http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: THE BULLION AND GRAIN EXCHANGE LTD.  AND OTHERS

       Vs.

RESPONDENT: THE STATE OF PUNJAB

DATE OF JUDGMENT: 13/09/1960

BENCH: GUPTA, K.C. DAS BENCH: GUPTA, K.C. DAS DAS, S.K. HIDAYATULLAH, M. SHAH, J.C. AYYANGAR, N. RAJAGOPALA

CITATION:  1961 AIR  268            1961 SCR  (1) 668

ACT: Forward  Contracts  Tax-Validity  of   enactment-Legislative competence-Severability of valid portion-Punjab Forward Con- tracts  Tax Act, 1951 (Punj). 7 of 1951), s.  2-Constitution of India, Seventh Schedule, List II, Entry 62.

HEADNOTE: The  appellants, who were carrying on the business  of  com- mission agents in forward contracts, filed a petition before the High Court of Punjab under Art. 226 of the  Constitution of  India  challenging the validity of  the  Punjab  Forward Contracts  Tax  Act, 1951, on the ground that it  was  ultra vires the powers conferred upon the State Legislature.   The Act  provided  for the levy of a tax  on  forward  contracts which  were  defined,  by.  S. 2,  as  agreements,  oral  or written, for sale of goods on a future date but on the basis of which actual delivery of goods was not made or taken  but only  the difference between the price of the  goods  agreed upon  and  that  prevailing on the  date  mentioned  in  the agreement  or  any other date was paid or  received  by  the parties.  The High Court took the view that the Act was  one to  tax speculation in futures and fell within Entry  62  of the  State  List as an Act to impose taxes  on  betting  and gambling. Held,  that  as the definition of the expression  "  forward contract  " in the Punjab Forward Contracts Tax  Act,  1951, does  not  set out all the elements which are  necessary  to render a contract a wagering contract the legislature  could not be considered to have contemplated wagering contracts in defining  " forward contracts " in the way it did.  The  Act therefore  does not fall within Entry 62, List  II,  Seventh Schedule of the Constitution, and is beyond the  legislative competence of the State Legislature. Held,  further,  that  even  if  the  definition  could   be considered  to be wide, enough to include certain  contracts which may be wagering contracts because of the fact that the parties  to  the contract had no intention  to  deliver  the goods,  the portion of the Act which would then be valid  is so  thin  and truncated that the entire Act should  be  held

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

invalid. R.   M. D. Chamarbaugwala v. The Union of India, [1957] S.   C. R. 93o, relied on.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 123/55 669 Appeal  by special leave from the judgment and  order  dated November 12, 1951, of the Punjab High Court in Writ Petition No. 116 of 1951. N.   C.  Chatterjee,  S.  N. Andley, J.  B.  Dadachanji  and Rameshwar Nath, for the appellants. S.   M. Sikri, Advocate-General for the State of Punjab, N.   S.  Bindra  and  D. Gupta, for  the  respondent.  1960.   September  13.   The  Judgment  of  the  Court  was delivered by DAs GUPTA J.-This appeal is against the judgment of the High Court of Punjab rejecting the appellant’s application  under Art.  226  of  the Constitution.  In  this  application  the appellants  who  had  been  carrying  on  the  business   of commission  agents in Forward Contracts at Ludhiana  alleged that the Punjab Forward Contracts Tax Act, 1951 (Punjab  Act No. VII of 1951), was ultra vires the powers conferred  upon the State Legislature and prayed for a declaration that  the Act  and  the notification made and  the  rules  promulgated thereunder  by the respondent, State of Punjab,  were  void. There was a further prayer for directing the State of Punjab by a writ of mandamus or other appropriate writ to allow the petitioners to carry on the business of Forward Contracts or as  commission agents in Forward Contracts  unrestricted  by the  provisions  of the above-mentioned Act  and  the  rules thereunder And not to enforce the Act. The  respondent’s  case as made in para. 5 of  its  written- statement was that " the impugned Act is not ultra vires the State Legislature.  It is a law with respect to the  matters enumerated  in& Entry 62 of the State List read  with  Entry No. 7 of the Concurrent List of the 7th Schedule." The High Court held that:- "The impugned Act, is an Act to tax speculation in  futures, at  least so far as dealers such as the  present  applicants are concerned, falls within Item 62 of the State List as  an Act  to  impose taxes on betting and gambling, and  to  that extent at least is valid." 670 In this view the High Court rejected the application. The  only  question  for  our decision  is  as  regards  the legislative competence of the State Legislature of Punjab to enact this statute.  Though a reference under Entry 7 of the Concurrent List of the 7th Schedule of the Constitution  was made  in  the  respondent’s written  statement  no  reliance appears to have been placed on this entry in the High  Court nor  has it been relied on before us by the learned  counsel appearing on behalf of the respondent and it is quite  clear that  the  impugned  Act cannot fall within Item  7  of  the Concurrent  List  which  is  in  these  terms:"   Contracts, including  partnership, agency, contracts of  carriage,  and other   special  forms  of  contracts,  but  not   including contracts  relating  to agricultural land ".  It  is  common ground before us that the Act must be held to be within  the legislative competence of the Punjab State Legislature  only if in pith and substance it fell within Item 62 of the State List and if it did not so fall it must be held to be  beyond the  State  Legislature’s competence.  Item  62  mentions  "

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

taxes on luxuries, including taxes on entertainment,  amuse- ments, betting and gambling." If  the  impugned  Act provides for a  tax  on  betting  and gambling then and then only it can come within Item 62.  The Act provides for the levy of a tax on forward contracts  and it  has defined " forward contract" in s. 2 in these  words: "Forward contract" means an agreement, oral or written,  for sale  of  goods on a future date but on the basis  of  which actual  delivery of goods is not made or taken but only  the difference  between the price of the goods agreed  upon  and that  prevailing on the date mentioned in the  agreement  or any  other  date  is paid or received by the  parties  ".  " Dealer  "  is  defined in the same section  to  mean  "  any person,  firm,  Hindu  Joint  family  or  limited   concern, including an arhti or " chamber " or association formed  for the purpose of conducting business in forward contracts, who conducts  such business in the course of trade in the  State either  on his own behalf or on behalf of any other  person, arhti, "chamber" or association". ,Sale" is defined to mean                             671 "the  final, settlement in respect of an agreement  to  sell goods  mentioned  in  a forward contract, and  it  shall  be deemed  to have been completed on the date originally  fixed in  the forward contract for this purpose or any other  date on  which the final settlement is made ". Section 4  is  the charging section and provides for a levy on the business  in forward  contracts  of a dealer a tax at such rates  as  the Government may by notification direct.  Section 5 lays  down that every dealer shall be liable to pay tax under this  Act as  long as he continues his business in forward  contracts. Section 6 prohibits any dealer from carrying on business  in forward   contracts  unless  he  has  been  registered   and possesses a registration certificate.  Section 7 deals  with the mode of payment of the tax and for submission of returns while s. 8 provides for assessment of the tax. As  the  term " forward contract " has been defined  in  the statute itself we have to forget for the purpose of deciding the present question any other notion about what a  "forward contract"  means.   For the purpose of  this  statute  every agreement  for  sale of goods on a future date is  not  a  " forward  contract ". It has to be an agreement for the  sale of  goods  on  a future date and has to  satisfy  two  other conditions,  viz., (1) actual delivery of the goods  is  not made  on the basis of the agreement and (2)  the  difference between  the  price  of  the  goods  agreed  upon  and  that prevailing  on  the date mentioned in the agreement  or  any other  date is paid by the buyer or received by the  seller. The test of a forward contract under this definition is that delivery  of  goods  is  not made  or  taken  but  only  the difference between the price of the goods as agreed upon and that  prevailing  on  some other date is paid..  Is  such  a contract  necessarily  a  wagering  contract  and  therefore gambling ? When  two parties enter into a formal contract for the  sale and  purchase  of  goods at a given  price,  and  for  their delivery at a given time it may be that they never  intended an  actual transfer of goods at all, but they intended  only to  pay  or receive the difference according as  the  market price should vary from the 86 672 contract price.  When such is the intention it has been held that is not a commercial transaction but a wager on the rise or fall of the market, which comes within the connotation of "  gambling  ".  It  is the fact  that  though  in  form  an

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

agreement  for sale purports to contemplate delivery of  the goods  and  the payment of the price, neither  delivery  nor payment of the price is contemplated by the parties and what is  contemplated  is merely the receipt and payment  of  the difference  between  the contract price and the price  on  a later  day that makes the contract a wagering contract.   In the  definition  of " forward contract in the  impugned  Act there  is no reference, directly or indirectly’ to  such  an intention.   It  is only by reading for the words  "  actual delivery  of goods is not made or taken " the  words  actual delivery  of  goods  is  not to be  made  or  taken  and  by substituting  for  the words " is paid or  received  by  the parties  "  the  words " is to be paid or  received  by  the parties  " and also by omitting the words " on the basis  of which " that the word " forward contract " as defined in the section  can be held to refer to a wagering contract.   This however  we  are  not entitled to do.  The  reason  why  the Legislature did not use the words " to be made or taken " or "  to be paid or received " in the definition clause is  not far  to seek.  An agreement oral or written which  in  terms provides that actual delivery is not to be made or taken and that  the  entire price of the goods is not to be  paid  and only  the difference between the price of the  goods  agreed upon  and that prevailing on some other date would  be  paid would  be hit by s. 30 of the Contract Act and would not  be enforceable.   Parties  to a written agreement for  sale  of goods  would therefore take good care to see that the  terms do not provide that delivery should not be made but only the difference   is  to  be  paid.   There  might  be  an   oral understanding between the parties that no delivery should be demanded  or made, but that only difference should be  paid. But it will be next to impossible for a tax being imposed on the  proof of such intention, not expressed in  the  written contract.  When the agreement for sale of goods is oral, but the parties                             673 agree as between themselves that no delivery would be  made, but  difference in price would be paid, it would be  equally impossible  for a taxing authority to discover in  which  of the contracts such an agreement has been made.  The  dispute whether a particular contract is a wagering contract or  not arises  in civil courts generally when the contract of  sale is  sought  to be enforced and one of the parties  tries  to avoid the contract by recourse to s. 30 of the Contract Act. When  such  a  dispute comes before the  Court,  it  becomes necessary  to consider all the circumstances to see  whether they  warrant  the legal inference that  the  parties  never intended  any  actual delivery but intended only to  pay  or receive the difference according as the market price  should vary  from  the contract price.  It is therefore  well  nigh impossible  for any taxing authority to brand  a  particular forward con. tract as a wagering contract ; nor is it to  be expected  that  any party on whom the tax is  sought  to  be levied,  will  voluntarily disclose that in  the  particular contract or in a number of contracts, the intention was  not to  deliver  the  goods  but only  to  pay  or  receive  the difference  in  price.  Aware of these difficulties  in  the practical  application  of  a law to levy  tax  on  wagering contracts, the legislature decided to levy tax on  contracts for sale of goods in which actual delivery is not  factually made  or taken, whatever be the intention at the  time  when the agreement was made. It appears clear therefore that the words " forward contract "  as  defined in the Act do not set out  all  the  elements which are necessary to render a contract a wagering contract

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

and so the impugned legislation to tax forward contracts  as defined does not come within.  Entry 62. The learned Advocate-General for the State of Pun. jab tried to  convince us that even though the words used in  defining forward  contract may include contracts which do not  amount to  wagering  contracts,  they are wide  enough  to  include certain contracts which may be wagering contracts because of the fact that the parties to the contract, had no  intention to 674 deliver  the  goods.  If the definition is wide  enough-  to include contracts which are wagering contracts, he contends, the statute should not he struck down as a whole but  should be  held  to  be  valid in respect  only  of  such  wagering contracts.  On behalf of the appellants Mr. N. C. Chatterjee has drawn our attention to the provisions of registration of "  dealers " in s. 6 and has argued that the very fact  that the  Legislature  was  calling upon  persons  dealing  in  " forward  contracts " to register themselves and to  prohibit dealing  in  forward contracts  by  non-registered  dealers, justifies  the  conclusion  that  the  Legislature  was  not thinking  of wagering contracts at all.  As against this  it is proper to note that the Constitution itself  contemplated taxation on gambling " by State Legislatures.  It is however one  thing  to tax gambling, and quite another thing  for  a Legislature  to  encourage  gambling by  asking  persons  to register themselves for-this purpose.  The definition of a " dealer " it has to be noticed includes " a limited  concern, including,  a Arhti, Chamber or association formed  for  the purpose of conducting business in forward contracts ".  While it might happen in fact that an association would  be formed  for the purpose of conducting business  in  wagering contract,  it  is hardly likely that the  Legislature  would take   upon  itself  the  task  of  openly  permitting   and recognizing  such associations.  These, in our opinion,  are good  reasons  for  thinking that the  Legislature  did  not contemplate wagering contracts at all in defining "  forward contract" in the way it did. Assuming  however  that  the definition is  wide  enough  to include wagering contracts, the question arises whether  the portion  of the Act which would then be valid  is  severable from  the  portion which would remain invalid.  One  of  the rules  approved by this Court in R. M. D. Chamarbaugwala  v. The Union of India (1), for deciding this question was  laid down in these words:- "In  determining  whether the valid parts of a  statute  are separable from the invalid parts thereof, it (1)  [1957] S.C.R. 930.                             675 is the intention of the legislature that.is the  determining factor.   The test to be applied is whether the  legislature would  have enacted the valid part if it had known that  the rest of the statute is invalid." A second rule was that if  "the  valid and invalid parts of a statute are  independent and  do  not form part of a scheme but what  is  left  after omitting the invalid portion is so thin and truncated as  to be  in substance different from what it was when it  emerged out of the legislature, then also it will be rejected in its entirety.  " Applying  either of these rules, we are bound to  hold  that the  entire Act should in the present case be held  invalid. It  seems  to  us clear that if  the  Legislature  had  been conscious  that  taxation on all forward contracts  was  not within its legislative competence it would have at once seen

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

that  because of the difficulty of finding out  which  among the  contracts  for  sale  of goods on  a  future  date  are wagering contracts, it would not be worthwhile to enact  any law for taxing wagering contracts only.  It is equally clear that  once the law is held to be invalid as regards  forward contracts  other than wagering contracts, what is left is  " so  thin and truncated as to be in substance different  from what  it was when it emerged out of the legislature  ".  The respondent’s  contention that the statute should be hold  to be  valid  in  respect of  wagering  contracts  even  though invalid  as regards other forward contracts  must  therefore also be rejected. Our  conclusion therefore is that the impugned statute  does not  fall  within Item 62 of the State List and that  it  is beyond the legislative competence of the State  Legislature. The  appellants  were  therefore  entitled  to   appropriate reliefs  as prayed for in their petition under Art.  226  of the Constitution. We  therefore allow this appeal, set aside the order of  the High  Court and direct that the petition under Art.  226  of the  Constitution  be allowed and declare  that  the  Punjab Forward  Contracts  Tax  Act No. VII of  1951  is  void  and unconstitutional  as  it is ultra vires the  powers  of  the State  Legislature,  that the notification  made  under  the rules promulgated by the 676 respondent under this Act are also void and unconstitutional and  that  a mandamus do issue directing the  respondent  to allow  the petitioners to carry on the business  of  forward contracts  or  as commission agents  for  forward  contracts unrestricted  by the provisions of the said  Punjab  Forward Contracts  Tax Act No. VII of 1951 and the rules  thereunder and not to enforce the provisions of this Act and the rules. The appellants will get their costs in this Court as also in the court below. Appeal allowed.