IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5751  OF 2008 (Arising out of S.L.P.(C) No.14286/2006)

State of M.P. & Ors. ...Appellant(s)

Versus

Lalit Jaggi ...Respondent(s)

CIVIL APPEAL NOS. 5752 TO 5756 OF 2008 (Arising out of S.L.P.(C) Nos.14287, 14288, 14290, 14291 of 2006 &

3788 of 2007)

O R D E R

Leave granted.

This  Civil  Appeal  (arising  out  of  S.L.P.(C)  No.14286/2006)  is  filed  by the

State of Madhya Pradesh against the judgment of the High Court dated 17th January,

2006 in Writ Petition No.9310/2005.  This judgment has been followed in all  conjoint

matters,  namely,  Civil  Appeals  arising  out  of  S.L.P.(C)  Nos.14287,  14288,  14290,

14291/2006 and 3788/2007.

By a Notification dated 21st February, 2005, the State Government framed a

Liquor  Policy  for  the  year  2005-2006.   Clause  13  of  that  Policy  prescribed  the

procedure for depositing the licence fee by a retailer of liquor.  Sub-clause (1) of Clause

13 of the Policy stipulated that the annual licence fee would be divided into 24 equal

1

fortnightly  instalments.   It  further  stipulated  that  in  lieu  of  the  quantity  of  liquor

purchased  by  the  licence-holder,  duty  deposited  at  the  prescribed  rates  shall  be

adjusted against his licence fee equivalent to the demand for the concerning fortnight

(see Clause 13.1).  Under Clause 13.3, it was stipulated that if any retail seller of liquor

fails to deposit the prescribed fortnightly instalment of licence fee before expiry of the

next  instalment due,  then  the  license  so  granted could  be  revoked  and  some other

arrangement will be made to operate the respective liquor shops.  Under Clause 13.4, it

was  stipulated  that  if  any  licence-holder  of  retail  shop  of  any  liquior  deposits  the

prescribed fortnightly instalment before the expiry of the fortnight but for some reason

liquor  could  not  be  supplied  within  the  fortnight,  then he shall  be  supplied  liquor

immediately after the expiry of that fortnight.

Following  the  said  Policy,  a  Circular  came  to  be  issued  by  the  Excise

Commissioner  on  9th August,  2005  clarifying  certain  doubts  expressed  by  District

Excise Officers who had granted permission to supply liquor even when the deposit of

fortnightly licence fee was made belatedly.  By the said Circular, it was clarified that

liquor will  be supplied to the contractors in a specific fortnight against the amount

deposited and, in case, if there is short-deposit, then the duty will be deposited in the

next fortnight but no liquor will be supplied during the fortnight in respect of which

there is a default.

The said Clause 13.3 and Clause 13.4 of the Policy and the Circular referred

to  above  came  to  be  challenged  vide  Writ  Petition  Nos.9310/2005,  1676/2006,

10799/2005, 11204/2005, 11202/2005 and 311/2006.

By the impugned judgment, Clauses 13.3 and 13.4 were declared to be ultra

2

vires Article 14 of the Constitution and Section 25 of the M.P. Excise Act, 1915.  Hence

these Civil Appeals.

The key question which arises for determination in these Civil Appeals is:

What  is  the  nature  of  payment  which  the  auction  purchaser  makes  to  the  State

Government as and by way of licence fee for a given fortnight?  In our view, before we

come to the relevant judgments on this aspect, it may be stated that the licence fee,

payable in advance in 24 equal instalments, is in essence rent charged for parting with

the State's privilege for manufacturing and vending liquor and it is not a consideration

for sale of liquor.  It is different from Issue Price.  However, it has been urged before

the High Court on behalf  of the auction purchaser that the licence fee contains an

element of excise duty and, consequently, the State had no authority under the Act to

impose duty in advance on undrawn liquor.

While striking down Clauses 13.3 and 13.4 of the Policy, the Division Bench

of the High Court relied upon two judgments of  this  Court in  the case of  State of

Madhya Pradesh Vs. Firm Gappulal & Ors., reported in [1976] 1 SCC 791, and in the

case of Bimal Chandra Banerjee Vs. State of M.P. etc., reported in AIR 1971 SC 517.   

Before we come to the relevant judgment, at the very outset, it may be stated

that these two judgments have no application for the simple reason that there is a basic

difference between excise duty and licence fee. Both the judgments dealt with levy of

excise duty on undrawn liquor.  As stated above, rental is the consideration for the

privilege granted by the Government for manufacturing and vending liquor.  There is

no  levy  of  excise  duty  in  enforcing  payment  of  a  stipulated  sum mentioned  in  the

licence.  The concepts of advance licence fee and excise duty are entirely different and

3

this has been very succinctly brought out in two judgments of this Court which we shall

presently refer.

In the case of State of Orissa & Ors. Vs. Narain Prasad & Ors., reported in

(1996)  5  SCC  740,  a  Division  Bench  of  this  Court  (B.P.Jeevan  Reddy  and

K.S.Paripoornan, JJ.) in a language which has all the clarity at its command, has held:-

“33.  A review of the decided cases of this Court on the subject indicates a clear shift in the way this matter has been looked at.  Initially, the matter was looked at from the point of view of the levy of excise duty.  On that basis, it was held that unless there is a sale,  no duty can be collected (Bimal  Chandra Banerjee, Gappulal and Ram Kumar).  But then a different view point emerged with the Constitution  Bench  decision  in  Har  Shankar which  was  carried forward in  Panna Lal, Jage Ram and Y. Prabhakara Reddy.  These decisions look at the matter from the point of view of the several payments being, in truth and effect, consideration for the grant of privilege/licence.  They point out that the excise duty is a duty on manufacture and production and not on sale.  It was a case, they said, where the duty was being passed on to the licensee who in turn passed it on to the consumer.  What all the licensee paid, they held, is nothing but consideration for the grant of licence and the mere fact that  the  total  consideration  fixed  comprises  several  elements (including excise duty), it cannot be said that excise duty is levied upon the licensee.  In our opinion, the Orissa matters fall under the ratio of Panna Lal and Y. Prabhakara Reddy and not under the ratio of  Bimal  Chandra  Banerjee,  Gappulal  and Ram  Kumar.   The amounts  mentioned in  Rules  6  and 6-A, as  also the undertakings contained therein, together constitute the consideration for grant of privilege/licence, determined by auction, as contemplated by Section 29 of the Act.  As explained hereinbefore, the obligation to remit the excise  duty  is  independent  of  the  sale/purchase  of  liquor;  it  is payable  on  or  before  the  specified  dates  every  month;  it  is  an addition  to  the  monthly  instalment  payable  under  Rule  6;  its remittance is not tied up to the purchase of M.G.Q. except to the extent that the licensee has to pay the prescribed instalment of excise duty prior to the lifting of the liquor.  It, therefore, cannot be said that there is any levy of excise duty upon the licensee.  The concept here  is  altogether  different.   It  is  a  case  where  the  consideration payable by the licensee for grant  of licence is  made up of monthly

4

rental plus excise duty besides the obligation to purchase the M.G.Q. The licensee pays the rental and excise duty as undertaken by him under the agreement/contract executed by him and as required by conditions of the licence under which he is doing business,  i.e.,  as and by way of consideration.  Indeed, the Rules could have provided that the entire amount provided under Rules 6 and 6-A should be paid in advance before the issuance of licence in which event it could not have been contended that it is not in consideration of grant of licence.  Merely because the Rules provide a concession and provide for collection of the said amounts in convenient instalments spread over  the  year,  the  nature  and  character  of  the  payments  cannot change.”

The judgment of this Court in State of Orissa Vs. Narain Prasad, which has

considered the earlier two judgments of this Court, has not been considered by the

High Court in its impugned judgment.

In the case of  Asstt.  Excise Commissioner & Ors. Vs.  Issac Peter & Ors.,

reported in (1994) 4 SCC 104, a three Judge Bench of this Court once again, speaking

through Justice Jeevan Reddy, has succinctly brought out the concept of the licence fee

payable by the auction purchaser vide para 26 which we quote in extenso hereinbelow:-

“Learned counsel for respondents then submitted that doctrine of fairness and reasonableness must be read into contracts to which State is  a  party.   It  is  submitted that  the  State  cannot  act  unreasonably  or unfairly even while acting under a contract involving State power.  Now, let us see, what is the purpose for which this argument is addressed and what is the implication?  The purpose, as we can see, is that though the contract says that supply of additional quota is discretionary, it must be read as obligatory —- at least to the extent of previous year's supplies –- by applying the said doctrine.  It is submitted that if this is not done, the licensees would suffer monetarily.  The other purpose is to say that if the State is  not able to so supply,  it  would be unreasonable  on its  part to demand the full amount due to it under the contract.  In short, the duty to act fairly is sought to be imported into the contract to modify and alter its terms and to create an obligation upon the State  which is not there in the contract.   We must confess,  we are not aware of any such doctrine of

5

fairness or reasonableness.   Nor could the learned counsel bring to our notice any decision laying down such a proposition.  Doctrine of fairness or the duty to act fairly and reasonably is a doctrine developed in the administrative law field to ensure the rule of law and to prevent failure of justice where the action is administrative in nature.  Just as principles of natural justice ensure fair decision where the function is quasi-judicial, the doctrine of fairness is evolved to ensure fair action where the function is administrative.  But it can certainly not be invoked to amend, alter or vary the express terms of the contract between the parties.  This is so, even if the contract is governed by statutory provisions, i.e., where it is a statutory contract  –- or rather more so.   It  is  one thing to say that  a contract –- every contract – must be construed reasonably having regard to its language.  But this is not what the licensees say.  They seek to create an obligation on the other party to the contract, just because it happens to be  the  State.   They  are  not  prepared  to  apply  the  very  same rule  in converse case, i.e., where the State has abundant supplies and wants the licensees to lift all the stocks.  The licensees will undertake no obligation to  lift  all  those  stocks  even  if  the  State  suffers  loss.   The  one-sided obligation, in modification of express terms of the contract, in the name of duty to act fairly, is what we are unable to appreciate.  The decisions cited by the learned counsel for the licensees do not support their proposition. In Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay  it was held that where a public authority is exempted from the operation of a statute like Rent Control Act, it must be presumed that such exemption from the statute is  coupled with the duty to act fairly and reasonably. The decision does not say that the terms and conditions of contract can be varied, added or altered by importing the said doctrine.  It may be noted that though the said principle was affirmed, no relief  was given to the appellant in that case.  Shrilekha Vidyarthi v. State of U.P. was a case of mass termination of District Government Counsel in the State of U.P.  It was a case of termination from a post involving public element.  It was a case  of  non-government  servant  holding  a  public  office,  on  account  of which it was held to be a matter within the public law field.  This decision too does not affirm the principle now canvassed by the learned counsel. We are, therefore, of the opinion that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State.  In such cases, the mutual rights and liabilities of the parties are governed by the terms of  the  contracts  (which  may be  statutory in some cases)  and the laws relating  to contracts.   It  must  be remembered that these contracts are entered  into  pursuant  to  public  auction,  floating  of  tenders  or  by negotiation.   There  is  no  compulsion  on  anyone  to  enter  into  these contracts.  It is voluntary on both sides.  There can be no question of the

6

State power being involved in such contracts.  It bears repetition to say that the State does not guarantee profit to the licensees in such contracts. There is  no warranty against incurring losses.  It is  a business for the licensees.  Whether they make profit or incur loss is no concern of the State.  In law, it is entitled to its money under the contract.  It is not as if the  licensees  are  going  to  pay  more  to  the  State  in  case  they  make substantial profits.  We reiterate that what we have said hereinabove is in the context of  contracts entered into between the State and its  citizens pursuant to public auction, floating of tenders or by negotiation.  It is not necessary to say more than this  for the purpose of these cases.   What would be the position in the case of contracts entered into otherwise than by public auction, floating of tenders or negotiation, we need not express any opinion herein.”   

We are surprised that despite exhaustive exposition of law by this Court on

the nature of the payment of licence fee by the auction purchaser, the High Court in its

impugned judgment  has  not  considered  any  of  the  above  judgments  while  striking

down the relevant clauses of the Policy and the Circular.   Moreover,  the reasoning

given  in  the  judgment  is  cryptic.   When  the  High  Court  strikes  down  the

Policy/Circular as ultra vires, we expect the High Court to give detailed reasons for

saying so.  No reasons are given in the impugned judgment.

Before  concluding,  we  may state  that  the  entire  controversy  arises  in  the

contractual field.  The Sale Memo signed by the auction purchaser is nothing but the

contract.   The High Court has not even considered the General Licence Conditions

stipulated in the Rules under the Act 1915 which stands incorporated in the Sale Memo

and which, inter alia, deals with payment of annual licnece fee in instalments.  None of

the above facts have been considered by the Division Bench of the High Court while

proceeding to set aside Circular/Policy as ultra vires Section 25 of the M.P. Excise Act,

1915.

7

For the afore-stated reasons, the impugned judgment is set aside and the Civil

Appeals stand allowed with no order as to costs.

                         ...................J.               (S.H. KAPADIA)

                  ...................J.                                         (B. SUDERSHAN REDDY) New Delhi, September 17, 2008.

8