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PETITIONER: BIHAR DISTILLERY AND ANR.

       Vs.

RESPONDENT: UNION OF INDIA AND ORS.

DATE OF JUDGMENT:       29/01/1997

BENCH: B.P. JEEVAN REDDY, SUJATA V. MANOHAR

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T B.P. JEEVAN REDDY. J.      Until the  commencement of  the Constitution  and for a few years  thereafter, rectified  spirit was mainly used for the purpose  of manufacturing  country liquor.  Indian  Made Foreign Liquors  [I.M.F.L.] and  other intoxicating  drinks. Its used  for industrial  purposes was  not significant. The rapid pace  of industrialization  from  mid-fifties  onwards brought into  existence several  industries, which  required rectified spirit  as one  of their  raw materials,  with the result  the   demand  of  rectified  spirit  for  industrial purposes went  up  substantially  and  has  been  going  up. Evidently, in  recognition of  this fact,  did the  Union of India  amend,   in  the  year  1956,  the  Schedule  to  the Industries [Regulation  and Development] Act, 1951 including the alcohol industry therein.      Notwithstanding the aforesaid amendment of the Schedule to the  Industries [Regulation  and Development]  Act, 1951, the establishment  of a  distillery,  its  working  and  the distribution and sale of the rectified spirit produced by it continued to  be regulated  by the  States as  before, under various enactments in force in those States. Similar was the position in  the State  of Bihar where the first petitioner- distillery is  located. As a matter of fact, right up to the year 1991-92,  it was  getting its license renewed under the provisions of  the Bihar  Excise Act.  The original  license itself was  granted under  the Bihar  Act. I on or about the year 1992,  the authorities  of the  Bihar State proposed to cancel the petitioner’s license for certain reasons assigned by them.  The petitioner  objected it on the ground that the grant and cancellation of license in respect of a distillery manufacturing rectified  spirit is the exclusive province of the Government of India and that the State government had no say in  the matter.  With this  contention has it approached this Court.  It relies  upon  the  seven-Judge  Constitution Bench decision  of this  Court in  Synthetics and  Chemicals Limited v. State of Uttar Pradesh [1990 (1) S.C.C. 1091. The petitioner says  that it  was licensed  to  manufacture  and manufactures only ‘industrial alcohol’ and no other alcohols or liquors.

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    According  to   the  division   of  legislative  powers contained  in  the  Seventh  Schedule  to  the  Constitution [relatable to  Article 246],  the power  to legislate on the subject of  "industries" is assigned to the States. Entry 24 in List-II  reads: "24. Industries subject to the provisions of Entries 7 and 52 of List-I".* Entries 7 and 52 in List-I, referred to in Entry 24 of List-II, read thus:      "7.    Industries    declared    by      Parliament by  law to  be necessary      for the  purpose of  defence or for      the prosecution of war.      52.  Industries,   the  control  of      which by  the Union  is declared by      Parliament by  law to  be expedient      in the public interest." *    Prior to  Constitution [Seventh  Amendment]  Act,  1956 only Entry  52 was  referred to  in this  Entry. By the said Amendment Act, Entry 7 was also added.      In the year 1951, the Parliament enacted the Industries [Development and Regulation] Act, 1951 [I.D.R. Act]. Section 2 contains  a declaration in we terms of Entry 52 of List-I. By virtue  of this  enactment, the  Parliament took over the control of  the industries  specified in  the first Schedule denuding the  States of  that power.  In the  year 1956, the Schedule to  the I.D.R.  Act was  amended, as  stated herein before, including  inter alia  Item 26.  Item 26 reads: "26. Fermentation Industries: (i) alcohol; (ii) other products of fermentation industries".  As a matter of fact, however, the several  state   enactments  continued   to   regulate   the establishment, functioning  and disposal of rectified spirit and other  products of  these distilleries  even after 1956. Nobody ever questioned it until an industry,. Synthetics and Chemicals  Limited  [Synthetics]  did  so  by  way  of  writ petitions filed  in the Allahabad High Court in or about the years 1975-78.  Synthetics was  a licensee for the wholesale vend of  denatured spirit**.  It questioned the levy of vend fee **   Denatured spirit  is rectified  spirit. Denaturants are added to  it to  make it  unfit for  use in  manufacture  of I.M.F.Ls., other  intoxicating liquors or for diluting it to obtain country  liquor. Denaturing  is not necessary for its use for  industrial purposes. Indeed, some industries cannot use denatured rectified spirit. But, by and large, rectified spirit supplied to industries is denatured.      on denatured  spirit impose  sd by  the State  of Uttar Pradesh under the provisions of the Uttar Pradesh Excise Act and the  Rules made  thereunder. It contended that the power to levy  excise duty  or  tax  on  denatured  spirit  vested exclusively in the Parliament and that the State was totally incompetent to  levy the  same. The  High Court rejected the contention  holding,   that  the   expression  "intoxicating liquors" occurring  in Entry  8 of  List-II of  the  Seventh Schedule to  the Constitution  took in  its  fold  denatured spirit as  well and,  therefore,  the  State  had  exclusive privilege to  deal  in  denatured  spirit.  The  matter  was carried to  this Court  wherein it  was  contended  that  by virtue of  Item 26  of the  Schedule to  the I.D.R. Act, the Union has  taken under its control the industries engaged in the manufacture  of industrial  alcohol and  that the States have been denuded of any power to deal with denatured spirit including the  power to  levy vend  fees. The contention was rejected by  this Court  [A.C. Gupta and P.S. Kailasam, JJ.] as well, vide 1980 (2) S.C.R. 531. This Court referred inter alia to the history of State Excise laws in this country and to the  wide definition  of ‘liquor’ in those enactments and

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observed that  while enacting  the Government  of India Act, 1935, the  British Parliament  must have  been aware  of and must be  deemed to  have accepted  the said  wide definition [i.e., including non-potable liquors as well. Synthetics was not satisfied  with the  judgment. It  filed a  petition  to review the  same. Meanwhile,  several other industrial units approached this  Court by  way  of  writ  petitions  raising contentions similar  to  those  raised  by  Synthetics.  The matter was  referred to  and heard  ultimately by  a  larger Constitution Bench of seven learned Judges whose decision is reported in  1990 (1)  S.C.C. 109.  Sabyasachi Mukharji,  J. spoke for himself, E.S. Venkataramiah, CJ., Ranganath Misra, B.C.Ray, K.N.Singh  and S. Natarajan, JJ., while G.L.Oza, J. rendered  a  separate  concurring  opinion.  This  decision, reversing the  decision in 1980 (2) S.C.R. 531 and upholding the contention  of the writ petitioners, brought about a sea change in  the thinking  on the  subject. It  held that  the expression "intoxicating  liquors" in  Entry  8  of  List-II means and  refers to  only  potable  liquors  and  that  the potability is  determined  by  the  standards  specified  by I.S.I. [Indian  Standards Institutel,  i.e., alcohol content not  exceeding  43%  v/v.  Entry  51  of  List-II  was  also similarly held  limited to potable liquors. The power of the States to  legislate in  respect of  liquors was  held to be restricted to  potable liquors alone. The Court held further that  "rectified   spirit"  [which   expression   was   used interchangeably with  the  expression  "ethyl  alcohol"  and "industrial alcohol"]  which is  of  95%  and  above  purity cannot be  treated as a potable liquor and hence lies within the exclusive  control of  the Union by virtue of the I.D.R. Act. After  1956, the Court held, the power of the States is confined to  (1) making a law prohibiting potable liquor and to regulate  it, (2)  laying down regulations to ensure that nonpotable alcohol  is not diverted and mis-used for potable purposes, (3)  charging excise  duty on  potable alcohol and (4) to  charge fees  for rendering any service. [See Para 86 at Page 158]. The decision was rendered on October 25, 1989.      When the  present writ  petition came  up for admission before a  Bench comprising one of us [B.P. Jeevan Reddy, J.] and K.S.  Paripoornan, J.,  it was thought necessary to give notice to  all the  State governments  and to  the Union  of India in  view of the peculiar nature of the problem arising herein. The  order made by the Bench of May 9, 1996, insofar as is relevant, reads thus:      "The question  arising herein  is a      thorny  one.  It  is  also  arising      frequently.  The  decision  of  the      larger Constitution  Bench of  this      Court  in  Synthetics  &  Chemicals      Ltd. &  Anr. Vs.  State of  U.P.  &      Ors. (1990  (1) SCC  109) calls for      demarcation of  the spheres  of the      Union and  the States  particularly      in the matter of alcoholic liquors.      Recently, this  Court has  held  in      State of A.P. Vs. McDowell (JT 1996      (3) SC  679) that  so  far  as  the      intoxicating        liquors/potable      liquors are  concerned, it  is  the      exclusive province  of the  States.      But for  manufacturing intoxication      liquors,   or   for   manufacturing      industrial alcohol  as the case may      be, one must have to manufacture or      purchase  alcohol.   It   is   only

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    thereafter  that   the  alcohol  is      either  converted  into  industrial      alcohol (by  denaturing it) or into      potable  liquors  by  reducing  the      strength  of   alcohol  (which   is      normally of  95% purity  or above).      Indeed, alcohol  can  be  used  for      industrial  purposes  even  without      denaturing it.  Saying that  States      step in  only when  alcohol becomes      potable and  not before it leaves a      large enough  room for  abuse apart      from  difficulties  of  supervision      and regulation.  In the  matter  of      licensing   too,   problems   would      arise, as  to  who  should  licence      such industry  - whether the Center      alone or the States or both. Having      regard to  the  importance  of  the      question, we  think that  this is a      proper cases where notice should go      to all the States who will be heard      on  this  question.  The  Union  of      India is  already a  party  to  the      writ petition."      Accordingly, notices  have been issued to all the State governments. We  have directed  notice to  learned  Attorney General as  well. We  have  heard  Sri  Bimal  Kumar  Sinha, learned counsel  for the writ petitioner, Sri Shanti Bhushan for the State of West Bengal, Sri Rakesh Dwivedi, Additional Advocate General  for the  State of  Uttar Pradesh for Uttar Pradesh and  Bihar, Sri  Santosh  Hegde  for  the  State  of Karnataka, Sri  M.S. Nargolkar for the State of Maharashtra, Sri V.  Krishnamurthy for the State of Tamil Nadu, Sri K.Ram Kumar for  the State  of Andhra  Pradesh, Sri G. Prakash for the State  of Kerala,  Ms. Subhashini  for the State of Goa, Sri P.N.  Misra for the State of Orissa and Sri T. Sridharan for the  State of  Himachal  Pradesh.  Sri  M.S.  Usgaonkar, learned Additional  Solicitor General appeared for the Union of India.  We also  requested Sri  Harish N.  Salve, who was appearing in  the connected  matter [Special  Leave Petition (C) No. 8963/96 - involving inter alia the question at issue herein] to  address us  on the general question which he has agreed gracefully to do.      Let us first notice the relevant entries in the Seventh Schedule to  the Constitution. Entry 6 in List-II deals with "Public Health  and Sanitation; Hospitals and Dispensaries". Entry 8  reads: "Intoxicating  liquors, that  is to say, the production, manufacture, possession, transport, purchase and sale of  intoxicating liquors".  Entry 24, which has already been  referred  to,  reads:  "24.  Entries  subject  to  the provisions of  Entries 7  and 52 of List-I". Entry 51, which is one of the taxing entries in List-II reads:      "51.  Duties   of  excise   on  the      following  goods   manufactured  or      produced   in    the   State    and      countervailing duties  at the  same      or lower  rates  on  similar  goods      manufactured or  produced elsewhere      in India:--      (a)  alcoholic  liquors  for  human      consumption;      (b) opium,  Indian hemp  and  other      narcotic drugs and narcotics,      but  not  including  medicinal  and

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    toilet   preparations    containing      alcohol or  any substance  included      in  sub-paragraph   (b)   of   this      entry."      The last  entry in  List-II, viz.,  Entry 66  speaks of "fees in respect of any of the matters in this List, but not including fees taken in any court."      Entries 7, 52 and 84 in List-I which alone are relevant herein read thus:      "7.    Industries    declared    by      Parliament by  law to  be necessary      for the  purpose of  defence or for      the prosecution of war.      52.  Industries,   the  control  of      which by  the Union  is declared by      Parliament by  law to  be expedient      in the public interest.      84. Duties of excise on tobacco and      other   goods    manufactured    or      produced in India except--      (a)  alcoholic  liquors  for  human      consumption;      (b) opium,  Indian hemp  and  other      narcotic drugs and narcotics,      but  not  including  medicinal  and      toilet   preparations    containing      alcohol or  any substance  included      in  sub-paragraph   (b)   of   this      entry."      Entry 33  in List-III  [Concurrent List]  may  also  be noticed. It reads:      "33. Trade and Commerce in, and the      production, supply and distribution      of,--      (a) the  products of  any  industry      where the  control of such industry      by  the   Union  is   declared   by      Parliament by  law to  be expedient      in   the   public   interest,   and      imported goods  of the same kind as      much products;      (b)  foodstuffs,  including  edible      oil seeds and oils;      (c)   cattle    fodder,   including      oilcakes and other concentrates;      (d) raw  cotton, whether  ginned or      ungineed, and cotton seed; and      (e) raw jute."      A  reading  of  the  above  entries  would  immediately disclose that  Entry 51  in List-II  and Entry  84 in List-I compliment each other. Both provide for duties of excise but while the  State are  empowered to  levy duties of excise on (a) alcoholic  liquors for  human consumption and (b) opium, Indian hemp  and narcotics  manufactured or  produced in the State and  countervailing duties  at the same or lower rates on similar goods manufactured or produced elsewhere in India [but excluding  medicinal and  toilet preparation containing alcohol or  any substance  included in  sub-paragraph (b) of this Entry], the Union is empowered to levy duties of excise on tobacco and other goods manufactured or produced in India except (a)  alcoholic  liquors  for  human  consumption  (b) opium, Indian  hemp and  other narcotic  including drugs and narcotics.  Medicinal  and  toilet  preparations  containing alcohol or any substance included in sub-paragraph (b) which are excluded  from entry.  For our  purposes,  the  relevant

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expression in  "alcoholic  liquors  for  human  consumption" which is  included in  Entry 51 in List-II and excluded from Entry 84 in List-I. The words employed denote that there may be alcoholic  liquors meant for human consumption as well as for other  purposes. Now  coming to  Entry 8 in List-II, i t does not  use the  expression "alcoholic  liquors for  human consumption".  It   employes  the  expression  "intoxicating liquors" which  expression is,  of course,  not qualified by words "for  human consumption".  This  is  for  the  obvious reason that  the very  word  "intoxicating"  signifies  "for human consumption".  Entry 8,  it is necessary to emphasize, places  all  aspects  of  intoxicating  liquors  within  the State’s   sphere;   production,   manufacture,   possession, transport, purchase  and sale  of  intoxicating  liquors  is placed within  the exclusive  domain of the States. Entry 6, which inter  alia speaks of "public health" is relevant only for the  reason that  it furnishes  a ground for prohibiting consumption of  intoxicating liquors.  Coming to Entry 33 in List-III, the language of clause (a) thereof is significant. Even though  control of  certain industries  may  have  been taken over  by the  Union by virtue of a declaration made by Parliament in  terms of  Entry 52 in List-I, yet the "trade, commerce in,  and the production, supply and distribution of the products"  of such  industry is placed in the concurrent field, which  in the  present context  means that though the control of  alcohol industry  is taken  over by  the  Union, trade  commerce   in  and   the   production,   supply   and distribution of  the products  of alcohol  industry  can  be regulated both  by the  Union and  the  States  subject,  of course, to  Article 254. It also means, as will be explained later, that insofar as the field is not occupied by the laws made by Union, the States are free to legislate.      In the matter of industries mentioned in List-II, Entry 24 in  List-II is  in the nature of general entry. It speaks of industries but is made expressly subject to Entries 7 and 52 of  List-I. By  making a declaration in terms of Entry 52 in List-I in Section 2 of the I.D.R. Act, the Parliament has taken control  of the  several industries  mentioned in  the Schedule to  the Act.  The States have been denuded of their power to  legislate with respect to those industries on that account. It  has,  however,  to  those  industries  on  that account. It  has, however,  been held by a three-Judge Bench of this  Court in  State of Andhra Pradesh v. McDowell [1996 (3) S.C.C.  709] that  Entry 52  over-rides only Entry 24 in List-II and no other Entry in List-II. It has been held that Entry 8  is not  overridden or  over-borne in  any manner by Entry 52  - which  means that so far as intoxicating liquors are concerned,  they are  within the exclusive sphere of the States.  We   may  pause   at  this   stage  and   append  a clarification which  has become  necessary in  the light  of certain words  occurring in  Para  85  of  the  judgment  of Sabyasachi Mukharji, J. in Synthetics**. At the inception of Para 85  of  the  said  judgment,  the  following  statement occurs:      "After the  1956 amendment  to  the      IDR Act bringing alcohol industries      (under fermentation  industries) as      Item 26  of the  First Schedule  to      IDR  Act   the  control   of   this      industry has  vested exclusively in      the Union.  Thereafter, licences to      manufacture both  potable and  non-      potable alcohol  is vested  in  the      Central  Government.   Distilleries      are manufacturing alcohol under the

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    central licences  under IDR Act. No      privilege for  manufacture even  if      one existed,  has been  transferred      to the distilleries by the State." ------------------------------------------------------------ **whenever we refer to "Synthetics" hereafter, it would mean the judgment of the seven’ Judge Constitution Bench reported in 1990 (1) S.C.C. 109.      It is  obvious that  the words "both potable and" occur here as  a result of some accidental or typographical error. The entire  preceding discussion  in the judgment repeatedly affirms that  so far as potable alcohols are concerned, they are governed  by Entry 8 and are within the exclusive domain of the  States. The  aforesaid words  cannot fit in with the said repeatedly  affirmed reasoning.  We are,  therefore, of the opinion  that the  said passage  cannot be understood as holding that  even in  respect of  the industries engaged in the  manufacture  or  production  of  potable  liquors,  the control is  vested in  the Union by virtue of Item 26 of the First Schedule  to the  I.D.R. Act.  In view  of the express language of  Entry 8  - as  has been  clearly  explained  in McDowell -  so far  as potable  liquors are concerned, their manufacture, production, possession, transport, purchase and sale is  within the  exclusive domain  of the States and the Union of  India has  no say  in the  matter. For  a  similar clarification with respect to the power of the State to levy sales tax  on industrial  alcohol, reference  may be  had to State of  Uttar Pradesh  v. Synthetics and Chemicals Limited [1991 (4) S.C.C. 139].      The several  State governments,  to whom  notices  have been given,  have responded.  Some of  them have  filed very elaborate counters  setting out  their case.  The first  and foremost contention  urged on their behalf is that rectified spirit is  "intoxicating liquor" within the meaning of Entry 8 of  List-II. In  other words, their contention, based upon the  ration   in  McDowell,  is  that  rectified  spirit  is "intoxicating liquor" within the meaning of Entry 8 of List- II, and  hence, outside  the purview of Entry 24 of List-II, which in  turn means  that the  Union cannot  take over  its control by  making a  declaration in  terms of  Entry 52  of List-I and  further that  Item 26  of the  Schedule  to  the I.D.R. Act is ineffective and invalid insofar as it seeks to regulate the  production, manufacture  et  al  of  rectified spirit. In  support of  their submission,  they have  relied upon the legislative history of the several State enactments in India apart from a wealth of material including technical data. They  submit that  the decision  to  the  contrary  in Synthetics is not correct and requires reconsideration. they have also  assigned  several  reasons  why  the  holding  in Synthetics insofar  as the  meaning of "intoxicating liquor" is concerned  should be  held to be obtainer. They submitted that in the interests of maintaining the balance between the Centre and  the States and to preserve the federal nature of our Constitution  - which is one of its basic features - the matter must  be referred  to a  larger Bench to consider the correctness of  Synthetics. They submitted that the relevant words in  Entry 51  of List-II  and Entry  84 of  List-I are "alcoholic liquors for human consumption" and not "alcoholic liquors fit  for human  consumption". They complained with a good amount of emotion that the decision in Synthetics reads the word  "fit" into  the said  entries and makes it a basis for curtailing the legislative power of the States. There is no warrant for such addition, they submitted. In addition to the above submissions, the following facts are stated in the affidavit filed on behalf of the State of Uttar Pradesh: the

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reduction  process   of  converting  rectified  spirit  into country liquor  involves mixing  of water  and stirring.  By adding water, the alcoholic content is reduced to 35% v/v to make it  country liquor.  Adding of spices is optional. Rule 45 of  the Uttar Pradesh Excise Rules defines the expression "reduction of liquor". According to the definition, it means "the reduction  of liquor  from a higher to a lower strength by the  addition of  water". Mere  mixing of  water,  it  is submitted, makes  rectified spirit  country liquor.  On this basis too,  his submitted,  rectified spirit  is really  and essentially an  intoxicating liquor and merely because water is required  to be  added to make it country liquor, it does not cease  to be  intoxicating liquor. By way of analogy, it is submitted  that even  the whiskies  and brandies  are not ordinarily consumed  as such  but only after mixing water or soda. Addition  of water  or soda, it is submitted, does not change the  character of whisky or brandy either. It is next submitted that  bulk of  rectified  spirit  manufactured  in Uttar Pradesh  is used  for the purpose of obtaining country liquor or  I.M.F.Ls. Only  a  small  quantity  is  used  for industrial purposes. Having regard to the predominant use to which rectified  spirit is  put, it is submitted, it must be understood  as   intoxicating  liquor.   The   addition   of denaturants is only with a view to ensure that the rectified spirit  is  not  used  for  potable  purposes.  Yet  another submission put forward by the State of Uttar Pradesh is that even during  the course  of manufacture of rectified spirit, potable liquor into existence. It is submitted that the main raw material  for rectified  spirit is molasses. The process of  manufacture   is  eleborately   set  out,  supported  by technical  literature.   The  samples   taken  from  certain distilleries by  the Excise  staff and  the  result  of  the analysis of  the said  samples is  also relied  upon. It  is submitted that  the  process  of  manufacture  of  rectified spirit  involves   increasing  the   alcoholic  content   by repeatedly processing  it. The  alcoholic content  keeps  on rising from  stage to stage. It is submitted that at several intermediary stages,  the liquor  can be  taken out and used for drinking  purposes, whether  as it  is or  after  mixing water, as  the case  may be.  Sri  Rakesh  Dwivedi,  learned Additional Advocate  General for the State of Uttar Pradesh, placed strong reliance upon the reasoning and conclusions in the judgment  of the  Allahabad High  Court in  Vam  Organic Chemicals Limited  v. State  of Uttar Pradesh [Writ Petition (C) No. 16782 of 1990 dated September 9, 1991], which, it is brought to our notice by written submissions, has since been affirmed by  this Court  in Civil  Appeal No.  230  of  1997 decided on  January 21,  1997 by  a Bench  consisting of the Hon’ble Chief Justice and Sen, J.      On the  other hand,  it is  submitted  by  the  learned counsel for  the petitioner  and Sri Salve that there are no good and  valid reasons  for doubting the correctness of the decision in  Synthetics or  for referring  the  issue  to  a larger Constitution  Bench  of  nine  or  more  Judges.  The acceptance of  the States’  submission would make Item 26 in the Schedule  to the I.D.R. Act superfluous and meaningless. The  decision   in  Synthetics,  Sri  Salve  submitted,  has correctly drawn  the dividing  line between  the  respective spheres of  the Union  and the  States and  there is no good reason to  doubt its  correctness. Learned  counsel took  us through  the   judgment  of   Sabyasachi  Mukharji,   J.  at considerable length to emphasis his submission that what all is urged  now was  indeed urged  before the larger Bench and considered.  The   law  laid   down   after   an   elaborate consideration of  submissions made  by several  parties  and

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several State  governments cannot  and need not be reopened, urged Sri  Salve. The  learned counsel  for  the  petitioner submitted that  the petitioner-factory  is  engaged  in  the manufacture  of   industrial  alcohol  alone  and  that  the rectified spirit  manufactured by  it is  not allowed  to be moved out except after denaturing it.      Sri Usgaonkar  for the  Union of  India took  the stand that the  decision in Synthetics lays down the law correctly and that  the powers  of the  States are  only those  as are specified therein.      Inasmuch as  strong reliance  is placed  by the learned Additional Advocate  General for  the State of Uttar Pradesh on the  decision of  a Division  Bench of the Allahabad High Court  in  Writ  Petition  16782  of  1990  disposed  of  on September 9, 1991 [rendered by one of us, B.P. Jeevan Reddy, as the  Chief Justice  of that  Court], it  is necessary  to notice the  relevant reasoning  and the findings in the said judgment in  view of  the  fact  that  the  same  have  been affirmed by  this Court. The High Court first dealt with the factual situation on the basis of the pleadings and material placed before  it and  recorded the following finding, which it repeatedly  affirmed, was central to the entire reasoning and conclusion in that judgment.      "Ethyl  alcohol,   which  is   also      called   rectified    spirit,   the      alcoholic content  of which  is 95%      V/V,  can   be  used   both  as  an      industrial  alcohol  and  also  for      obtaining country  liquor and other      liquors.  Even  without  denaturing      it, rectified  spirit can  be  used      for industrial  purposes. But it is      not  correct   to  say  that  ethyl      alcohol/rectified  spirit   can  be      used only  for industrial  purposes      and for no other purpose. As stated      by the  respondents, just by mixing      water with  it, it  becomes country      liquor and  is sold  and  taxed  as      such by  the State. Further, it can      also be  used as a raw material for      producing   Indian   made   foreign      liquors (IMFL),  wines,  rums  etc.      Denaturing is  insisted upon by the      State with  a view to ensure that a      particular  quantity  of  rectified      spirit/ethyl alcohol is not misused      or diverted  for being utilised for      human consumption,  viz. either for      obtaining  country  liquor  or  for      manufacturing  IMFLs,   wines  etc.      Once   denatured,   the   rectified      spirit/ethyl alcohol cannot be used      other for  obtaining country liquor      or for  manufacturing IMFLs, wines,      etc. unless,  of course,  it is re-      natured again."      Referring to  the decision of this Court in Synthetics, the High Court made the following observations:      "It must,  however, be  made  clear      that  in  the  said  decision,  the      distinction      between      ethyl      alcohol/rectified  spirit  as  such      and denatured  spirit  was  not  in      issues, nor  was it  considered. It

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    was generally  mentioned that ethyl      alcohol/rectified spirit containing      95% alcohol  V/V is  an  industrial      alcohol. As  we  have  pointed  out      hereinabove,      even      without      denaturing,       such        ethyl      alcohol/rectified  spirit   can  be      used         for         industrial      purposes......The      distinction,      which is  brought out in this case,      was not in issue before the Supreme      Court in  Synthetics and  Chemicals      (main  judgment).   It,  therefore,      cannot be  said  that  the  Supreme      Court has  ruled, as  a  matter  of      law, that  any and  every rectified      spirit/ethyl    alcohol    is    an      industrial alcohol."      At a  later stage, the Bench dealt with the distinction between regulatory  fees and fees for services rendered with reference to  the decision  of this  Court in Corporation of Calcutta v.  Liberty Cinema  [1965 (2) S.C.R. 477] and held, that in  the case  of regulatory fees the State is not bound to prove quid pro quo.      Yet another  finding recorded by the High Court is that by virtue of enactment of the I.D.R. Act [after insertion of Item 26  aforementioned] the State is not totally denuded of any power  to make a law with respect to rectified spirit or for that  matter industrial alcohol. After noticing Entry 33 of List-III  in the Seventh Schedule, Section 18-G read with other provisions  f I.D.R.  Act and  the Rule  [made by  the State Excise  authority] concerned  therein, the  High Court observed:      "All this  discussion  is  for  the      purpose  of  establishing  that  by      virtue of  the IDR  Act, the  State      Legislatures are not completely and      totally  deprived   of  the   power      conferred upon  them by Entry 24 of      List II,  but that  the deprivation      is  only   partial,  viz.,  to  the      extent indicated  in the  IDR  Act.      This discussion is equally relevant      for  the   purpose  of  determining      whether the felicitated by Entry 33      of  List   III  has   been  totally      occupied by  Parliament or  whether      any field  is still left unoccupied      for the State Legislature to make a      law.   Entry    33,   it   may   be      reiterated,      empowers      both      Parliament and  State  Legislatures      to make a law with respect to trade      and commerce  in  products  of  any      industry  included   in  the  first      schedule to  the IDR  Act. The said      entry   further    empowers    both      Parliament and  State  Legislatures      to  make  a  law  with  respect  to      production, supply and distribution      of the  products of  such industry.      Rectified  spirit   is,  without  a      doubt, a  product  of  an  industry      specified in  the first schedule to      the  IDR   Act.  If  so,  both  the

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    Parliament and  State  Legislatures      can make  a law with respect to the      production, supply and distribution      of products  of such  industry.  By      virtue of  Section 18-G  of the IDR      Act, the  State Legislature cannot,      of course,  make a  law  regulating      the  supply   and  distribution  of      and/or trade  and commerce  in such      products for securing the equitable      distribution  and  availability  at      fair prices  of such  product; such      an order  can be  made only  by the      Central   Government   under   that      Section, but in other respects, the      field  is   open  for   the   State      Legislatures.      Relying upon  the holding  in Tika  Ramji v.  State  of Uttar Pradesh  [1956 S.C.R.  393], the  High Court  observed that "the  possibility of  an order under Section 18-G being issued by  the Central  Government would  not be enough. the existence of  such an  order would  be  the  essential  pre- requisite before  any redundancy  could ever  arise". It was held that the rule made by the State and Section 18-G of the I.D.R. Act  "operate on  different fields"  and not  even on cognate fields if examined applying the doctrine of pith and substance.      The reasoning in the said judgment has been approved by this Court in all respects in its judgment dated January 21, 1997. The  following  observations  in  the  judgment  dated January 21,  1997 in  Civil  Appeal  No.  230  of  1997  are apposite:      "This Court dealt with the question      of legislative  competence  of  the      State to  impose  tax  or  levy  on      industrial alcohol  in the  case of      Synthetic  Chemicals  v.  State  of      U.P. [(1990)  1 S.C.C.  109] = 1989      supp. (1)  Supp. (1)  SCR  623  and      ruled in  the  negative.  The  High      Court  took   the  view   that  the      distinction      between      ethyl      alcohol/rectified  spirit  as  such      and denatured  spirit  was  not  in      issue, nor  was  it  considered  in      that judgment  and held  that  this      Court cannot  be said to have ruled      that every  rectified  spirit/ethyl      alcohol is  industrial alcohol. The      High  Court  reiterated  that  once      denatured,  the   alcohol   becomes      exclusively   industrial    alcohol      since  it   cannot  be   used   for      obtaining  country  liquor  or  for      manufacturing IMFLs  and said  that      it is  to ensure that ethyl alcohol      meant for  industrial  use  is  not      misused  or   diverted  for   human      consumption      that      impugned      regulation is  provided for  by the      State   and    further   that   the      regulation being  part  of  general      regulation of  the trade in alcohol      in the interest of public health is      relatable to Entries 6 & 8 of List-

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    II."      At a  later stage,  the learned Chief Justice, speaking for the Bench, observed:      "A careful reading of that judgment      [Synthetics] shows  that the  Court      was fully  aware of  the fact  that      rectified spirit was the ingredient      for    intoxicating    liquor    or      alcoholic    liquor    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’.      This Court observed further:      "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."      [Emphasis added]      The decision  also affirms the reasoning and conclusion of the  High Court  on the  inter-play of the I.D.R. Act and the rule  impugned therein  in the  context of  Entry 33  of List-III, referred  to herein  before. [We may say that this aspect has  been  kept  in  mind  by  us  while  demarcating hereinafter the  respective spheres  of the  Union  and  the States in the matter of control over production and disposal of rectified  spirit.] The learned Chief Justice also relied upon the  earlier decision of this Court in McDowell, and in particular upon the following holding therein:      "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 I.D.R. 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   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

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    Seventh     Schedule     to     the      Constitution read  with Article  47      thereof".      We are  of the  respectful and  considered opinion that the decision  in Synthetics  did not  deal with  the aspects which are  arising for  consideration herein 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  I.M.F.Ls. When  to 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 t 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 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 basis substance  from   which  I.M.F.Ls.   are  made.   [Denatured rectified spirit,  of  course,  is  wholly  and  exclusively industrial alcohol.]  This basic  factual premise,  which is not and  cannot be  denied by  any one  before us***, raises certain aspects  for consideration  herein  which  were  not raised or  considered in  Synthetics. Take  a case where two industries ‘A’ and ------------------------------------------------------------ ***If  rectified   spirit  is  toxic  and  unfit  for  human consumption, why  is it  necessary to  denature it, asks the learned Additional  Advocate General  for the State of Uttar Pradesh. Denaturing  is meant  precisely for  making what is meant for  human consumption unfit for human consumption, he says.      ‘B’  come   forward  with   proposals  to   manufacture rectified spirit;  ‘A’ says  that it proposes to manufacture rectified spirit  and then  denature it immediately and sell it as  industrial  alcohol  while  ‘B’  says  that  it  will manufacture rectified  spirit and  utilise it  entirely  for obtaining country  liquor [arrack or by whatever other name, it may be called] or for manufacturing I.M.F.Ls. from out of it or to supply it to others for the said purpose. According to Synthetics,  ‘A’ is  under the  exclusive control  of the Union and  the only  powers of  the State  are those  as are enumerated in  Para 86 quoted above. But what about ‘B’? The rectified spirit  manufactured by  it is avowedly meant only for potable  purposes. Can  it  yet  be  called  "industrial alcohol"? Can  it still be said that the State concerned has no power  or authority  to control and regulate industry ‘B’ and that  the Union alone will control and regulate it until the potable liquors are manufactured? The Union is certainly not interested  in or  concerned with manufacture or process of manufacture  of country  liquor or  I.M.F.Ls.  Does  this situation not leave a large enough room for abuse and misuse of rectified  spirit? It should be remembered that according to many  States before  us, builk  of the  rectified  spirit produced in  their respective  States is  meant for  and  is utilised for obtaining or manufacturing potable liquors. Can it be  said even  in such  a situation that the State should fold its  hands and wait and watch till the potable stage is reached. Yet another and additional circumstance is this: it is not  brought to  our notice that any notified orders have been issued  under Section 18-G of the I.D.R. Act regulating the sale,  disposal or  use  of  rectified  spirit  for  the purpose of  obtaining or manufacturing potable liquors which means that  by virtue of Entry 33 of List-III, the States do

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have the  power to  legislate on  this  field  -  field  not occupied by  any law made by the Union. It is these and many other situations  which have  to be taken into consideration and provided  for 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. The line of  demarcation can and should be drawn at the stage of clearance/removal  of   the  rectified   spirit.  Where  the removal/clearance is for industrial purposes [other than the manufacture of potable liquor], the levy of duties of excise and all  other control  shall be  of the Union but where the removal/clearance is  for obtaining or manufacturing potable liquors, the  levy of duties of excise and all other control shall be  that of the States. This calls for a joint control and supervision  of the  process of manufacture of rectified spirit and its use and disposal. We proceed to elaborate: (1)  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  I.D.R.  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. 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, it  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 t  post their  staff in  the distilleries  and levy reasonable regulatory fees to defray the cost of such staff, as held  by this  Court in Shri Bileshwar Khand Udyog Khedut Sahakari Mandali  Ltd. v.  State of Gujarat & Anr. [1992 (1) S.C.R. 391]  and Gujchem  Distillers India  Ltd. v. State of Gujarat & Anr. [1992 (1) S.C.R. 675]. (2). So far  as industries  engaged in  the  manufacture  of rectified spirit exclusively for the purpose of 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. According to the State  governments, most  of the distilleries fall under this category. (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: 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

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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 while the duties of excise on  rectified spirit cleared/removed for the purposes of obtaining  or  manufacturing  potable  liquors  shall  be levied by  the concerned  State  government.  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 concerned  State to  ensure evasion of excise duties  on   rectified  spirit   removed/cleared  from   the distillery.  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 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. 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 concerned State Excise enactment 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 -  nay, necessary  -  that  the  Union government  makes   necessary  rules/regulations  under  the I.D.R. 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. (6)  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. (7)  The power  to permit  the establishment of any industry engaged in  the manufacture  of  potable  liquors  including I.M.F.Ls.,  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 intoxication  liquors  is equally that of the States, as held in McDowell.      The  writ  petition  is  disposed  of  with  the  above directions and  clarifications. The show-cause notice issued by the Bihar Excise authorities to the writ petitioner shall be disposed  of in  the light  of the  law declared  herein, after  making   necessary  enquiry   into  relevant  factual position, according to law.      No costs.