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Judgment
Ramanujam, J.—The Petitioner in both the writ petitions is the same. The Petitioner-company is a manufacturer of aromatic chemicals,
synthetic musks and industrial perfume compounds having foreign colloboration with Messrs. Meschemeijer Aromatic, Amsterdam, Holland. For
their manufacturing purpose, the company needs special denatured spirit which is classified as industrial alcohol. The special denatured spirit is
prepared by adding C.P. Menthol, a very highly poisonous chemical to the spirit to take special denatured spirit which is unfit for human
consumption. As a matter of fact, special denatured spirit which is used for the Petitioner''s manufacturing purposes is highly poisonous and if
consumed, it will prove instantneously fatal.
In exercise of the powers conferred by Sections 4, 16, 17, 18, 13(a), 21 and 34 of the Madras Prohibition Act, the State Government had
issued the Madras Denatured Spirit, Methyl Alcohol and Varnish (French Polish) Rules, 1959. Under the said rules persons desiring to have
possession and use of denatured spirit, methylated spirit or methyl alcohol to manufacture specified commodities had to obtain a D.L.2 licence
from the Collector. Initially no licence fee was chargeable for such a licence. However, from April, 1964, the Government, introduced a licence fee
of Rs. 15 per year. This continued upto 31st March, 1969. In March, 1970, the Government amended the aforesaid rules by providing for a
higher licence fee of Rs. 20 from 1st April, 1969. This was subsequently increased to Rs. 100 from 1st April 1970 which continued upto 31st
March, 1973. By G.O. Ms. No. 59, Excise and Prohibition Department dated 24th February 1973, the Government introduced a slab rate of
licence fee for form D.L. 2 licence. As per the said slab rate system, the rates areas follows.--
Upto 500 litres in the cases of Rs.25
educational institutions ....
Upto 500 litres in cases other than Rs.50
educational institutions ....
501 to 1,000 litres .... Rs.100
1001 to 5,000 litres .... Rs.200
5,001 to 7,500 litres .... Rs.300
7,501 to 10,000 litres .... Rs.500
10,001 to 20, 000 litres .... Rs.1,000
20,001 to 40, 000 litres .... Rs.2,000
40,001 to 80,000 litres .... Rs.3,000
80,001 to 1,00,000 litres .... Rs.4,000
In excess of 1 lakh litres .... Rs.5,000
(for each slab of 1 lakh litres in excess of the 1st one lakh litres).
Since the Petitioner came under the category of industries using between 40,000 to 80,000 litres, the licence fee payable by it came to Rs.
3,000. The Petitioner paid the said licence fee under protest as they had to obtain renewal of licence for carrying on their manufacture. It had,
however, challenged the said levy of licence fee as being void and illegal on the following grounds: (i) that the Tamil Nadu Denatured Spirit,
Mythyl, Alcohol and Varnish (French Polish) Rules, 1959, which were made under the Madras Prohibition Act ceased to be in force on the
suspension of the Prohibition Act, 1937 and that, therefore no licence fee could be levied under the said rules unless the said rules had been
reframed after the Prohibition Act was restored; (ii) that in any event, the State Legislature acting under Entry 8, of list II of Schedule VII of the
Constitution had power to control only intoxicating liquors and not alcohol unfit for human consumption and, therefore, it had no legislative
competence to demand a licence fee in respect of industrial alcohol which is not fit for human consumption (iii) that the definition liquor in Section
2(16) of the Tamil Nadu Excise Act, 1971 in so far as it includes alcohol not fit for human consumption h beyond the legislative competence of the
State Legislature under Entry 51, of List II of Schedule VII: (iv) that the Tamil Nadu Excise Act, 1971 places unreasonable restriction on the
Petitioner''s trade by Insisting on a licence fee for possession and use of industrial alcohol which is not fit for human consumption, and (v) that in
any event, the levy of licence fee at a slab rate unrelated to the services rendered by the Government is harsh and oppressive and cannot, in any
event, be upheld by this Court.
In the counter-affidavit filed by the Respondents, they had stated that though the Prohibition Act has been suspended in 1971, all the rules and
notifications issued under that Act had been kept alive so far as they are consistent with the provisions of the Tamil Nadu Excise Act, 1971 by
Section 83 of that Act and that, therefore, the Government had the power to enhance the licence fee by amending the said rules. According to the
Respondents under the provisions of the Madras Denatured Spirit Methyl Alcohol and Varnish (French Polish) Rules, 1959 read with Section 27
of the Tamil Nadu Excise Act, 1971, a licence in Form D.L.2 should be obtained on payment of the prescribed annual licence fee for possession
and use of special denatured sprit in the manufacture of specified commodities other than varnish and the Petitioner being a manufacturer using the
special denaturedspirit is bound to take out a licence on payment of the annual licence fee prescribed under the said rules. As regards the
Petitioner''s connection that the State Government has no legislative competence to either control or demand a licaence in respect of industrial
alcohol which is not fit for human consumption, the Respondents concede that the State Government had the power to levy excise duty in respect
of alcoholic liquors for human consumption only under centry 51, of list II of the Seventh Schedule, hut state that though the industrial alcohol is not
an excisable article under the Tamil Nadu Excise Act, 1971, it will come under the definition of liquor contained in Section 2(16) of the Act and
that, therefore the State Legislature has the competence to control and demand a licence for the possession and use of industrial alcohol. They
state that the production, manufacture, possession, import, export, transport, purchase and sale or use of all kinds of liquor except intoxicating
drugs irrespective of the fact whether they are fit for humnan consumption or not are governed and regulated by the excise laws enacted by the
State Legislature, that the Tamil Nadu Excise Act, 1971 empowers the State Government to levy a licencs fee on all kinds of liquor except
intoxicating drugs and that the levy of licence fee for possession and use of industrial alcohol is legal, even though it is not one of the excisable
goods under the Tamil Nadu Excise Act, 1971.
Dealing with the Petitioner''s contention that the State Legislature cannot make a non-excisable item such as industrial alcohol a subject matter of
the Tamil Nadu Excise and in doing so, the State Legislature has acted beyond its power; and that it is a colourable exercise of power, the
Respondent''s case is that, no excise duty is in fact levied on denatured sprit, methylated sprit and methyl alcohol and that for a proper enforcement
of the duty on liquor fit for human consumption under excise law the State Legislature is entitled to levy of licence fee for possession and use of
such industrial alcohol. The Respondents also stated that the Government after careful consideration increased the annual licence fee for licences in
Form D.L. 2 with reference to the quantity of sprits to holders of licence in Form D.L.2 by introducing a slab rate system on the basis of the
quantity used by the licensee in its manufacture, that the introduction of slab rate system cannot be legally questioned, that the increase in licence
fee is not arbitrary as contended by the Petitioner and that the quantity of licence fee has been fixed with reference to the services rendered by the
Government in respect of D.L. 2. licences. In support of the slab rate system introduced for the first time by the impugned Government Order, the
Respondents pointed out that the quantum of licence fee is fixed with reference to the quantity of industrial alcohol used by each licensee, that the
licensees who are permitted to use larger quantities of sprits in the manufacture of industrial products can afford to pay a higher licence fee, that the
services rendered by the Government to D.L. 2 licensees is in proportion to the quantity used in the manufacture and that, therefore, the slab rate
system cannot be attacked as unreasonable. To show the correlation between the licence fees levied from the licencees and the services rendered
to them, the Respondents stated that prior to the revision of licence fee in 1973, there were no special staff for periodical check of D.L. licensees,
relese of stock, passing of indents, etc., and that subsequent to the revision of licence fees in 1973, special staff as detailed in Annexure I has been
employed for lease of stock passing of indents, periodical check, etc., and the total cost of the special staff is about Rs. 2-70 lakhs per annum. It is
said that the cost of processing one application for D.L. licence comes to about Rs. 67 as detailed in Annexure II to the counter-affidavit, and that
having regard to the fact that the total licence fee estimates as per the impugned Government Order, is Rs. 3.48 lakhs as against the sum or Rs.
4.70 lakhs incurred as expenditure by the Government towards processing of applications for licence and cost of staff. The licence fee described in
the impugned Government Order, cannot be said to be arbitrary or unrelated to services rendered by the Government.
As regards the first contention of the Petitioner, it is true that the Prohibition Act, 1937 was suspended by the State Legislature in 1971, but it
enacted on the same day the Tamil Nadu Excise Act, 1971. Section 83 of the said 1971 Act is as follows:
Rules and notification under Tamil Nadu Act X of 1937 to continue--All rules made and notifications issued under the Tamil Nadu Prohibition Act,
1937 (Tamil Nadu Act X of 1937) and in force immediately before the date of the Commencement of this Act shall be deemed to have been
issued under the corresponding provisions of this Act in so far as they are not inconsistent with the provisions of this Act and shall continue in force
accordingly unless and until superseded by anything done or any action taken under this Act.
Under this section all rules and notification issued under the Prohibition Act which stood suspended from 30th August, 1971 had been continued in
force by introducing a fiction that the said rules and notifications should be deemed to have been issued under the corresponding provisions of the
1971 Act unless and until they are superseded by anything done under the Excise Act. It cannot be disputed that but for the said Section 83, the
rules and notifications issued under the Tamil Nadu Prohibition Act will cease to be in force on the suspension of the Prohibition Act except to the
extent covered by Section 6 of the General Clauses Act. How ever, Section 83 continues all the existing rules and notifications made under the
Prohibition Act which were in force on the date of the commencement of the Tamil Nadu Excise Act so far as they are not inconsistent with the
provisions of the Act, Section 27 of the Tamil Nadu Excise Act prescribed the form and conditions of the licences and also enables the State
Government to fix the licence lee. Therefore, the Madras Denatured Spirit, Methyl Alcohol and Varnish (French Polish) Rules, 1959 should be
deemed to have been issued u/s 27 of the Act by virtue of Section 83. In view of the express provisions in Section 83 keeping alive the rules and
notifications issued under the Prohibition Act, we are not in a position to agree with the contention of the Counsel for the Petitioner that the said
rules have ceased to be in force from the date of suspension of the Prohibition Act.
The second and third contentions of the Petitioner relate to the legislate competence of the State Legislature to enact the Tamil Nadu Excise
Act, 1971 in relation to industrial alcohol which is not fit for human consumption. Entry 8, of Act II is as follows:
Intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors.
Entry 51 of the same list is set out below:
Duties of excise on the following goods manufactured on produced in the State and countervailing duties as the same or lover rates on similar
needs manufactured or produced elsewhers in India:
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narocotic drugs and narcotics;
but not including medicinal and toilet preparations containing alcohol or any substance included in Sub-paragraph (b) of this entry.
According to the learned Counsel, the Tamil Nadu Excise Act, 1971 has been made by the State Legislature under Entry 51 of list II and,
therefore, the said Act cannot cover alcoholic liquors not fit for human consumption and in so far as the Excise Act, 1971 seeks to levy a licence
fee in respect of alcolic liquors net for human consumption it should be taken to be ultra vire of the powers of the State Legislature under that
Entry. We cannot, however, agree with the learned Counsel that the Tamil Nadu Excise Act of 1971 is a piece of Legislation made exclusively
under item 51 of List II.
A persual of the various provisions of the Act would indicate that it is a legislation not only under Entry 51 but also under Entry 8 of List II.
Entry 51 deals with the levy of duties of excise on the goods manufactures or produced by the State. The Tamil Nadu Excise Act not only
provides for the imposition and collection of excise duty or countervailing duty on excisable articles but also provides for many other matters.
While the provisions for imposition and collection of duties of excise and countervailing duty are contained in Chapter VI the rest of the Act deals
with other matters. Chapter III regulates the import, export and transport of liquor. Chapter IV regulates the manufacture, possession and also sale
of liquor. Chapter v. controls and regulates the import, export, transport or sale of molasses, and Chapter VII provides for the licences and licence
fee required for dealing in liquorsa. Thus Chapters other than Chapter VI of the Tamil Nadu Excise Act deal with liquor, whether they are
excisable or not. Therefore the Act should be taken to be a legislation both under Entries 8 and 51, of List I. In this view, the Petitioner''s
contention that industrial alcohol, which is not fit for human consumption and therefore, not excisable, cannot be the subject matter of control or
regulation under the provisions of the Act losses all significance. We are of the view that even if industrial alcohol is not it for human consumption
and as such is not an excisable article u/s 2(6) of the Act, it can be brought under control or regulation under the provisions of the Act in view of
the wide definition of liquor given in Section 2(16) as including arrack, spirits of wine methylated spirits, spirits, wine, beer and all liquid consisting
of or containing alcohol. As per the scheme of the Act tough defined in Section 2(16) which includes within it alcohol which is fit for human
consumption can be controlled and regulated under the Act tough for the purpose of levy of excise and countervailing duty, it is only alcoholic
liquor fit for human consumption which is brought under the definition of excisable article u/s 2(6). We have, therefore, to reject the Petitioner''s
contention that industrial alcohol being unfit for human consumption cannot be dealt with under the Tamil Nadu Excise Act.
Coming to the fourth contention of the Petitioner that the imposition of a licence fee for possession and use of industrial alcohol is an
unreasonable restriction on the Petitioner''s manufacture, we are of the view that for the purpose of control and regulation of possession and use of
liquor, a provision for taking out a licence is necessary and the levy of a fee for the issue of such a licence is no uncommon. Such a requirement has
to be held to be a reasonable restriction introduced by the State in pesa interest. Therefore, the said restriction has to be taken to be reasonable
restriction protected by Article 19(5) of the Constitution.
Coming to the fifth contention of the Petitioner we find, it is two-told. One is that the slab system of levy can, it at all be justified only in the
matter o taxation and not in the imposition of a licence fee which should always have a proper correlation to the services rendered. The other is
that even if the slab system can be applied to the imposition of a licence fee, the licence fee imposed under the impugned Government Order, has
no relation at all to the services rendered and that being without any quid pro quo it should be held to be bad. According to the learned Counsel
the introduction of a slab system in the matter of levy of licence fee cannot be justified in law as a person holding a other quo of for possession and
use of industrial alcohol dies not get any higher, service from the Government when compared with other licencees and that the slab system has
been introduced only to anake a highers extraction of license fee from the bigger manufacturers on the basis that bigger the manufacturer, higher is
the ability to pay licence fee, and such a principle based on the ability to pay is relevant only in the matter of taxation and not in the matter of levy of
licence fee. It is said that paragraph 8 of the counter affidavit seems to suggest that the Government has adopted the slab system for levy of licence
fees only on the basis of ability to pay. In paragraph-8 of the counter affidavit, it is stated thus:
Certain educational institutions, (Schools, Colleges, Polytechnics) who were granted DL.2 licences in Form DL.2 under the Madras Denatured
Spirit, Methyl, Alcohol and Varnish (French Polish) Rules, 1959 with quotas of less than 500 (five hundred) liters per year for use of spirit for
laboratory and research purpose could be not pay the licence fee of Rs. 100 (Rupees one hundred) and in respect of them the annu licence fee
was fixed at Rs. 25 (Rupees twenty five) and on the other hand those licensees who were permitted to use large quantities of spirits in the
manufacture of their industrial products - could afford to pay much higher amounts towards licence fees....
It is true, this paragraph indicates that the imposition of slab system of levy was partly based on the capacity to pay. It cannot be disputed that
the ability or capacity to pay is relevant only in the matter of taxation and not in the matter of the imposition of a licence fee which is normally based
on quid pro-quo or the cost of services rendered to the licensees.
However, in the supplemental counter affidavit filed by the Respondents, it has been stated that the expenses incurred by the Government in
the case of an applicant for a large quantity of denatured spirit is proportionately higher than in the case of an applicant for a small quantity. From
this it is clear that ability to pay was not the sole basis for adopting the slab system. It is further stated that in administering the licences after they
are granted not only the licences of higher quota holders require more careful processing at all levels, but they also involve more frequent and time
consuming checks by higher officers of Revenue Commercial Tax-Police and Excise Department which naturally involve more cost and that,
therefore, the slab system has been introduced to rationalise the services pro rata so that the higher quota holders bore a higher incidence of the
charges and the lower quota holders bore the lower incidence of charges.
Therefore, the principal basis on which the slab system has been introduced appears to be substantially to rationalise the services pro rata i.e.,
the smaller licensees to pay a smaller licence fee and 9 bigger licensees to pay a higher licence fee. Such a basis or nation cannot be said to be
foreign to the imposition of a lice ice fee. We cannot, therefore, hold the levy of (sic) fee on the basis of slab system to be bad.
As regards the complaint of the Petitioner that the licence fee collected from the DL.2 licensees has no relationship or comparison with the cost
of services rendered to them, it is seen from the counter affidavit that there were about 1357 D.L. licences in the State at the time when the
impugned G.O. was passed, that the cost of processing each application for licence comes to Rs. 67 (as detailed is Annexure-II to the counter
affidavit) and that the total cost of processing the said applications and the grant of licences will come to Rs. 90,919 (1357 x 67). The counter
affidavit, however, has taken into account the cost of processing applications for licences which had been rejected. The cost of processing the
applications which had been rejected cannot be mulcted on the persons who had been successful in getting the licences. The cost of special staff
said to have been employed for release of stock, passing of indents a id periodical check is said to be Rs. 2.70 Lakhs per annum and the details
are set out in Annexure-1 to the counter affidavit. However, the said special staff also exercise control and check over other licensees under the
Prohibition Act and their work is not confined only to D.L. licensees. It is no known as to how many other licensees are there apart from D.L.
licensees. Thus, the entire cost of maintaining the special staff set out in Annexure-1 cannot be mulcted on the D.L. licensees. With reference to this
aspect, an additional counter affidavit has been filed by the Respondents practically at the conclusion of the hearing of the castses. That counter
affidavit say as that DL. licence fee collected under the Prohibition Act is kept under a separate head of account to be spent for the purposes for
which the fee is collected, the head of account being 039-AE, Denatured Spirits and Medicated Wines--04--Denatured Spirits that out of 3,000
applications from D.L. licensees, 700 will be applications from D.L.2 licensees and that the work involved in processing an application for D.L.2
licence is about twisce the work involved in processing an application for any other D.L. Licence. It is also pointed out in the additional counter
affidavit that out of Rs. 2.7 Lakhs being the cost of special staff maintained, Rs. 1,32,000 will represent the cost of services rendered by the
special staff in relation to D.L.2 licences which are 373 in number out of the total D.L. licences of 1,357 and that the work involved in the
supervision of D.L.2 licences is nearly three times the work involved in the supervision of other types of licences.
Though the Respondents have given certain facts and figures in the original counter-affidavit and also in the additional counter-affidavit, they
cannot be taken to have satisfactorily established the correlation between the licence fee and the cost of service rendered to the licensees. Even
assuming that the supervision of the activities of D.L.2 licensees is a service rendered to the licensee, and the cost of such service is three times the
services rendered to other D.L. Licensees, the total realisation of Rs. 3.48 lakhs from all D.L. licensees appears to be disproportionately high
when compared with the services rendered. Even, if Rs. 67 is taken to be the cost of processing a licence application, the total cost of processing
of applications and grant of 1,357 D.L. licences comes to Rs. 90,919 and out of 1,357 licences, the number of D.L.2 licences is only 373. Then
adding to it, Rs. 1,32,000 the alleged cost of supervision of D.L.2 licences, the aggregate comes to Rs. 2.22 Lakhs as against the actual licence fee
of Rs. 3.48 lakhs realised. Rs. 1,32,000 the cost of supervision admittedly includes the cost of frequent and time consuming checks by higher
officers of Revenue, Commercial Taxes, Police and Excise Department as is seen from the supplemental counter-affidavit. We are of the view that
the amount of licence fee levied under the impugned Government order is disproportionate to the services rendered.
We do not see how the frequent and the so-called time consuming checks by higher officers of Revenue, Commercial Taxes, Police and
Excise Departments referred in the counter-affidavit can be taken into account for the purpose of determining the quantum of the licence fee. The
officers of the Commercial Taxes and Excise Departments are interested in the levy and collection of sales tax and duties of excise, and the
checking done by them of the licensees'' business or the purpose of levy of sales tax and excise duty cannot be taken to be a service rendered by
those departments to the Petitioner. Therefore, the periodical checks done by the Commercial Taxes and Excise Departments cannot at all be
taken into account for the purpose of quantifying the licence fee.
In the decision in Indian Mica Micanite Industries Vs. The State of Bihar and Others, , the Court was concerned with the validity of licence tee
levied tinder the Bihar and Orissa Excise Act, 1915. Originally, the fee levied in 1919 was only Rs. 2, per annum irrespective of the quantity of the
denatured spirit in the possession of the manufacturer. Later, the quantum of licence fee was enhanced. When that enhancement was challenged,
the Supreme Court held that to uphold a levy as a fee it must be shown that it has a reasonable co-relationship of a general character (though not
with arithmetical exactitude) with the service rendered by the Government, that the State in maintaining an elaborate staff to prevent the licensees
from converting it into potable alcohol and thereby avoiding payment of heavy duties renders little or no service to the licensees, but only protects
its own interest, that the granting of a licence to regulate any trade business or profession in public interest, generally speaking, does not confer any
privilege or benefit on any one and that prima facie, the levy of licence fee in that case was excessive even, if the State is taken to be rendering
some services to the licensees by periodical supervision. The principle laid down in that case squarely applies to this case as well. Since the test of
quid pro quo fails on the material placed before us, the impugned Government Order prescribing the licence fee has to be set aside with a direction
to the Government to refix the quantum of licence fee strictly in accordance with the law. The, writ petitions are accordingly Avowed. There will be
no order as to costs.