” was a State subject or a Union subject should be the real controversy. It was with a view to describing that particular kind of liquor the term “industrial alcohol” is used. It was observed that after an analysis of all the provisions of law giving the

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Union Parliament and the State Legislature jurisdiction to legislate on alcohol, this Court in Synthetics and Chemicals (7J) held that the impugned notifications therein, imposing certain fees as vend fee or transport fee, etc. were within the legislative competence of the State. That this Court was fully aware of the fact that rectified spirit was the ingredient for “intoxicating liquors” or alcoholic liquors for human consumption although rectified spirit/ethyl alcohol as well as denatured spirit are referred to as “industrial alcohol” in that judgment. This Court did not hold that the State will have no power whatsoever in relation to “industrial alcohol”. In fact, in the judgment in Synthetics and Chemicals (7J), the Court has enumerated the various areas relating to “industrial alcohol” in which the State could still legislate or make rules. In that regard paragraph 86 of the judgment in Synthetics and Chemicals (7J) was quoted. Of course, the same has been explained in Synthetics and Chemicals (2J), discussed above. This Court observed in this case that denaturation of spirit meant for industrial use is meant to prevent misuse of non-potable alcohol for human consumption and as such was specifically mentioned by the Court to be within the legislative competence of the State. This Court observed in para 14 as under: “14. 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 or 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.”

Haryana Brewery Ltd.: 9.11 In Government of Haryana vs. Haryana Brewery Ltd. (2002) 4 SCC 547 (“Haryana Brewery Ltd.”), the controversy related

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to levy of excise duty on beer brewed by the respondent therein. Rule 35 of the Punjab Brewery Rules, 1956 and Section 32 of the Punjab Excise Act, 1914 were considered. It was observed by this Court that the said Rule was only an enabling provision which would help the Excise Authorities in calculating what would be the quantity of beer manufactured and fit for human consumption on which excise duty could be imposed. The said Rule was declared valid and it did not require any reading down as had been done by the High Court. It was observed that the tax was on the end product and not on the raw material. Rule 35 indicated that in order to determine what was the quantity of beer manufactured which was fit for human consumption, after all the processes were completed, one had to see what was the quantity of raw materials which were utilised for the manufacture of beer and then allowance for wastage of seven per cent had to be made and thereafter the quantity of beer manufactured was determined. That the figure taken for the purpose of calculating the excise duty was only on the end product, namely the beer produced, and not the quantity of the raw material used in manufacture of beer, during which loss of some quantity as wastage would have occurred and there could not be a deduction of any sum or proportion as wastage from the quantity of end product in order to arrive at that quantity. In such a case, the question of determining any allowance of seven per cent for wastage did not arise. Therefore, the Excise Authorities could levy excise duty only on the beer after it had been manufactured and the levy was on the quantity manufactured. How this quantity had to be arrived was to be determined according to Section 32 read with Rule 35 of the aforementioned Act and Rules. Hence, Rule 35 was sustained as valid and it did not require any reading down.

Industrial Corporation (P) Ltd.: 9.12 In the State of Bihar vs. Industrial Corporation (P) Ltd. (2003) 11 SCC 465 (“Industrial Corporation (P) Ltd.”), the respondent companies were engaged in the manufacture of rectified spirit from molasses allotted to them by the Controller of Molasses in terms of the Bihar Molasses (Control) Act, 1947 and they had been granted licences under various provisions of the Bihar and Orissa Excise Act, 1915. It was found that certain

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quantity of rectified spirit had to be produced but instead there was a shortfall and therefore, notice was issued and penalty was imposed on the premise that the respondents therein had diverted the molasses towards manufacturing either country liquor or liquor which was fit for human consumption. Assailing the same, writ petitions were filed before the High Court which had allowed the said writ petitions. Therefore, the State had appealed before this Court. 9.13 This Court noted that molasses is a by-product of sugar and mainly used as raw material for manufacture of spirit, including alcohol for human consumption. The respondents in the said case were engaged in the manufacture of rectified spirit from molasses and penalty was imposed owing to a loss of revenue by reason of loss of wastage of molasses while carrying on manufacture of such rectified spirit. One of the contentions raised was that the State has power to impose duty only on the spirit which is for human consumption and the respondents therein had not carried out any activities in relation to manufacture of potable liquor from the molasses. It was observed that the judgment in Modi Distillery applied to the said case and therefore, no penal duty could be imposed on rectified spirit. Reliance placed on Bihar Distillery was not gone into inasmuch as it was observed that it was unnecessary to go into the question of the correctness of the observations made in Bihar Distillery. However, the observations of the High Court therein were that in view of the judgment of this Court in Synthetics and Chemicals (7J), the State had no legislative competence even in relation to potable liquor, (which is fit for human consumption), was not correct.

Vam Organic II: 9.14 In Vam Organic II, a notification dated 13.01.1990 whereby licence fee of 15 paise per litre was sought to be imposed on the quantity of specially denatured spirit (STS) obtained from distilleries in the State of Uttar Pradesh under Rule 3(a) of the UP Licences for the Possession of Denatured Spirit and Specially Denatured Spirit Rules, 1976 was assailed before the Allahabad High Court. The writ petitions were allowed, and the State had filed appeals before this Court. Section 3 (13) of the UP Excise Act, 1910 (for short, “1910 Act”) had defined the word

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“intoxicant” as meaning “any liquor or intoxicating drug”. The word “liquor” in turn was defined in Section 3(11) as meaning “intoxicating liquors and includes spirits of wine, spirit, wine, tari, pachwai, beer and all liquid consisting of or containing alcohol, also any substance which the State Government may by notification declare to be liquor for the purposes of the Act.” In paragraph 6 of the judgment, it was observed that “industrial alcohol” is not liquor nor is it potable as such. However, it may be utilized to produce a kind of liquor if it is denatured. “Denatured” in Section 3(9) of the Act was defined to mean “rendered unfit for human consumption in such manner as may be prescribed by the State Government by notification in this behalf”. Thus, the State Act equated “industrial alcohol” to non-potable alcohol and not fit for human consumption. To ensure the denaturation of “industrial alcohol” under Section 41 of the 1910 Act, Rules were made in the year 1976. It was contended by the appellant State that the word “industry” has been construed by the Constitution Bench of this Court in ITC Ltd. vs. Agricultural Produce Market Committee (2002) 9 SCC 232 (“ITC Ltd.”) to mean only manufacture and production. Therefore, the State was competent under Entry 33 - List III to regulate the products of an industry which was declared to be a controlled industry under Entry 52 - List I. Since there was no Central legislation occupying the field, the State law must be held to be valid. 9.14.1 Referring to Synthetics and Chemicals (7J), it was observed that since the coming into force of the IDRA on 08.05.1952, the State Legislatures are constitutionally incompetent to levy tax on “industrial alcohol”. This principle was reiterated in Modi Distillery wherein it was held that the State’s power to levy excise duty was limited to alcoholic liquors for human consumption which means, that liquor which, as it is, is consumable in the sense that it is capable of being taken by human beings as such as a beverage or drink. Therefore, even if ethyl alcohol (95 per cent) could be used as a raw material or input, after processing and substantial dilution, in the production of whisky, gin, country liquor etc. nevertheless, it was not “intoxicating liquors” which expression meant only that liquor which was

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consumable by human beings as it was. Therefore, the State could not legislate on “industrial alcohol” despite the fact that such “industrial alcohol” has the potential to be used to manufacture alcoholic liquors for human consumption. 9.14.2 Ultimately, in paragraph 43 of the judgment, it was pithily observed as under: “43. Considering the various authorities cited, we are of the view that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and the public is protected from consuming such illicit liquor. But this power stops with the denaturation of the industrial alcohol. Denatured spirit has been held in Vam Organics I to be outside the seisin of the State Legislature. Assuming that denatured spirit may by whatever process be renatured (a proposition which is seriously disputed by the respondents) and then converted into potable liquor, this would not give the State the power to regulate it. Even according to the demarcation of the fields of legislative competence as envisaged in Bihar Distillery industrial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery “denatured rectified spirit, of course, is wholly and exclusively industrial alcohol” (SCC p. 742, para 23).”

Analysis of Judicial Dicta:

10. I shall now analyse the judgments of this Court on the points in controversy. 10.1 In Indian Mica, the question which came up was whether the fee levied under Rule 111 of the Bihar and Orissa Excise Rules

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framed under Section 90 of the Bihar and Orissa Excise Act, 1915 on denatured spirit used and possessed by the appellants therein had sufficient quid pro quo for the levy. This Court struck down the levy as being unjustified and excessive as there was no co-relationship between the levy and the services rendered. 10.2 In Southern Pharmaceuticals and Chemicals vs. State of Kerala, AIR 1981 SC 1863 (“Southern Pharmaceuticals”), being aggrieved by the dismissal of their writ petitions and upholding the constitutional validity of Section 12-A and other sections of the Kerala Abkari Act, and Rules 13 and 16 of the Kerala Rectified Spirit Rules, 1972, the manufacturers of medicinal and toilet preparations containing alcohol had filed the appeal before this Court questioning the legislative competence of State to enact a law relating to medicinal and toilet preparations containing alcohol under Entry 8 - List II. Repelling the said contention in light of the scheme of legislation and its history, it was observed that impugned Act was relatable to Entry 8 - List II. Reference was also made to the judgment of this Court in FN Balsara and it was held that the main purpose of the impugned Act was to consolidate the law relating to manufacture, sale and possession of “intoxicating liquors” which squarely fell under Entry 8 - List II, while the main object of the Central Act was to provide for the levy and collection of duties of excise on medicinal and toilet preparations containing alcohol falling under Entry 84 - List I. According to this Court when the framework of the two enactments was examined, it was apparent that the Central and the State legislations operated in two different and distinct fields. It was held that in the matter of making rules or detailed provisions to achieve the object and purpose of a legislation, there may be some provisions seemingly overlapping or encroaching upon the forbidden field, but that does not warrant the striking down of the impugned Act as ultra vires the State Legislature. 10.3 In Synthetics and Chemicals (7J), the question for consideration was whether different legislations and rules in respect of “industrial alcohol” enacted by the States were valid. In my view, this Court was clear about the concept of “industrial alcohol” and “intoxicating liquors” and therefore, the State Legislatures’ competence to levy excise duty on “industrial alcohol” was considered as the seminal issue. In that context,

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