judgement:
Civil Appeal No. 20 of 1955.
Appeal from the Judgment and Order dated the ' 29th day of September 1954 of the High Court of Judicature at Madras in Original Side Appeal No. 113 of 1954 arising out of the order dated the 9th day of August 1954 of the said High Court in its Ordinary Original Civil Jurisdiction in Application No. 3542 of 1954.
376 C. K. Daphtary, Solicitor General for India (H. J. Umrigar, Mohan Kumaramangalam and Rajinder Narain, with him) for the appellants.
B. H. Dhebar and P. G. Gokhale for respondent No. 1.
Samarendra Nath Mukherjee and B. N. Ghose for respondent No. 2.
N. P. Engineer, (B. Moropant and V.J. Taraporewala, with him) for respondent No. 3. 1955.
April 20.
The Judgment of the Court was delivered by BHAGWATI J.
This appeal with a certificate under article 133 (1) (c) of the Constitution is directed against the judgment of the High Court of Judicature at Madras dismissing the appeal of the Appellants and refusing to set aside a sale effected by Respondent 2 of certain properties belonging to the Madras Electric Tramways (1904) Ltd. hereinafter called the Company, above the ground at Vepery, Madras and Mylapore, including the machinery cars, etc.
and buildings as scrap to Respondent 3 in his capacity as the Receiver of the trustees of the debenture holders of the Company.
The Appellants are the Secretary and President respectively of the Madras Tramways Workers Association (Registered No. 1253) a Trade Union registered under the Trade Unions Act.
The workmen employed by the Company are entitled under the award of the Special Industrial Tribunal, Madras in I. D. No. 9 of 1953 published in the Fort St. George Gazette, dated the 8th July, 1953 being G. 0.
Ms. No. 3024/53 to a payment of nearly Rs. 7,00,000 out of which the workers belonging to the Madras Tramways Workers Association alone would be entitled nearly to a sum of Rs. 4,35,000 and are thus the major creditors of the Company.
The Company was incorporated in England with its principal office situated at No. 1, Rundalls Road, Vepery, Madras 7 and was running the Tramway Service in Madras with licence issued to it by the Government under the Tramways Act.
It had issued 377 1300 First Debentures of CIOO each and the debenture holders had appointed the Beawer Trust Ltd., England as trustees.
By an Indenture made in England on the 13th October 1924 the Company charged by way of first charge in favour of the trustees all its undertaking properties and assets for the time being both present and future including its uncalled capital with the payment of all moneys for the time being owing on the security of the debentures and such charge was to rank as a floating charge.
By two subsequent deeds made at Madras dated the 26th March, 1925 and 6th July, 1950 certain immovable properties belonging to the company were mortgaged in favour of the said trustees.
The said Trustees appointed Respondent 2, the Managing Director of the Company and day to day management of the Tramway Service and of the business of the Compay, as their Receiver.
He took possession as such Receiver,, from the midnight of 11th April, 1953 of all the assets of the Company including moneys in the bank to the credit of the Company and after that date the Tramways Service was suspended and still remains suspended.
One J. B. Beardsell, one of the Directors of the Company filed O. P. No. 419 of 1953 as the duly constituted Attorney of the Company for winding up the Company on the ground that it was unable to pay its debts and that it bad ceased to carry on its business.
An order for the winding up of the Company was made by the Court on the 20th January, 1954 and the Official Receiver, High Court, Madras, was appointed the Official Liquidator.
Since all the assets including the moneys of the Company were in possession of Respondent 2, the Official Receiver was unable to take charge of anything except the records of the Company.
Soon after the order for winding up the Respondent 2 advertised in the newspapers on the 23rd January, 1954 for the sale of the properties and assets of the Company.
At the end of the conditions of sale he stated in paragraph 7 that "the sales are for the time being subject to the approval of the High Court 378 at Madras and it will be for the undersigned to obtain such approval for accepted offers free of all costs to the purchaser".
At the time of the order of winding up, two suits were pending in the High Court, C.S. No. 191 of 1952 filed by the Company against the State of Madras for Rs. 1,33,204 9 0 and interest thereon being electric charges alleged to have been collected by the State of Madras in excess of those payable by the Company and paid by the company under protest and C.S. No. 368 of 1953 filed by the State of Madras against the Company for the recovery of Rs. 9,26,123 2 3 with interest thereon, being the difference alleged to be due in respect of the electric charges under the old rates and the revised rates applicable to the Company.
During the pendency of the said suits Respondent 2 gave an undertaking in Application No. 4533 of 1953 in Civil Suit No. 368 of 1953 that he would not without the orders of the High Court dispose of any of the assets of the Company which were in his possession till the disposal of the suit C.S. No. 368 of 1953.
The two suits aforesaid were tried together and were disposed of by a common judgment on the 16th March 1954.
On the 16th July 1954 Respondent 2 agreed to sell and Respondent 3 agreed to buy the movable properties of the Company the particulars of which were set out in the agreement entered into on that date, for a price of Rs. 4,01,658 of which half was paid on the signing of the agreement and the other half was agreed to be paid out of the proceeds of sale to be made by the purchasers of the assets as scrap.
On the 23rd July 1954 the Official Receiver, High Court, Madras (Respondent 5 herein) filed an application No. 3542 of 1954 for setting aside the said sale of the assets of the Company on the grounds, inter alia, that it was prejudicial to the interests of the General body of unsecured creditors, that the same had been concluded with undue haste and without adequate publicity and in violation of Respondent 2 's said undertaking to the Court.
It also asked for an injunction restraining the Respondent 2 from 379 handing over and the Respondent 3 from either taking over or breaking up the assets purchased by him pending, the disposal of the said application.
This application was based on a report of the Official Receiver in which after setting out the relevant facts he submitted that even though under section 229 of the Indian Companies Act the Company which was admittedly insolvent was governed by rules prevailing with regard to the respective rights of the secured and unsecured creditors and to debts provable and valuation of annuities governing the administration in insolvency and secured creditors generally stood outside the liquidation and were entitled to have the remedy of realising the security and proving before him for the deficiency, if the properties of the Company could be sold for a price higher than the amount due to the Trustees of the debenture holders there was a possibility of a surplus coming into his bands for the benefit of the unsecured creditors.
If the Respondent 2 proved before him for any deficiency due to the secured creditors, it would certainly affect the rights of unsecured creditors, and moreover though the secured creditors might realise the security, it will be in the interests of the unsecured creditors to see that a fair and proper price was obtained.
He therefore submitted that in the interests of the unsecured creditors it was just and necessary to have a fair valuation ascertained and an enquiry held to ascertain whether the sale by the Respondent 2 in favour of Respondent 3 was bona fide and for a proper price.
Respondent 2 filed an affidavit in reply in August 1954 contending inter alia, (1) that the offer by the Respondent 3 was the highest, that he had received and that this had been accepted bona fide, (2) that in the advertisement the condition as to the previous sanction of the Court was inserted because of the undertaking that be had given to the Court in C.S. No. 368 of 1953 and that this undertaking lapsed with the dismissal of the said suit on the 16th March 1954, (3) that he had been advised by the Solicitors in England for the debenture trustees that it was unnecessary for him to obtain 380 the sanction of the Court and that he had been instructed not to apply for such sanction and (4) that the sale was bona fide and he had secured as good a price as could be obtained.
By its judgment and order dated the 9th August 1954 Mr. Justice Balakrishna Ayyar (in Chambers) dismissed the said application with costs.
The learned Judge held that the question whether Respondent 2 had violated the undertaking given by him was not germane to the application before him, that undoubtedly the Respondent 2 did give wide publicity of his intention to sell the assets of the Company, that it could not be said that the sale was sub rosa on the ground of want of wide publicity to the intended sale of the Company 's assets and that the Respondent 3 's offer was the best offer received by the Respondent 2 looking both to the abstract of offers appended to the affidavit of the Respondent 2 in the said application, and looking to the other offers pointed out to him by Respondent 5.
The learned Judge further referred to the offer of the Corporation of Madras and said that the said Corporation had not made any firm offer at all and that the offer of one A. Chettiar of Rs. 4,25,000 made on 5th August 1954 during the hearing of the application was an offer made by a person who did not appear to him to be of a man of sound financial status.
The learned Judge in his judgment also recorded the fact that during the hearing of the application the Respondent 3 offered to sell to the Madras Municipal Corporation the entire assets he had purchased at the same price which he paid for it but the Corporation were not prepared to accept the offer.
The Respondent 5 accepted the said judgment and decision and did not prefer any appeal against the same.
But the Appellants who were not parties to the proceedings applied for and obtained from the High Court leave to appeal from the said decision.
This appeal also was dismissed by the High Court with costs on the 24th September 1954.
The High Court differed from the finding of the Trial Court and held that due publicity had not been given to the 381 intended sale and observed that if the matter rested merely on a decision of that point they would have allowed the appeal and set aside the sale.
They how ' ever held that in the absence of fraud or want of bona fides on the part of the seller along with that of the buyer the sale in favour of the Respondent 3 could not be set aside.
The High Court further considered the question whether the said sale was void as being without the leave of the Court in view of section 232 of the Indian Companies Act and answered that question in the negative.
The High Court further held that a secured creditor had a right to realise his security without seeking the assistance of the court and remaining outside the winding up.
Being aggrieved by the said judgment and decree of the High Court the Appellants applied for leave to appeal to this Court and such leave was granted by the High Court on the 24th September 1954.
The bona fides of the Respondent 2 in the matter of the sale were not challenged either in the Courts below or before us and there were concurrent findings of fact that the price obtained by Respondent 2 was the best price available under the circumstances.
It was however urged by the learned Solicitor General for the Appellants: (I) that the High Court, having found that due publicity had not been given to the intended sale, ought not to have allowed the Respondent 3 at that stage to raise the question as to whether the Court had any power or jurisdiction to set aside the sale except on the ground that it was vitiated by fraud or for want of bona fides and (2) that the sale by Respondent 2 being a sale held without leave of the winding up Court was void under section 232(1) of the Indian Companies Act.
The High Court bad allowed the Respondent 3 to raise the question even at that late stage inasmuch as it was a pure question of law and the learned Solicitor General therefore rightly did not press the first contention before us.
The main argument centered round the second contention, viz., whether the sale effected by the Respondent 2 without leave of the winding up Court was void and hence liable to be set aside.
382 The decision of this question turns upon the true construction of section 232 of the Indian Companies 'Act, which runs as under: "(I) Where any company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put in force without leave of the Court against the estate or effects or any sale held without leave of the Court of any of the properties of the company after the commencement of the winding up shall be void.
(2) Nothing in this section applies to proceedings by the Government".
It may be noted that the words "or any sale held without leave of the Court of any of the properties" underlined above were inserted by Act XXII of 1936.
Before this amendment section 232(1) was almost in identical terms with section 228(1) of the English Companies Act of 1948.
Two other sections of the Indian Companies Act may be noted in this context, viz. section 171:"When a winding up order has been made or a provisional liquidator has been appointed no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the Court, and subject to such terms as the Court may impose." and Section 229: "In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section;" which correspond respectively to sections 231 and 317 of the English Companies Act of 1948.
383 The position of a secured creditor in the winding up of a company has been thus stated by Lord Wrenbury in Food Controller vs Cork(1): "The phrase 'outside the winding up ' is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee.
The mortgagee of a company in liquidation is in a position to say "the mortgaged property is to the extent of the mortgage my property.
It is immaterial to me whether my mortgage is in winding up or not.
I remain outside the winding up ' and shall enforce my rights as mortgagee".
This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor.
He may say 'I will prove in respect of my debt '.
If so, he comes into the winding up".
It is also summarised in Palmer 's Company Precedents Vol.
II, page 415: "Sometimes the mortgagee sells, with or without the concurrence of the liquidator, in exercise of a power of sale vested in him by the mortgage.
It is not necessary to obtain liberty to exercise the power of sale, although orders giving such liberty have sometimes been made".
The secured creditor is thus outside the winding up and can realise his security without the leave of the winding up Court, though if he files a suit or takes other legal proceedings for the realisation of his security he is bound under section 231 (corresponding with section 171 of the Indian Companies Act) to obtain the leave of, the winding up Court before he can do so although such leave would almost automatically be granted.
Section 231 has been read together with section 228(1) and the attachment, sequestration, distress or execution referred to in the latter have reference to proceedings taken through the Court and if the creditor has resort to those proceedings he cannot put them in force against the estate or effects of the Company after the commencement of the winding up without the leave of the winding up Court.
The (1) 1923 Appeal Cases 647.
49 384 provisions in section 317 are also supplementary to the provisions of section 231 and emphasise the position of the secured creditor as one outside the winding up, the secured creditor being, in regard to the exercise of those rights and privileges, in the same position as he would be under the Bankruptcy Act.
The corresponding provisions of the Indian Companies Act have been almost bodily incorporated from those of the English Companies Act and if there was nothing more, the position of the secured creditor here also would be the same as that obtaining in England and he would also be outside the winding up and a sale by him without the intervention of the Court would be valid and could not be challenged as void under section 232(1) of the Indian Companies Act.
It was however urged that the addition of the words "or any sale held without leave of the Court of any of the properties" had changed the position of the secured creditor and even though the secured creditor realised the security without the intervention of the Court such sale, if effected by him without the leave of the winding up Court, was void.
It was pointed out that these words did not find their place in the corresponding section 228(1) of the English Companies Act and therefore even though any attachment, distress or execution put in force without leave of the Court against the estate or effects of the company after the commencement of the winding up was void under the terms of the section 232(1) as it originally stood, the words "or any sale held without leave of the Court of any of the properties" of the company were wide enough to include not only a sale held through the intervention of the Court but also a sale effected by the secured creditor without the intervention of the Court whether the sale was by private treaty or by public auction.
It was contended on the other hand on behalf of the contesting Respondent, Respondent 3, that the amendment was made in order to get over the decision of the Allahabad High Court in Kayastha Trading and Banking Corporation Ltd. vs 385 Sat Narain Singh(1) and that in any event on a true construction of section 232(1) as amended the words "any sale held" had reference in the context only to sales held by or effected through the intervention of the Court and not sales effected by the secured creditor without the intervention of the Court.
The decision of the Allahabad High Court above referred to had held on a construction of section 232(1) as it then stood, that an execution was not put in force merely when the property of the judgment debtor was sold in pursuance thereof, but it was put in force when the property was attached and hence where the property of an insolvent company was attached prior to the date of the commencement of the winding up but was actually sold subsequent to such date, the sale was not void and could be upheld.
There was an earlier decision of the Patna High Court in Baldeo Narain Singh vs The, United India Bank Ltd.(1) in which a contrary decision had been reached exactly under similar circumstances.
It is well known that this conflict was resolved and the decision of the Allahabad High Court was got over by inserting this amendment by Act XXII of 1936.
The statement of objects and reasons is certainly not admissible as an aid to the construction of a statute.
But it can be referred to for the limited purpose of ascertaining the conditions prevailing at the time which actuated the sponsor of the Bill to introduce the same and the extent and urgency of the evil which he sought to remedy.
State of West Bengal vs Subodh Gopal Bose and Others(3).
The amendment of section 232(1) inserted by Act XXII of 1936 was designed to prevent such sales as were upheld by the decision of the Allahabad High Court in Kayastha Trading and Banking Corporation Ltd. vs Sat Narain Singh(1) and it would be permissible to refer to that portion of the statement of objects and reasons for the purpose of ascertaining the extent and urgency of the evil which was sought to be remedied by introducing the amendment.
It follows therefore that the (1) Allahabad 433 (2) [1915] 38 Indian Cases 91.
(3) ; , 628.
386 amendment could not have been intended to bring within the sweep of the general words "or any sale held without the leave of the Court of any of the properties" sales effected by the secured creditor outside the winding up.
Even apart from this intendment there are certain canons of construction which also tend to support the same conclusion.
Prior to the amendment the law was well settled both in England and in India that the secured creditor was outside the winding up and he could realise his security without the intervention of the Court by effecting a sale of the mortgaged premises by private treaty or by public auction.
It was only when the intervention of the Court was sought either by putting in force any attachment, distress or execution within the meaning of section 232(1) as it stood before the amendment or proceeding with or commencing a suit or other legal proceedings against the company within the meaning of section 171 that leave of the Court was necessary and if no such leave was obtained the remedy could not be availed of by the secured creditor.
The sale of the mortgaged premises was also brought by the amendment on a par with the attachment, distress or execution put in force at the instance of the secured creditor and having regard to the context such sale could only be construed to be a sale held through the intervention of the Court and not one effected by the secured creditor outside the winding up and without the intervention of the Court.
It is a well recognised rule of construction that "when two or more words which are susceptible of analogous meaning are coupled together noscunter a sociis, they are understood to be used in their cognate sense.
They take, as it were, their colour from each other.
, that is.
, the more general is restricted to a sense analogous to the less general.
(Maxwell on Interpretation of Statutes, Tenth Edition, p. 332).
The Judicial Committee of the Privy Council also expressed itself in similar terms in Angus Robertson & Others vs George Day(1): (1) , 69. 387 "It is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them".
Having regard therefore to the context in which these words "any sale held without leave of the Court of any of the properties" have been used in juxtaposition with "any attachment, distress or execution put into force without leave of the Court against the estate or effects" it would be a legitimate construction to be put upon them that they refer only to sales held through the intervention of the Court and not to sales effected by the secured creditor outside the winding up and without the intervention of the Court.
There is also a presumption against implicit alteration of law and that is enunciated by Maxwell on Interpretation of Statutes, 10th Edition, at page 81 in the following terms: "One of these presumptions is that the legislature does not intend to make any substantial alteration in the law beyond what it explicitly declares, either in express terms or by clear implication, or, in other words, beyond the immediate scope and object of the statute.
In all general matters outside those limits the law remains undisturbed.
It is in the last degree improbable that the legislature would overthrow fundamental principles, infringe rights, or depart from the general system of law, without expressing its intention with irresistible clearness. . . . .
This passage from Maxwell was approved of by Their Lordships of the Privy Council in Murugian, P. vs Jainudeen, C. L.(1) and Their Lordships agreed that the law was correctly stated in the passage just cited.
To the same effect are also the observations of the Court of Appeal in National Assistance Board vs Wilkinson(1) where it was held that the Statute is not to be taken as affecting a fundamental alteration in the general law unless it uses words pointing unmistakably to that conclusion.
In that case at page 658 Lord Goddard, C.J. observed: (1) [1954] 3 Weekly Law Reports 682, 687, (2) 388 "But it may be presumed that the legislature does not intend to make a substantial alteration in the law beyond what it expressly declares.
In Minet vs Leman(1), Sir John Romilly, M. R. stated as a principle of construction which could not be disputed that 'the general words of the Act are not to be so construed as to alter the previous policy of the law, unless no sense or meaning can be applied to those words consistently with the intention of preserving the existing policy untouched ' ".
If the construction sought to be put upon the words "or any sale held without leave of the Court of any of the properties" by the Appellants were accepted it would effect a fundamental alteration in the law as it stood before the amendment was inserted in section 232(1) by Act XXII of 1936.
Whereas before the amendment the secured creditor stood outside the winding up and could if the mortgage deed so provided, realise his security without the intervention of the Court by effecting a sale either by private treaty or by public auction, no such sale could be effected by him after the amendment and that was certainly a fundamental alteration in the law which could not be effected unless one found words used which pointed unmistakably to that conclusion or unless such intention was expressed with irresistible clearness.
Having regard to the circumstances under which the amendment was inserted in section 232(1) by Act XXII of 1936 and also having regard to the context we are not prepared to hold that the Legislature in inserting that amendment intended to effect a fundamental alteration in law with irresistible clearness.
Such a great and sudden change of policy could not be attributed to the Legislature and it would be legitimate therefore to adopt the narrower interpretation of those words of the amendment rather than an interpretation which would have the contrary effect.
(Vide the observations of the Privy Council in Vasudeva Mudaliar & Others vs Srinivasa Pillai & another(1).
(1) ; (2) (19O7) I.L.R. 30 Madras 426, 433, 389 It may be observed in this connection that section 171 enacts a general provision with regard to suits or other legal proceedings to be proceeded with or commenced against the company after a winding up order has been made and lays down that no suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court may impose.
This general provision is supplemented by the supplemental provisions to be found respectively in sections 229 and 232(1) of the Act.
Section 229 speaks of the application of insolvency rules in winding up of insolvent companies and section 232(1) speaks of the avoidance of certain attachments, executions, etc., put into force without the leave of the Court against the estate and effects of the company and also of any sale held without the leave of the Court of any of the properties of the company after the commencement of the winding up.
Section 229 recognises the position of the secured creditor generally as outside the winding up but enables him in the event of his desiring to take the benefit of the winding up proceedings to prove his debt, to value the same and share in the distribution pro rata of the assets of the company just in the same way as he would be able to do in the case of insolvency under the Presidency Towns Insolvency Act or the Provincial Insolvency Act.
Section 232(1) also has reference to legal proceedings in much the same way as legal proceedings envisaged by section 171 of the Act and the attachment, distress or execution put in force or the sale held are all of them legal proceedings which can only be resorted to through the intervention of the Court.
The word "held" in connection with the sales contemplated within the terms of the amended section also lends support to this conclusion and this conclusion is further fortified by the terms of section 232(2) which says that nothing in this section applies to proceedings by the Government, thus in effect indicating that what are referred to in section 232(1) are proceedings within the meaning of that term as used in section 171 of the Act.
390 The Federal Court also put a similar construction on the provisions of section 171 read with section 232(1) of the Act in The Governor General in Council vs Shiromani Sugar Mills Ltd. (In Liquidation)(1) "Section 171 must, in our judgment, be construed with reference to other sections of the Act and the general scheme of administration of the assets of a company in liquidation laid down by the Act.
In particular, we would refer to section 232.
Section 232 appears to us to be supplementary to section 171 by providing that any creditor (other than Government) who goes ahead, notwithstanding a winding up order or in ignorance of it, with any attachment, distress, execution or sale, without the previous leave of the Court, will find that such steps are void.
The ref erence to "distress" indicates that leave of the Court is required for more than the initiation of original proceedings in the nature of a suit in an ordinary Court of law.
Moreover, the scheme of the application of the company 's property in the pari passu satisfaction of its liabilities, envisaged in section 211 and other sections of the Act, cannot be made to work in co ordination, unless all creditors (except such secured creditors as are "outside the winding up" in the sense indicated by Lord Wrenbury in his speech in Food Controller V. Cork(1) at page 671) are subjected as to their actions against the property of the company to the control of the Court.
Accordingly, in our judgment, no narrow construction should be placed upon the words "or other legal proceeding" in section 171. 'In our judgment, the words can and should be held to cover distress and execution proceedings in the ordinary Courts.
In our view, such proceedings are other legal proceedings against the company, as contrasted with ordinary suits against the company".
We are therefore of the opinion that the sale effected by Respondent 2 as the Receiver of the Trustees of the debenture holders on the 16th July 1954 was valid and binding on all parties concerned and could not be challenged as it was sought to be done by the (1) , 55.
(2) 391 Official Receiver.
The position was rightly summed up by the High Court as under: "We thus reach the position that no leave of Court was needed before the Receiver appointed by the mortgagee debenture holders exercised the power of sale and that as there is no allegation of want of bona fides or recklessness or fraud against the Receiver in exercising such a power, it would follow that the sale held by the Receiver is valid and effectual to convey title to the purchaser and that such a sale cannot be avoided on the ground either of want of due notice given by the Receiver before effecting the sale or on the ground of undervalue".
The result therefore is that the appeal fails and must be dismissed with costs of the contesting Respondent 3.
The other Respondents who have appeared before us will bear and pay their own costs of the appeal.

summary/full:
The secured creditor is outside the winding up and can realism his security without the leave of the winding up Court, though if he files a suit or takes other legal proceedings for the realisation of his security he is bound under section 171 of the Indian Companies Act to obtain the leave of the winding up Court before he can do so although such leave would almost automatically be granted.
375 It is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them.
It is also a well recognized rule of construction that the legislature does not intend to make a substantial alteration in the law beyond what it explicitly declares either in express words or by clear implication and that the general words of the Act are not to be so construed as to alter the previous policy of the law, unless no sense or meaning can be applied to those words consistently with the intention of preserving the existing policy untouched.
Held therefore that having regard to the context in which the words "any sale held without leave of the Court of any of the properties" added in section 232(1) by the amending Act XXII of 1936 have been used in juxtaposition with "any attachment, distress or execution put into force without leave of the Court against the estate or effects" it would be a legitimate construction to be put upon them that they refer only to sales held through the intervention of the Court and not to sales effected by the secured creditor outside the winding up and without the intervention of the Court, and that the amendment was not intended to bring within the sweep of the general words sales effected by the secured creditor outside the winding up.
Held accordingly that in the present case the sale effected by respondent No. 2 as the receiver of the trustees of the debenture holders in July 1954 was valid and binding on all parties concerned and could not be challenged as it was sought to be done by the Official Receiver.
Food Controller vs Cork(1923 A.C. 647), Kayastha Trading and Banking Corporation Ltd. vs Sat Narain Singh ([1921] I.L.R. 43 All. 433), Baldeo Narain Singh vs The United India Bank Ltd. ([1915] , State of West Bengal vs Subodh Gopal Bose and others ; , Angus Robertson and others vs George Day , Murugian, P. vs Jainudeen, C. L. ([1954] 3 W.L.R. 682), National Assistance Board vs Wilkinson ([1952] 2 Q.B. 648), Vasudeva Mudaliar and others vs Srinivasa Pillai and another ([1907] I.L.R. and The Governor General in Council vs Shiromoni Sugar Mills Ltd. (In Liquidation) (1946 F.C.R. 40), referred to.


judgement:
he levy of luxury tax is within the competence of the State legislature, the said legislature would be well within its competence to enact a law for recovery of an amount which though already refunded to a party, partakes of the nature of a luxury tax in the light of that law.
[707 C] & CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.
1689 1690 and 1692 1705 of 1972.
From the Judgment and order dated the 15th October, 1970 of the Kerala High Court at Ernakulam in O.P. Nos. 934 and 944 and W.A. 693 Nos. 15, 17, 18, 20, 22, 24, 27, 31, 32, 51 55 of 1965 and W.A. No. 170 of 1965 respectively.
T. section Krishnamurthy Iyer, C. K. Viswanatha Iyer and T. A. Rama chandran for the Appellants in C.As.
1689, 1962 and in C.As.
1694 to 1705 of 1972 C. K. Viswanatha Iyer and T. A. Ramachandran for the appellants in C.As.
1690 and 1693.
D. V. Patel and K. R. Nambiar for Respondents in all the appeals.
The Judgment of the Court was delivered by KHANNA, J.
Whether the provisions of the Luxury Tax on Tobacco (Validation) Act, 1964 (Act 9 of 1964) (hereinafter referred to as the Act) enacted by the State Legislature of Kerala are void on the grounds that (1) the State Legislature lacked the legislative competence to enac that Act, and (2) the provisions of the Act contravened article 301 of the Constitution and were not protected by article 304 is the main question which arises for determination in these 16 civil appeals Nos.
1689, 1690 and 1692 to 1705 filed on certificate against the judgment of the Kerala High Court.
A Division Bench of the High Court has up held the validity of the Act.
We may set out the chequered history giving rise to civil appeals 1689 and 1692.
Learned counsel for the parties are agreed that it is not necessary to set out the facts of the other cases and that the decision in the above two appeals would also govern those other cases.
The appellants were dealers in tobacco and tobacco preparations in Mattancherry in erstwhile Cochin State.
In 1909 Cochin Tobacco Act (Act 7 of 1084 M.E.) was enacted by the Maharaja of Cochin.
Section 4 p of that Act prohibited the transport, import or export, sale and cultivation of tobacco, except as permitted by the Act and the rules framed thereunder.
In pursuance of the power given by that Act the Diwan of Cochin made rules relating to matters specified in the Act.
Under the rules it became necessary to obtain a licence for cultivation of tobacco plant.
Drying, curing, manufacturing and the storing of tobacco cultivated in the State was to be done under the supervision of an Excise officer in licenced manufacturing yards and store houses.
The system which was in force for the collection of tobacco revenue up to August 1950 was to auction what were called A class and class shops.
In addition, there were class shops, the licence for which was granted either on the recommendation of or in consultation with class licensees.
A somewhat similar law was in operation in the erstwhile Travancore State.
On April 1, 1950 after the Constitution had come in force and Travancore Cochin had become a Part State Finance Act (No. 25 of 1950) extended the Central Excises and Salt Act (No. 1 of 1944) to Part State of Travancore Cochin by section 11 thereof.
Section p 13 (2) of the Finance Act provided that "if immediately before the 1st lay of April 1950, there is in force in any State other than Jammu and Kashmir a law corresponding to, but other than, an Act referred to in r sub sections (1) or (2) of section 11, such law is hereby repealed with effect from the said date. ".
In consequence of this provision in 3 L 159SCI/176 694 Finance Act, 1950, the rules which were in force on April 1, 1950 were changed in the Cochin area by notification dated August 3, 1950 and the system of auction sales of A class and class shops was done away with and instead graded licence fees were introduced for various classes of licensees, including class licensees.
Similar change was made for the Travancore area.
Notification dated January 25, 1951 was issued in this context.
A class licensees under the new rules were called stockists, class licensees were wholesale sellers and class licensees were retailers.
A class licensees were to pay a specified minimum fee for a fixed maximum quantity of tobacco and tobacco goods possessed by them and an additional fee for an additional quantity.
The fee was to be levied only in respect of the tobacco imported into the State The State of Travancore Cochin collected licence fee from the appellants for the period from August 17, 1950 to December 31, 1957.
In 1956 the appellants, who were A class licensees, filed writ petitions in Kerala High Court for refund of the licence fee collected from them on the ground that the Cochin and Travancore Tobacco Acts stood repealed by the Finance Act of 1950 because of the extension of the Central Excises and Salt Act to Part State of Travancore Cochin.
The petitions were opposed on behalf of the State and it was contended that the Cochin Act or the similar Travancore Act did not stand repealed from April 1, 1950.
It was urged that the State was competent to frame new rules under the Cochin Tobacco Act and the corresponding Travancore Act.
It was further stated that the tax in question could be validly levied under entry 60 or 62 of List II of the Seventh Schedule to the Constitution.
The High Court dismissed the petitions holding that the laws under which the new rules were framed were in force and were valid under entry 62 of List II of the Seventh Schedule.
The 13: appellants then came up in appeal to this Court.
It was held by this Court in its judgment dated January 24, 1962 reported in (1962) Supp.
2 SCR 741 that the Cochin Tobacco Act of 1084 and the rules framed thereunder as also similar provisions in Travancore, requiring licences to be taken out for storage and sale of tobacco and for payment of licence fee in respect thereof were law corresponding to the provisions of the and hence stood repealed on April 1, 1950 by virtue of section 13(2) of the Finance Act, 1950.
It was further held that as the parent Acts, namely, the Cochin Tobacco Act and corresponding Travancore Act had stood repealed, the new rules framed in August 1950 and January 1951 under those Acts for the respective areas of Cochin and Travancore for the issue of licences and payment of fee therefore for storage of tobacco were invalid ab initio.
After the above decision of this Court the appellants made a demand to the respondent State that the amounts of Rs. 1,14,750 collected by the State from them by way of licence fee under the invalid rules might be refunded to them.
The respondent State refunded.
73,500 to the appellants on April 29, 1963.
On July 10, 1963 the appellants filed original petition No. 1268 of 1963 in the Kerala High Court for issue of a writ to the respondent State to pay the balance amount of Rs 41.250 which along with interest came to Rs. 52,800 to the appellants.
During the pendency of the above petition on December 16, 695 1963 the Governor of Kerala promulgated ordinance No. 1 of 1963 which was later replaced by Kerala Luxury Tax on Tobacco (Validation) Act of 1964 (Act of 1964).
This Act received the assent of the President on March 3, 1964.
Original petition No. 1268 of 1963 was thereupon amended with a view to challenge the validity of the above mentioned Act.
In the meanwhile, on January 21, 1964 demand was made in view of the ordinance by the State Government calling upon the appellants to pay the amount of Rs. 73,500 which had been refunded to them by the State Government.
Original petition No. 934 of 1964 was filed by the appellants in the Kerala High Court to challenge the validity of demand notice dated January 21, 1964 as also the vires of the Act.
At this stage it may be appropriate to refer to the relevant provisions of the Act.
The preamble of the Act reads as under: "PREAMBLE: WHEREAS it is expedient to provide for the levy of a luxury tax on tobacco for the period beginning with the 17th day of August, 1950 and ending on the 31st day of December 1957, and the validation of the levy and collection of fees for licences for the vend and stocking of tobacco for the aforesaid period: BE it enacted in the Fifteenth Year of the Republic of India as follows: " Section 2(ii) of the Act defines tobacco to include leaf of the tobacco plant, snuff, cigars, cigarettes, beedies, beedi tobacco, tobacco powder and other preparations or admixtures of tobacco.
Section 3 is the charging section and provides that "for the period beginning with the 17th day of August 1950 and ending on the 31st day of December, 1957, every person vending or stocking tobacco within any area to which this Act extends shall be liable and shall be deemed always to have been liable to pay a luxury tax on such tobacco in the form of a fee for licence for the vend and stocking of the tobacco, at such rates as may be prescribed, not exceeding the rates specified in the Schedule".
Section 4(1) of the Act gives power to the State Government to make rules by publication in the gazette to carry out the purposes of the Act.
According to sub section (3) of section 4 of the Act, 'the rules and notifications specified below purported to have been issued under the Tobacco Act of 1087 (Travancor Act 1 of 1087) or the Cochin Tobacco Act, VII of 1084, as the case may be, in so far as they relate or purport to relate to the levy and collection of fees for licences for the vend and stocking of tobacco, shall be deemed to be rules issued under this section and shall be deemed to have been in force at all material times.
" Along the rules and notifications specified in subsection (3) of section 4 are rules published on August 3, 1950 and January 25, 1951.
Sections 5 and 6 read as under: "5.
Validation Notwithstanding any judgment, decree or order of any court, all fees for licences for the vend or stocking of tobacco levied or collected or purported to have been 696 levied or collected under any of the rules or notifications specified in sub section (3) or section 4 for the period beginning with the 17th day of August, 1950 and ending on the 31st day of December, 1957, shall be deemed to have been validly levied or collected in accordance with law as if this Act were in force on and from the 17th day of August, 1950 and the fees for licences were a luxury tax on tobacco levied under the provisions of this Act, and accordingly, (a) no suit or other proceeding shall be maintained or continued in any court for the refund of any fees paid or purported to have been paid under any of the said rules or notifications; and (b) no court small enforce a decree or order directing the refund of any fees paid or purported to have been paid under any of the said rules or notifications.
Recovery of licence fees refunded Where any amount paid or purported to have been paid as a fee for licence under any of the rules or notifications specified in sub section (3) of section 4 has been refunded after the 24th day of January, 1962, and such amount would not have been liable to be refunded if this Act had been in force on date of the refund, the person to whom the refund was made shall pay the amount so refunded to the credit of the Government in any Government treasury on or before the 16th day of April, 1964, and, where such amount is not so paid, the amount may be recovered from him as an arrear of land revenue under the Revenue Recovery Act for the time being in force.
" According to the appellants, the label given to the tax imposed by the charging section was only a cloak to disguise its real nature of being an excise duty.
The State Legislature, as such, was stated to be in competent to levey excise duty on tobacco.
It was also stated that the provisions of the Act were violative of the provisions of article 301 of the Constitution.
In the meanwhile, a single Judge of the High Court dismissed on July 20, 1964 original petition No. 1268 of 1963 which had been filed by the appellants.
The appellants thereupon filed appeal before a Division Bench of the High Court against the judgment of the learned single Judge.
The learned Judges of the Division Bench allowed original petition No. 963 of 1964 and quashed demand notice dated January 21 1964 issued by the State asking for refund of Rs.73,500.
The High Court relied upon a decision of this Court in the case of Kalyani Stores vs state of Orissa(1) and held that in the absence of any production or manufacture of tobacco inside the appellant State it was not competent for the State Legislature to impose a take on tobacco imported from outside the State.
The provisions of Act 9 of 1964 were held to violate article 301 of the Constitution and not protected by article 304.
The learned Judges also set aside the judgment (1) ; 697 Of the single Judge and allowed the appeals against that judgment in original petition No. 1268 of 1963.
The State of Kerala thereafter came up in appeal to this Court.
As per judgment dated July 30, 1969 reported in (1970)1 SCR 700 this Court held that the High Court had not correctly appreciated the import of the decision in Kalyani Stores (supra).
It was held that only such restrictions or impediments which directly and immediately impeded the free flow of trade, commerce and intercourse fell within the prohibition imposed by article 301.
This Court further observed that unless the High Court first came to the finding whether or not there was the infringement of the guarantee under article 301 of the Constitution, the further question as to whether the statute was saved under article 304 (b) did not arise.
The case was accordingly sent back to the High Court with the direction to take further affidavits in the matter.
The Court left it open to the parties to argue as to whether the levy in question was in substance a duty of excise and as such whether it was not competent for the State Legislature to enact the provisions in question.
After remand affidavits were filed on behalf of the appellants and the respondent State.
The learned Judges of the High Court as per judgment under appeal gave the following findings: "(1) The levy being in respect of goods produced out side the State, it cannot be, and is not, an excise duty falling within entry 84 of the Union List.
(2) The tax is on tobacco, an article of luxury, consumed within the taxing territory, levied on the occasion of its stocking and vending by the importers into the taxing territory.
It clearly answers the description of luxury tax falling within entry 62 of the State List.
(3) There being no competing internal goods, the mere fact that the levy is only on imported goods can only have, like any other tax, the economic effect of reducing the demand by reason of increasing the price.
The consequent diminution in the quantity of goods imported into the taxing territory is too remote an effect to be a direct impediment to the free flow of trade offending article 301 of the constitution.
(4) However, the payment of the tax in the shape of a licence fee being a condition precedent to bringing the goods into the taxing territory, there would appear to be a direct impediment on the free flow of goods and therefore of trade into that territory notwithstanding that the taxable event is not the movement of the goods but the stocking after completing their journey and reaching their destination, the levy in advance being only for convenience of collection.
(5) Even assuming that the levy offends article 301, it is saved by article 304(b) being a reasonable tax levied in the 698 public interest, the condition in the proviso thereto being satisfied by the assent of the President in view of article 255.
(6) The guarantee in article 301 and the saving in article 304(b) being in respect of both inter State and inter State trade, the fact that the taxing territory is only a part of the State is of no consequence.
" On behalf of the appellants, their learned counsel Mr. Krishnamurthy Iyer has at the outset contended that the question as to whether the levy of the licence fee upon the appellants constitutes excise duty is concluded by the decision of this Court of January 24, 1962 and the same operates as res judicata.
As against that, Mr. Patel on behalf of the respondent State submits that the question decided by this Court on January 24, 1962 was different from that which arises in these appeals and that the said decision does not operate as res judicata.
The above submission of Mr. Patel, in our opinion, is wellfounded.
What was decided by this Court in its judgment dated January 24, 1962 was that the Cochin Tobacco Act r and the similar Travancore Act taken along with the rules framed under those Acts by the respective Diwans were in substance law corresponding to the .
The Cochin Tobacco Act and the similar Travancore Act, it was further held, stood repealed on April 1, 1950 by virtue of section 13(2) of the Finance Act, 1950.
So far as the rules are concerned which were issued on August 3, 1950 and January 25, 1951, this Court held that as the parent Acts under which those rules were issued stood repealed on April 1, 1950, there would be no power in the State Government thereafter to frame new rules in August 1950 and January 1951 for there would be no law to support the new rules.
The above question does not arise for determination in these appeals before us.
What we are concerned with is the constitutional validity of the Kerala Act 9 of 1964.
This Act was enacted subsequent to the above decision of this Court rendered on January 24, 1962.
No question relating to the validity of the above mentioned Act in the very nature of things could arise at the time of the earlier decision in 1962.
We, therefore, are of the view that the judgment dated January 24, 1962 of this Court does not operate as res judicate regarding the points of controversy with which we are concerned in these appeals.
It has next been argued on behalf of the appellants that the levy for the licence fee for stocking and vending of tobacco, even though described as luxury tax in charging section 3 of the Act, is in reality and substance an excise duty on tobacco.
Excise duty on tobacco under entry 84 of List I of the Seventh Schedule to the Constitution can only be levied by Parliament and, as such, according to the learned counsel for the appellants, the State Legislature was not competent to enact the impugned Act 9 of 1964.
This; contention.
in our opinion, is equally devoid of force.
Excise 699 duty, it is now well settled, is a tax on articles produced or manufactured in the taxing country.
Generally speaking, the tax is on the manufacturer or the producer, yet laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production [see p. 750 51 of the judgment of this Court delivered on January 24, 1962 in the case between these very parties, reported in (1962) Supp.
2 SCR 741].
The fact that the levy of excise duty is in the form of licence fee would not detract from the fact that the levy relates to excise duty.
It is, however, essential that such levy should be linked with production or manufacture of the excisable article.
The recovery of licence fee in such an event would be one of the modes of levy of the excise duty.
Where, however, the levy imposed or tax has no nexus with the manufacture or production of an article, the impost or tax cannot be regarded to be one in the nature of excise duty.
In the light of what has been stated above, we may now turn to the provisions of the impugned Act 9 of 1964.
The charging section 3 of this Act creates a liability for payment of luxury tax on the stocking and vending of tobacco.
There is no provision of this Act which is concerned with production or manufacture of tobacco or which links the tax under its provisions with the manufacture or production of tobacco.
The same is the position of the rules issued on August 3, 1950 and January 25, 1951 and Mr. Krishnamurthy Iyer on behalf of the appellants has frankly conceded that those rules are in no way concerned with the production or manufacture of tobacco.
It would, therefore follow that the levy of tax contemplated by the provisions of section 3 of the Act has nothing to do with the manufacture or production of tobacco and, as such, cannot be deemed to be in the nature of excise duty.
Argument that the provisions of the Act fall under entry 84 of List I of the Seventh Schedule to the Constitution must, therefore, be held to be bereft of force.
The next argument which has been advanced on behalf of the appellants is that the tax on the vending and stocking of tobacco cannot be considered to be luxury tax, as contemplated by entry 62 of List II of the Seventh Schedule to the Constitution.
According to that entry, the State Legislatures can make laws in respect of "taxes on luxuries, including taxes on entertainments, amusements, betting and gambling".
Question, therefore, arises as to whether tobacco can be considered to be an article of luxury.
The word "luxury" in the above context has not been used in the sense of something pertaining to the exclusive preserve of the rich.
The fact that the use of an article is popular among the poor sections of the population would not detract from its description or nature of being an article of luxury.
The connotation of the word "luxury" is something which conduces enjoyment over and above the necessaries of life.
It denotes something which is superfluous and not indispensable and to which we take with a view to enjoy, amuse or entertain ourselves.
An expenditure on something which is in excess of what is 700 required for economic and personal well being would be expenditure on Luxury although the expenditure may be of a nature which is incurred by a large number of people, including those not economically well off.
According to Encyclopaedia Britanica, luxury tax is "a tax on commodities or services that are considered to be luxuries rather than necessities.
Modern examples are taxes levied on the purchase of jewellery, perfume and tobacco".
It has further been n said: "In the 19th and 20th centuries increased taxes have been placed on private expenditure upon alcohol, tobacco, entertainment and automobiles.
Such expenditure is superfluous in the sense that a large part of it may be said to be in excess of what is required for economic efficiency and personal well being, although the expenditure affects large numbers of people." In Re The Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938(1) Gwyer CJ.
while dealing with excise duty described spirits, beer and tobacco as articles of luxuries.
It is no doubt true that for those who have been lured by the charms and blandishments of Lady Nicotine there are few things which are so soothing to the distraught nerves and so entertaining as tobacco and its manifold preparations.
One of them has gone to the extent of saying that he who doth not smoke hath either known no great griefs, or refuseth himself the softest consolation, next to that which comes from heaven (Bulwer Lytton, What will He do with It ?).
Charles Lamb in "A Farewell to Tobacco" observes: "For thy sake, tobacco, I would do anything but die".
The fact all the same remains that the use of tobacco has been found to have deleterious effect upon health and a tax on tobacco has been recognized as a tax in the nature of a luxury tax.
One of the earliest indictments of tobacco is in Robert Burton 's Anatomy of Melancholy wherein he says: "It 's a plague, a mischief, a violent purger of goods, lands, health, hellish, devilish, and damned tobacco, the ruin and overthrow of body and soul.
" Another indictment is from James I of England (Counterblaste to Tobacco) when it is said: "A custom (smoking) loathsome to the eye, harmful to the brain, dangerous to the lungs, and in the black stinking fume thereof, nearest resembling the horrible Stygian smoke of the pit that is bottomless." The taxation of the objects or procedures of luxurious consumption has aimed at two purposes, on the surface contradictory: the suppressing or limiting of this consumption and the deriving of a public (1) 701 income from it.
On closer inspection a good deal of this contradiction vanishes when it is seen that prohibition and taxation of luxury tend equally to fix certain levels and standards of living, as against economic and social progress, which is tending to "level" such differences (see page 634 of the Encyclopaedia of the Social Sciences Volumes IX X, 14th Printing).
It may be added that there is nothing static about what constitutes an article of luxury.
The Luxuries of yesterday can well become the necessities of today.
Likewise, what constitutes necessity for citizens of one country or for those living in a particular climate may well be looked upon as an item of luxury for the nationals of another country or for those living in a different climate.
A number of factors may have to be taken into account in adjudging a commodity as an article of luxury.
Any difficulty which may arise in borderline case would not be faced when we are dealing with an article like tobacco, which has been recognised to be an article of luxury and is harmful to health.
The learned Judges of the High Court were of the opinion that the levy of tax in question was violative of article 301 of the constitution, according to which subject to the provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free.
The learned Judges in this connection took the view that the levy of tax as a condition preceding to the entry of goods into a place directly impeded the flow of trade to that place.
The conclusion arrived at by the High Court in this respect, in our opinion, was correct and sound.
The appellants were A class licensees.
According to rule 16 of the rules issued on January 25, 1951, A class licensees shall be entitled to purchase tobacco from any dealer within or without the State without any quantitative restriction.
This class of licensees could sell only to other A class licensees or class licensees.
It was also mentioned in that rule that the licence fee would be realised only for the quantities brought in from outside.
Perusal of the rules shows that it was imperative for the A class licensees to pay the licence fee in advance before they could bring tobacco within the taxable territory.
We agree with the learned Judges of the High Court that such levy directly impedes the free flow of trade and as such is violative of article 301 of the Constitution.
The next question which arises for consideration is whether the levy of tax is protected by article 304(b) of the Constitution.
Article 3041b) reads as under `"304.
Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law (a) . . . . . (b) impose such reasonable restrictions on the freedom of trade.
commerce or intercourse with or within that State as may be required in the public interest; 702 Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.
" We may observe that the requirement of the proviso regarding the sanction of the President has been satisfied.
It is no doubt true that the assent of the President was given subsequent to the passing of the Bill by the legislature but that fact would not affect the validity of the impugned Act in view of the provisions of article 255 of the Constitution.
Clause (b) of article 304 empowers the Legislature of a State notwithstanding anything in article 301 or article 303 but subject to the sanction of the President to impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest.
Article 302 confers power upon Parliament to impose by law such restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest.
Perusal of article 302 and article 304 shows that while Parliament can impose restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest, so far as the State Legislatures are concerned, restrictions must satisfy two requirements, firstly, they must be in the public interest and, secondly the restrictions should be reasonable.
Shall J. speaking for the majority of the Constitution Bench in the case of State of Madras vs N. K. Nataraja Mudaliar(1) observed that the exercise of the power to tax may normally be presumed to be in the public interest.
The above observations though made in the context of article 302 have equal relevance under article 304.
Not much argument is needed to show that the power to tax is essential for the maintenance of any governmental system.
Taxes are levied usually for the obvious purpose of raising revenue.
Taxation is also resorted to as a form of regulation.
In the words of Justice Stone, "every tax is in some measure regulatory" Sonzinky vs United State(2)1.
According to Roy Blough, the taxing power "becomes an instrument available to government for accomplishing objectives other than raising revenues" [The Federal Taxing Process, page 410 (Quoted on page 263 of American Constitutional Law by Trsolini and Shapiro, 3rd Ed.].
To some extent every tax imposes an economic impediment to the activity taxed as compared with others not taxed, but that fact by itself would not make it unreasonable.
It is well settled that when power is conferred upon the legislature to levy tax, that power must be widely construed; it must include the power to impose a tax and select the articles or commodities for the exercise of such power; it must likewise include the power to fix the rate and prescribe the machinery for the recovery of tax.
This power also gives jurisdiction to the legislature to make such provisions as, in its (1) ; (2) ; (1937) 703 Opinion, would be necessary to prevent the evasion of the tax.
As observed by Chief Justice Marshall in M 'Culloch vs Maryland (1), "the power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it".
There can also be no doubt that the law of taxation in the ultimate analysis is the result of the balancing of several complex considerations.
The legislatures have a wide discretion in the matter.
In considering the question as to whether the restriction is reasonable in public interest, the court will have to balance the importance of freedom of trade as against the requirement of public interest.
Article 304(b) necessarily postulates that considerations of public interest may require and justify the imposition of restrictions C` on the freedom of trade provided they are reasonable.
In determining the reasonableness of the restriction, we shall have to bear in mind the importance of freedom of trade and the requirement of public interest.
It is a question of weighing one relevant consideration against another in the context of the larger public interest [see Khyerban Tea Co. Ltd. vs State of Madras(2)].
We agree with Mr. Krishnamurthy Iyer that the onus of showing that the restrictions on the freedom of trade, commerce or intercourse in the public interest are reasonable, is upon the State.
It is also true that no effort was made in the affidavit filed on behalf of the State in this case to show as to how the restrictions were reasonable, but that fact would not necessarily lead the court to hold that the restrictions are unreasonable.
If the court on consideration of the totality of facts finds that the restrictions are reasonable, the court would uphold the same in spite of lack of details in the affidavit filed on behalf of the State.
In judging the question of reasonableness of restriction in the present case, we must bear in mind that the levy of luxury tax relates to tobacco, the consumption of which involves health hazard.
Regulation of the sale and stocking of an article like tobacco which has a health hazard and is considered to be an article of luxury by imposing a licence fee for the same, in our opinion, is a permissible restriction in public interest within article 304(b) of the Constitution.
The material on record shows that except for cultivation of tobacco on experimental basis, no tobacco is grown in the area with which we are concerned.
The levy of luxury tax is bound to result in raising the price of tobacco in the area of erstwhile States of Travancore and Cochin.
Once of the likely effects of the enhancement of the price of a commodity entailing health hazards is to lower its consumption.
The fact that there is no commercial production of tobacco in the area with which we are concerned would show that there is no discrimination between tobacco brought from outside that area and the locally grown tobacco because in fact there is no tobacco of the latter category, except that grown on experimental basis.
4 Ed.579, 607.
(2) [1964] 5 S.C.R.9 75.
704 Argument has been advanced on behalf of the appellants that the provisions of the Act do not apply to the entire State of Kerala but apply only to those areas which were parts of erstwhile States of Travancore and Cochin.
The restriction of the operation of the Act to only a part of the area of the State would show, it is urged, that the restriction is unreasonable.
This contention, in our opinion, is not well founded.
The fact that the operation of the Act is confined to a particular area and does not extend to the entire State is due to historical reasons.
The object of the Act was to validate the recoveries already made.
In the case of Nazeeria Motor Service etc.
vs State of Andhra Pradesh & Anr.(1), the appellants, who were motor transport operators, challenged the increase in surcharge of the fares and freights imposed by the Andhra Pradesh Motor Vehicles (Taxation of Passengers and Goods) Amendment and Validation S Act, 1961.
It was urged that the Act fell within the mischief of article 301 of the Constitution and was not protected by article 304(b) and article 19(1)(f) of the Constitution.
Contention was also advanced that the provisions of the said Act were violative of article 14 of the Constitution.
In support of the above contentions, reference was made to the fact that the Act had been made applicable to the Andhra area and had not been made applicable to the Telengana area.
Some other grounds were also relied upon to challenge the validity of the Act.
This Court upheld the validity of the Act and repelled the contentions.
No doubt this Court referred to the circumstance that the levy of tax was confined only to the Andhra area and was not operative in the Telengana area in the context of the argument that the Act was violative of article 14 of the Constitution, the fact all the same remains that one of the grounds advanced with a view to assail the validity of the Act was that its provisions were not applicable to the Telengana area.
We are unable to accede to the submission that this Court lost sight of the fact that the Act was not applicable to the Telengana area in holding that its provisions were protected by article 304(b) of the Constitution.
It is also true that the levy of tax relates only to the period from August 17, 1950 to December 31, 1957, but that too was due to the historical reason that the licence fee had been realised only during that period and the object of the impugned Act was to validate the recovery already made.
Argument has also been advanced by Mr. Krishnamurthy Iyer that the impugned Act is a colourable piece of legislation because what is sought to be done is to validate the levy made under provisions of law which were found to have been repealed.
It is further pointed out that those provisions of law were found by this Court to be similar to the provisions of the Central Execises and Salt Act and as such, those provisions were beyond the competence of a State Legislature.
Any levy made under those provisions cannot, according to the learned counsel, be validated by the State Legislature.
The above argument has a seeming plausibility, but, on deeper examination, we find it to be not tenable.
It is no doubt true, as stated by (1) ; 705 this Court in the case of Jaora Sugar Mills (P) Ltd. vs State of Madhya Pradesh & Ors. (1) that when an Act passed by a State Legislature is invalid on the ground that the State Legislature did not have legislative competence to deal with the topics covered by it, in that event even Parliament cannot validate such an Act, because the effect of such attempted validation, in substance, would be to confer legislative competence on the State Legislature in regard to a field or topic which, by the relevant provisions of the schedules to the Constitution, is outside its jurisdiction.
Where a topic is not included within the relevant List dealing with the legislative competence of the State Legislature, Parliament, by making a law cannot attempt to confer such legislative competence on the State Legislatures.
The above principle would, however, have no application where, as in the present case, what is sought to be done is to validate the recovery of licence fee for stocking and vending of tobacco.
The impugned provisions under which that levy is sought to be made with a retrospective effect have nothing to do, as already pointed out above, with production and manufacture of tobacco.
The levy is sought to be made as luxury tax which is within the competence of the State Legislature and not as excise duty which is beyond the legislative competence of the State Legislature.
If the levy in question can be justified under a provision which is within the legislative competence of the State Legislature, the levy shall be held to be validly imposed and cannot be considered to be impermissible.
Where a challenge to the validity of a legal enactment is made on the ground that it is a colourable piece of legislation, what has to be proved to the satisfaction of the court is that though the Act ostensibly is within the legislative competence of the legislature in question, in substance and reality it covers field which is outside its legislative competence.
In the present case we find that in enacting the impugned provisions, the State Legislature, as already pointed out above, has exercised a power of levying luxury tax in the shape of licence fee on the vend and stocking of tobacco.
The enactment of a law for levying luxury tax is unquestionably within the legislative competence of the State Legislature in view of entry 62 in List II of the Seventh Schedule to the Constitution.
As such, it cannot be said that the impugned Act is a colourable piece of legislation.
In the case of Jaora Sugar Mills (P) Ltd. access was levied under the Madhya Pradesh Sugarcane (Regulation of Supply and Purchase) Act, 1958 on sugarcane.
This Court in the earlier case of Diamond Sugar Mills(2) had held that such a levy was not valid.
Following the above decision the Madhya Pradesh High Court struck down section 23 which was the charging section of the Madhya Pradesh Sugarcane (Regulation of Supply and Purchase) Act, 1958.
There were similar Acts in several other States which suffered from the same infirmity and to meet that situation, Parliament passed the .
The Act made valid by section 3 all the assessments and collections made before its commencement under the various State Acts and laid down that all the provisions of the (1) (2) ; 706 State Acts as well as the relevant notifications, rules, etc., made under the State Acts would be treated as part of section 3.
It was further provided that the said section shall be deemed to have existed at all material times when the cess was imposed, assessed and collected under the State Acts.
The appellant, a sugar factory, was asked to pay the cess for the years 1959 60 and 1960 61.
The appellant challenged the levy.
The High Court having dismissed the petition, the appellant came to this Court.
Among the various contentions which were advanced on behalf of the appellant in the case were: (1) What the validation of the Act had done was to attempt to cure the legislative incompetence of the State Legislatures by validating State Acts which were invalid on the ground of absence of legislative competence in the respective State Legislatures; (2) Parliament lrad passed the Act in question not for the purpose of levying a cess of its own, but for the purpose of enabling the respective States to retain the amounts which they had illegally collected.
The Act was, therefore, a colourable piece of legislation; and (3) The Act had not been passed for the purposes of the Union of India and the recoveries of cesses which were retrospectively authorised by it were not likely to go into the Consolidated Fund of India.
The Constitution Bench of this Court speaking through Gajendragadkar CJ.
repelled all the above contentions.
It was held by this Court that if collections are made under statutory provision which are invalid because they deal with a topic outside the legislative competence of the State Legislature, the Parliament can in exercise of its undoubted legislative competence, pass a law retrospectively validating the said collections by converting their character into collections made under its own statute operating retrospectively.
So far as the present case is concerned, we have already pointed out above that it was within the competence of the State Legislature to make a law in respect of luxury tax and to recover that tax in the shape of licence fee for vend and stocking of tobacco.
The State Legislature has sought to validate the recovery of the amounts already made by treating those amounts as luxury tax.
The fact that the validation of the levy entailed converting the character of the collection from an impermissible excise duty into permissible luxury tax would not render it unconstitutional.
The only conditions are that the levy should be of a nature which can answer to the description of luxury tax and that the State Legislature should be competent to enact a law for recovery of luxury tax.
Both these conditions as stated above are satisfied.
As regards the power of the legislature to give retrospective operation to a tax legislation, we may also refer to the case of Rai Ramkrishna & Ors.
vs State of Bihar(1) wherein it was held that where the legislature can make a valid law, it can provide not only for the prospective operation of the material provisions of the said law but can also provide for the retrospective operation of the said provisions.
The legislative power was held to include the subsidiary or the auxiliary power to validate law which had been found to be `H invalid.
It was also observed that in judging the reasonableness of the retrospective operation of law for the purpose of article 304(b), (1) ; 707 The test of length of time covered by the retrospective operation could nob by itself be treated as decisive.
Again, in the case of Epari Chinna Krishna Moorthy, Proprietor, Epari Chinna Moorthy & Sons, Berhampur, Orissa vs State of Orissa(1) the Constitution Bench of this Court repelled the argument that a legislation should be held to be invalid because its retrospective operation might operate harshly in some cases.
As a result of the above, we would hold that the impugned provisions are protected by article 304(b) of the Constitution.
Lastly, it has been argued that section 6 of the impugned Act is invalid because it provides for payment of an amount which had been refunded in pursuance of the order of this Court.
Section 6 is thus stated to be an encroachment by the legislature upon a judicial field.
This contention, in our opinion, is bereft of force.
If a provision regarding the levy of luxury tax is within the competence of the State Legislature, the said Legislature would be well within its competence to enact a law for recovery of an amount which, though already refunded to a party, partakes of the nature of luxury tax in the light of that law.
If an amount can answer to the description of luxury tax, there would be no legal impediment to recovering the same as luxury tax, even though initially it was recovered or sought to be recovered as something different from luxury tax.
As a result of the above, we dismiss these appeals, but, in the circumstances, leave the parties to bear their own costs.
P.B.R Appeals dismissed.

dataset_name: IN-Abs

summary/full:
The Finance Act 1950 extended the Central Excise and Salt Act, 1944 to the Part State of ' Travancore Cochin and repealed the Cochin Tobacco Act, 1909 and the Tobacco Act (Travancore Act I of 1087).
Thereafter a system of licensing was introduced by which the licensees were required to pay a specified fee in respect of tobacco imported into the State.
The appellants challenged unsuccessfully in the High Court the collection of the licence fee for the period between August 1950 and December 1957.
The Act and rules having been declared by this Court as invalid ab initio, the State refunded a portion of the licence fee collected.
but the appellants filed writ petitions claiming refund of the remainder of the licence fee paid by them.
During the pendency of the writ petitions the Kerala Luxury Tax on Tobacco (Validation) Act of 1964 (Act 9 of 1964) was passed by the State legislature to provide for the levy of a luxury tax on tobacco and validate the levy and collection of fees for licences for the vend and stocking of tobacco for the period between August 17, 1950 and December 31, 1957 and it received the assent of the President.
The appellants then challenged the validity of the 1964 Act, but the State on the other hand demanded payment of the part of the fee earlier refunded to the parties The validity of the demand notice was questioned by the appellants on the question of validity of the 1964 Act, the High Court held that (1) the levy being in respect of goods produced outside the State, was not an excise duty falling within Entry 84 of the Union List; (2) the tax clearly answers the description of luxury tax falling within entry 62 of State, List; (3) however, the payment of the tax being a condition precedent to the bringing of the goods into the taxing territory, it was a direct impediment on the free flow of goods, and (4) even so, it is saved by Article 304(b) being n reason able tax levied in public interest.
Dismissing the appeals, ^ HELD.
(1) The judgment of this Court in A. B. Abdullkadir & ors.
vs The State of Kerala & Anr.
[1962] Supp. 2 S.C.R. 741 does not operate as res.
judicata regarding the points in controversy in these appeals.
What was held in that case was that the Cochin Tobacco Act and the similar Travancore Act taken along with the rules framed under those Acts were in substance law corresponding to the Central Excise and Salt Act.
The Cochin Tobacco Act and the similar Travancore Act stood repealed on April 1, 1950 and there would be no power in the State Government thereafter to frame new rules in August 1950 and January 1951 for there would be no law to support the new rules.
In the instant case what is questioned is the constitutional validity of Act 9 of 1964 which was enacted subsequent to the above decision of this Court.
[698 C G] (2)(a) The argument that the provisions of the Act fell under Entry 84 of List I of the Seventh Schedule is bereft of force.
The liability to pay the tax is on stocking and vending of tobacco.
There is no provision in the Act which is concerned with production or manufacture of tobacco or which links the tax under its provisions with the manufacture or production of tobacco.
[699 D E] 691 (b) Excise duty is a tax on articles produced or manufactured in the taxing country.
Generally speaking, the tax is on the manufacturer or producer, yet laws are to be found which impose a duty of excise at stages subsequent to the manufacture or production.
[698H, 699A] A. B. Abdulkadir & Ors vs The State of Kerala & Anr.
[1962] Supp. 2 S.C.R. 741 referred to.
(c) Where, however, the levy imposed or tax has no nexus with the manufacture or production of an article, the impost or tax cannot be regarded to be B one in the nature of excise duty.
[699 B C] (3) The word `luxury ' has not been used in the sense of something pertaining to the exclusive preserve of ' the rich.
The connotation of the word `luxury ' is something which conduces enjoyment over and above the necessaries of life.
There is nothing static about what constitutes an article of luxury.
The luxuries of yesterday could well become the necessities of today.
Likewise, what constitutes necessity for citizens of one country or for those living in a particular climate may well be looked upon as an items of luxury for the nationals of another country or for those living in a different climate.
A number of factors may have to be taken into account in adjudging the commodity as an article of luxury.
[699 G, 701B] (4) (a) The High Court was right in its view that the levy of tax was violative of Article 301 of the Constitution.
But while the Parliament can impose restrictions on the freedom of trade, commerce or intercourse between one State and another or within any part of the territory of India as may be required in the public interest, so far as the State legislatures are concerned, restrictions must satisfy two requirements, firstly they must be in public interest, and secondly, the restrictions should be reasonable.
State of Madras vs N. K. Nataraja Mudaliar ; referred to, (b) To some extent every tax imposes an economic impediment to the activity taxed as compared with others not taxed.
But that fact by itself would, not make it unreasonable.
The law of taxation in the ultimate analysis is the result of ' the balancing of several complex considerations.
The legislatures have a wide discretion in the matter.
[702G, 703 AB] (c) In considering the question whether the restriction is reasonable in public interest the Court will have to balance the importance of freedom of trade as against the requirement of public interest.
[703 B] Khyerban Tea Co. Ltd. vs State of Madras [1964] S S.C.R. 975 referred to.
(d) The onus of showing that the restrictions on the freedom of trade, commerce or intercourse in the public interest are reasonable is upon the State.
[703D] In the present case the levy of luxury tax relates to tobacco the consumption of which is a health hazard.
Regulation of the sale and stocking of such an article and treating it as an article of luxury by imposing a licence fee is a permissible restriction in public interest within article 304(b) of the Constition.
[703 F] (e) The fact that the operation of the Act was confined to a particular area, and did not extend to the entire State was due to historical reasons.
The object of the Act was to validate the recoveries already made.
[704 B] Nazeeria Motor Service etc.
vs State of Andhra Pradesh (f) The levy of tax is protected by Article 304(b) of the Constitution as the requirement of the proviso regarding the sanction of the President has been satisfied.
Though the assent of the President was given subsequent to the 692 passing or the Bill by the State Legislature, that fact would not affect the validity of the impugned Act in view of the provisions of Article 255 of the Constitution.
[702 AB] (5)(a) Where a topic is not included within the relevant List dealing with the legislative competence of the State Legislature, Parliament, by making a law cannot attempt to confer such legislative competence on the State legislatures This principle would, however, have no application where what is sought to be done is to validate the recovery of licence fee for stocking and vending of tobacco.
The impugned provisions have nothing to do with the production and manufacture of tobacco.
The levy is sought to be made as luxury to which is within the competence of State legislature and not as excise duty which is beyond the legislative competence of the State legislature.
If the levy in question could be justified under a provision which is within the legislative competent of the State legislature, the levy shall be held to be validly imposed and cannot be considered to be impermissible.
[705 B D] (b) The impugned Act cannot be said to be a colourable piece of legislation.
Where a challenge to the validity of a legal enactment is made on the ground that it is a colourable piece of legislation what is to be proved is that though the Act ostensibly is within the legislative competence of the legislature in substance and reality it covers a field which is outside its legislative competence.
In the present case, in enacting the impugned provisions the Slate legislature has exercised power of levying luxury tax in the shape of licence fee on the vend and stocking of tobacco.
The enactment of a law for levying luxury tax is unquestionably within the legislative competence of the State legislature in view of Entry 62 in List II of the Seventh Schedule to the Constitution.
[705 E F] Jaora Sugar Mills (P) Ltd. vs State of Madhya Pradesh & ORS.
and Diamond Sugar Mills Ltd. & Anr.
vs The State of Uttar Pradesh & Anr.
; distinguished.
(c) The State legislature has sought to validate the recovery of the amounts already made by treating those amounts as luxury tax.
The fact that the validation of the levy entailed converting the character of the collection from an impermissible excise duty into permissible luxury tax would not make it an Inconstitutional.
The only conditions are that the levy should be of a nature which can answer to the description of luxury tax and that the State legislature should be competent to enact a law for recovery of luxury tax.
Both these conditions are satisfied.
[706 FG] (6)(a) Where the State legislature can make valid law it can provide not only for the prospective operation of the material provisions of the law but can also provide for the retrospective operation of the provisions.
[706 G] (b) In judging the reasonableness of the retrospective operation of law for the purpose of Article 304(b), the test of length of time covered by the retrospective operation could not by itself be treated as decisive.
[706H, 707A] (c) It is not correct to say that the legislation should be held to be invalid because its retrospective operation might operate harshly in some cases.
[707A] Rai Ramkrishna & Ors.
vs State of Bihar [1964] 1 S.C.R. 897 and Epari Chinnaa Krishna Moorthy, Proprietor, Epari Chinna Moorthy & Sons.
Berhampur, Orissa vs State of Orissa [964] 7 S.C.R. 185 applied.