REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1541 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 25060 OF 2005]

V.K. ASHOKAN       … APPELLANT

Versus

ASSTT. EXCISE COMMNR. & ORS.     … RESPONDENTS

WITH  

CIVIL APPEAL NO. 1542 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 25467 OF 2005]

V.K. ASHOKAN      … APPELLANT

Versus

ASSTT. EXCISE COMMISSIONER & ORS.    … RESPONDENTS

WITH  

CIVIL APPEAL NO.1543 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 1568 OF 2006]

P.K. RAJAN      … APPELLANT

Versus

ASSTT. EXCISE COMMNR. & ORS.    … RESPONDENTS

2

WITH  

CIVIL APPEAL NO. 1544 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 1696 OF 2006]

THANKAM RAMAKRISHNAN      … APPELLANT

Versus

ASSISTANT EXCISE COMMISSIONER  & ORS.    … RESPONDENTS

WITH  

CIVIL APPEAL NO. 1545 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 1773 OF 2006]

T.P. SALEEM & ANR.      … APPELLANTS

Versus

STATE OF KERALA & ORS.       … RESPONDENTS

WITH  

CIVIL APPEAL NO. 1546 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 2166 OF 2006]

K.C. RAJAN      … APPELLANT

Versus

STATE OF KERALA & ORS.    … RESPONDENTS WITH  

3

CIVIL APPEAL NO. 1547 OF 2009 [ARISING OUT OF S.L.P. (CIVIL) NO. 6091 OF 2006]

THANKAM RAMAKRISHNAN      … APPELLANT

VERSUS

ASSISTANT EXCISE COMMISSIONER  & ORS.    … RESPONDENTS

J U D G M E N T

S.B. SINHA, J.

1. Leave granted.

2. Interpretation of the provisions of the Kerala Abkari Act (for short,

“the Act”)  and the Rules framed thereunder known as the Kerala Abkari

Shops  (Disposal  in  Auction)  Rules,  1974  (for  short,  “the  Rules”)  is  the

question involved in these appeals.  They arise out of a common judgment

and order dated 17.10.2005 passed by a Division Bench of the High Court

of Judicature at Kerala at Ernakulam in O.P. No. 5742 of 1998 (H), W.A.

No. 1822 of 1998 (C), O.P. No. 5910 of 1998 (C), O. P. No. 5783 of 1999

(L), O.P. No.10276 of 1998 (W), and W.A. No.1790 of 1998(C).

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3. The questions involved herein broadly arise in the following factual

matrix in the cases.   We would, however, notice the fact involved in the

individual cases also.   

4. Appellants  herein  carry on business  in  toddy.   For  the  purpose  of

grant of privilege in terms of the provisions of the said Act and the Rules

framed thereunder, the State frames policy-decision from time to time.  

The position of the parties with reference to the name of the licenses

and the other relevant dates would appear from the following:

Sl. No .

S.L.P. No. Licencee  of Shop  Nos. &  Excise Range  

Date  of cancellation of Licence

Rule under which licence is cancelled

Details  of Writ Petition filed before the  High Court  by the petitioners

Details  of Criminal Case  

1. 25060  of 2005 (V.K. Ashokan)

Licencee  of Shop  Nos. 55  to  96  of Thrissur Excise Range  

26.09.1997 vide  order  of Assistant Excise Commissione r  

Rule  6 (30)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  No. 5742  of 1998 dismissed by  the judgment impugned in  the S.L.P.

Accused No.  1  in S.C.  No.83 of  1999  – acquitted by  the Sessions Judge  by judgment dated 16.05.2008 .

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2. 25467  of 2005 (V.K. Ashokan)

Licencee  of Shop  Nos. 109  to  222 of Irinjalakuda Excise Range  

27.10.1997 vide  order  of the  Assistant Excise Commissione r  

Rule  6 (28)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  No. 6609  of 1998  – judgment of  Single Judge  on 21.07.1989 .   Writ Appeal No. 1822  of 1998 dismissed by  the impugned judgment in  this S.L.P.

Accused No.  2  in S.C. No.210  of 1999  – acquitted by judgment dated 16.05.2008

3. 1568  of 2006 (P.K. Rajan)

Licencee  of Shop Nos. 1 to  54  of Cherpu Excise Range  

26.09.1997 vide  order  of the  Assistant Excise Commissione r  

Rule  6 (30)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  No. 5910  of 1998 dismissed by  the judgment impugned in  this S.L.P.

Accused No.  2  in S.C. No.293  of 1999  – acquitted by judgment dated 15.11.2005 .

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4. 1773  of 2006 (T.P. Saleem)  

Licencee  of Shop Nos. 1 to  52  and 137  &  138 of Vadanapall y  Excise Range  

25.05.1998 vide  order  of the  Assistant Excise Commissione r  

Rule  6 (28)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  No. 5783  of 1999 dismissed by  the judgment impugned in  the S.L.P.

No criminal case against him

5. 2166  of 2006  (K.C. Rajan)

Licensee  of Shop  Nos. 97 to 171 of Anthikad Excise Range  

26.09.1997 vide  order  of the  Assistant Excise Commissione r

Rule  6 (30)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  10276 of  1998 dismissed by  the judgment impugned in this SLP.

Accused No.  1  in S.C. No. 84 of  1999  – acquitted by judgment dated 02.09.2006

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6. 1696  of 2006 (Thankam Rama- krishanan )

Petitioner  is the  widow of  K.V. Rama- krishnan who  was  a co-licencee of  shop Nos. 1 to 54 of  Cherpu Excise Range  

26.09.1997 vide  order  of the  Assistant Excise Commissione r  

Rule  6 (30)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition O.P.  No. 5910  of 1998  – dismissed by  the judgment impugned in this SLP

Petitioner’s late husband was accused No.  3  in S.C.  No. 293  of 1999 which case  ended in  acquittal by judgment dated 15.11.2005 .

7. 6091  of 2006  (Thankam Rama- krishnan)

Petitioner  is the  widow of  K.V. Rama- krishnan who  was  a co-licensee of  Shop Nos.  109 to 222  of Irinjalakuda Excise Range.

27.10.1997 vide  order  of the  Assistant Commissione r  

Rule  6 (28)  of the Abkari shops (Disposa l  in Auction) Rules.

Writ Petition No.  6609 of  1998  – dismissed by  Single Judge  by judgment dated 21.07.1998 .  W.A. No. 1790  of 1998 dismissed by  the judgment impugned in this SLP.

Petitioner’s late husband was accused No.1  in S.C.  No. 210  of 1999 which case  ended in  acquittal by judgment dated 16.05.2008 .  

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5. On  or  about  6.3.1997,  the  Government  of  Kerala  published  a

notification in its Gazette expressing its intention to part with its privilege

of vending toddy through retail shops in the notified Excise Ranges for the

year 1997-98 wherefor public auction was proposed to be held on the dates

notified  therefor.    We are  concerned with  shops  situate  within  Thrissur

Range,  Irinjalakuda  Range,  Cherpu  Range,  Vadanappally  Range  and

Anthikad Range.

6. Indisputably,  although  the  notification  for  holding  auction  for  one

Financial Year was published, the Collector of the District held auction for

three years, namely, 1997-98, 1998-99 and 1999-2000 purporting to be on

the basis of the past practice prevalent therefor.  Appellants participated in

the said auction and became the successful bidders.  On the date of auction,

they entered into a temporary agreement in Form-II appended to the Rules,

which was for a period of three years.  They were, however, granted license

to deal in the said commodity only for one year.   

7. The Board of  Revenue is  said to  have confirmed the said  auction.

Appellants  upon  having  declared  to  be  the  successful  bidders  furnished

security to the extent of one-third of the amount payable for the first year.   

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8. On or about 6.9.1997 and 7.9.1997, Excise Inspectors, inspected the

toddy shops of the  appellants  and took three bottles  of toddy as sample.

They were sent for chemical examination to the specified laboratories.  A

common  certificate  was  obtained  in  respect  of  all  samples  stating  that

“Diazepam” had been detected therein at varying rates of 1.8 mg to 2.2 mg

per litre of toddy sample.   Pursuant thereto, criminal cases were registered

against  the  appellants.   It  is  now  accepted  that  appellants  have  been

acquitted of the charges leveled against them in the criminal proceedings.  

9. Separate  proceedings  were  also  initiated  by  the  Assistant  Excise

Commissioner for cancellation of licenses.   Those proceedings, as  would

appear from the following chart were initiated either under Rule 6(28) or

Rule 6(30) of the Rules.   

Proceeding initiated under Rule

Range  

Civil  Appeal  @  SLP (C) No. 25060/2005

6(30) Thrissur  

Civil  Appeal  @  SLP (C) No. 25467/2005

6(28) Irinjalakuda  

Civil  Appeal  @  SLP (C) No. 1568/2005

6(30) Cherpu  

Civil  Appeal  @  SLP (C) No. 1696/2006

6(30) Cherpu

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Civil  Appeal  @  SLP (C) No. 1773/2006

6(28) Vadanappally  

Civil  Appeal  @  SLP (C) No. 2166/2006

6(30) Anthikad  

Civil  Appeal  @  SLP (C) No. 6091/2005

6(28) Irinjalakuda  

10. Licenses were cancelled in terms of the said provisions on or about

26.9.1997. So far as the orders directing cancellation of licences in terms of

the provisions of Rule 6(28) are concerned, they were referred to the Excise

Commissioner for confirmation.   

11. In the meantime, auctions were held.  As no bidder turned out, the

Assistant Commissioner of Excise entered into negotiations with some of

the parties on the basis whereof, the licenses were also granted to the said

parties for the remaining period.    

12. The  matters  were  referred  to  the  Commissioner  of  Excise  for

confirmation of sale.  At that stage, the Board purported to have come to the

conclusion  that  in  cases  where  licenses  were  cancelled  in  terms  of  the

provisions  of  Rule  6(30)  of  the  Rules,  Rule  6(28)  would  also  be

automatically  attracted  and  on  the  basis  thereof,  the  decision  of  the

Assistant Commissioner was upheld.  

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13. On or about 19.12.1997, the Assistant Commissioner of Excise issued

another order forfeiting the amount of security deposit purporting to act in

terms of Rule 6(28) of the Rules, stating:

“As per  order  number first  cited,  the  licences  of toddy  shops  of  Cherpu,  Thrissur  and  Anthikad ranges was cancelled under Rule 6 (30) of Abkari Shops (Disposal in Auction) Rules 1974, since the Original  purchasers  of  toddy  shops  of  above ranges for the  year  1997-2000 violated  the rules and licence conditions and committed the offences punishable under Section 57(a) and 56 of Abkari Act  and  also  Section  22  of  NDPS  Act  1985 consequent  on  the  detection  of  Diazepam in  the samples of toddy sent for chemical analysis from toddy depot and toddy shops of the above ranges.

Board as per reference 2nd cited have ordered that rule 6(28) of Abkari Shops (Disposal in Auction) Rules  1974  is  automatically  attracted  in  these cases and uphold the decision of the Asst. Excise Commissioner,  Thrissur  of  cancellation  of  the licence  made as  per  rule  6(30)  read  with  rule  6 (28).

Hence as per rule 6(28) of Abkari Shops (Disposal in  Auction)  Rules  1974,  the  amount  of Rs.58,50,000/-  in  respect  of  toddy  shops  of Cherpu range, Rs.44,40,000/- in respect of toddy shops  of  Thrissur  range  and  Rs.88,50,000/-  in respect  of  toddy  shops  of  Anthikad  range deposited by the original purchasers of the above toddy shops as per TR No. 4232, 4230 and 4229 respectively  are  hereby  forfeited  to  Government with immediate effect.”

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14. Consequent to the said order, the Circle Inspector of Excise issued a

notice dated 8.1.1998 demanding a huge amount as also the interest thereon

at the rate of 18% per annum stating that the Government of Kerala had

suffered  losses  in  holding  re-auctions  which  took  place  on  or  about

11.11.1997  and  wherefor  licences  had  been  granted  with  effect  from

14.11.1997. Revenue Recovery proceedings were initiated under Section 7

of the Kerala Revenue Recovery Act on 11.3.1998 asking the appellants to

remit the amount mentioned therein with interests as arrears in respect of

toddy shops specified therein.   

15. Two of the appellants before us had filed writ petitions. During the

pendency of the said writ petitions, Tahsildar (Revenue Recovery) issued an

order  in  Form 11  attaching  the  immovable  properties  of  the  appellants

whereupon applications for amendment of the writ petition were filed, inter

alia,  questioning the proceedings  initiated subsequent  to  the filing of the

writ petition.   

16. A learned  single  judge  of  the  High  Court  dismissed  the  said  writ

applications.  Two  writ  appeals  were  preferred  thereagainst.   In  the

meanwhile,  other  appellants  had  also  filed  writ  petitions.  The  Division

Bench, however, withdrew all other writ applications before it and disposed

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of the  pending writ  petitions  as also  the  said writ  appeals  by a common

judgment.   

17. The High Court noticed the contentions raised before it in paragraph

11 of its judgment, which reads as under:

“Counsel submitted that sub-rule (30) of rule 6 of the  Kerala  Abkari  Shops  (Disposal  in  Auction) Rules was not in existence prior to 30.3.1996 but was  substituted  on  30.3.1996  which  has  not conferred any power on the department to cancel the  licence.   Sri  K.  Ramakumar  appearing  for some of the licencees submitted that licences were cancelled without notice to the petitioners and the principles  of  natural  justice  have  been  violated. Further counsel also referred to Section 26 of the Kerala  Abkari  Act  and  submitted  that  only Commissioner  has  got  the  power  to  cancel  the licence  and  the  cancellation  of  the  licence  by Assistant Commissioner was without jurisdiction. Identical  are  the  contentions  raised  by Advocate Sri.  Premjit  Nagendran  as  well.   Additional Advocate General on the other hand supported the action of the department.”

Holding that the order cancelling the licence having been passed as

“diazepam” had been detected on chemical examination of the toddy seized

from the business premises of the appellants and furthermore they having

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defaulted  in  payment  of  kist,  committed  an  offence  punishable  under

Section 57A(iii) and Section 55(1) of the Abkari Act.

18. The  contention  raised  before  the  High  Court  that  the  licence  was

granted for a period of one year and hence for rest of the years appellants

were not liable to pay the kist amount, was rejected stating:

“Consequently  contention  of  the  counsel  that licence  was  also  for  one  year  and  therefore petitioner cannot be held liable for the rest of the period  cannot  be  accepted.   Respondent  State  is legally entitled  to  recover the  loss  caused to  the State by issuing demand notice to the petitioners. We are of  the view that  the action taken by the Respondents  is  perfectly  in  order  and  in accordance  with  the  Kerala  Abkari  Act  and  the Rules framed thereunder.”

19. Mr. R.F. Nariman, Mr. Harish Salve, Mr. Mathai  M. Paikadey, the

learned Senior Counsel and Mr. Roy Abraham, learned counsel appearing in

support of these appeals raised the following contentions:

i. Proceedings  under  Rule  6(28)  and  under  Rule  6(30)  being

different in nature, while cancelling licences in terms of Rule 6

(30) of the Rules the consequences emanating from Rule 6(28)

are not envisaged under the statute.  

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ii. Rule  6(30),  as  it  originally  stood,  contained  a  provision  for

forfeiture of the amount deposited and the same having been

deleted  from the statute  book,  recourse to the said provision

was wholly impermissible.   

iii. The licences having been granted for one year; assuming that

the  agreement  was  entered  into  by  and  between  the

Commissioner of Excise and the appellants for a period of three

years, the amount of purported loss could have been calculated

only for the rest of the year.  

iv. In any event, as there are some cases, in which there was no

failure to pay kist and in any event having regard to the fact

that  the amount  of  security furnished would cover the entire

kist amount, Rule 6(28) could not have been taken recourse to.  

v. Proceedings for forfeiture of the deposit, etc. in any view of the

matter being a matter arising out of a contract qua contract, it

was obligatory on the part of the State to prove actual damages,

inasmuch as for invoking such a penal  clause,  the State was

bound  to  establish  breach  of  contract  on  the  part  of  the

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licensees and consequential entitlement to damages particularly

when the contracts themselves had been terminated.

vi. The  Commissioner  of  Excise  could  not  have  confirmed

cancellation of licenses and consequential orders in such cases

which are covered by Rule 6(30) and not Rule 6(28).

20. Mr. T.L.V. Iyer, learned Senior Counsel appearing on behalf of the

State of Kerala, on the other hand, would contend:

i. Keeping  in  view  the  scheme  of  the  Act  and  the  Rules,

appellants having with their eyes wide open took part in the bid

for a period of three years and having entered into agreements

for  the  said  period  cannot  be  permitted  to  contend  that  the

contract was for one year.

ii. Having regard to the provisions contained in Rule 5(10) of the

Rules read with conditions of the Agreement as contained in

Form  I  and  Form  II  appended  thereto,  the  mode  of

determination of the quantum of damages being fixed, namely,

the original amount minus resale amount plus cost of resale, the

amount which was payable to the State and the amount which

was offered by the new purchasers together with interest at the

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rate of 18% per annum, the losses suffered during the period

1998-99  and  1999-2000  can  also  be  recovered  by  the  State

having regard to the terms as contained in the agreement as it is

not denied or disputed that the appellants executed agreement

for a period of three years.

21. The Act was enacted by Maharaja of Cochin By Act No.10 of 1967, it

was extended to the whole of Kerala.  By reason of the provisions of the

said  Act,  manufacture  or  sale  of  liquor,  including  country  liquor  is

regulated.  The regulatory statute, indisputably, is made in terms of Entry 8

of List II of the Seventh Schedule of the Constitution of India.  A licence is

granted under the Act.  The licensees indisputably are required to carry out

the manufacture or sale of country liquor in terms of the provisions of the

Act, rules framed thereunder as also the terms and conditions of the licence.

“Country Liquor” has  been defined in  Section  3(12)  of  the Act  to

mean ‘toddy or arrack’.  

‘Toddy’ has been defined in section 3(8) of the Act to mean:  

“Toddy”  means  fermented  or  unfermented  juice drawn from coconut, palmyra, date, or any other kind of palm tree.”

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Section  18A  provides  for  grant  of  exclusive  or  other  privilege  of

manufacture, etc. on payment of rentals. It reads as under:

“18A. Grant  of  exclusive  or  other  privilege  of manufacture, etc. on payment of rentals:- (1)

It  shall  be  lawful  for  the  Government  to grant to any person or persons, on such conditions and  for  such  period  as  they  may  deem  fit,  the exclusive or other privilege—

(i) of  manufacturing  or  supplying  by wholesale; or  

(ii) of selling by retail; or

(iii) of  manufacturing  or  supplying  by wholesale  and  selling  by  retail,  any liquor  or  intoxicating  drugs  within any local area on his or their payment to  the  Government  of  an  amount  as rental in consideration of the grant of such privilege.  The amount of rental may be settled by auction, negotiation or  by  any  other  method  as  may  be determined by the Government, from time to time, and may be collected to the exclusion of, or in addition, to the duty or tax leviable under Sections 17 and 18.

(2) No  grantee  of  any  privilege  under  sub- section  (1)  shall  exercise  the  same  until  he  has received  a  licence  in  that  behalf  from  the Commissioner.

(3) In such  cases,  if  the  Government  shall  by notification so direct, the provisions of Section 12

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relating to toddy and toddy producing trees shall not apply.”

22. The State of Kerala in exercise of its rule making power conferred

upon it under Sections 18-A and 29 of the Act framed rules known as ‘The

Kerala Abkari Shops (Disposal in Auction) Rules, 1974.    

Rule 7(2) of the Rules reads as under:

“7(2).  No toddy other  than  that  drawn from the Coconut Plamyrah or Choondapana palms shall be sold by the licensees.  All toddy kept or offered for sale should be of good quality and unadulterated. Nothing  shall  be  added  to  it  to  increase  its intoxicating power or for any other purpose.”         

Rule 2(d) defines the term “Assistant Excise Commissioner” to mean

an  Officer  in  executive  charge  of  an  Excise  Division  and  includes  any

officer appointed by the Government under clause (b) of Section 4 of the

Act  to  exercise  the powers  and to  perform the functions  of  an Assistant

Excise  Commissioner  under  these  rules.  Rule  2(db)  defines  the  term

“Auction purchaser” to mean an open bidder or a tenderer declared as an

auction purchaser in the auction.  The term “Board of Revenue” is defined

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by Rule 2(e) to mean the Board of Revenue, Kerala constituted under the

Kerala Board of Revenue Act, 1957.   

Rule  3  empowers  the  State  to  take  policy  decisions  for  grant  of

privilege for any period in all or any of the independent shops within the

tracts or taluks to be notified in the Gazette by way of public auction shop

by shop or in lot or lots, inter alia, by the Collectors of the Districts. Rule 4

provides that the number, location and the period for which the privilege of

vending, selling or supplying is  to be auctioned and the dates  of auction

shall be notified in the Gazette at least 10 days before the commencement of

the  auctions.  Rule  5(10)  envisages  execution  of  a  temporary  agreement

between  the  auction  purchaser  and  the  auctioning  officer.   The  auction

purchaser has to furnish solvency certificate and 30% of the bid amount.

Rule  5(15)  provides  that  in  addition  to  the  solvency certificate  and cash

security mentioned in sub-rule (10), the auction purchaser shall furnish such

personal  sureties  as  may  be  required  of  him  to  the  satisfaction  of  the

Assistant Excise Commissioner. The Board of Revenue may direct auction

purchaser to furnish additional cash security. Failure to comply with sub-

rule (10) of Rule 5, would lead to forfeiture of the security deposit and the

shop resold or disposed of by the Assistant Excise Commissioner subject to

the confirmation of Board of Revenue.  

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Rule 6 forbids  sale  or  possessing  of  toddy outside the local  limits

specified in the licence by any licensee.  

Rule 6(28) reads as under:-

“6(28) Whenever the licensee fails to pay the kist, tree-tax,  duty,  etc.  due  from him for  any month together with, the interest due under sub-rule (25) on  or  before  the  25th day  of  the  month,  the Assistant  Excise  Commissioner  subject  to confirmation by the Board of Revenue may cancel the  licence  and  order  a  resale  at  the  risk  of  the licensee or direct the management of the business of  the  contract  by  departmental  agency  or otherwise  dispose  of  the  same.  All  losses  on account  of  such  cancellation  and  resale  or Departmental management or other disposal of the privilege shall be borne by the defaulting licensee, but he shall have no right to the gain, if any, which accrues.   Disposal  otherwise  than  by  resale includes closure.  The whole of the deposit, if any made at the commencement of the lease shall  be liable  to  forfeiture.   The  Departmental Management  fee  collected  from a  shop  while  it was  under  Departmental  management  due  to default  of payment of security, kist,  etc. shall  be liable to forfeiture at the discretion of the Excise Commissioner.   The  Assistant  Excise Commissioner  may,  however,  allow  sales  to continue or make such other  arrangements  as  he deems fit pending resale or other disposal of the privilege.   Any  sum  due  from  a  licensee  on account  of  kist,  tree-tax  or  otherwise  may  be recovered from his deposit, if any made by him at the commencement of the lease or collected under the Revenue Recovery Act.  If  any adjustment  is made from the deposit the licensee shall be bound to replace the sum adjusted from his deposit within

22

fifteen days of receipt  of notice  from the Excise Officer in charge of the Division in which his shop is situated.  Interest on account of loss by resale shall be calculated from the date of confirmation of the resale of the shop.

Provided  that  the  Assistant  Excise Commissioner concerned may before confirmation of cancellation by the Board of Revenue, restore the  licence  cancelled  by  him  subject  to confirmation  by  the  Board  of  Revenue,  if  the defaulter  pays  up  the  amount  defaulted  by  him before the expiry of one month from the date of such cancellation.”

Rule 6(30) reads as under:

“6(30)  Infraction  of  any  of  the  rules  or  the conditions of the licence either by the licensee or by any person in his employment shall  entail  on the licensee or his agent or both, a fine of Rs.5,000 or cancellation of the licence or both.  An officer of  and  above  the  rank  of  the  Assistant  Excise Commissioners shall be competent to impose all or any of the above penalties:

Provided that if the holder of such licence or permit,  sells  or  stores  for  sale  liquor  in  any premises  other  than  the  licenced  premises,  such penalty shall not be less than twenty five thousand rupees.”

23

The  said  rule  6(30),  however  was  substituted  by GO(P)  75/96/TD

published  in  Kerala  Gazette  Extraordinary  514  dated  30.3.1996,  prior

whereto, the said rule 6(30) reads thus:

“6(30)  Infraction of any of the conditions of the licence or of these rules or of the Tree Tax Rules or any offence committed against the Abkari Act, with or without the licensed premises either by a licensee or by any person in his employment shall entail on the licensee either:-

(a) Payment of fine upto Rs.2,000 (two thousand); or

(b) Forfeiture of deposit  if any and cancellation of licence and resale or other disposal of the privilege at the risk of the  licensee.   When  the  licence  is  thus  cancelled  the amount still payable for the reminder of the term of the licence shall become due at once.”

Rule 6(32) reads as under:

“6(32) Failure on the part of the licensee to pay up the amount of the fine, if any, imposed upon him under  these  clause  shall  entail  on  him  the consequence  similar  to  these  prescribed  in  sub- rule (28) for failure to pay the kist due from him.

Rule 6(34) reads as under:

“6(34). If any licensee is convicted of any offence under any law for the time being in force relating to Excise Revenue, the Excise Commissioner may declare  his  licence  forfeited.   If  any  auction purchaser had been convicted of any such offence before  a  licence  is  actually  issued  to  him,  the

24

Board  of  Revenue  may  cancel  his  contract  and refuse  the  issue  of  licence.   If  the  licensee  is convicted under the Penal Code or after the issue of  the  licence  to  him  should  it  transpire  that previous to such issue he was convicted under the law or was disqualified to hold a shop under sub- rule  (3)  Rule  5  such  conviction  or  the disqualification  shall  render  him  liable  to forfeiture of the licence and also the forfeiture of his deposit, if the offence of which he is convicted or the disqualification disclosed is such, as in the opinion of the Board of Revenue renders him unfit to hold it.  When a licence is forfeited under this sub-rule the privilege shall be resold or otherwise disposed of at the risk of the licensee.”

Chapter  VI  of  the  Rules  contains  special  conditions  applicable  to

licensees for the privilege of vending toddy in independent shops.

23. The  Government  of  Kerala  issued  a  notification  on  6.3.1997

expressing  its  intention  to  part  with  its  privilege  of  vending  toddy  and

foreign liquor in respect of several Ranges including Thrissur, Irinjalakuda,

Cherpu, Vadanappally, Anthikad.

24. Indisputably,  a  fax  message  was  received  from  the  Excise

Commissioner by the District Collectors of all the districts which are in the

following terms:

25

“ Please  refer  to  your  fax  message  No.  R5- 381/97  dated  17.3.1997  regarding  the  Abkari auction held on 17.3.1997.

As the Gazette Notification was only for 97- 98,  confirmation  can  also  be  only  for  97-98, provided  the  bidders  are  willing  to  pay  1/3rd of total bid amount as rental for 97-98.

For  98-99  and  99-2000  separate Government  approval  will  be  obtained  for extension of agreement at the same rates, without fresh auction.

If  the  bidders  are  willing  to  accept  these conditions Board of Revenue will confirm the bids for  97-98  and  take  action  for  extension  beyond 31.3.1998.

Please confirm the above within 24 hours.”

Pursuant  to  the  above  fax  message  received  from  the  Excise

Commissioner  by the District  Collectors  of  all  the  districts,  a  permanent

agreement was thereafter entered into in Form II.   Separate licenses were

issued for one year, i.e. for 1997-98 only, which are valid for the period

from 1.4.1997 to 31.3.1998.  Confirmation of auction was granted for one

year only.

25. We will proceed on the basis that although the license was granted for

one  year,  appellants  had  in  fact  entered  into  a  contract  for  three  years.

26

Indisputably, they participated in the bid  which was held for a period of

three years.  The effect of the bid for the said period, however, would be

considered a little later.  

As the said auction was confirmed, appellants started conducting their

businesses.  Indisputably, they furnished security.  Some of them paid their

kist  regularly.  Two  sets  of  proceedings  were  initiated,  as  noticed

hereinbefore, one in terms of Rule 6(28) and another in terms of Rule 6(30)

of the Rules.   

26. We would first deal with the proceedings initiated under Rule 6(30)

of the Rules.   

There cannot be any doubt or dispute whatsoever that a proceeding

for cancellation of licence is maintainable on the ground of contravention of

any of the provisions of the Rules or the conditions of licence. The High

Court has rightly noticed that mixing of “diazepam” with toddy constitutes

an  offence  in  terms  of  the  provisions  of  the  Act.   The  same  being  in

violation of not only the Rules but also the conditions of licence, Rule 6(30)

would  be  attracted.   Appellants  before  us  are  not  questioning  the  order

terminating their licenses.  In any event, the period of licence is over.   

27

Whether  the  consequence  of  termination  of  licence  would  attract

forfeiture  of  deposit  or  not  is  the  question.   Rule  6(30)  and  Rule  6(28)

operate in two different fields.  Whereas licence can be cancelled in terms of

Rule  6(28)  only  when  the  kist  has  not  been  regularly  paid,  Rule  6(30)

applies in a wider spectrum.  The consequences emanating from Rule 6(28)

cannot ensue even in cases where a licence had been terminated in terms of

Rule 6(30), as the rules have not stated so explicitly.  It was so done prior to

the substitution of the present rule. The very fact that the State in exercise of

its rule making power amended the rule in terms whereof the original clause

(b) was deleted is a clear pointer to show that a conscious step was taken not

to take recourse of forfeiture of deposit in a case where licence is cancelled

in terms of Rule 6(30).  The principles contained in the Heydon’s Rule shall

squarely be attracted in this case.  It is a settled principle of interpretation of

statute  that  when  an  amendment  is  made  to  an  Act,  or  when  a  new

enactment is made, Heydon’s rule is often utilized in interpreting the same.

{See  Philips Medical Systems (Cleveland) Inc.  vs.  Indian MRI Diagnostic

and  Research  Ltd.  & Anr.  [2008  (13)  SCALE 1]}.   For  the  purpose  of

construction of Rule 6(30), as it stands now, the Court is entitled to look to

the  legislative  history  for  the  purpose  of  finding  out  as  to  whether  the

mischief prior to such amendment is sought to be rectified or not.  Applying

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the Heydon’s rule, we have no other option but to hold that such was the

intention on the part of the Rule making authority.  

27. We may furthermore notice that the legal position becomes explicit

having regard to the provisions of Rule 6(32) and Rule 6(34).  They provide

for similar consequences but in absolutely different situations. Rule 6(32)

provides for forfeiture only in a case where the amount of fine is not paid.

It is not a case where Rule 6(32) was directed to be applied as the licensees

did not deposit the amount of fine imposed on them.  It is also not a case

that  forfeiture was ordered in view of the judgment of conviction passed

against the licensees.  The step taken by the respondent State, for forfeiture

of amount of deposit as also recovery of the amount of loss purported to

have been sustained by them, could have taken recourse to in terms of Rule

6(34) if they were convicted.  Recourse thereto could have been taken only

by the appropriate authority.  The same would not automatically follow only

because  the  licence  was  cancelled  in  terms of  Rule  6(30)  of  the  Rules.

Therefore,  the  Board,  in  our  opinion,  was  not  correct  to  hold  that  the

consequences laid down in Rule 6(28) would automatically be attracted.   

28. We have noticed hereinbefore that the order passed under Rule 6(28)

of the Rules must be confirmed by the Excise Commissioner. Such is not the

requirement in case of cancellation of licence under Rule 6(30).

29

Indisputably,  whereas  in  the  cases  where  Rule  6(28)  was  taken

recourse  to,  records  were  sent  to  the  Commissioner  of  Excise  for

confirmation of the order, no such step was taken by the said authority in

cases  where  Rule  6(30)  was  taken  recourse  to.  Indisputably,  the  Board

constituted  under  the  Kerala  Board  of  Revenue Act  stands  abolished.  In

terms of  the  said  Rules,  it  is  stated at  the Bar that  the Commissioner  of

Excise  being  a  Member thereof;  for  all  intent  and purport,  exercises  the

jurisdiction  of  the  Board.  We  may  assume  the  same  to  be  legally

permissible.  

29. Functions of the Board and/or its power under the Act have not been

specified under the Act.  The Board, indisputably, derives its power to act in

a supervisory capacity only in terms of the provisions of the Kerala Board of

Revenue Act and not under the said  Act.   Board, thus,  did not have any

supervisory  jurisdiction  under  the  Act,  apart  from  the  functions  of  the

Excise Commissioner as contained in the provisions of Section 4(b) of the

Act.  Even otherwise, the Board vis-à-vis the Excise Commissioner does not

have any power to take cognizance of a matter suo motu. It is accepted at

the Bar that only when the question as regards confirmation of the resale

was  placed  before  the  Commissioner  of  Excise,  he  purported  to  have

noticed that apart from violating the conditions of licence as also the Rules

30

wherefor proceedings  for cancellation  of  licence  was initiated,  appellants

have also allegedly failed and/or neglected to pay their kist and as such they

made themselves liable for action in terms of Section 6(28) of the Rules.  It

is  neither  denied  nor  disputed  that  apart  from  the  lack  of  inherent

jurisdiction to initiate such a suo motu proceeding, neither any notice was

issued  to  the  licensees  nor  any  proceeding  was  initiated  therefor.   The

principles of natural justice had, thus, not been complied with.  

A  bare  perusal  of  the  provisions  contained  in  Rule  6(28)  would

clearly show that the order of cancellation of licence need not  be passed

only because it is lawful to do so.  The Licensing Authority in such matters

exercises a discretionary jurisdiction.  The proviso appended to the said rule

is  a clear  pointer to the said effect.   In a given case,  it  is  possible for a

licensee to show that although in fact he had not paid the kist, he could not

do so for sufficient or cogent reasons; he also could raise a plea which could

have been accepted by the Licensing Authority that interest of justice would

be subserved if he is allowed to deposit the amount with interest or penalty,

as the case may be.  

30. For  the  aforementioned reasons,  we are  of  the opinion  that  it  was

impermissible  for  the Assistant  Commissioner of  Excise  to  pass  the  said

31

order dated 19.12.1997 opining that the consequences of forfeiture under

rule 6(28) is automatic upon cancellation of licence under Rule 6(30).

At this juncture, we may also notice the submission of Mr. Iyer that

Commissioner of Excise is also a Licensing Authority within the meaning of

Section 26 of the Act and, thus, whether he had exercised a power in terms

thereof  or  in  terms  of  Rule  6(28)  is  immaterial.  The  learned  counsel

contended that  where a function is  entrusted to a statutory authority, the

order  passed  by  it  may  not  be  held  to  be  invalidated  only  because  no

provision  of  law  was  mentioned  or  the  provision  of  law  incorrectly

mentioned.  There cannot be any dispute with regard to the aforementioned

legal  proposition  but  in  a  case  of  this  nature,  where  admittedly,  the

principles  of  natural  justice  were  violated  as  it  is  a  basic  rule  of

administrative law that where two statutory authorities could exercise the

same power if a matter has been heard by one authority, the other could not

have exercised the power.    

Furthermore,  the  nature  of  power  to  be  exercised  by  the

Commissioner of Excise, namely, cancellation of licence on the one hand

and confirmation of a sale and/or confirmation of an order passed by the

Assistant Commissioner of Excise, on the other, stand on different footings.

We are not oblivious of the fact that the appellants have no right to carry on

32

any business in liquor.  It is considered to be ‘res extra commercium’. (See

State of Punjab & Anr. vs. Devans Modern Breweries Ltd. & anr. (2004) 4

SCC 26).   

In Kerala Samsthana Chethu Thozhilali Union vs.  State of Kerala &

ors. [(2006) 4 SCC 327], this Court held:

“22. It is, furthermore, not in dispute that Article 14 of the Constitution of India would be attracted even in the matter of trade in liquor.

25. While  imposing  terms  and  conditions  in terms of Section 18A of the Act, the State cannot take recourse to something which is not within its jurisdiction or what is otherwise prohibited in law. Sub-sections (c) and (d) of Section 24 of the Act provide that every licence or permit granted under the Act would be subject to such restrictions and on such conditions and shall be in such form and contain  such particulars  as  the Government  may direct either generally or in any particular instance in this behalf. The said provisions are also subject to the inherent limitations of the statute. Such an inherent limitation is that rules framed under the Act must be lawful and may not be contrary to the legislative  policy.  The  rule  making  power  is contained in Section 29 of the Act. At the relevant time,  Sub-section  (1)  of  Section  29  of  the  Act provided that the government may make rules for the purpose of carrying out the provisions of the Act  which  has  been amended  by Act  No.  12  of 2003  with  effect  from 1.4.2003  empowering  the State  to  make  rules  either  prospectively  or retrospectively for the purposes of the Act.”

33

Referring to  State of M.P.  VS. Nandlal Jaiswal [(1986) 4 SCC 566]

and Khoday Distilleries Ltd. vs. State of Karnataka [(1995) 1 SCC 574], it

was held:

“27.  The  State  may  have  unfettered  power  to regulate  the  manufacture,  sale  or  export-import sale  of  intoxicants  but  in  the  absence  of  any statutory  provision,  it  cannot,  in  purported exercise of the said power, direct a particular class of workers to be employed in other categories of liquor shops.  

28. The  Rules  in  terms  of  Sub-section  (1)  of Section 29 of the Act, thus, could be framed only for the purpose of carrying out the provisions of the  Act.  Both  the  power  to  frame rules  and  the power  to  impose  terms  and  conditions  are, therefore,  subject  to  the  provisions  of  the  Act. They must conform to the legislative policy. They must not be contrary to the other provisions of the Act. They must not be framed in contravention of the constitutional or statutory scheme.”

31. But  there  is  no  gainsaying  that  when  a  license  has  been  granted,

which is subject to exercise of statutory power, the provisions of the statute

must be complied with before a penal action thereunder is taken.  The law

provides  for  compliance  of  principles  of  natural  justice  as  consequence

flowing  from  an  order  of  cancellation  of  licence  has  serious  civil

34

consequences  and  as  such  it  was  obligatory  on  the  part  of  the  Excise

Commissioner  to  comply  with  the  principles  of  natural  justice.   He  has

failed to do so.  

32. The  submission  of  Mr.  Iyer  that  in  few  of  the  matters  Assistant

Commissioner of Excise had served notices before the recovery proceedings

had been initiated cannot be accepted for more than one reason.  Such a

notice  had  been  issued  only  pursuant  to  the  order  passed  by the  higher

authority, namely, the Commissioner of Excise.  As the higher authority had

already made up his mind and confirmed forfeiture of the security as also

cancellation  of  license,  administrative  discipline  would  require  that  it  is

complied  therewith.   Issuance  of  such  notices  was,  therefore,  a  mere

formality.   

In  K.I. Shephard  vs.  Union of India  [(1987) 4 SCC 431], this court

observed:

“It is common experience that once a decision has been taken, there is a tendency to uphold it and a representation  may  not  really  yield  any  fruitful purpose.”

35

Secondly, because when an authority has already made up his mind,

the formality of complying with the principles of natural justice may be held

to be a nominal and sham one.   

In Rajesh Kumar & ors. vs. Dy. CIT & ors. [(2007) 2 SCC 181], this

Court held:

“15.  Effect  of  civil  consequences  arising  out  of determination  of  lis  under  a  statute  is  stated  in State  of  Orissa v.  Dr.  (Miss)  Binapani  Dei  and Ors.  (1967) 2 SCR 625. It is an authority for the proposition  when  by reason  of  an  action  on  the part  of  a  statutory  authority,  civil  or  evil consequences  ensue,  principles  of  natural  justice are  required  to  be  followed.  In  such  an  event, although no express provision is laid down in this behalf compliance of principles of natural justice would be implicit. In case of denial of principles of natural justice in a statute, the same may also be held ultra vires Article 14 of the Constitution.”

33. We have noticed hereinbefore that the Commissioner of Excise being

a higher authority had already expressed his opinion that application of Rule

6(28) of the Rules is automatic consequent upon the cancellation of licence

in  terms of  sub-rule  (30)  of  Rule  6.   Assistant  Commissioner  of  Excise

could not have taken a different view.   

36

If  only  the  Assistant  Commissioner  of  Excise  had  the  original

authority to issue such a notice and not the Commissioner of Excise being

an higher authority, the law laid down by this Court in  Commissioner of

Police, Bombay vs. Gordhandas Bhanji [AIR 1952 SC 16] would have been

applicable.  The proceeding, thus, in a case of this nature should have been

initiated  by  the  Assistant  Commissioner  of  Excise  and  not  by  the

Commissioner of Excise.  Where the statutory authority, it is well known,

exercises his jurisdiction conferred on him by a statute, he has to apply his

own mind  and  the  procedures  laid  down therefore  must  be  scrupulously

followed.    

34. In Ramana Dayaram Shetty vs. The International Airport Authority of

India & ors. [AIR 1979 SC 1628], this Court held:

“It is a well settled rule of administrative law that an executive authority must be rigorously held to the standards by which it  professes its actions to be judged and it must scrupulously observe those standards  on  pain  of  invalidation  of  an  act  in violation of them. This rule was enunciated by Mr. Justice  Frankfurter  in  Vitarelli  v.  Seaton  (1959) 359 U.S. 535: 3 L Ed. 2d 1012 where the learned Judge said:

‘An  executive  agency  must  be  rigorously held  to  the  standards  by  which  it  professes  its action to be judged. Accordingly, if dismissal from employment is based on a defined procedure, even

37

though  generous  beyond  the  requirements  that bind  such  agency,  that  procedure  must  be scrupulously  observed.  This  judicially  evolved rule  of  administrative  law  is  now  firmly established and, if I may add, rightly so. He that takes  the  procedural  sword  shall  perish  with  the sword.’

This  Court  accepted  the  rule  as  valid  and applicable in India in A.S. Ahluwalia v. State of Punjab (1975) 3 SCR 82: (AIR 1975 SC 984) and in  subsequent  decision  given  in  Sukhdev  v. Bhagatram  (1975)  3  SCR  619:  (AIR  1975  SC 1331),  Mathew,  J.,  quoted  the  above-referred observations  of  Mr.  Justice  Frankfurter  with approval.  It  may be  noted  that  this  rule,  though supportable  also  as  emanation  from  Article  14, does  not  rest  merely  on  that  article.  It  has  an independent existence apart from Article 14. It is a rule  of  administrative  law  which  has  been judicially evolved as a check against  exercise of arbitrary power by the executive authority. If we turn to the judgment of Mr. Justice Frankfurter and examine it, we find that he has not sought to draw support for the rule from the equality clause of the United States Constitution,  but  evolved it  purely as a rule of administrative law. Even in England, the  recent  trend  in  administrative  law  is  in  that direction as is evident from what is stated at pages 540-41  in  Prof.  Waders  Administrative  Law 4th edition. There is no reason why we should hesitate to  adopt  this  rule  as  a  part  of  our  continually expanding  administrative  law.  Today  with tremendous  expansion  of  welfare  and  social service  functions,  increasing  control  of  material and  economic  resources  and  large  scale assumption of industrial and commercial activities by  the  State,  the  power  of  the  executive Government  to  affect  the  lives  of  the  people  is steadily  growing.  The  attainment  of  socio-

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economic justice  being  a  conscious  end of  State policy, there is a vast and inevitable increase in the frequency with which ordinary citizens come into relationship of direct encounter with State power- holders. This renders it necessary to structure and restrict the power of the executive Government so as to prevent its arbitrary application or exercise. Whatever  be  the  concept  of  the  rule  of  law, whether it be the meaning given by Dicey in his "The  Law of  the  Constitution"  or  the  definition given  by  Hayek  in  his  "Road  to  Serfdom"  and "Constitution of liberty" or the exposition set-forth by Harry Jones in his "The Rule of Law and the Welfare State", there is, as pointed out by Mathew, J.,  in  his  article  on  "The Welfare  State,  Rule  of Law and Natural Justice" in "Democracy, Equality and Freedom," "substantial agreement is in juristic thought that the great purpose of the rule of law notion is  the protection of the individual  against arbitrary exercise of power, wherever it is found". It  is  indeed  unthinkable  that  in  a  democracy governed  by  the  rule  of  law  the  executive Government or any of its officers should possess arbitrary power over the interests of the individual. Every action of the executive Government must be informed  with  reason  and  should  be  free  from arbitrariness. That is the very essence of the rule of law and its bare minimal requirement. And to the application  of  this  principle  it  makes  not difference  whether  the  exercise  of  the  power involves affection of some right or denial of some privilege.”

35. It  is  furthermore  a  well  settled  principle  of  law  that  a  statutory

authority must exercise its jurisdiction within the four corners of the statute.

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Any action taken which is not within the domain of the said authority would

be illegal and without jurisdiction.   

36. We may now consider  the applicability of Rule 6(28)  of the Rules

(without going into the individual cases).

The notices of demand were issued for a huge sum towards the loss

purported to have sustained by the State as if the privilege of sale in toddy

was transferred by the State in favour of the appellants herein for a period of

three years.  We have noticed hereinbefore that  not  only the licence was

granted  for  a  period  of  one  year  only,  i.e.,  1997-98,  in  fact,  the

advertisement had been made for one year and confirmation of sale was also

accorded for the said year only.  A binding contract no doubt comes into

operation on the acceptance thereof by the State but where the acceptance of

the amount of bid was subject to an order of confirmation by a statutory

authority acceptance  of  the offer  must  be held  to  be conditional  and the

same  being  subject  to  the  confirmation,  it  is  difficult  to  accept  the

contention of Mr. Iyer that the contract was for the entire period of three

years.   The grant  of licence for the purposes of carrying out  business  as

envisaged under Section 18A of the Act is imperative in character whereby

a valid contract for a period of three years was clearly impermissible in law.

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In that view of the matter, the demand could not have been made towards

the loss suffered for a period of three years.  

We have also noticed hereinbefore that even the amount of security

which was required to be furnished by the licensee was calculated as if the

contract was being given for one year only.   

We may for the purpose of further discussions take into consideration

the  fact  involved  in  Civil  Appeal  arising  out  of  Special  Leave  Petition

(Civil) No. 25467 of 2005.  The bid for toddy shop Nos. 109 to 222 for a

period  of  1997-2000  given  by the  appellant  was  Rs.  15,10,00,000/-.   A

security of Rs. 1,51,00,000/- has been furnished.  Appellant started carrying

on business on and from 1.4.1997.  They paid tax for first-half of the year

1997-98. They had allegedly defaulted in payment of the kist for the month

from July 1997 onwards which was due on 1.10.1997 as per Rules.  Raid, as

noticed hereinbefore, was conducted on 19.7.1997.   

Indisputably,  the  officers  of  the Excise Department  of  the State  of

Kerala sealed the shop due to which the appellants could not carry out any

business from July till October.  Apart from the fact that they were required

to pay the kist for a period of six months and not for a period of two and a

half years, the demand of Rs.11,10,23,687/- made on them cannot be said to

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be  legal  and  valid.   Appellant  had  inter  alia  contended  that  the  auction

amount for one year being Rs.5,03,33,333/- out of which they had already

deposited Rs.3,20,00,020/- being an amount for more than the rental for a

period of seven months, there was no default.  Indisputably, the said amount

of Rs.3,20,00,020/- included the amount of security. But in the event, the

license was to be cancelled with effect from 19.7.1997, the said amount was

available  to  the  State  Government  for  compensating  itself  towards  the

damage suffered by it.  

37. Damages  can  be  imposed  on  a  licensee  either  for  violation  of  the

provisions of a statute on the part of the licensee and/or under the contract.

So far as the damages to be levied under statute  is concerned,  it  will  be

governed by the provisions of the statute.  However, if damages are to be

computed  under  the  contract,  the  provisions  of  the  Indian  Contract  Act

and/or the terms of the contract would be relevant. Ordinarily, they should

not be mixed up.  If having regard to the provisions of Section 18A of the

Act no contract for a period of more than one year could have been granted,

damages could not have been calculated on the basis of the contract.   

Rules 3 and 4 of the Rules and factually all the documents point out

that appellants had been allowed to carry out their business for a period of

one year.  Appellants were called upon to pay a sum of Rs.2,06,55,786/- by

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notice  dated  21.10.1997  within  three  days  without  complying  with  the

principles  of  natural  justice  as  the  appellant  had  not  been  given  an

opportunity of hearing entirely on the basis of the recommendations made

by the Circle Inspector of Excise.  The contract was directed to be cancelled

inter  alia  on  the premise  that  the  contractors  did  not  remit  the  defaulted

amount such as kist tree tax and interest in spite of the said notices.

38. It is on the aforementioned ground alone the order of cancellation as

also the forfeiture of security amount was passed.  No statement had been

made as to  how and in what  manner  the State suffered any loss.   If  the

amount  of  security  is  to  be  taken  into  consideration  indisputably  there

would be no default.  

The term ‘security’ signifies that which makes secure or certain.  It

makes the money more assured in its payment or more readily recoverable

as distinguished from, as for example, a mere I.O.U., which is only evidence

of a debt, and the word is not confined to a document which gives a charge

on  specific  property,  but  includes  personal  securities  for  money.  [See

Chetumal Bulchand vs. Noorbhoy Jafferji (AIR 1928 Sind 89)].  It is a word

of  general  import  signifying  an  assurance.   The  amount  of  security  was

available in cash.  The State could at any time recoup its damages or at least

a  part  of  it  from the  amount  of  security.   It  is  with  the  aforementioned

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backdrop, we may analyze the provisions of sub-Rule (28) of Rule 6.  It

confers  a  discretionary  jurisdiction  on  the  Assistant  Commissioner  of

Excise.  Exercise of such jurisdiction in favour of revenue, if any, would

furthermore be subject to confirmation by the Board of Revenue.  The said

statutory authority may at its discretion cancel the licence.  While doing so,

it may order a resale at the risk and cost of the licensee.  It may at its option

also  direct  the  management  of  the  business  of  the  contract  by  the

departmental agency or otherwise dispose of the same.  It is only when one

or other direction is issued, all losses on account of such cancellation and

resale or departmental management or other disposal of the privilege shall

be borne by the defaulting licensee.  It is of some importance to notice that

whereas all losses are to be borne by the licensee but he would have no right

to  the  gain,  if  any, which accrues  by reason of such resale  of license or

taking over of the management of the business by the departmental agency

or disposal thereof otherwise.  Actual losses suffered by the State by reason

of  any  of  the  aforementioned  actions  taken  must  therefore  be  clearly

ascertained.  

As Rule 6(28) provides for a penal clause, the principles of natural

justice were required to be applied.  Rule 6(28) itself provides that any sum

due  from  a  licensee  on  account  of  kist,  tree-tax  or  otherwise  may  be

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recovered  from  his  deposit  subject  only  to  the  condition  that  if  any

adjustment is made from the deposit, the licensee would be bound to replace

the sum adjusted therefor within fifteen days of receipt of notice from the

Excise Officer in charge of the Division in which his shop is situated.   

The proviso appended confers a wide jurisdiction upon the Assistant

Excise Commissioner to restore the licence cancelled by him in the event

the defaulter pays up the amount defaulted by him before the expiry of one

month from the date of such cancellation.  The said rule, therefore, does not

postulate that consequences must ensue on happening of one contingency or

the other.  

39. There is another aspect of the matter which cannot be lost sight of.  If

damages  cannot  be  calculated  and  the  terms  of  the  contract  provides

therefor only for penalty by way of liquidated damages, having regard to the

provisions contained in Section 74 of the Indian Contract Act a reasonable

sum only could be recovered which need not in all situations even be the

sum specified in the contract. {See  Maula Bux vs.   Union of India [AIR

1970 SC 1955] and Shree Hanuman Cotton Mills & anr. vs. Tata Air Craft

Ltd. [AIR 1970 SC 1986]

Section 74 of the Contract Act reads as under:

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“When  a  contract  has  been  broken,  if  a  sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other  stipulation  by  way  of  penalty,  the  party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract  reasonable  compensation not exceeding  the  amount  so  named  or,  as  the  case may be, the penalty stipulated for.

* * * * * *”

There are authorities, no doubt coloured by the view which was taken

in  English  cases,  that  Section  74  of  the  Contract  Act  would  have  no

application to cases of deposit for due performance of a contract which is

stipulated  to  be  forfeited  for  breach,  e.g.,.  Natesa  Aiyar  v.  Appavu

Padayachi [1913] I.L.R. 38 Mad. 178.; Singer Manufacturing Company v.

Raja  Prosad  [1909]  I.L.R.  36  Cal.  960.;  Manian  Patter  v.  The  Madras

Railway Company [1906] I.L.R. 19 Mad. 188, but this view no longer is

good  law  in  view  of  the  judgment  of  this  Court  in  Fateh  Chand vs.

Balkishan  Das   (1964)  1  SCR 515  =  (AIR 1963  SC 1405).  This  Court

observed at p.526 (of SCR):

“Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty.... The measure of damages in the case of breach of a stipulation by  way  of  penalty  is  by  Section  74  reasonable

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compensation not exceeding the penalty stipulated for.”

The Court also observed:

"It was urged that the section deals in terms with the right to receive from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for  the  assumption  made  by  some  of  the  High Courts  in  India,  that  Section  74  applies  only  to cases  where  the  aggrieved  party  is  seeking  to receive some amount on breach of contract and not to cases whereupon breach of contract an amount received  under  the  contract  is  sought  to  be forfeited.  In  our  judgment  the  expression  "the contract contains any other stipulation by way of penalty"  comprehensively  applies  to  every covenant  involving  a  penalty  whether  it  is  for payment  on  breach  of  contract  of  money  or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award  reasonable  compensation  is  statutorily imposed upon courts by Section 74. In all  cases, therefore, where there is a stipulation in the nature of  penalty  for  forfeiture  of  an  amount  deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount specified in the contract as liable to forfeiture.", and that,

"There  is  no  ground  for  holding  that  the expression "contract contains any other stipulation by  way  of  penalty"  is  limited  to  cases  of stipulation  in  the  nature  of  an  agreement  to  pay money or deliver property on breach and does not

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comprehend covenants under which amounts paid or property delivered under the contract, which by the  terms  of  the  contract  expressly  or  by  clear implication are liable to be forfeited.”

40. Forfeiture  of  earnest  money  under  a  contract  for  sale  of  property

whether movable or immovable, if the amount is reasonable, would not fall

within  Section  74.  That  has  been  opined  in  several  cases.  (See  Kunwar

Chiranjit Singh v. Har Swarup A.I.R. 1926 P.C. 1.; RoshanLal v. The Delhi

Cloth  and  General  Mills  Company  Ltd.,  Delhi  I.L.R.  33  All.  166.;

Muhammad Habibullah  v.  Muhammad Shafi  I.L.R.  41  All.  324.;  Bishan

Chand v. Radha Kishan Das I.D. 19 All. 490). These cases have explained

that  forfeiture  of  a  reasonable  amount  paid  as  earnest  money  does  not

amount to imposing a penalty. But if forfeiture is of the nature of penalty,

Section  74  applies.  Where  under  the  terms  of  the  contract  the  party  in

breach has undertaken to pay a sum of money or to forfeit a sum of money

which he has already paid to the party complaining of a breach of contract,

the undertaking is of the nature of a penalty.

{See  Maula  Bux (supra)  and Saurabh  Prakash  vs.  DLF  Universal  Ltd.

[(2007) 1 SCC 228]}

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41. We  may  not  moreover  lose  sight  of  another  fact.   Raids  were

conducted; shops were sealed on specific allegations, namely, the licensees

had mixed some poisonous substance with liquor.  They were prosecuted for

adding ‘Diazepem’.  Evidently, the fact that the chemical report showed that

‘Diazepem’  had  been  mixed  with  toddy  have  prejudiced  the  licensing

authority.  Such prejudice is  apparent  even on the face of the  impugned

order passed by the High Court.  

It has not  been denied or disputed before us that all  the appellants

have since been acquitted of the said charges by a competent criminal court.

It  was  in  the  aforementioned  situation  we  thought  of  taking  into

consideration all aspects of the matter so as to do complete justice to the

parties.   

In the peculiar facts and circumstances of this case, therefore, we are

of the opinion that it was not a case where even Rule 6(28) could have also

been  resorted  to.   As  we  have  not  applied  our  mind  to  the  judgment

rendered by the criminal court leading to the acquittal of the appellants, we

leave the parties to seek any other remedies available to them in law,   

42. For the aforementioned reasons, the impugned judgment of the High

Court  is  set  aside.   These  appeals  are  allowed.   Consequently  the  Writ

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Petitions stand allowed to the extent indicated above.  However, in the facts

and circumstances of the case, there shall be no order as to costs.  

……………….…..………….J. [S.B. Sinha]

..………………..……………J. [Cyriac Joseph]

NEW DELHI; MARCH 05, 2009

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